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McDermott Will & Schulte’s real-time tax disputes insights
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IRS Updates Rules Regarding Appeals Conferences

by , , , , and | Sep 22, 2016 | , , ,

The Internal Revenue Service (IRS) has revised the Internal Revenue Manual (IRM) regarding Appeals Conferences.  Below is a summary of material changes to IRM 8.6.1, effective October 1, 2016:

  • The IRM was revised to reflect that most conferences in Appeals will be conducted by telephone.  The revision also provides guidance for when in-person conferences are appropriate (e.g., when there are substantial books and records to review that cannot be easily referenced with page numbers or indices, or when there are numerous conference participants that create a risk of an unauthorized disclosure or breach of confidentiality).
  • IRM 8.6.1.4.1.2, In-Person Conferences: Circuit Riding was added.  If the assigned Appeals employee is in a post of duty that conducts circuit riding, circuit riding will be permitted when the address of the taxpayer, representative or business (for business entities) is more than 100 miles from a customer-facing virtual conference site or 150 miles from the nearest Appeals Office.  Area Directors have the discretion to deviate from these mileage limitations.  Circuit riding will also be allowed if the nearest Appeals Office cannot take the case due to high inventories or lack of technical expertise, or if there is no convenient alternative.
  • Language was added in IRM 8.6.1.4.4 to state that Appeals has the discretion to invite Counsel and/or Compliance to the conference.  The IRM notes that the prohibition against ex parte communications must not be violated and references Rev. Proc. 2012-18.
  • The definition of a new issue was updated in IRM 8.6.1.6.1(2).  The IRM retains prior language stating that a new issue is a matter not raised during Compliance’s consideration and adds that any issue not raised by Compliance in the report (e.g., 30-Day Letter) or rebuttal and disputed by the taxpayer is a new issue.

The revised IRM 8.6.1 is available here.



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Protecting Confidential Taxpayer Information in Tax Court

by , and | Jul 21, 2016 | , , , , , , ,

Taxpayers value confidentiality, particularly if there is a dispute with the IRS that involves highly-sensitive trade secrets or other confidential information. Not surprisingly, complex tax litigation often raises the question of what confidential information has to be “made public”—through discovery responses or the introduction of exhibits or testimony in a deposition or at trial—so that a taxpayer can dispute IRS adjustments in court if administrative efforts to resolve the case are not successful. Fortunately, the Tax Court tends to protect highly-sensitive trade secrets or other confidential information from public disclosure even when the judge must review the information to decide the case.

In the Tax Court, the general rule is that all evidence received by the Tax Court, including transcripts of hearings, are public records and available for public inspection. See Internal Revenue Code (Code) Section 7461(a). Code Section 7458 also provides that “[h]earings before the Tax Court . . . shall be open to the public.” Code Section 7461(b), however, provides several important exceptions. First, the court is afforded the flexibility to take any action “which is necessary to prevent the disclosure of trade secrets or other confidential information, including [placing items] under seal to be opened only as directed by the court.” Second, after a decision of the court becomes final, the court may, upon a party’s motion, allow a party to withdraw the original records and other materials introduced into evidence. In our experience, the trend appears to be erring on the side of protecting information from disclosure.

(more…)



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Some Questions Posed by Declining Audit Rates and Audit Campaigns

by | Jul 8, 2016 | , ,

The IRS is spending increasingly less time auditing large companies. This is a good thing, right?  But wait, the IRS is starting to launch audit campaigns. And some large taxpayers are still being audited even if they are not caught up in a campaign. What could be some of the consequences of these dynamics?

A recent report confirmed that IRS audits of large companies have fallen steeply in recent years. The report conducted by TRAC (Syracuse University’s Transactional Records Access Clearinghouse) (available here) analyzed IRS audit history of large companies from 2010 through 2015.  The study found the IRS spent 34 percent less time on average auditing companies with $250 million or more in assets (Big Corps) in 2015 than it did in 2010.  Audits of the largest companies are declining even more sharply: the IRS spent 47 percent less time auditing companies with assets of $20 billion or more (Giant Corps). Further, the total number of large businesses audited by the IRS’s LB&I (Large Business & International) Division in 2016 is 22 percent lower than it was last year during this time period.

Large taxpayers may take a deep breath once their continuous audit cycle becomes less continuous or stops altogether. This is understandable. But if you are a taxpayer that is audited, a number of important questions immediately come to mind:

  • Will we have good rapport with a new IRS audit team? We spent years building our relationship with the previous IRS team—has all that very important work gone out the window? Will I have the time to build rapport with the new IRS team, or will they be under such time pressure to audit discrete issues that we will have little opportunity to interact with the team and shape the audit plan?
  • Will the IRS team arrive with a preconceived idea of the “proper outcome”? Will information document requests (IDRs) be standardized? Will we be able to effectively negotiate the scope of IDRs? Or will the IRS team simply be fact-gatherers for a more centralized committee that makes decisions?
  • Will we be able to meet with actual decision makers? Or will the decision makers be a committee in the background that we never truly get to engage in a meaningful discussion? Will centralized decision makers take into account the specifics of our situation, or will we be “lumped in” with other taxpayers?
  • Will the IRS issue “fighting regulations” in an attempt to chill legitimate transactions? Will IRS audit teams attempt to apply these fighting regulations to transactions that predate the effective date of the new regulations? After all, doesn’t the IRS often contend that the new regulations are not really a change and simply reflect existing law?
  • Will fewer audits mean bigger adjustments? What institutional pressure is IRS Exam under to propose very large adjustments? What about penalties?
  • Will IRS Appeals exercise true independence and concede improper adjustments? Or will IRS Appeals simply “split the baby” based on inflated numbers? Will this combination of factors [...]

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IRS Updates List of Items Requiring National Office Review

by and | Jul 7, 2016 | , , , , ,

On June 30, 2016, the Internal Revenue Service (IRS) issued Chief Counsel Notice 2016-009, which can be found here. In the notice, the IRS updated the list of issues that require IRS National Office review (the List). The List indicates those issues or matters raised by IRS field examiners that must be coordinated with the appropriate IRS Associate office.

There are several new items on the List. Notably, corporate formations with repatriation transactions, certain spin-off transactions and transactions that may implicate Treasury Regulation § 1.701-2 partnership anti-abuse rules are now also included. Debt-equity issues pursuant to Section 385 continue to be on the List.

In addition, now included are issues designated for litigation and issues that for technical tax reasons will not be referred to the IRS Office of Appeals under Revenue Procedure 2016-22, Section 3.03 (also relating to issues designated for litigation). We discussed Revenue Procedure 2016-22 in a recent posting. (more…)



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IRS Issues New Procedures to IRS Appeals for Requesting Assistance from Exam in Docketed Tax Court Case

by , , and | Jul 1, 2016 | , , ,

On June 24, 2016, the Internal Revenue Service (IRS) issued a memorandum (AP-08-0616-0003, available here) to the IRS Appeals Division (Appeals) providing new, uniform procedures for requesting assistance from the Examination Division (Exam) in docketed Tax Court cases. The guidance implements standard procedures that would treat petitioners similarly. Currently, when petitioners provide new information to Appeals that was not previously considered by Exam, Appeals requests Exam’s assistance based on local procedures, which sometimes result in disparate treatment of petitioners. The guidance is effective on August 29, 2016.

Under the new procedures, Appeals will send a request for Exam’s assistance if Appeals determines that the new information merits additional analysis or investigation. If Exam approves the request, an Exam Agent may recommend changes to the proposed adjustment, including an increase in tax, based upon the new information. Appeals, however, is not required to adhere to Exam’s recommendations. Where acceptance of the Exam Agent’s recommended changes results in a new issue or an increased deficiency, the IRS generally must bear the burden of proof on such changes from the notice of deficiency pursuant to Tax Court Rule 142. If Exam denies the request, Appeals will consider settlement offers based on all information in the case file, and the probative value of the new information.

 



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IRS Wages ‘Campaigns’ against Taxpayers

by , and | Jun 29, 2016 | , , ,

Late last year, the Internal Revenue Service’s (IRS’s) Large Business and International (LB&I) division announced that it would restructure its organization. The restructuring was precipitated by shrinking resources and a shifting environment. A primary feature of the restructuring is the end of the continuous audit program (where the IRS audits a large taxpayer year after year for decades) and a move to an issue focused, coordinated attack—to wit, the new IRS “Campaign” methodology. Although this program is clearly in its infancy, practitioners are starting to see how the IRS is implementing their latest project.

In essence, IRS campaigns are a centralized risk identification strategy. The IRS has leveraged its knowledge throughout its system, identified the most serious tax issues and allocated its resources to those issues. The emphasis then, is off specific taxpayers and on to specific tax issues. (more…)



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IRS Commissioner Asks Congress to Overturn Loving

by and | Apr 22, 2016 | , ,

Following a report by the US Government Accountability Office (GAO) that criticized the Internal Revenue Service (IRS) for failing to protect taxpayer financial information from cybersecurity threats, IRS Commissioner John Koskinen has requested that US Congress give the IRS the power to license tax preparers.  Prior efforts by the IRS to regulate paid tax preparers by forcing them to pass a competency exam and meet continuing education requirements had been struck down in a 2013 federal district court decision which was later affirmed unanimously by the US District Court for the District of Columbia in Loving v. IRS, 742 F.3d 1013 (DC Cir. 2014).

Having failed to achieve its goal in court, in 2014 the IRS turned to Capitol Hill to grant it the authority to enforce nationwide certification requirements on independent tax return preparers.  Imposing competency requirements on tax return preparers is an idea supported not only by the IRS but also by National Taxpayer Advocate Nina E. Olsen and other tax policy leaders.  Proponents have long argued that government regulations are needed to address ineptitude among “mom-and-pop” tax preparers and unscrupulousness among other preparers who take advantage of uninformed taxpayers.  Efforts to pass the legislation in Congress, however, had stalled.

Now, Commissioner Koskinen is using the recently issued GAO report to renew the push to established minimum standards for tax preparers.  It would seem unlikely, however, that these new efforts will bear any fruit.



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IRS Updates Appeals Procedures for Tax Court Cases

by and | Mar 25, 2016 | , , , , , ,

On March 23, 2016, the Internal Revenue Service (IRS) issued Rev. Proc. 2016-22, 2016-15 IRB 1, which clarifies and describes the practices for the administrative appeals process in cases docketed in the Tax Court.  The stated purpose of the revenue procedure is to facilitate effective utilization of appeals and to achieve earlier development and resolution of Tax Court cases.

Previously, the procedures for the appeals process of Tax Court cases was contained in Rev. Proc. 87-24, 1987-1 C.B. 720.  In October 2015, the IRS released a proposed revenue procedure updating the rules and requesting public comments.  Three substantive comments were received and considered by the IRS, resulting in changes to the proposed revenue procedure.  Rev. Proc. 2016-22 states that some of the suggestions that were not adopted may be addressed in other IRS guidance materials.

The general rule followed by the IRS is that all cases docketed in the Tax Court that have not previously been considered by IRS Appeals will be transferred to Appeals unless the taxpayer notifies IRS counsel that it wants to forego settlement consideration by Appeals.  This rule is subject to certain exceptions, most notably if the case has been designated for litigation by the IRS.  The revenue procedure also provides that “[i]n limited circumstances, a docketed case or issue will not be referred if Division Counsel or a higher level Counsel official determines that referral is not in the interest of sound tax administration.”  Although no definition is provided, examples are provided of: (1) a case involving a significant issue common to other cases in litigation for which the IRS maintains a consistent position; or (2) cases related to a case over which the Department of Justice has jurisdiction.  Referral to IRS Appeals will generally occur within 30 days of the case becoming at issue in the Tax Court, which can be either the date the Answer is filed by the IRS or a Reply (if required) is filed by the taxpayer.

The revenue procedure clarifies, and limits, the role of IRS counsel when a case is referred to Appeals.  Unlike Rev. Proc. 87-24, the new revenue procedure provides that Appeals has sole discretion to determine whether IRS counsel may participate in any settlement conference and will consider input from the taxpayer on this point.  It also clarifies that when a case is forwarded to Appeals for consideration, “Appeals has the sole authority to resolve the case through settlement until the case is returned to Counsel.”  In the past, taxpayers were concerned about the ability of IRS counsel to disrupt a settlement reached with Appeals.  If a settlement is reached with Appeals, IRS counsel’s involvement is ministerial in that counsel should only review any decision document signed by the taxpayer for accuracy and completeness before signing the decision document on behalf of the IRS and filing it with the Tax Court.

The new revenue procedure should also be a welcome development for estate tax cases given that there is no statutory provision to extend the [...]

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