The IRS Large Business and International Division is preparing for an influx of refund requests and deciding how best to execute its corporate and partnership compliance programs during the coronavirus pandemic and beyond.
LB&I staff have been spending a lot of time addressing issues stemming from COVID-19 and the coronavirus relief legislation while continuing their efforts to advance core work streams such as the large corporate compliance program, compliance campaigns, and the compliance assurance process (CAP), LB&I Deputy Commissioner Nikole Flax said August 18.
Speaking during a webinar hosted by Miller & Chevalier Chtd., Flax said LB&I has been fortunate “because most of our employees are able to telework, so for the most part, we’ve been fully functional throughout the pandemic . . . operating with a number of changes.”
To accomplish that, the IRS has provided increased flexibility, such as procedures for digital signatures and transmission of materials, and the agency is working on, for example, improving employees’ ability to communicate with taxpayers electronically, Flax said.
“We’re really trying to be fully functional . . . working in a digital environment” and continuing to monitor the situation to determine where we need more flexibility, Flax said, noting that LB&I is getting input from taxpayers and groups on what needs to be done “to be sustainable in the future, because we could be in this posture for some time.”
“We see the benefit of being able to work remotely” and will be evaluating whether it will be appropriate to maintain the new flexibility in the long term, Flax said.
Since new exam activity resumed in mid-July, LB&I has been aware of taxpayers’ situations and has been working with them determine how to proceed “in a way that’s respectful of their business operations” and considers limitations they may have — for example, accessing documents.
Refund Influx Coming
LB&I is preparing for a high volume of refund claims via Form 1120-X, “Amended U.S. Corporation Income Tax Return,” which triggers the Joint Committee on Taxation review process, Flax said.
The anticipated refund claims stem from the provision in the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136), which, among other things, modified section 172 to allow taxpayers to carry back losses arising in tax years from 2018 to 2020 for up to five years before the year of the loss.
Under section 6405(a), the JCT is required to review IRS reports on corporate taxpayer refund claims in excess of $5 million before a refund is made. No payment is made until 30 days after the date the IRS submits the report for JCT review.
“We’ve been doing work internally and with the [JCT] staff to ensure that’s a seamless process,” recognizing that taxpayers need their cash refunds, Flax said. She added that LB&I is trying to balance the right enforcement approach with speeding up claims processing.
Flax said she doesn’t anticipate a long delay with the JCT review process because it’s done electronically, obviating the need to send paper files. “That review should be smooth and [has] mechanisms in place to work through issues that [the JCT] may have,” Flax said.
TCJA Focus
In May LB&I announced a compliance campaign focused on issues stemming from the sweeping changes to the code made by the Tax Cuts and Jobs Act that will also consider the effects of the CARES Act on returns it examines. The new compliance campaign is intended to “identify transactions, restructuring and technical issues and better understand taxpayer behavior” under the 2017 tax law, according to LB&I’s list of active campaigns.
“In 2020, the majority of returns that will be under review by LB&I will be returns reflecting changes brought about by TCJA,” the IRS said. The campaign will monitor “issues on a select pool of returns and share information learned throughout LB&I and the IRS.”
Flax explained that taxpayers in the LB&I’s large corporate compliance program — which launched in 2019 as a replacement for its predecessor, the coordinated industry case program, and has about 2,500 taxpayers — won’t technically be part of the TCJA compliance campaign. But to a taxpayer, it probably won’t look that different because LB&I reviews TCJA issues for its largest corporate taxpayers, Flax added.
Flax also said that the CAP prefile program — which reopened to new applicants last year and now has about 150 taxpayers — informed the TCJA compliance campaign. CAP offers taxpayers subject to continuous audit the chance to exchange information with the IRS to work toward resolution of all or most tax positions before they file their returns. Thus, it provides taxpayers and the IRS an opportunity to agree on the treatment of completed transactions, which should save taxpayers time and provide certainty on critical tax issues. CAP taxpayers are historically compliant and represent the lowest compliance risk.
“With the CAP taxpayers, we do have some experience with the TCJA provisions and the position that taxpayers have taken [and] . . . obviously gotten insight as to where the pain points are, [for example] where there might be challenges” because of a lack of clarity, Flax said.
LB&I is also aware of timing issues because some taxpayers’ positions being reviewed were based on TCJA guidance that could be different from the permanent rules, Flax said. She said that while the CAP process has been informative and useful, the government hasn’t locked down its understanding of the implementation and taxpayers’ positions because there’s still uncertainty on what the tax landscape will look like post-TCJA.
Flax noted several changes that were implemented last year to the CAP program, including requiring companies to have financial statements based on generally accepted accounting principles and specifying some eligibility and suitability requirements for taxpayers.
LB&I realizes that flexibility may be needed in some eligibility requirements because of the effect of COVID-19, with some companies having a significantly different tax posture compared with recent history, Flax said. She added that the division doesn’t want the current situation to be a detriment to companies’ eligibility to continue in the program.
Increasing Partnership Activity
LB&I’s activity concerning passthrough entities is on the rise, but the scope varies among different types of businesses, Flax said.
The division intends to launch a program for large partnerships that is similar to the large corporate compliance program, Flax said, noting that the timing is uncertain and that it likely won’t be rolled out until perhaps early 2021.
Over the past few years, the IRS has been implementing the centralized audit regime under the Bipartisan Budget Act of 2015, which has included procedural aspects — ensuring the rules are clear — and information technology developments, a heavy lift for the agency, Flax said.
LB&I is reviewing tax year 2018 — the first year the new audit regime is effective — and has taken steps to ensure successful implementation while recognizing that some open issues require more clarity, which it intends to provide, Flax said.
Correction, August 25, 2020: This article was updated to correct the name of the compliance assurance process (CAP) program.