On November 6, 2017, the Internal Revenue Service (IRS) released two new International Practice Units (IPUs) relating to Advance Pricing Agreements (APAs) for inbound and outbound tangible goods transactions. The IPUs provide a summary of the APA process, the types of APAs, and the interpretation and impact of an APA. The IPUs focus on the APA analysis for inbound distributors and outbound distributors. As we have previously noted, this high-level guidance to field examiners signals the IRS’s continued focus on international tax issues.
On November 3, 2017, the Internal Revenue Service (IRS) Large Business and International (LB&I) division identified 11 new examination compliance “campaigns.” We have extensively discussed LB&I’s “campaign” examination process, including posts on Understanding LB&I “Campaigns” and Run for Cover – IRS Unveils Initial “Campaigns” for LB&I Audits.
The IRS identified the 11 new campaigns “through LB&I data analysis and suggestions from IRS compliance employees.” The new campaigns are:
- Form 1120-F Chapter 3 and Chapter 4 Withholding Campaign
- Swiss Bank Program Campaign
- Foreign Earned Income Exclusion Campaign
- Verification of Form 1042-S Credit Claimed on Form 1040NR
- Agricultural Chemicals Security Credit Campaign
- Deferral of Cancellation of Indebtedness Income Campaign
- Energy Efficient Commercial Building Property Campaign
- Corporate Direct (Section 901) Foreign Tax Credit
- Section 956 Avoidance
- Economic Development Incentives Campaign
- Individual Foreign Tax Credit (Form 1116)
Practice Point: The IRS’s salvo represents the “second wave” of LB&I’s issue-focused compliance work. Indeed, the IRS noted that “[m]ore campaigns will continue to be identified, approved and launched in the coming months.” It is clear that the IRS is focusing its resources on these campaigns, and has developed significant internal expertise on these issues. If you have one of the identified issues, consider being proactive and preparing an audit ready-file as the issue will likely be examined.
In Estate of Levine v. Commissioner, the US Tax Court (Tax Court) rejected an Internal Revenue Service (IRS) attempt to expand upon the privilege waiver principles set forth in AD Inv. 2000 Fund LLC v. Commissioner. As background, the Tax Court held in AD Investments that asserting a good-faith and reasonable-cause defense to penalties places a taxpayer’s state of mind at issue and can waive attorney-client privilege. We have previously covered how some courts have narrowly applied AD Investments.
In Estate of Levine, the IRS served a subpoena seeking all documents that an estate’s return preparer and his law firm had in their files for a more-than-ten-year period, beginning several years before the estate return was filed and ending more than four years after a notice of deficiency (i.e., which led to the Tax Court case) was issued. The law firm prepared the estate plan and the estate tax return in issue. The law firm represented the estate during the audit, and after the notice of deficiency was issued, the law firm was engaged to represent the estate in “pending litigation with the IRS.” Continue Reading Tax Court Says IRS’s “Drift-Net” Argument to Expand Privilege Waiver Must Be Anchored in Principles
As most taxpayers know, under Internal Revenue Code (Code) Section 6501(a), the Internal Revenue Service (IRS) generally has three years after a tax return is filed to assess any additional tax. However, Code Section 6501 provides several exceptions to this rule, including but not limited to the following.
- False or fraudulent returns with the intent to evade tax (unlimited assessment period)
- Willful attempt to defeat or evade tax (unlimited assessment period)
- Failure to file a return (unlimited assessment period)
- Extension by agreement (open-ended or for a specific period)
- Adjustments for certain income and estate tax credits (separately provided in specific statutes)
- Termination of private foundation status (unlimited assessment period)
- Valuation of gifts of property (unlimited assessment period)
- Listed transactions (assessment period remains open for one year after certain information is furnished)
- Substantial omission of items (six-year assessment period)
- Failure to include certain information on a personal holding company return (six-year assessment period)
If the IRS issues a notice of deficiency and the taxpayer files a petition in the Tax Court, the statute of limitations on assessment is extended until after the Tax Court’s decision becomes final. See Code Section 6503(a); see also Roberson and Spencer, “11th Circuit Allows Invalid Notice to Suspend Assessment Period,” 136 Tax Notes 709 (August 6, 2012). Continue Reading Statutes of Limitation in the International Tax Context
On September 7, 2017, the Treasury Inspector General for Tax Administration (TIGTA) issued a report about the Internal Revenue Service’s (IRS) Freedom of Information Act (FOIA) procedures. After reviewing a statistically valid sample of FOIA requests, TIGTA concluded that the IRS improperly withheld information 14.3 percent of the time—or approximately 1 in 7 FOIA requests.
TIGTA also found that at the end of Fiscal Year 2016, there were 334 backlogged information requests. Below is a chart from the report showing the IRS’s recent history of backlogged FOIA requests.
TIGTA’s findings are consistent with our experiences with FOIA requests. It is not unusual for the IRS to make repeated requests for extensions to respond. We note further that, during an examination, the IRS is statutorily authorized to provide taxpayers access to their administrative file. Indeed, the Internal Revenue Manual confirms this at section 126.96.36.199 (June 15, 2017). Yet the IRS examination team often requires a FOIA request.
Practice Point 1: As a result of the IRS’s FOIA backlog, some taxpayers have resorted to filing lawsuits in federal district court to enforce their FOIA rights. Because the IRS must respond to court deadlines, taxpayers are sometimes able to force a more expedient response and move to the front of the response line.
Practice Point 2: Taxpayers should attempt to tailor their FOIA requests, only requesting the information in which they are interested. In theory, this could make the IRS’s job easier and, in turn, responses more timely.
Practice Point 3: If taxpayers intend to seek information from the government through the FOIA process, they should do so as soon as possible (e.g., at the beginning of the examination process) so that they may get the information in time to be useful.
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.
In a long-awaited decision, the US Tax Court recently held that gain realized by a foreign taxpayer on the sale of a partnership engaged in a US trade or business was a sale of a capital asset not subject to US tax, declining to follow Revenue Ruling 91-32. The government has yet to comment regarding its intentions to appeal.
Wrapping up July—and Looking Forward to August
Tax Controversy Activities in August:
August 7, 2017: Elizabeth Erickson and Kristen Hazel will be representing McDermott Will & Emery at the 2017 US Captive Awards in Burlington, Vermont. McDermott has been shortlisted in the Law Firm category.
August 8, 2017: Tom Jones is presenting an update on Captive Insurance Tax in Burlington, Vermont, at the Vermont Captive Insurance Association Annual Conference “Mission: Possible”— the largest captive insurance conference in the US by number of paid attendees.
August 18, 2017: Todd Welty is speaking at the Texas Society of Certified Public Accountants Advanced Estate Planning Conference about:
- Current developments in federal transfer taxes
- Current state of federal tax reform
- Proposed changes to state death tax laws and the impact of those changes on estate
- Gift and trust planning
- Consistent basis regulations
- The state of valuation discounts
- Recent rulings on defined value clauses and charitable gifts
August 23, 2017: Tom Jones is presenting an update on Annual Federal & State Tax at the North Carolina Captive Insurance Association Annual Conference in Charlotte, North Carolina.
Wrapping up July:
Our July 2017 blog posts are available on taxcontroversy360.com, or read each article by clicking on the titles below. To receive the latest on state and local tax news and commentary directly in your inbox as they are posted, click here to subscribe to our email list.
In a highly-anticipated Technical Advice Memorandum (TAM) dated March 23, 2017 and released on July 21, 2017, the Internal Revenue Service (IRS) ruled that two taxpayers who had invested in a Limited Liability Company that owned and operated a refined coal facility (the LLC) were not entitled to refined coal production credits they had claimed because their investment in the LLC was structured “solely to facilitate the prohibited purchase of refined coal tax credits.” This analysis marks a departure from the position staked out by the IRS in a number of recent refined coal credit cases, which focused on whether taxpayers claiming refined coal credits were partners in a partnership that owned and operated a refined coal facility.
The Internal Revenue Service (IRS) has broad authority under Internal Revenue Code (IRC) Section 7602 to issue administrative summonses to taxpayers and third parties to gather information to ascertain the correctness of any return. If the IRS does not know the identity of the parties whose records are covered by the summons, the IRS may issue a “John Doe” summons only upon receipt of a court order. The court will issue the order if the IRS has satisfied the three criteria provided in IRC Section 7609(f):
- The summons relates to the investigation of a particular person or ascertainable group or class of persons,
- There is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and
- The information sought to be obtained from the examination of the records (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.