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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 IPU on Corporate Inversions

by | Jul 7, 2016 | , , ,

On June 7, 2016 , the Internal Revenue Service (IRS) released an LB&I International Practice Unit (IPU), providing high-level guidance to IRS field examiners on the application of the anti-inversion rules of Internal Revenue Code section 7874 and certain of the regulations and notices issued thereunder (see here). The IPU notes that it is meant to provide only high-level conceptual guidance, and that many aspects of the highly complex notices and regulations recently issued in this area are beyond the scope of the IPU. Some of these issues will be addressed in future IPUs.

This high-level guidance to field examiners signals the IRS’s continued focus on international tax issues.



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Tax Bar Has Serious and Substantial Comments to the Proposed IRC Section 385 Regulations

by and | Jul 1, 2016 | , ,

On April 4, 2016, the Internal Revenue Service and the US Department of the Treasury issued proposed regulations pursuant to Internal Revenue Code (IRC) section 385 addressing whether an interest in a related corporation is treated as stock or indebtedness for US federal income tax purposes (Proposed Regulations). On June 29, 2016, both the DC Bar Taxation Section and the New York State Bar Association Tax Section submitted comments on the Proposed Regulations. Both Tax Sections urged Treasury not to finalize the Proposed Regulations. The DC Bar Taxation Section letter can be found here and the New York State Bar Association Tax Section letter can be found here.

The Proposed Regulations have been met with substantial criticism by the tax bar and taxpayers alike. The Proposed Regulations would have a significant impact on intercompany debt of multinational groups and could, if finalized in their proposed form, force major changes in the way that taxpayers conduct routine business.



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CbC Reporting Is Here to Stay! Treasury Issues Final Regs

by | Jun 30, 2016 | , ,

As anticipated in our earlier post, Country-by-Country (CbC) reporting is finally here! On Wednesday, the US Department of the Treasury released final regulations for CbC reporting, effective June 30, 2016. The final regulations apply to any US person who is the “ultimate parent” of a multinational enterprise group that has annual revenue for the preceding year of at least $850 million. For tax years beginning after June 30, 2016, taxpayers subject to the final regulations will be required to file a new Form 8975 Country-by-Country Report with their US federal income tax returns. CbC reporting will likely change the disclosure landscape for entities operating in multiple countries.



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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 Publishes IPU on Penalties for Failure to Report Transfer of Property to a Foreign Corporation

by and | Jun 16, 2016 | , ,

On June 14, 2016, the Internal Revenue Service (IRS) published an International Practice Unit (IPU) on the monetary penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation (available here).  Under IRC section 6038B(a)(1)(A), a US person who transfers property to a foreign corporation in an exchange described in IRC sections 332, 351, 354, 355 or 361 is required to file Form 926 and accompanying information with the IRS.  The Form 926 and accompanying information must be filed with the US person’s income tax return for the taxable year that includes the date of the transfer.

Failure to comply with the reporting requirements (e.g., failure to timely file a Form 926 or providing false or inaccurate information) can result in a penalty equal to 10 percent of the fair market value of the transferred property for which there was a failure to comply, up to $100,000.  However, the penalty is not limited if the failure to furnish was due to intentional disregard.  The penalty may be waived if the US person demonstrates that the failure to comply was due to reasonable cause and not to willful neglect.  If there is a failure to comply, the statute of limitations on assessment of tax for the year of noncompliance potentially remains open until three years after the date on which the required information is provided.

The IPU contains detailed instructions to IRS revenue agents for purposes of examining this issue and determining whether to assert a penalty.  In our experience, the IRS in recent years has been more aggressive in asserting penalties for failure to comply with information reporting requirements and has imposed a heavy burden on taxpayers to demonstrate that the reasonable cause exception applies.  This IPU states that additional IPUs on information reporting penalties in other situations (e.g., failure to file Form 5471, issues associated with offshore bank accounts and check-the-box rules for foreign entities) will be forthcoming.  Given the increased focus on penalties in this area and statute of limitations issues, taxpayers subject to these information reporting requirements should ensure that they are complying with the IRS rules in this area.



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IRS Publishes Another IPU on Transfer Pricing

by and | Jun 8, 2016 | , ,

The Internal Revenue Service (IRS) continues to publish International Practice Units (IPUs) on transfer pricing.  As explained in our prior post, the IRS has provided guidance on the three requirements to come within the transfer pricing rules in IRC section 482.  The IRS continues to expend its limited resources on international tax issues, arming its field agents with extensive directions on how to audit transfer pricing issues.  It is clear that international tax issues are and will continue to be the focus of IRS agents in auditing multinational entities.



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Proposed Code Sec. 367 Regulations Attempt to Tax Foreign Goodwill and Going Concern Value

by | Jun 3, 2016 | , ,

The transfer of foreign goodwill and going concern value by a domestic corporation to a foreign subsidiary for use in a trade or business outside the United States has never been subject to taxation under Code Sec. 367. Without any legislative change, the Internal Revenue Service and the Treasury in proposed regulations would seek to tax such transfers.

In his recent article in the International Tax Journal, Lowell Yoder, global head of McDermott’s Tax Practice, discusses the sweeping changes proposed under the new 367 regulations and the problems posed by the IRS’ approach.  He recommends that the IRS withdraw the proposed regulations, which go far beyond (and actually contradict) legislative intent.

Read the full article.



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Report on Temporary Regulations Addressing Notional Principal Contracts With Nonperiodic Payments

by and | May 31, 2016 | ,

McDermott partner John T. Lutz and associate Chelsea E. Hess were the principal authors of a recent report for the New York State Bar Association Tax Section, “Report on Temporary Regulations Addressing Notional Principal Contracts With Nonperiodic Payments.” The report comments on the temporary and proposed regulations published on May 8, 2015, relating to the treatment of nonperiodic payments made or received pursuant to notional principal contracts (NPCs).

Read the report.



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