TAX CONTROVERSY 360
TAX CONTROVERSY 360
McDermott Will & Schulte’s real-time tax disputes insights
TAX CONTROVERSY 360
McDermott Will & Schulte’s real-time tax disputes insights
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Introducing McDermott’s Blog Series on LB&I’s International Practice Units

by | Mar 9, 2016 | , ,

As part of an overall strategy and reorganization to utilize resources more efficiently, the Internal Revenue Service’s (IRS’s) Large Business and International (LB&I) Division has developed a series of International Practice Units.  These Practice Units typically consist of a set of slides explaining how agents in the field should approach a particular issue of interest in international tax or transfer pricing. A complete list of these Practice Units can be found here.

The IRS intends the Practice Units to serve as “job aids and training materials” and as “a means for collaborating and sharing knowledge among IRS employees.” The first group was published at the end of 2014, and the IRS has steadily released new Practice Units ever since.  Presently, the IRS has published over 100 practice units on a wide range of international topics.

Practice Units provide general explanations of international tax concepts, as well as information about specific types of transactions.  Practice Units are not official pronouncements of law, and cannot be used, cited or relied upon for support.  Nonetheless, they provide taxpayers with a window into the IRS’s current thinking about these issues.  Moreover, Practice Units may be helpful to anticipate the IRS’s approach relating to specific international issues.  Over the next few months, Tax Controversy 360 will unveil a series of posts highlighting individual Practice Units of special interest—please stay tuned!



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IRS Updates LB&I Examination Process Guide

by | Mar 4, 2016 | , , ,

Effective May 1, 2016, the Internal Revenue Service (IRS) will begin applying previously announced changes to the Large Business & International (LB&I) Division’s examination process.  Publication 5125 begins by setting forth expectations for the LB&I exam team and the taxpayer or its representatives.  It then addresses IRS expectations regarding refund claims.  Finally, the publication discusses the three stages of the LB&I examination process—planning, execution and resolution—and how the IRS and taxpayers should conduct themselves during each stage.

The IRS had previously released draft publication 5125 in November 2014, which concerned some taxpayers, particularly with respect to the statement that informal refund claims would only be accepted within 30 days of the opening conference.  Final Publication 5125 retains the 30-day period for making informal refund claims, but provides that LB&I will not require a formal claim after the 30-day period if an issue has been identified for examination (unless IRS published guidance specifically requires a formal claim).  Exceptions may also be granted by LB&I senior management.

Publication 5125 also made changes to the examination process based on the recent shift to an issue-based audit approach.  The case manager will have overall responsibility for the case, which may be beneficial to taxpayers involved in recent audits where domestic and international personnel appeared to share responsibility for the conduct of the audit.  Factual and issue development are also heavily stressed, with an emphasis on the information document request (IDR) process and a focused and useful examination plan.  The publication also states that IRS team members are expected to seek the taxpayer’s acknowledgment of the facts and to resolve any disputes prior to the issuance of Form 5701, Notice of Proposed Adjustment.

Taxpayers should review Publication 5125 to familiarize themselves with the current audit process and to ensure that IRS team members are following the guidance.  To the extent an IRS team member is not following the guidance, taxpayers should not hesitate to discuss the matter with the team manager.



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New Post-Validus Revenue Ruling Applies to Foreign Reinsurance Transactions

by and | Feb 24, 2016 | , ,

In mid-2015, the United States Court of Appeals for the District of Columbia Circuit affirmed (although on narrower grounds) the decision of the United States District Court for the District of Columbia in Validus Reinsurance, Ltd. v. United States.  In Validus, 786 F.3d 1039, the D.C. Circuit ruled that there was no statutory authority for the imposition of a so-called “cascading” federal excise tax (FET) to foreign retrocession transactions – a transaction involving a policy of reinsurance issued by a foreign reinsurer to another foreign reinsurer.

The D.C. Circuit relied on two principles in rejecting the application of a “cascading” FET to foreign retrocession transactions:  (1) the presumption against extraterritoriality and (2) FET should not be imposed more than once on the same transaction (that is, on the same premium amounts).  The D.C. Circuit declined, however, to specifically speak on the issue of foreign reinsurance transactions – a transaction involving a policy of reinsurance issued by a foreign reinsurer to another foreign insurer (rather than reinsurer) – despite the fact that both principles might equally apply to these transactions as well.

However, the recently released Revenue Ruling 2016-03 specifically notes that “the IRS will no longer apply the one-percent excise tax imposed by section 4371(3) to premiums paid on a policy of reinsurance issued by one foreign reinsurer to another foreign insurer or reinsurer ….”  (emphasis added).  Thus, under Revenue Ruling 2016-03, there is no distinction between foreign retrocession and foreign reinsurance transactions.  For those taxpayers with foreign reinsurance transactions, who have been stuck in limbo after the Validus decision, Revenue Ruling 2016-03 may provide relief from an IRS examiner’s inappropriate imposition of a “cascading” FET.



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LB&I Practice Units: Know Your EOI Programs

by | Feb 10, 2016 | , , , ,

On January 20, 2016, the Large Business and International (LB&I) Division released a Practice Unit entitled Overview of Exchange Information Programs and Types of EOI Exchanges, defining and describing the Internal Revenue Service (IRS) Exchange of Information (EOI) programs. These EOI Practice Units specify what types of exchanges are covered by EOI programs and what types of information the IRS can seek through each type of EOI exchange.

The IRS breaks down the avenues for international information exchange into several categories:

  • Specific Requests involve requests for information pertaining to a specific taxpayer under examination or investigation for a specific period.
  • Spontaneous Exchanges involve the transmission of taxpayer information by one member of an EOI agreement that is deemed potentially of interest to a foreign partner even though no specific requests have been initiated by the foreign partner.
  • Automatic Exchanges involve the transmission of taxpayer information that foreign partners have agreed to exchange on a regular and systematic basis without individualized specific requests. The most common example includes information relating to dividends, interest, rents, royalties, salaries and annuities earned in one partner country by residents of the other partner country.
  • Industry-Wide Exchanges involve the sharing of trends, policies and operating practices in a particular industry or economic sector and do not implicate specific taxpayer information.
  • The Simultaneous Examination Program coordinates strategies and the development of technical issues between the United States and a foreign partner if it is determined a common interest exists between the respective taxing authorities. These discussions are intended to facilitate the exchange of relevant taxpayer information with the foreign partner in furtherance of the separate independent examinations of a taxpayer by each jurisdiction.
  • Joint Audits take place when the United States and one or more of its foreign partners collaborate to conduct a single examination of a taxpayer or a related taxpayer within their jurisdictions.
  • The Simultaneous Criminal Investigation Program operates through the EOI provisions of bilateral tax agreements and fosters the coordination of separate criminal investigations conducted concurrently by the United States and the foreign partner.
  • The Mutual Legal Assistance Program relates to an agreement that authorizes a partner country to secure evidence for use by the requesting country in criminal judicial proceedings of the taxpayer.
  • The Mutual Collection Assistance Request Program is intended to utilize the collection assistance provisions of tax treaties, enabling one partner state to collect taxes covered by the treaty on behalf of the other contracting state. These collection provisions appear in a limited number of current United States treaties.

The Practice Units provide a short general overview of each method and—of particular usefulness—describe what government office or department is responsible for executing requests in each category. Thus, the Practice Units may be a good “first line of defense” for information-gathering when you believe the IRS is pursuing or has received an international EOI request related to your client.

In future posts, we will discuss how these tools are utilized in practice, [...]

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Substantial Changes to Auditing Partnerships

by | Feb 2, 2016 | , ,

On November 2, 2015, the Bipartisan Budget Act of 2015 was signed into law, and which instituted significant changes to the rules governing the federal tax audits of partnerships for tax years after 2017.  In the absence of affirmatively electing partner-level adjustment, the new rules impose entity-level tax liability for Internal Revenue Service (IRS) audit adjustments to partnerships.  The new rules are a significant departure from what has historically been merely pass-through treatment of partnerships for US federal income tax issues.

There is a small partnership exception to elect out of the new audit rules.  This election may apply to partnerships with 100 or fewer partners, each of which is an individual, a C corporation, an S corporation or an estate of a deceased partner.  However, any tiered partnership – partnerships that have partnerships as partners – are ineligible for the exception.

The new rules determine IRS audit adjustments at the partnership level for items of partnership income, gain, loss, deduction or credit.  The taxes owed on those adjustments are calculated at the maximum statutory tax rate, and assessed and collected from the partnership in the year that the audit or any judicial review is completed.  Additionally, the partnership is liable for all associated penalties and interest.

Alternatively, the partnership can elect out of the entity-level tax, but must furnish to every partner for each year under examination a statement of the partner’s share of any tax adjustments.  Under this election, each partner will be responsible for paying its taxes, penalties and interest related to the adjustment.

The new rules also change who speaks to the IRS on behalf of the partnership.  Instead of the “tax matters partner,” the new rules provide for a “partnership representative.”  The partnership representative, who no longer must be a partner, has sole power to act on behalf of the partnership during the audit.  Moreover, the partnership representative can bind both the partnership and the partners with respect to the IRS examination and adjustments.

The new partnership audit regime applies to partnership returns filed for tax years beginning after December 31, 2017.  Because the new rules make fundamental changes to the way that partnerships were audited in the past, we are hopeful that the delayed effective date will give taxpayers time to consider the potential effects of the new rules on their partnerships and operative agreements.  The new rules leave open numerous issues, and we expect the IRS to issue substantial guidance in the future.



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