Today we welcome first-time guest poster Tom Greenaway. Tom is a principal in KPMG’s Tax Controversy Services practice. He is a former senior attorney in the IRS Office of Chief Counsel’s then-Large and Midsize Business Division. Tom has written on a variety of tax procedure issues and is in the process of updating the chapter on examinations in the 7th edition of Effectively Representing Your Client Before the IRS. We are fortunate to gain his insights as he describes the rollout of IRS changes in its enforcement strategies relating to our nation’s largest taxpayers. Les
For several years, the Large Business & International Division of the IRS (LB&I) has been shifting its approach to its enforcement priorities in light of prolonged budget constraints and reduced staffing. LB&I leadership is trying to better select returns for examination, and to swiftly address noncompliance issues when they find them, all in the name of efficiency and increased productivity.
Productivity in the context of IRS enforcement usually means generating and sustaining meaningful adjustments (though individual revenue agents and managers are not evaluated on this basis). For decades, however, the “no-change” rate for LB&I corporate examinations has been stuck above 20 percent, and the “no-change” rate is more than double that—almost 50%—for LB&I examinations of pass-thru entities and foreign corporations. In IRS jargon, a “no-change” means an audit did not generate any adjustments to the tax return as filed—thus no return on this significant investment of IRS resources. Corporate taxpayers and pass-thrus with more than $10 million in assets on their balance sheets are LB&I taxpayers.
IRS enforcement serves as a vital backstop to our system of voluntary income tax compliance. But the current trend of fewer examinations owing to budget cuts and increased non-income tax enforcement responsibilities, combined with perennially high no-change rates, is a bad mix. This is a prime reason LB&I is fundamentally changing its process and structure.
One element of LB&I’s new process is to risk assess taxpayers centrally and develop nationwide compliance “campaigns.” According to IRS, a campaign will be developed when LB&I decides, centrally, that an issue requires a response across an identified population of taxpayers in the form of one or multiple “treatment streams.” This centralized risk assessment will include the use of data analytics to identify issues and taxpayers that pose the highest risk to sound tax administration and compliance. LB&I announced this shift in approach more than a year ago, and in response more than 600 campaign ideas were submitted for consideration, mostly from internal IRS sources. Andrew Velarde, Some Complex Issues Won’t Be Part of Initial LB&I Campaigns, Tax Notes Today, (Nov. 15, 2016) available at 2016 TNT 221-3.
On January 31, 2017 IRS released the initial rollout of 13 different LB&I’s campaigns. Each campaign is assigned to an LB&I practice area and executive who will serve as the lead.
Here’s the list of the initial 13 campaigns:
- Section 48C Energy Credits
- OVDP Declines-Withdrawals
- Section 199 Domestic Production Activities Deduction – Multichannel Vide Program Distributors & TV Broadcasters
- Micro-Captive Insurance
- Related Party Transactions
- Deferred Variable Annuity Reserves & Life Insurance Reserves Industry Issue Resolution (IIR)
- Basket Transactions
- Land Developers – Completed Contract Method (CCM)
- TEFRA Linkage Plan Strategy
- S Corporation Losses in Excess of Basis
- Form 1120-F (Foreign Corporation) Non-Filer Campaign
- Inbound Distributors
The initial campaigns cover a wide range of topics. They range from technical tax issues affecting multiple industries (e.g., transfer pricing by inbound distributors, cash repatriation strategies), to industry-focused issues (e.g., variable annuity reserves IIR for insurers and completed contract method for land developers), to procedural compliance issues (e.g., OVDI withdrawals, practical workarounds of TEFRA partnership linkage limitations, and foreign corporate non-filers). Some campaigns that have been promised, like Chapter 3 withholding, were not included in this initial rollout.
As promised, the recommended “treatments” for each campaign vary, although all of the campaigns (except the insurance IIR) will involve examinations to some degree or another.
Some of the campaigns already have well-established treatments in place. For instance, IRS has already identified basket transactions as listed transactions and transactions of interest, and recently issued a related Practice Unit. Practice Units on inbound distributors have been available to the public since December 2014. Treatments of other issues, on the other hand, like the Insurance Industry IIR and TEFRA linkages, have been stalled for years.
Large business taxpayers—and their LB&I examination teams—will need to learn how to adapt to IRS campaigns. IRS officials have said that if a return selected for a campaign examination does not fit the targeted facts or concerns, LB&I wants to release the taxpayer and potentially refine the campaign. Amy Elliott, First LB&I Campaign List to Include Inbound and Outbound Issues, Tax Notes Today, (Dec. 19, 2016) available at 2016 TNT 243-3. Practitioners will play an important role in helping examiners understand whether the targeted concern is actually an issue on the returns selected.
On properly selected campaign examinations, the transparency and commitment to collaboration that are hallmarks of the new LB&I generally and the campaign process specifically should lead to faster issue identification, development, and resolution on campaign cases—all of which should be shared goals of both taxpayers and the IRS. Planned ongoing feedback from this process should further help IRS refine or even end a treatment, or a campaign, if the treatments succeed, or do not work.
Another key for practitioners will be to maintain the team’s focus on pre-identified campaign issues. Traditionally, LB&I examination teams enjoyed wide latitude to identify and develop issues for examination. That is all changed now. A shift towards centrally-developed campaigns necessarily comes at the expense of the field teams’ discretion to raise issues. According to at least one official, examination teams working campaign cases may raise other, non-campaign issues “that they feel they cannot walk away from,” but that standard sets a high bar for overloaded examination teams to clear. Andrew Velarde, Some Complex Issues Won’t Be Part of Initial LB&I Campaigns, Tax Notes Today, (Nov. 15, 2016) available at 2016 TNT 221-3.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.
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