New and Notable in IRS Controversy. Brian Paperny AT&T (Moderator) Mario Manniello Verizon Heather Maloy EY Kevin Brown PwC

Transcription

1 New and Notable in IRS Controversy Brian Paperny AT&T (Moderator) Mario Manniello Verizon Heather Maloy EY Kevin Brown PwC

2 Disclaimer Views expressed in this presentation are those of the speakers and do not necessarily represent the views of the firms or companies which they represent. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.

3 Presenters Kevin Brown is the leader of PwC s Washington National Tax Services' U.S. Tax Controversy and Regulatory Services Team. Kevin joined PwC after several notable professional roles, including Acting Commissioner of the IRS and Chief Operating Officer of the American Red Cross. In his nine years at the IRS, Kevin worked in a number of other positions including Deputy Commissioner for Services and Enforcement; Commissioner of the Small Business/Self-Employed (SB/SE) Division, Principal advisor and chief of staff for former IRS Commissioner, Mark Everson; as well as Division Counsel for the SB/SE Division. Heather Maloy is a Principal in Ernst & Young LLP s National Tax Department in the Tax Policy & Controversy (TPC) group. Before joining EY in 2015, Heather served for almost six years as the IRS Commissioner for the Large Business & International (LB&I) Division where she was responsible for developing and driving several key initiatives. In addition to LB&I Commissioner, Heather held a number of notable roles at the IRS during her almost 18 years of service including Associate Chief Counsel for Income Tax & Accounting and Passthroughs & Special Industries in the Office of Chief Counsel, Deputy Associate Chief Counsel for Domestic-Technical, and Assistant to the Commissioner. Mario Manniello is an Executive Director of Income and Transaction Taxes at Verizon Communications Inc. He is responsible for managing all domestic audits in both the income and transaction tax areas. Mario received a Master s of Science Degree in Taxation from Seton Hall University and a Bachelor of Science Degree in Accounting from Rutgers University. Mario has over 25 years of experience in tax in both public accounting and private industry, including over 15 years of experience in the telecommunications industry.

4 Agenda IRS Update Resolving Issues In Appeals Industry Issues Learning Objective: To provide an update on the current state of Internal Revenue Service controversy and the potential impact to the industry.

5 IRS Update

6 Latest on IRS Leadership IRS Commissioner - Charles P. Rettig Tax attorney specializing in Federal and State tax litigation 35+ year career at small (11 attorney) tax controversy practice in Beverly Hills Long time member of the IRS Advisory Council and various State Advisory Boards Technical vs Management background as compared to recent IRS Commissioners IRS Chief Counsel Nominee - Michael J. Desmond Tax attorney specializing in Federal tax litigation Currently a solo-practitioner in Santa Barbara, previously a partner at two large D.C. firms Served as Treasury s Office of Tax Policy s Tax Legislative Counsel, and as a litigator in the Tax Division at the Department of Justice

7 Latest on IRS Leadership (continued) Other Key Leadership Positions Remain Vacant Deputy Chief Counsel (Technical) serving as interim Chief Counsel Significant turnover in IRS Senior Executive ranks due to retirements 50% retirement eligible

8 IRS Staffing Continues to Decline Overall IRS staffing down, from 100,000 in 2010 to roughly 82,000 Succession planning crisis 40% of overall workforce eligible to retire in 2019 Fewer than 100 employees under the age of 25 Less than 1,000 under the age of 30 (many are parttime/seasonal employees) LB&I agents staffing fallen from 7,000 in 2010 to below 5,400 Appeals staffing reduced by over 35% since 2011 (No Appeals Officers in 11 States) Revenue officer staffing down roughly 33% since 2011

9 Budget Woes Continue FY17 budget ($11.2B) was lowest since 2007, approximately $1B in cuts since percent budget reduction (adjusted for inflation) since percent of IRS budget is related to personnel costs Virtual hiring freeze for past 6 years Training budget down from $169M in 2010 to $39M in 2017 FY 2018 budget provides no relief - Treasury Department cut by 4.1% - IRS cut $239M - Additional $200M needed to keep pace with inflationary costs

10 2019 Budget Additional Budget Cuts Proposed President s FY 2019 budget proposes base funding of $11.1B vs $11.2 in FY 2018 Earmarks $2.3B for running key tax filing and compliance IT applications Proposes additional $15B over the next 10 years to close tax gap $330M of the $15B ask would be allocated to 2019 primarily for enforcement and technology Per budget request - $15B investment would generate $44B in revenue (net $29B) Taxpayer service funding would be reduced by 8.7% compared to 2017 budget IRS also requesting $397M over next two years to implement new tax law: - 73% allocated to technology and hardware - 19% taxpayer assistance and outreach - Balance allocated to guidance, forms and publications, etc.

11 2019 Budget Additional Budget Cuts Proposed (continued) IRS also requesting $397M over next two years to implement new tax law 73% allocated to technology and hardware 19% taxpayer assistance and outreach Balance allocated to guidance, forms and publications, etc. Other key takeaways Expands IRS math error authority (correcting errors without taxpayer contact) Increases return preparer oversight Requires SSNs for certain credits (vs ITINs)

12 IRS Accomplishments and Challenges

13 IRS Accomplishments Collected $3.3 trillion (represents 94% of all government funding) Processed 244 million returns and information documents Issued $426B refunds Examined 0.6 percent of all returns filed Answered 25M live calls and 38M automated calls Treasury/IRS propose to strike 300 Tax Regulations Key systems remain operational during peak filing season Stopped $1.1B in fraudulent refund claims

14 Gross Collections By Return Type

15 Refunds By Return Type

16 IRS Major Challenges Tax Reform Significant Challenges to Implement New Tax Law Significant loss of technical expertise since last major tax law change Comprehensive cost to implement unknown Added challenge of implementing large scale tax reform during filing season Executives, managers and technical experts being reassigned to implementation teams IRS estimates more than 131 filing season systems will be impacted by tax law Many complex provisions to interpret i.e.; dramatic changes to international taxation Computer programming, system updates and balancing filing season demands Revising regulations, drafting and publishing new forms and publications, issuing other guidance Updating IRS website, toll-free assistance technique guides, etc. Training employees on new tax law and guidance (IRS Just in Time model)

17 IRS Major Challenges Technology Key IRS legacy computing systems developed over 50 years ago More than 600 unique systems feed IRS Masterfile Hardware and software updated over years - programming and data structures static 63% of IRS computer hardware is out of date 28% of software over four years old System limitations impede ability to enhance taxpayer service and compliance Critical Cyber Security Concerns IRS systems are frequent targets of cyber criminals and identity thieves To date, no servers or databases compromised perimeter security enhanced Individual account data systems have been compromised (Get Transcript Application) Technology and system constraints associated with major changes pose additional risk

18 IRS Major Challenges Balancing Service and Enforcement Audits and Post Filing Collections Continue to Decline Large corporate audits declined 50% since 2010 IRS examined 1.1% of all corporate returns (other than S corps) during FY 2016, based on a total of 1.88 million returns and 21,135 examinations Examination coverage of large corporate returns: - Assets between $500M - $1B - 9.5% - Assets between $1B - $5B %

19 Returns Filed vs Returns Examined Returns Filed vs Returns Examined

20 Audit Results Agreed vs Unagreed Audit Results Agreed vs Unagreed

21 IRS Major Challenges Balancing Service and Enforcement (continued) Diminishing Customer Service Number of Taxpayer Assistance Centers continues to decline (taxpayers assisted down from 6.4M in 2010 to 4.4M in 2016) Taxpayer Assistance Centers in person assistance - appointment only IRS toll-free assistance fell to approximately 53 percent (roughly half of calls not answered)

22 LB&I Exam Update Issue focus relies on centralized identification of risk Campaigns will utilize range of treatments to pursue risks - Guidance formal or informal - Soft notices; industry outreach - Issue-focused audits Transition is in the early stages - Some CIC taxpayers decontrolled; cycles skipped or limited - Additional campaigns under consideration - New audit rules described IRM and Publication 5125

23 Publication 5125 Updates IRM 4.46 Reinforces earlier changes in IDR process Transparency Informal claims must be submitted within 30 days of opening conference; later-filed claims must be formal amended return Defines role (and preeminence) of LB&I issue teams; overall case management stays with compliance managers Issue teams directed to secure taxpayer s acknowledgement of the facts (AOF) for unagreed issue If new information requiring investigation or additional analysis is provided to Appeals, the case will be returned to examination

24 Planning Phase Determines scope of audit Select issues with broadest impact on compliance Collaboration among all parties Examination Plan reviewed by both parties

25 Execution Phase Outlined issue development process to include the issue-team approach Incorporated Information Document Request (IDR) enforcement process Added Acknowledgement of Facts (AOF) step

26 Resolution Phase Emphasizes the use of resolution tools at the earliest appropriate point New expectation to address Issue Exit Strategies Consider and discuss: - Early referral - Fast Track - Statute of limitations - JCT Review

27 Campaigns A campaign is a plan focused on strategic issues. It uses the right resources and combination of treatment streams to achieve intended compliance outcomes. A treatment stream is a compliance action or combination of actions that LB&I will implement to achieve the compliance goal of the campaign. Workload selection will be centrally selected, prioritized, and risk assessed based on campaigns and defined compliance goals. Accordingly, campaigns are the process LB&I uses to identify issues and prioritize and allocate resources to the issues with the highest compliance risk. Where do ideas for campaigns arise? Will campaigns offer training to allow RAs to get to know the industries better? What types of matters to expect to see as campaigns? - Specific or broad

28 IRS LB&I Campaigns 1. Section 48C Energy Project Credit 2. Offshore voluntary disclosure program declines and withdrawals 3. Domestic production activities deduction under section Micro-captive insurance 5. Related-party transactions 6. Deferred variable annuity reserves 7. Basket transactions 8. Completed contract method of accounting 9. Linkage plan strategy under the 1982 Tax Equity and Fiscal Responsibility Act 10.S corporation losses claimed in excess of basis 11.Repatriation 12.Form 1120-F non-filers 13.Inbound distributors

29 IRS LB&I Campaigns (continued) 14.Form 1120-F Chapter 3 and Chapter 4 withholding 15.Swiss bank program 16.Foreign earned income exclusion 17.Verification of Form 1042-S Credit claimed on Form 1040NR 18.Agricultural chemicals security credit 19.Deferral of cancellation of indebtedness income 20.Energy efficient commercial building property 21.Corporate direct (IRC section 901) foreign tax credit 22.IRC section 965 avoidance 23.Economic development incentives 24.Individual foreign tax credit (Form 1116) 25.Costs that facilitate an IRC section 355 transaction 26.SECA tax

30 IRS LB&I Campaigns (continued) 27.Partnership stop filer 28.Sale of partnership interest 29.Partial disposition of election for buildings 30.Interest capitalization for self-constructed assets 31.F3520/3520-A Non-Compliance and campus assessed penalties 32.Forms 1042/1042-S compliance 33.Nonresident alien tax treaty exemptions 34.Nonresident alien schedule A and other deductions 35.NRA tax credits 36.Restoration of sequestered AMT credit carryforward 37.S Corporation distributions

31 IRS LB&I Campaigns (continued) 38.Virtual currency 39.Repatriation of foreign triangular reorganizations 40.Section 965 transaction tax 41.Section 199 claims risk review 42.Syndicated conservation easement transactions 43.Foreign base company sales income: manufacturing branch rules F interest expense/home office expense 45.Individuals employed by foreign governments and international organizations More to come?

32 Future of CAP Compliance Assurance Process Uncertainty continues Recent CAP program changes New entrants into program anticipated in 2019 Increased focus on Pre-Filing Agreements (PFA) - PFA User Fee - $174,000 per issue

33 Resolving Issues In Appeals

34 Appeals Judicial Approach and Culture (AJAC) AJAC is generally effective for cases received in IRS Appeals on or after September 2, 2014 Appeals will not raise new issues. If taxpayer raises a new issue, the case will be released to Exam for examination of the issue. If taxpayer provides new information related to an issue in Appeals, the case will be returned to Exam for review of the new information. If taxpayer raises a new theory or argument related to an issue in Appeals, the new theory or argument will be shared with Exam for review within a specified time frame. Appeals will attempt to settle an issue on factual hazards where the issue submitted by Exam was not fully developed. There must be one year remaining on the statute of limitations prior to the case being accepted by Appeals.

35 Participation in Appeals Conferences IRM Section was revised in October 2016 and states - Appeals has the discretion to invite Counsel and/or Compliance to the Appeal s conference. - The prohibition against ex parte communications must not be violated. - Appeals may also request that other experts attend conferences. Taxpayers have raised a number of concerns about this policy. Appeals has undertaken a pilot to test the policy

36 Participation in Appeals Conferences - Pilot Pilot underway - Certain Number of Appeals Team Case Leaders (ATCLs) are participating in pilot. - Participating ATCL s will invite Compliance and Counsel to participate in all cases assigned to that ATCL. - Taxpayer cannot opt out of the pilot

37 Participation in Appeals Conferences - Pilot Questions about the Pilot - Will ATCL s not in pilot have the ability to invite compliance and Appeals to participate? - How is this different from the Rapids Appeals Process (RAP)? - Does the Appeal Officer acts a mediator or exercise independent judgment? - Do Compliance and Counsel personnel participate in settlement discussions? - When do settlement discussions begin?

38 Rapid Appeals Process (RAP) Is Rapid Appeals Process a high priority focus for the Appeals organization? - Anecdotally, it appears ATCLs are suggesting RAP as the preferred process and some taxpayers have felt pressured to agree to RAP What has the feedback been on RAP from Appeals and taxpayers? If a RAP is unsuccessful, will the ATCL make a settlement offer or does the RAP need to be terminated before Appeals will offer a settlement?

39 Industry Issues

40 Industry Issues Section Qualified Film Rev. Rul Software Set Top Box R&D Transfer Pricing

41 Questions and Answers

42 Thank You