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TAX CONTROVERSY 360
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McDermott Will & Schulte’s real-time tax disputes insights
IRS Guidance
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BEWARE: Whistleblowers Can “Out” You to the IRS!

by and | Jul 24, 2017 | , , ,

Not only should companies worry about the Internal Revenue Service (IRS) auditing their returns, but they also have to be aware of a potential assault from within. Indeed, current and former employees have an incentive to air all of your tax issues with the hope of being rewarded for the information.

Section 7623(b) was added to the Internal Revenue Code (IRC) in 2005, and pays potentially large monetary rewards for so-called tax whistleblowers. To qualify for remuneration, a whistleblower must meet several conditions to qualify for the Section 7623(b) award program: (1) submit the confidential information under penalties of perjury to the IRS’s Whistleblower Office; (2) the information must relate to a tax issue for which the taxpayer (if the IRS found out) would be liable for tax, penalties and/or interest of more than $2 million; and (3) involve a taxpayer whose gross income exceeds $200,000 the tax year at issue. If the information substantially contributes to an administrative or judicial action that results in the collection, the IRS will pay an award of at least 15 percent, but not more than 30 percent of the collected proceeds resulting from the administrative or judicial action (including related actions).

Section 7623(b) has spawned a collection of law firms around the country dedicated to signing up scores of whistleblowers who are hoping to cash in big! Our clients routinely ask us how to best protect themselves. We typically tell our clients that the best defense is a good offense. Consider the following:

  1. Use of non-disclosure agreements with employees who work on sensitive projects like mergers and acquisitions;
  2. Limit employee access to the companies tax accrual workpapers and other documents that indicate the tax savings involved in a transaction or a position claimed on a return;
  3. Review your procedures to ensure that privilege and confidentiality is maintained (this would include training employees and managers);
  4. Review company’s internal procedures for employee complaints to ensure that you have robust procedures in place that offer an independent review and allow for anonymous submissions; and
  5. Be vigilant, and look for signs that an employee is “disgruntled.”

Practice Point: If you are under examination by the IRS, you may be able to discern a whistleblower issue based on the questions being asked by the IRS and whether those questions could only be formed based on information provided by a whistleblower. If this situation exists, it is important to determine whether you should raise the issue with the IRS, particularly if you believe that any confidential and/or privileged information has been provided to the IRS without your consent. To make sure you are protected and adequately prepared, consult with your tax controversy lawyer.



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John Doe Intervenes in Virtual Currency Summons Enforcement Case

by | Jul 21, 2017 | , , ,

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.

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Tax Court Rejects IRS Reliance on “Cursory” Analysis in Revenue Ruling

by | Jul 19, 2017 | , ,

We have previously discussed, in March and October of 2016, the various levels of deference given to Internal Revenue Service (IRS) guidance, whether it is in published or private form. For revenue rulings, courts traditionally apply Skidmore deference, which essentially looks at the persuasiveness of the ruling. Under this standard, and the IRS’s position in its procedural regulations, if a ruling contains the same material facts and its analysis is persuasive, courts will generally defer to it.

The Tax Court’s recent opinion in Grecian Magnesite Mining, Industrial & Shipping Co., SA, v. Commissioner, 149 TC No. 3 (July 13, 2017), is a friendly reminder that just because a revenue ruling addresses the same material facts present in a taxpayer’s case does not automatically mean that courts will side with the IRS. In Grecian, a revenue ruling contained three fact patterns which were essentially the same as the taxpayer’s facts. The ruling held that gain realized by a foreign partner upon disposing of its interest in a United States partnership should be analyzed on an asset-by-asset basis, and that to the extent the partnership’s assets would give rise to effectively connected income (ECI) if sold by the partnership, the departing partner’s pro rata share of such gain should be treated as ECI. Despite this conclusion, the Tax Court rejected the IRS’s argument that the ruling was entitled to deference and required upholding the IRS’s deficiency determination. Rather, the court noted that the ruling’s discussions of the relevant partnership provisions was “cursory in the extreme” and it criticized the ruling’s treatment of the United States taxation of international transactions. As a result, the court declined to accord any deference to the ruling and ultimately found that the taxpayer’s position was correct as to the issue addressed in the ruling.

Practice Point: Although many revenue rulings contained detailed discussions and analysis of the tax laws, some are based on blanket statements of law that are not supported by relevant authorities. In these situations, taxpayers and their advisors should carefully consider whether a court would afford any deference to such a blanket statement.



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Courts Rejects Challenge to OVDP Transition Rules

by and | Jul 18, 2017 | , , ,

The Internal Revenue Service (IRS) currently offers non-compliant US taxpayers several different relief programs to report foreign assets and/or income to become compliant with US rules related to the disclosure of offshore income. See here for a link to the different options. The two main programs are the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Filing Compliance Procedures (SFCP). The IRS launched the OVDP in 2012 to enable a taxpayer with undisclosed foreign income or assets to settle most potential penalties he may be liable for through a lump sum payment of 27.5 percent of the highest aggregate value of the taxpayer’s undisclosed foreign assets for the voluntary disclosure period, which is the previous eight years. The OVDP replaced prior offshore voluntary disclosure programs and initiatives from 2009 and 2011. OVDP has a number of filing and payment requirements, including paying eight years’ worth of accuracy-based penalties. The IRS updated and revised the OVDP in 2014.

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New IRS CbC Resource

by and | Jul 17, 2017 | , , ,

We have reported several times about the new Country-by-Country (CBC) reporting regime. Taxpayers and the tax bar have been desperate for clarity about the requirements for CbC reporting.  In response, today the Internal Revenue Service (IRS) announced the launch of its CbC resource on its www.IRS.gov website. The new information is designed to provide background on CbC, frequently asked questions and other information. One of the best features is a list of jurisdictions that have concluded Competent Authority Arrangements with the United States.



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Tracking Tax Guidance and Court Cases

by and | Jul 14, 2017 | , , ,

Oftentimes, taxpayers rely on various authorities in planning transactions and reporting them for tax purposes, as well as defending them during an Internal Revenue Service (IRS) audit, appeals or in litigation. These sources include authorities like the Internal Revenue Code, legislative history and other legislative materials, Treasury regulations and other IRS published guidance (e.g., revenue rulings, revenue procedures, notices, announcements), IRS private guidance (e.g., chief counsel advice, technical advice memoranda, private letter rulings, etc.), and case law. As we have discussed previously, these authorities are afforded different weight by courts and the IRS, and can serve different purposes in your matter.

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LB&I’s Final Campaigns Webinar: Section 48C Energy Credits and Completed Contract Method for Land Developers

by and | Jun 27, 2017 | , , ,

On June 20, 2017, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) hosted its final webinar regarding LB&I Campaigns. Our previous coverage of LB&I Campaigns can be found here. The webinar focused on two campaigns:  (1) Section 48C Energy Credits and (2) Land Developers – Completed Contract Method.

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Appeals Large Case Pilot Program Draws Criticism

by | Jun 15, 2017 | , , ,

In October 2016, the Internal Revenue Service (IRS) revised the Internal Revenue Manual (Manual) 8.6.1.4.4 to provide IRS Appeals Division (Appeals) with discretion to invite representatives from the IRS Examination Division (Exam) and IRS Office of Chief Counsel (Counsel) to the Appeals conference. Many tax practitioners opposed this change, believing that it undermines the independence of Appeals and may lead to a breakdown in the settlement process.

In May 2017, the American Bar Association (ABA) Section of Taxation submitted comments recommending the reinstatement of the long-standing Manual provision regarding the limited circumstances for attendance by representatives from Exam and Counsel at settlement conferences. Additionally, the Tax Section’s comments were critical of the practice whereby some Appeals Team Case Leaders (ATCLs) in traditional Appeals cases are “strongly encouraging” IRS Exam and the taxpayer to conduct settlement negotiations similar to Rapid Appeals or Fast Track Settlement, such that many taxpayers do not feel they can decline such overtures. The Tax Section comments suggested that the use of Rapid Appeals Process and Fast Track Settlement should be a voluntary decision of both the taxpayer and IRS Exam and the use of these processes should be the exception rather than the rule. (more…)



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The View from Here: LB&I’s Cross-Border Activities Campaigns Webinar

by and | May 25, 2017 | , , ,

On Tuesday, May 23, 2017, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) hosted its sixth in a series of eight webinars regarding LB&I Campaigns. Our previous coverage of LB&I Campaigns can be found here. The webinar focused on two cross-border activities campaigns: (1) the Repatriation Campaign and (2) the Form 1120-F Non-Filer Campaign. Below, we summarize LB&I’s comments on the new campaigns.

Repatriation Campaign

In general, the active earnings of foreign subsidiaries are not subject to tax until repatriated to the United States. Typically, those repatriations would be treated as dividends and would be subject to tax. LB&I stated that, through examination experience, it has observed that some taxpayers have engaged in techniques to permit repatriation from such entities while inappropriately avoiding US taxation.

LB&I developed the Repatriation Campaign with three goals in mind. First, LB&I was concerned with developing better objective techniques to identify risks across the broad taxpayer population. Second, LB&I is trying to improve sightlines into a broader segment of the LB&I population beyond the largest taxpayers under continuous audit. Third, LB&I intends to address any compliance risks related to repatriation in a way that increases voluntary compliance.

Unlike other campaigns, LB&I is not focused on a specific structure or techniques. LB&I is instead trying to identify objective indicators of opportunities to implement questionable planning (in the IRS’s view). Per LB&I, returns with those indicators are more likely to present compliance risks and are more likely to be selected. LB&I stated that it does not believe publicly identifying those indicators will increase voluntary compliance. Historically, when LB&I selected a return for examination, it did not necessarily start with any particular issue; any issue could be examined. If a return is selected under this campaign, LB&I’s initial focus will be narrower, but other compliance issues, if discovered, can still be added to the audit. Repatriation issues can also be raised outside of the Repatriation Campaign—possibly in a continuous audit or in an audit relating to another LB&I campaign. (more…)



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