TAX CONTROVERSY 360
TAX CONTROVERSY 360
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McDermott Will & Schulte’s real-time tax disputes insights
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Fast Track Settlement Now For SB/SE Taxpayers

by and | Mar 20, 2017 | , , , , ,

Today, the Internal Revenue Service (IRS) released Revenue Procedure 2017-25 extending the Fast Track Settlement (FTS) program to Small Business / Self Employed (SB/SE) taxpayers.  The IRS’s SB/SE group serves individuals filing Form 1040 (US Individual Income Tax Return), Schedules C, E, F or Form 2106 (Employee Business Expenses), and businesses with assets under $10 million.

FTS offers a customer-driven approach to resolving tax disputes at the earliest possible stage in the examination process. The program provides an independent IRS Appeals review of the dispute.  Under this approach, the IRS Appeals Officer acts as the mediator and has settlement authority.

The purpose of the program is to reduce the time to resolve cases and to provide the IRS Exam Team with the authority to settle cases based on hazards of litigation (which is generally reserved for IRS Appeals Officers).  FTS has been considered a great success by the IRS and many taxpayers.  The expansion of this successful alternative dispute resolution makes sense in light of the ever-shrinking resources of the IRS.



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IRS Issues IPU on Summons of Foreign Owned US Businesses

by and | Feb 2, 2017 | , , , , ,

On January 30, 2017, the Internal Revenue Service (IRS) released an International Practice Unit (IPU) on the use of a summons under IRC Section 6038A (IRC Section 6038A Summons) when a US corporation is 25-percent owned by a foreign shareholder.  See IPU here. The IPU describes the steps that the IRS should take when issuing an IRC Section 6038A Summons, and what to do when the US corporation does not substantially comply with the summons.

In general, IRC Section 6038A imposes reporting and recordkeeping requirements (together with certain procedural compliance requirements) on domestic corporations that are 25-percent foreign-owned, which the regulations refer to as a domestic reporting corporation (DRC).  Among other requirements, a DRC is required to keep permanent books of account or records per IRC Section 6001 that are sufficient to establish the correctness of the federal income tax return of the DRC, including information, documents, or records to the extent they may be relevant to determine the correct US tax treatment of transactions with related parties. See Treas. Reg. Section 1.6038A-3.

The IRS may issue an IRC 6038A Summons when:  (i) the taxpayer under exam is a DRC; (ii) there was a transaction between the DRC and the 25 percent foreign shareholder or any foreign person related to the DRC or to such 25 percent foreign shareholder; and (iii) the DRC is appointed to act as a limited agent with respect to any request by the IRS to examine its records or produce testimony that may be relevant to the tax treatment of any transaction between the DRC and a foreign related party.  If the DRC does not substantially comply in a timely manner with the IRC 6038A Summons, the IRS has sole discretion to determine the amount of the DRC’s deductions related to transactions with, and the cost of property purchased from (or transferred to), the foreign related party.

The IPU is particularly relevant in light of final regulations published in the Federal Register on December 13, 2016 (TD 9796) which treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation for purposes of the reporting, record maintenance and associated compliance requirements under IRC Section 6038A.  The regulations are effective for tax years beginning after December 31, 2016, and ending on or after December 13, 2017.  The IPU refers to these regulations in describing the criteria which must be met before the IRS issues an IRC Section 6038A Summons.

Practice Point:  For US entities that are owned by foreign entities and file US tax returns, it is crucial to have all of the relevant information for the entity in the US. US taxpayers are required to support all of the positions claimed on a return.  For example, if there are expenditures of the US entity that are paid for by the foreign affiliate, there should be adequate documentation in the US to support those payments.



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National Taxpayer Advocate 2016 Report – Penalties

by | Jan 26, 2017 | , , , ,

Every year, the Taxpayer Advocate Service’s (TAS) Annual Report to Congress provides a unique perspective regarding the workings of the Internal Revenue Service (IRS) and how the IRS relates to the vast majority of taxpayers. That insight is particularly valuable when the IRS chooses to assert penalties—one of the most policy-driven decisions that the IRS can make. In its 2016 report, the TAS makes a number of important observations and recommendations related to three of the most commonly asserted types of penalties—accuracy-related penalties, failure-to-file and failure-to-pay penalties, and the Trust Fund Recovery Penalty.

Accuracy-Related Penalties

The TAS identified 122 cases litigated between June 1, 2015, and May 31, 2016 (the reporting period), involving accuracy-related penalties.  Of those cases, the IRS prevailed in full in 86 cases (70 percent), taxpayers prevailed in full in 20 cases (16 percent), and 16 cases were split decisions (13 percent) (percentages were rounded down in the original report). Unusual this year were the number of split decisions and the number of taxpayer wins in pro se cases. Many cases involving the negligence penalty turned upon the taxpayer’s failure to maintain adequate books and records related to the adjustments at issue.

In 2013, the TAS issued a study noting that the IRS’s imposition of accuracy-related penalties, subsequently abated after an assessment and a successful taxpayer appeal (among other fact patterns), could lead to a perception of unfairness among taxpayers regarding the IRS’s manner of assertion of these penalties. The TAS cited this study in its 2016 report, and noted again that this conduct could be detrimental to voluntary taxpayer compliance and could undermine the purpose of accuracy-related penalties.

In fact, a main priority of the Annual Report overall is to improve voluntary compliance, a fundamental element of our tax system. The TAS notes that “unnecessary coercion” by the IRS—whether through unsustained penalties or otherwise—could have the effect of reducing voluntary compliance.

Failure-to-File / Failure-to-Pay Penalties

The TAS identified 45 total decisions involving failure-to-file and failure-to-pay penalties in the reporting period.  Of these, 28 cases involved taxpayers representing themselves. The majority of cases involved full or partial taxpayer losses.

The TAS noted, consistent with our experience, that the IRS frequently relies upon selection of failure-to-file and failure-to-pay cases through its Reasonable Cause Assistant software, which makes the initial decision to impose the relevant penalties in most cases without significant human involvement.  Personal review of the penalty decision does not generally occur until after the taxpayer files an administrative appeal.  The TAS advocated for heightened personal review of these penalties and heightened consideration of relevant facts and circumstances potentially supporting abatement.

Trust Fund Recovery Penalties

The TAS noted that several Trust Fund Recovery Penalty cases this year had successfully challenged whether the penalty was properly noticed and assessed. United States v. Appelbaum, 117 A.F.T.R.2d 2016-633 (W.D.N.C.); Romano-Murphy v. United States, 816 F.3d 707 (11th Cir. 2016).

The TAS further discussed a number of unsuccessful taxpayer challenges to assessment of the Trust Fund Recovery Penalty on grounds of [...]

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National Taxpayer Advocate 2016 Report – IRS Appeals and Alternative Dispute Resolution

by and | Jan 24, 2017 | , , , ,

In its annual report to the US Congress, the Taxpayer Advocate Service (TAS) had a lot to say about IRS Appeals and the (lack of) use of other alternative dispute resolution (ADR) techniques. In this post, we will highlight what the TAS had to say in this area.

IRS Appeals

Undoubtedly, one of the Internal Revenue Service’s (IRS) most successful dispute resolution techniques has been IRS Appeals. Briefly, after the IRS’s Examination Division proposes a tax adjustment, taxpayers have the statutory right to seek an “appeal” of the decision. IRS Appeals is a separate and seemingly independent division of the IRS where one or more appeals officers review the redeterminations and adjustments made by the Examination Division, and attempt to settle the dispute directly with the taxpayer based upon a “hazards of litigation” analysis, much in the same manner as a judge would rule. The TAS acknowledged the success and utility of the IRS Appeals program and mission, but requested that Congress expand the program, giving the IRS the resources it needs to manifest the full intent of the program.

The TAS reported that funding for IRS Appeals has diminished sharply—by about 11 percent from 2013 to 2016, with staff reduced during the same period by 24 percent. In response to shrinking resources, but hobbled by the same duties and similar case load, IRS Appeals has been forced to implement procedures and policies that hamper its long-term mission of providing a fair and impartial review of the Examination Division’s adjustments. The TAS pointed out that these policies have resulted in (1) creating an inhospitable Appeals environment; (2) limiting in-person Appeals conferences; (3) reducing the Appeals officer’s ability to perform a quality substantive review; and (4) failing to protect the rights of taxpayers when conducting collection Appeals hearings. The TAS noted that there has been a large increase of cases docketed in the US Tax Court before seeking an IRS appeal. The TAS believes that docketing a case before it goes to Appeals has added inefficiency and unnecessarily increased the case load of the Tax Court.

The TAS suggested the following solutions:

  1. Expand the locations in which Appeals Officers hear matters. Presently, there are numerous states in which there are no IRS appeals officers. As a result, taxpayers who seek an appeal and request an in-person conference are forced to travel to the states in which an IRS appeals officer is located.
  2. Hold more in-person appeals conferences. The TAS report argues that in-person conferences facilitate the efficient and expeditious settlement of matters.
  3. Revise procedures and policies to allow IRS appeals officers additional discretion and time to undertake factual development and provide more substantive review of matters.

Practice point: We have recently reported about many of the issues facing taxpayers seeking review by IRS Appeals. The TAS confirms our critiques of the system. IRS Appeals is a very good and useful technique that has a high probability of settling cases. Generally, appeals [...]

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IRS Audits and IRS Appeals — A Year in Review

by | Jan 6, 2017 | , , ,

This year has been marked with substantial changes in the manner in which the Internal Revenue Service (IRS) operates. Shrinking resources and retiring IRS professionals have marred the IRS and its efficiency. The pervasive theme for 2016 was trying to do the job with fewer resources.  For example, IRS audits continue to devolve with standardized information document requests (IDRs), international practice unit guides and issue-focused examinations (mostly focused on international tax issues). We say “goodbye” to old friends [au revoir Compliance Assurance Process (CAP) Program] and hello to new rules (e.g., partnership entity audit rules and adjustments). And we have born witness to the slow evisceration of the independence of IRS Office of Appeals.

As we turn the corner to a new year, we expect the IRS’s war on taxpayers to manifest itself in “campaign” after “campaign,” reminiscent of the tiered issue system of days gone by. We expect coordination on a national level to reside with IRS “issue specialists” controlling and dictating audits and appeals, which will increasingly challenge the efficiency of pre-litigation resolution techniques. The end result of these contractions may very likely be an increase in tax litigation as frustration with the administrative process boils over. But the wild card, of course, is what changes will be ushered in by the new administration. Will it be business as usual, or will we see a complete overhaul of the system? Only time will tell, as we wait with bated breath for the ball to drop.  (more…)



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IRS Announces New Chief of IRS Appeals

by and | Nov 29, 2016 | ,

In further changes to the Internal Revenue Service (IRS) Appeals Division, it was recently announced that Donna C. Hansberry will replace Kirsten B. Wielobob as chief of IRS Appeals. Ms. Hansberry is currently the deputy commissioner of the Tax Exempt and Government Entities Division. She started as a trial attorney for the IRS Office of Chief Counsel in 1987 and was previously assistant to the commissioner (attorney-advisor for tax). Ms. Weilobob will move to the position of deputy commissioner for services and enforcement.

There have been very significant changes to IRS Appeals during the last several months that challenge whether the division will continue to be a successful tool for taxpayers and the IRS to resolve difficult cases that are stuck at the Exam Division. The “changing of the guard” may be a sign of more changes to come. Indeed, Ms. Hansberry was formerly a trial attorney and was in charge of the Joint International Tax Shelter Information Centre, director of global high wealth and abusive transactions. For prior coverage on changes at IRS Appeals, see our previous articles:

“More Changes to IRS Appeals Procedures”

“IRS Appeals – Changes Afoot?”

“IRS Updates Rules Regarding Appeals Conferences”



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More Changes to IRS Appeals Procedures

by | Nov 4, 2016 | , , , ,

In a letter dated November 4, 2016, IRS Chief of Appeals Kirsten Wielobob provided some clarification regarding the authority of the Appeals Team Case Leaders (ATCLs) to settle cases, revisions to IRM section 8.6.1.4.4 permitting other IRS employees to attend conferences, clarifications to conference practices, and revisions to how Appeals handles section 9100 relief determinations. After a month of speculation, of interest to most taxpayers and practitioners is the news that, although settlement authority will remain with the ATCLs, Appeals will revise its procedures to make it clear that an Appeals Manager must review a case prior to an ATCL finalizing a settlement. In an apparent attempt to thread the proverbial needle, the letter indicates that the Appeals Manager “will not be accepting or rejecting settlements,” but if the ATCL and Appeals manager “disagree about a settlement,” the next higher level manager supervising ATCL Operations will resolve any disagreement. Although this procedure is contemplated in IRM section 8.7.11.3.1  (03-16-2015), the letter suggests that there will in fact be a procedural shift. It remains to be seen whether, as some have feared, this will lead to increased delays in resolving cases.



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The Interplay Between Tax Planning and IP Planning

by and | Nov 4, 2016 | , ,

On November 3, 2016, we presented at the Chicago Tax Club’s symposium regarding tax planning and intellectual property (IP) planning within a multinational corporation. The presentation covered various areas, including the importance of coordination between IP and tax groups when engaging in IP planning, the differences in the IP arena and the tax arena with respect to IP matters that can impact tax planning positions, and tax planning with IP holding companies. From a tax controversy perspective, we discussed being prepared for an Internal Revenue Service (IRS) audit with respect to IP planning, with a focus on contemporaneous documentation to support the taxpayer’s position, having audit ready files (including adhering to document retention policies), reviewing IRS audit materials (e.g., International Practice Units) to understand what the IRS may ask for during the audit, and being cognizant of the various privileges (e.g., attorney-client, tax practitioner and work product) and recent positions taken by the IRS with respect to whether certain advice provided by accountants is privileged.



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Tax Controversy Options

by | Oct 11, 2016 | , , , , , , ,

Knowing your options for a US Federal tax controversy is helpful in creating a sound and efficient strategy. The attached chart depicts the typical options involved in a US Federal tax controversy, from the IRS’s examination of the return, through administrative appeals, litigation in Tax Court, Circuit Court appeal, and to ultimate assessment of tax.



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IRS Appeals – Changes Afoot?

by and | Oct 4, 2016 | , , ,

IRS Appeals cases within the Large Business and International (LB&I) division that involve a significant number of issues, a significant amount of money, or highly complex issues are typically assigned to a “team” of IRS Appeals officers. The Appeals Team Case Leader (ATCL), however, has “complete control” of the case, is “independent” from the IRS Examination Team and, except for certain coordinated issues, has settlement authority for all work assigned to the Appeals team. See I.R.M. 8.7.11.2 (09-25-2013). Currently there are 35 ATCLs.

Rumors are rampant, however, that the IRS may soon eliminate the ATCL’s settlement authority and require review and approval of settlements by an Appeals Team Manager (ATM), of which there are only a handful. On September 22, 2016, at an annual conference sponsored by the Internal Revenue Service and the New York Chapter of the Tax Executives Institute, Reinhard Schmuck, an ATCL for Area 9 in New York, confirmed that the IRS is considering changes to ATCL’s settlement authority. He indicated that the review was initiated in response to a report filed by the Treasury Inspector General for Tax Administration that determined that in a sample of penalty Appeals cases, the case files did not always support Appeals’ decisions to abate penalties as required by Appeals criteria. See TIGTA Report Number:  2015-10-059 to the Internal Revenue Service Chief of Appeals (July 30, 2015). He cautioned, however, that the IRS had not made any final decisions.

Attendees at the conference, including former Appeals Officers and practitioners, expressed dismay at the proposed change because the LB&I Appeals process, which has worked well and instilled confidence in taxpayers, is not broken. This change may be a devastating blow to resolution at Appeals, and may cause a chilling effect on seeking redress at Appeals before heading to court. What is the use of spending a significant amount of time and effort to negotiate at Appeals if the decision maker is not even part of the negotiations?

What can we expect if the rumors ring true:

(1) Additional delays at Appeals;

(2) Unhappy ATCLs and ATMs;

(3) Unfair and unreasoned settlements;

(4)  Increased assertion of penalties; and

(5) Taxpayers avoiding Appeals and an increase in tax litigation.

The new procedures were rumored to be effective October 1. We do not have confirmation of a change in policy, but once the rumors are confirmed, we will report back.



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