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Michael R. Louis focuses practice on representing individuals and entities in US Internal Revenue Service (IRS) examinations, administrative appeals, civil tax controversies and criminal tax proceedings. Michael also has advised clients on the US federal tax consequences of corporate reorganizations and capital restructurings. Read Michael Louis' full bio.

Multinational Enterprises (MNEs) are facing an evolving international tax landscape with long-term implications for tax compliance, planning and controversy. Understanding these changes requires continual effort. Tax Executives Institute recently invited us to explore Country-by-Country (CbC) reporting issues at the 2017 Global Tax Symposium in Houston, Texas. We had a lively discussion and know this will be a hot topic as jurisdictions begin reviewing the CbC reports.

As background, the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project has been a key driver of international tax reform.  BEPS “Action 13” outlined a CbC reporting standard that has been adopted in more than 55 jurisdictions. The CbC report is an annual filing obligation identifying, among other things, the amount of revenue, profit before income tax, and income tax paid and accrued for each tax jurisdiction in which the taxpayer does business. The resulting transparency directly affects global tax strategies since the CbC report is subject to automatic exchange provisions and more than 1,000 such relationships have been established worldwide. Tax authorities will be using this information to perform tax risk assessments so taxpayers need heightened sensitivity to the breadth and depth of information available through the CbC report. If you are involved in the process of preparing a CbC report, discussing the CbC report with a tax authority, or are otherwise interested in how the CbC report could be used by a tax authority, the OECD’s Handbook on Effective Tax Risk Assessment is a valuable resource.

Continue Reading Tax Planning in a World of Increased Transparency

Forms 2848 Power of Attorney and Declaration of Representative are intended to authorize the Internal Revenue Service (IRS) to discuss a taxpayer’s confidential tax matters with a designated representative. Generally, the form requires the taxpayer to identify the tax form number (where applicable), a description of the matter and specify the applicable tax year(s) for the authorization to be valid. If the IRS determines that an issue is beyond the scope outlined in the Form 2848 they will not discuss that item with the representative. It is important to understand how the IRS interprets these restrictions.

Importantly, on September 8, 2017, the IRS released TAM 201736021, dated August 1, 2017, which expresses a narrow view of whether certain civil penalties are related to certain tax returns for purposes of a Form 2848 authorization. The TAM notes that “merely listing ‘civil penalties’ on Line 3 of the Form 2848” may no longer be sufficient authorization if the civil penalty relates to a return that is not otherwise enumerated within the Form 2848. For example, the TAM concluded that a Form 2848 only identifying an income tax return, such as a Form 1120 or Form 1040, would not constitute authorization for the IRS to discuss civil penalties related to international information returns that may have to be filed with the income tax return, such as a Form 5471. Under the IRS’s view, the civil penalty would be related to the Form 5471 but not the Form 1120.

The TAM provided a second example, reaching a similar conclusion regarding the relationship between a Form 1040 and a Form 3520. In short, authorization would not exist for the IRS to discuss with a representative whether an IRC section 6677 civil penalty for failure to file Form 3520 is applicable if the Form 2848 only identifies the Form 1040. This result may be more intuitive since the Form 3520 is not attached to the Form 1040 and is required to be filed separately. However, it is still more demanding than having a broader application of the “civil penalties” designation on the Form 2848.

Practice Point 1: Forms 2848 are generally executed at the outset of a matter when it may not be readily apparent in what direction the audit will progress or what issues the IRS may focus on. While we disagree with the IRS’s position as stated in the TAM, taxpayers and practitioners need to be cognizant of the IRS’s position and may need to revisit their Forms 2848 during the course of an audit.

Practice Point 2: As a general matter, the IRS agent handling an audit will tell the practitioner if the agent believes that a current Form 2848 is not sufficient, but that does not always happen. So it is good practice for taxpayers to send the practitioner any correspondence or notices that they receive from the IRS and not merely rely on the presumption that the IRS also mailed a copy to the practitioner listed on the Form 2848.

The Treasury Inspector General for Tax Administration (TIGTA) recently summarized several critical deficiencies in how the IRS handles electronically stored federal records in a recent report, available here. The lapses identified by TIGTA may affect the availability of those electronic records for future Freedom of Information Act (FOIA) requests, litigation and Congressional review. The report does not address the IRS’s retention policy for physical documents.

Federal law mandates the retention of the government’s federal records. Unfortunately, prior to May 22, 2013, IRS electronic asset disposal policies included instructions to “wipe” and “reimage” computer hard drives that were no longer needed by IRS users. If those computers were the only repository for electronically stored federal records, that information would be lost. TIGTA noted that, even though the IRS revisited those policies several times, computers were still being wiped and reimaged as part of the IRS’s migration to Windows 7 through January 14, 2016. This also affects email retention since users are often required to manually identify and store or print their email records. An upgraded email solution that will permit the automatic retention and storage of email records is being implemented.

Further, TIGTA determined the IRS’ storage and retention policies for computers that were not wiped or reimaged were ineffective. For example, TIGTA found that the IRS has approximately 32,000 laptops and desktops in storage, but an inventory report identifying the number and location of computing devices currently in storage from specific employees could not be readily produced, rendering electronic federal records on those devices essentially unavailable.

These inadequate electronic record retention policies have resulted in the destruction of material subject to litigation holds, delays in the FOIA process, and the unavailability of responsive documents for FOIA requests. TIGTA made the following recommendations, which the IRS agreed to:

  • An enterprise email system should be implemented that enables the IRS to comply with federal records management requirements.
  • A methodology for developing one list of executives for the permanent and 15-year email retention groups should be documented.
  • The newly issued policy on the collection and preservation of federal records associated with separated employees should be disseminated broadly within the agency.
  • The director should ensure that the policy for documenting search efforts is followed by all employees involved in responding to FOIA requests.
  • The director should develop a consistent policy for the search of federal records associated with separated employees.

Practice Point: When drafting FOIA requests and discovery requests for electronic records, practitioners should be aware of record-retention challenges facing the IRS since they will impact the IRS’s ability to fully respond to FOIA requests and adequately implement litigation holds for years to come.