11th annual domestic tax conference - united states · lb&i shift in audit focus ... domestic...

Domestic Tax Conference28 April 2016 | New York City

11th Annual

IRS/Large Business and International’sshift in audit focus and enforcement trends

Disclaimer

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

This presentation is © 2016 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US. and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.

Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP.

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.

Today’s presentersLinda KroeningExecutive Director, Ernst & Young LLP

Laura PrendergastExecutive Director, Ernst & Young LLP

John DiIorioSenior Manager, Ernst & Young LLP

Matthew CooperSenior Manager, Ernst & Young LLP

Agenda

► IRS budget and resource constraints► New Large Business and International

(LB&I) structure► Changing LB&I examination approach

and process► Update on appeals process ► New partnership audit procedures► Other IRS developments

IRS budget and resource constraints

IRS budget reduced

► In FY 2010, the IRS’s budget was $12.1b. Its budget for FY 2015 is $10.9b, a reduction of approximately 9.9% or around 17% adjusted for inflation.

$0

$5

$10

$15

FY2010

FY2011

FY2012

FY2013

FY2014

FY2015

IRS funding 2010-2015

Actual dollars(billions)Inflation adjusteddollars (billions)

1,

“This is the lowest level of funding since 2008, and the

lowest since 1998 when inflation is considered.”

IRS Commissioner John A. Koskinen

Number of employees down

94,346

91,380

89,551

83,613

78,121

76,540

0 20,000 40,000 60,000 80,000 100,000

Number of full-time equivalents (FTEs) at fiscal year-end

2015

2014

2013

2012

2011

2010

Source; IRS Data Book(s) 2010–2015, Table 30.

FY 2015 IRS audit coverage rates

Category Coverage rateOverall Individual 0.8%Individual with income over $200,000 2.0%Individual with income over $1m 9.6%Small corporation under $10m in assets 0.9%Large corporation $10–$50m in assets 5.8%Large corporation $50–$100m in assets 11.3%Large corporation $100–$250m in assets 14.2%Large corporation $250m to >$20b in assets 14.0%–64.0%Partnership 0.5%

New Large Business and International (LB&I) structure

LB&I’s new structure

► As of 7 February 2016 LB&I is organized by practice areas.► A practice area is a group of employees organized together to focus on one or

more areas of expertise.► Each practice area (along with other activities) will study compliance issues

within their area of expertise and suggest campaigns to be included in the compliance plan.

LB&I restructuring

LB&I is now organized into nine practice areas: five subject-matter based and four geographically based.

Geographic practice areas 1. Northeast (New York)

2. East (Downers Grove, Illinois)

3. Central (Houston)

4. West (Oakland, California)

Subject-matter practice areas1. Pass-through entities

2. Enterprise

► Includes financial products and institutions, corporate issues, credits, and penalties

3. Treaty and transfer pricing

4. Withholding and international individual compliance

► Includes FATCA

5. Cross-border activities

► International activities other than those falling under the transfer pricing and withholding areas

LB&I high level organization chart

Director of FieldOperations

Foreign PaymentsPractice

Johanna McGeady-Muirphy

Assistant DeputyCommissioner International

Theodore Setzer

DirectorProgram and Business

SolutionsSusan Latham

DirectorTechnology and

Program SolutionsKathryn Greene (A)

DirectorResourceSolutions

Keith Walker

Assistant DeputyCommissioner Compliance

IntegrationDavid Horton

DirectorData Mgt.

William Holmes

DirectorCompliance Planning

and AnalyticsChristopher Larsen

DirectorWestern Compliance

PAKimberly Edwards

DirectorPass Through Entities

PACheryl Claybough

DirectorEnterprise Activities

PAKathy Robbins

DirectorCentral Compliance

PATina Meaux

DirectorCross Border Activities

PAJohn Hinding

DirectorEastern Compliance

PALavena Williams

Director Withholding and Int’l Individual

Compliance PAPamela Drenthe

DirectorTreaty and Transfer

Pricing Operations PASharon Porter

Director Northeastern Compliance

PABarbara Harris

Director of FieldOperations WestDon Sniezek (A)

Deputy DirectorPass Through

EntitiesCliff Scherwinski

Director FinancialInstitutions and

ProductsGloria Sullivan

Director of fieldOperations North

CentralKatheryn Houston

Director of FieldOperations East

Orrin Byrd

Director of FieldOperationsGreat Lakes

Steve Whiteaker


Transfer PricingPractice

Cheryl Teifer


North AtlanticCatherine Jones

Director of FieldOperationsSouthwestPaul Curtis

PromoterProgram Financial Products

Director of FieldOperations West

Jolanta SanderDirector of Field

OperationsInternational

IndividualComplianceElise Gardner

Economists

Director of FieldOperations Mid-AtlanticDennis Figg

Computer AuditSpecialists

Global High Wealth

Banks/Insurance/RICs-REITs-

REMICs

Affordable Care Act

Director Corporate/CreditHolly Paz

Corporate Issuesand Credits

Penalties

Engineers


South CentralMargie Maxwell (A)

Tax ComputationSpecialists

Director of FieldOperationsSoutheast

John Hinman (A)

Director AdvancePricing and Mutual

AgreementHareesh Dhawale

Director TreatyAdministration

Deborah Palacheck

Treaty Assistance and Interpretation Team

Exchange ofInformation

Joint InternationalTax Shelter

Information Center

Senior AdvisorElizabeth Wagner

LB&ICommissioner

Douglas O’Donnell

Deputy CommissionerRosemary Sereti

Geographic practice area map

WestKimberly Edwards

CentralTina Meaux

EastLavena Williams

NortheastBarbara Harris

Director of Field Operations-WD. Sniezek (A)

Director of Field Operations-SW

P. Curtis

Director of Field Operations-SCM. Maxwell (A)

Director of Field Operations-NC

K. Houston

Director of Field Operations-GLS. Whiteaker

Director of Field Operations-SEJ. Hinman (A)

Director of Field Operations-NA

C. Jones

Director of Field Operations-MA

D. Figg

CA

AK

HI

NVUT

AZ NM

TX

OK

CO KS

WYID

MT

OR

WA

NE

SD

NDMN

IA

MO

AR

LA

MS

AL

TN

KY

IL

WIMI

GA

FL

SC

NC

VAWV

PA

NY

ME

MD

DE NJ

CT

MARI

NHVT

DC

NY

INOH

EngineersComputer Audit

SpecialistsGlobal High

WealthTax Computation

Specialists

Practice areas (PA)

Director Pass Through Entities

PA

Deputy DirectorPass Through Entities

Promoter Program

Director Enterprise Activities

PA

Director Financial Institutions and Products

Financial Products

Banks/Insurance/RICs-REITs-REMICS

Affordable Care Act

Director Corporate/Credit

Corporate Issues and Credits

Penalties

Director Cross Border Activities

PA

Director of Field Operations East

Director of Field Operations West

Director Withholding and International Individual

CompliancePA

Director of Field Operations Foreign Payments Practice

Director of Field Operations International Individual Compliance

Director Treaty and Transfer Pricing Operations

PA

Director of Field Operations Transfer

Pricing Practice

Economists

Director Advance Pricing and Mutual

Agreement

Director Treaty Administration

Treaty Assistance and Interpretation Team

Exchange of Information

Joint International Tax Shelter Information

Center

Compliance practice areas

Director Western Compliance

PA

Director of Field Operations West

Director Central Compliance

PA

Director Eastern Compliance

PA

Director Northeastern Compliance

PA

Director of Field Operations Southwest

Director of Field Operations North

Central

Engineers

Director of Field Operations South

Central

Director of Field Operations Great

Lakes

Tax Computation Specialists

Director of Field Operations North

Atlantic

Director of Field Operations Mid-Atlantic

Computer Audit Specialists

Global High Wealth

Director of Field Operations Southeast

Changing LB&I examination approach and process

LB&I shift in audit focus

► LB&I is moving to a centralized issue selection and return selection approach over the next few years. ► LB&I seeking to create a more flexible and knowledgeable workforce, using data analytics to

better identify areas of noncompliance, and creating tailored treatments to respond to issues. ► A shift to a centralized issue development process or “campaign” that focuses on how to identify and

address compliance risks.► Campaign-related actions would include development of training materials, technical positions,

and audit aids, among other tools.► New process integrates recent Information Document Request changes and new claim filing policy.► LB&I will generally be moving away from the Coordinated Industry Case (CIC) approach. ► Any potential changes to the compliance assurance process (CAP) have yet to be determined.

IRS issue examination approach

Build campaigns

Scan universe of external and internal inputs

Developissues

Analyzerisk

Select work

Execute Adapt

FocusStrategically identify and prioritize areas of compliance risk to more effectively address taxpayer compliance.

PlanDecide what work is performed, who performs it, and what support is needed, based on areas of compliance risk.

Execute work with dynamic tools, enhanced training, a robust support infrastructure, and timely feedback mechanisms.

Continually gather, assess, and incorporate

feedback to enhance operations and improve

taxpayer compliance.

ExecuteWork

Potential implications of new exam approach

► Fewer continuous large taxpayer examinations. How does it impact determination of effectively settled?

► Uncertain future of compliance assurance program► Greater centralization of issue identification and development. What will be

level of IRS transparency on issue selected for examination?► Greater scrutiny of issues with higher expectations to produce

documentation quickly► Potentially less flexibility to resolve issues at exam level► Multiple examination teams and management chains based on type of issue

selected for audit

New LB&I exam processPublication 5125 (February 2016)

► Replaces current “Quality Exam Process” incorporating recent changes► New Information Document Request Directive► Appeals Judicial Approach and Culture► Establishment of subject matter experts to promote knowledge sharing ► Establishes process for centralized issue identification and selection► Exam Teams may limit audit to pre-identified issues► Issues to be managed and audited by “issue teams”

► Updates to IRM 4.46 sections 1–6 issued in March 2016► Effective for examinations starting as of 1 May 2016► For cases in process as of 1 May, transition to the new process by adopting changes in

the Execution and Resolution phases.► https://www.irs.gov/pub/irs-utl/p5125.pdf

LB&I examination process – roles and responsibilities

► Expectations for LB&I examiners► Work transparently in a collaborative manner with the taxpayer to understand their business and

share the issues that have been identified for examination► Engage the taxpayer in the development of the audit steps and potential timeline appropriate for

the issues selected in the examination plan; provide a final copy to the taxpayer► Follow the information document request (IDR) procedures ► Keep the taxpayer informed of the status of each issue on a regular basis► Provide written documentation of all relevant facts, seek taxpayer acknowledgement, and if the

issue is unagreed, appropriately document all disputed facts► Apply the law to the facts in a fair and impartial manner► Prepare well-developed Notices of Proposed Adjustments► Resolve issues at the earliest appropriate point using the appropriate issue resolution tool

LB&I examination process – roles and responsibilities

► Expectations for taxpayers and representatives► Work transparently with the exam team by providing a thorough overview of business

activities, operational structure, accounting systems, and a global tax organizational chart► Identify personnel for each issue with sufficient knowledge who can provide input when

establishing initial audit steps, timelines, and actively assist in the development of the issues selected by the exam team

► Follow the IDR procedures► For issues identified for examination, provide work papers and supporting documents

requested, including those the taxpayer relied on when preparing the return► Collaborate with the issue team to arrive at an acknowledgment of the facts for unagreed

issues; provide support for additional or disputed facts► To foster early resolution, respond timely to each Form 5701 by providing a written legal

position for issues in dispute► Resolve issues at earliest appropriate point using an issue resolution tool

LB&I examination process – expectations with respectto claims

► Informal claims for refund► Provided to the exam team within 30 days of the opening conference► After 30 days, must file formal claims (unless issue has been identified for

examination and no IRS published guidance specifically requiringformal claims).

► In limited circumstances exceptions to the formal claims process may be granted by LB&I senior management.

► Claims will be disallowed if Treasury Regulation Section 301.6402-2 standards are not met.

LB&I examination process – planning and execution

► LB&I will determine the scope of the audit and issues to be examined based on the broadest impact on compliance regardless of the size or type of entity.

► Issue driven examination process► Focuses on the right resources on selected issues.► Establishment of issue examination team.

► Centrally selected issues to be managed and audited by “issue teams.”

► Encourages collaboration within issue teams where every examiner and their manager are equally responsible and accountable for the examination.

► Leverages knowledge transfer among technicians.► Establishes case timelines as determined by the most complex issues.

► Case manager in geographical practice will have overall responsibility for the case. Issue manager will collaborate with the case manager.

► Provides examiners an optional issue-driven risk analysis form (13744-I).

LB&I examination process – execution

► Issue development model► Relies on active dialogue and fact sharing► Seeks ongoing acknowledgment of facts to ensure accurate tax determinations► Updates IRM 4.46.4.5 to include the directives issued on the Information Document

Request process► Introduces the “Acknowledgement of Facts” Information Document Request

► Pro-forma IDR-IRM Exhibit 4.46.4-3

Pro-forma IDR – IRM exhibit 4.46.4-3

► “Purpose of IDR is to ensure that all relevant facts, whether favorable to the taxpayer or LB&I, are being considered before the Form 5701, Notice of Proposed Adjustment (NOPA) is issued.

► Please review the attached Form 886-A and respond accordingly in writing to the LB&I issue team by the agreed upon date (MM/DD/YYYY).a) Taxpayer agrees to the facts as written.

b) Taxpayer provides additional relevant facts and supporting documentation.

c) Taxpayer identifies disputed facts and provides clarification and/or supporting documentation

► Appeals will return the case to exam if the taxpayer presents new information during the Appeals process that was not shared with LB&I during the examination. Therefore, the taxpayer has the primary responsibility to ensure all relevant facts are provided to the LB&I issue team.

► Your response to the facts does not indicate agreement to the issue or any proposed tax adjustment. It is only to acknowledge that all of the relevant facts have been identified.”

LB&I examination process – resolution

► Issue resolution tools► Consistently encourages available issue resolution tools► Requires consideration of Fast Track Settlement with Appeals

► Taxpayer responsibility ► Ensuring all relevant facts and legal arguments provided during examination► Pro-Forma IDR for Acknowledgment of Facts on Unagreed Issues (IRM Exhibit 4.46.4-3) ► Prevent case being referred back to LB&I by Appeals

► Exit strategy► Discussions must include efforts to resolve tax controversy for certainty► Joint critique of the exam process to recommend improvements► Address future tax treatment of issues to eliminate carryover/recurring issues

q

Update on appeals process

Appeals Judicial Approach and Culture (AJAC)

► 18 July 2013 – Interim Guidance Memo for Appeals Employees► AJAC applies to Examination and Collection cases► AJAC themes:

► Judicial approach to Appeals hearing by utilizing what is in the case file► No new issues raised by Appeals.► Appeals will attempt to settle a case on factual hazards when the case submitted

by Compliance is not fully developed and the taxpayer has presented no new information or evidence.

► If a taxpayer provides Appeals with new information, Appeals will return the case to LB&I. If a taxpayer raises new arguments at Appeals, LB&I will be given the opportunity to review and comment on the arguments, but Appeals willmaintain jurisdiction.

Appeals Judicial Approach and Culture (AJAC)

► 3 July 2014 – Appeals released second phase of AJAC► Statute of Limitations – one year remaining prior to acceptance► Providing Exam with opportunity to comment (specific time frame, 45 days) or

return case to Exam (Appeals releases of jurisdiction to Exam)► Premature referral of case to Appeals or new information presented by

taxpayer during Appeals Hearing

Appeal procedure changes

► Elimination of Appeals arbitration program (Rev. Proc. 2015-44 obsoleting Rev. Proc. 2006-44)

► Fast Track Settlement Program Updated► Cases in which a 30-Day Letter has been issued are eligible for the Fast Track

Settlement (FTS) Program. This does not change LB&I’s general practice to offer FTS in appropriate situations prior to issuance of a 30-Day Letter. Also, FTS must be initiated prior to the issuance of the 90-Day Letter

► Fast track cases no longer qualify for post Appeals mediation process► IRS Notice 2016-22: The IRS described updates to its administrative appeals

process for cases docketed in the Tax Court.

New partnership audit procedures

Background

► New partnership rules and procedures enacted by the Bipartisan Budget Act of 2015 (Budget Act)

► Budget Act partnership rules affect► Who pays tax► How much tax is paid► Procedures

► Applies to partnership tax years beginning after 31 December 2017► A partnership may elect to apply the new procedures to earlier years► Election cannot be made until the IRS issues guidance

► Joint Committee on Taxation estimates the provisions will raise almost $10b over a 10-year period

Background

► Prior to Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)► Until TEFRA was enacted in 1982, the IRS had to audit each partner separately ► IRS difficulty in administering partner level audits led to TEFRA

► TEFRA is generally the current regime for auditing most partnerships► Centralized procedure, but IRS needs to still make partner level assessments

► IRS has had trouble administering TEFRA► New rules replace TEFRA and are intended to provide for a centralized audit

procedure that the IRS can administer ► New rules replace electing large partnership “ELP” rules as well

Partnerships subject to budget act rules

► Rules apply to all partnerships► Mandatory for partnerships with:

► More than 100 partners, or► Any flow-through entity (other than S Corps)

► Partnerships for which the rules are not mandatory may elect out► Election has to be made by the partnership separately for each tax year► Should partnership avoid flow-through partners if number of investors does not

exceed 100?► If elect out, subject to partner level audits ► IRS needs to issue guidance on the election procedures

Overview – who pays?

► General rule: Partnership pays tax► Partnership pays an “imputed underpayment” (equivalent of tax at highest rate)► Costs borne by current partners; no effect on prior year partners

► Hybrid – modifies amount partnership pays► Partner attributes may reduce imputed underpayment amount (e.g., tax-exempt

partners)► Historic partner may amend its return to pay its share of adjustment► Partnership still on hook

► Alternative: Historic partners pay tax► Partnership forces partners in year item arose to pay tax owed► Historic partners pay; partnership does not

Partnership representative – new role

► The “Partnership Representative” is the sole person with authority to act on behalf of the partnership and its partners► Replaces the TMP or tax matters partner under TEFRA► More powerful than the administrative role held by the TMP under TEFRA ► Partners have no statutory right to participate in an audit or litigation

► Does not matter whether partner has adopted an inconsistent position

► Partnership Representative has authority to bind all partners to audit adjustments► Partners will not separately sign IRS audit settlement agreements

Partnership representative

► Partnership may designate the Partnership Representative.► Eligible persons: any person with a substantial presence in the United States

► If partnership does not designate the Partnership Representative, the IRS may select any person to be Partnership Representative.

Notice to partners

► Neither the IRS nor the Partnership Representative has to give notice of audit or litigation proceeding to the partners.

► Audit can be resolved with the partnership and partners bound by a settlement (or audit resolution) and without any partners being aware that the partnership was under audit.

Key considerations

► New partnership agreements should take the new rules into account.► Existing partnerships will want to consider amending their agreements.

► But probably should let the dust settle before taking any action

► Financial statement considerations?

Other IRS developments


► Schaeffler Privilege Case, No. 14-1965-cv (2d Cir. 10 November 2015)► US Court of Appeals for the Second Circuit reversed the District Court of the

Southern District of New York and held that a taxpayer did not waive attorney-client privilege when he shared documents with a consortium of banks (the Consortium) with which he had a common legal interest.

► The Second Circuit also sustained the taxpayer's claim of work product protection for the documents, rejecting the lower court's finding that the documents would have been prepared in essentially the same form even if the taxpayer had not anticipated litigation with the IRS.

► Form 1042 and Other Withholding Tax/Employment Tax Issues► IRS Exam teams more frequently issuing IDRs on Form 1042 and other withholding

tax/employment tax issues.► IRS Employment Tax Agents are in IRS Small Business/Self-Employed Division.


► Change in due dates► C Corporations:

► For tax years beginning after 31 December 2015 Form 1120 is due the 15th day of 4th month following close of year.

► For calendar tax years beginning after 31 December 2015 until 31 December 2025, the extension period is only 5 months.

► For tax years on or after 1 January 2026, the extension period will increase to 6 months.

► Partnerships: ► For tax years beginning after 31 December 2015, Form 1065 is due the 15th day of 3rd month following

close of year. ► For tax years after 31 December 2015, the extension period changes from 5 months to up to 6 months.

► FBAR► Due date changed from 30 June to 15 April► Currently no extension allowed, but for tax years after 31 December 2015, taxpayers will be allowed

automatic extension up to 6 months.


► Section 6676 Erroneous Claim for Refund Penalty► Previously, 20% penalty for excessive claims that lacked reasonable basis.► PATH Act removed reasonable basis standard and added reasonable cause exception.

► Basket Option Contract Listed Transaction and Basket Contract Transaction ofInterest Notices► Notices 2015-73 and 2015-74 provide new listed transaction and transaction of interest. ► Taxpayers who participate in described transactions need to timely disclose on Form 8886.

► ID Theft► On 1 March 2016, IRS issued alert to payroll and human resources professionals to beware of

an emerging phishing email scheme that purports to be from company executives and requests personal information on employees.

Domestic Tax Conference28 April 2016 | New York City

11th Annual

11th annual domestic tax conference - united states · lb&i shift in audit focus ... domestic...

Documents