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To Agree or Not to Agree, That Is the Question

by McDermott Will & Emery and McDermott Will & Emery | May 17, 2017 | IRS Appeals, IRS Audits, Uncategorized

The last few years have seen significant changes in audit procedures employed by the Internal Revenue Service (IRS). These changes range from the new Information Document Request (IDR) procedures to substantial changes at the IRS Appeals level. This post focuses on the IRS’s attempt to develop an agreed set of facts before a case is submitted to IRS Appeals.

As taxpayers and practitioners are aware, IDRs are the most-used tool by IRS revenue agents to obtain information and develop the factual record (other common tools include interviews and site visits). Revenue agents use IDRs in several ways, including to request documents, understand taxpayer positions and identify key personnel involved. The end result of this information gathering is a notice of proposed adjustment, which then forms the basis for the revenue agent’s report in an unagreed case. (more…)

You Must Comply: IRS LB&I Reveals Details of Its Inbound Distributor and OVDP Decline-Withdrawal Campaigns

by Kristina Novak | May 15, 2017 | IRS Guidance, Transfer Pricing Resource, Uncategorized

On Wednesday, May 10, 2017, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) hosted a webinar with the Association of International Certified Professional Accountants (AICPA) regarding LB&I’s recently-announced campaigns targeting inbound distributors and taxpayers who either were declined by, or withdrew from, the IRS’s Offshore Voluntary Disclosure Program (OVDP). Our previous coverage of LB&I’s campaign initiatives can be found here. The slides from the presentation are available here.

Inbound Distributors

As described by the IRS, this campaign is intended to address transfer pricing in the context of United States distributors of goods sourced from foreign-related parties that may have reported gains or losses that are not commensurate with the functions performed and the risk assumed.

As discussed in Wednesday’s webinar, this campaign is somewhat unique in that the IRS is still evaluating whether this issue presents an actual—rather than a mere potential—threat of noncompliance. The IRS has identified a series of returns to be sent into the field for examination, but is currently holding them to evaluate whether a genuine threat of noncompliance exists. The IRS also stated that the campaign is being designed to allow for flexibility to release returns quickly, if compliance can be readily ascertained. (more…)

Taxpayer Rights Around the World (Follow-Up)

by McDermott Will & Emery | May 4, 2017 | Court Procedure Matters, IRS Guidance, Transfer Pricing Resource, Uncategorized

We previously wrote two blog posts about the 2nd International Conference on Taxpayer Rights held in Vienna, Austria in March 2017 here and here. Videos of each panel discussion are now available for viewing here. Planning is currently underway for the 3rd International Conference on Taxpayer Rights, which will be held in The Netherlands on May 3-4.

IRS Provides New Guidance on Ordinary Versus Capital Issue

by McDermott Will & Emery and McDermott Will & Emery | May 2, 2017 | IRS Guidance, Uncategorized

A frequently disputed tax issue is the proper treatment of costs incurred by taxpayers and whether they are currently deductible or must be capitalized. Internal Revenue Code (Code) Section 162 generally provides a deduction for ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. However, Code Section 263 provides no deduction for any amount paid for permanent improvements made to increase the value of any property. Code Section 263 requires capitalization of, amongst other things, costs paid or incurred to facilitate the acquisition of a trade or business. The capitalization rules of Code Section 263 trump the deductibility rules of Code Section 162. (more…)

The IRS’s Assault on Section 199 (Computer Software) Doesn’t Compute

by Jean A. Pawlow, Kevin Spencer and Robin L. Greenhouse | Apr 24, 2017 | Court Procedure Matters, IRS Appeals, IRS Audits, IRS Guidance, Trial Courts, Uncategorized

Internal Revenue Code Section 199 permits taxpayers to claim a 9 percent deduction related to the costs to develop software within the U.S. The relevant regulations and their interpretation, however, place substantial restrictions on claiming the benefit.

Moreover, the regulations and the government’s position haven’t kept up with the technological advances in computer software.

Before claiming the deduction on your return, consider that the Internal Revenue Service has this issue within its sights, and perhaps it will be the subject of one of their new “campaigns.”

In 2004, Congress enacted I.R.C. Section 199 to tip the scales of global competitiveness more in favor of American business. The main motivation of the statute was to create jobs by encouraging businesses to manufacture and produce their products in the U.S. The tax benefit, however, isn’t available for services, a theme that pervades many of the provisions in the statute and regulations.

Originally published in Bloomberg BNA Daily Tax Report – April 24, 2017 – Number 77

Overview of Tax Litigation Forums

by Elizabeth Chao and McDermott Will & Emery | Apr 21, 2017 | Appellate Courts, Court Procedure Matters, IRS Guidance, Tax Refunds, Trial Courts, Uncategorized

Taxpayers can choose whether to litigate tax disputes with the Internal Revenue Service (IRS) in the US Tax Court (Tax Court), federal district court or the Court of Federal Claims. Claims brought in federal district court and the Court of Federal Claims are tax refund litigation: the taxpayer must first pay the tax, file a claim for refund, and file a complaint against the United States if the claim is not allowed. Claims brought in the Tax Court are deficiency cases: the taxpayer can file a petition against the IRS Commissioner after receiving a notice of deficiency and does not need to pay the tax beforehand.

As demonstrated in the chart below, approximately 97 percent of tax claims are instituted in the Tax Court. It should be noted that, after a taxpayer files a petition in Tax Court, the taxpayer no longer has the option of bringing the claim in any other court for the year(s) at issue.

Tax Court Versus Tax Refund Litigation

Source: https://www.irs.gov/uac/soi-tax-stats-chief-counsel-workload-tax-litigation-cases-by-type-of-case-irs-data-book-table-27

(more…)

APA Challenge to Notice of Deficiency: QinetiQ Requests Supreme Court Review

by Jeffrey M. Glassman and Roger J. Jones | Apr 13, 2017 | Appellate Courts, Court Procedure Matters, IRS Guidance, Trial Courts, Uncategorized

On April 4, 2017, QinetiQ U.S. Holdings, Inc. petitioned the US Supreme Court to review the US Court of Appeals for the Fourth Circuit’s decision that the Administrative Procedure Act of 1946 (APA) does not apply to the Internal Revenue Service (IRS) Notices of Deficiency. We previously wrote about the case (QinetiQ U.S. Holdings, Inc. v. Commissioner, No. 15-2192) here, here, here and here. To refresh, the taxpayer had argued in the US Tax Court that the Notice of Deficiency issued by the IRS, which contained a one-sentence reason for the deficiency determination, violated the APA because it was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” The APA provides a general rule that a reviewing court that is subject to the APA must hold unlawful and set aside an agency action unwarranted by the facts to the extent the facts are subject to trial de novo by the reviewing court. The Tax Court disagreed, emphasizing that it was well settled that the court is not subject to the APA and holding that the Notice of Deficiency adequately notified the taxpayer that a deficiency had been determined under relevant case law. The taxpayer appealed to the 4th Circuit, which ultimately affirmed the Tax Court’s decision. (more…)

Understanding LB&I “Campaigns” – The Second Webinar

by Jeffrey M. Glassman | Apr 13, 2017 | IRS Audits, IRS Guidance, Uncategorized

On March 28, 2017, EY and the Internal Revenue Service (IRS) held a joint webcast presenting the Large Business & International’s (LB&I) new “Campaign” examination process. This was the IRS’s second in a planned eight-part series about Campaigns. The IRS speakers for the presentation were Tina Meaux (Assistant Deputy Commissioner Compliance Integration) and Kathy Robbins (Enterprise Activity Practice Area). We previously blogged about Campaigns on February 1, 2017 (link), and the first Campaigns webinar on March 8, 2017 (link).

(more…)

Acting IRS Chief Counsel appoints new Deputy Chief Counsel (Operations)

by Robin L. Greenhouse | Mar 30, 2017 | Court Procedure Matters, IRS Appeals, IRS Audits, IRS Guidance, Uncategorized

The Acting Chief Counsel announced that effective April 1, 2017, Drita Tonuzi will serve as the Deputy Chief Counsel (Operations), in Washington DC. In this position, Ms. Tonuzi will provide legal guidance and litigation support to the Internal Revenue Service (IRS) and the Departments of Treasury and Justice in all matters pertaining to the administration and enforcement of the Internal Revenue laws. This includes responsibility for all litigation in the United States Tax Court as well as the management of personnel in fifty field offices nationwide and in headquarters operations in Washington, DC. She will directly supervises nine Divisions including Large Business and International (LB&I), Small Business/Self Employed (SB/SE), Tax Exempt and Governmental Entities (TEGEDC), Wage and Investment (W&I), General Legal Services (GLS), Criminal Tax (CT), Procedure and Administration (P&A), Finance and Management (F&M) and Counsel to the National Taxpayer Advocate (CNTA).

Ms. Tonuzi began her career with the Office of Chief Counsel in 1987 in the Manhattan Office, where she litigated cases before the United States Tax Court. She served as the Securities & Financial Services Firms Industry Counsel and managed a group of attorneys, Deputy Division Counsel for the Large Business & International Division (formerly LMSB), where she was responsible for the operation and litigation of the organization and most recently she served as Associate Chief Counsel Practice and Administration.

With Ms. Tonuzi’s promotion, Kathryn Zuba has been appointed as the Acting Associate Chief Counsel, Procedure and Administration. Ms. Zuba will head an office of more than 150 professionals, who provide legal services to the IRS, other components of the Chief Counsel’s Office, other government agencies, and the public in the areas of federal tax procedure and administration. The responsibilities of this office include matters relating to the reporting and payment of taxes; assessment and collection of taxes; the abatement, credit or refund of over-assessments or overpayments of taxes; the filing of information returns; bankruptcy; disclosure; FOIA; privacy law; litigation sanctions; judicial doctrines; ethics; and liaison with the courts.

Taxpayer Rights Around the World (Part 1)

by McDermott Will & Emery | Mar 22, 2017 | Court Procedure Matters, IRS Guidance, Transfer Pricing Resource, Uncategorized

On March 13 and 14, the 2nd International Conference on Taxpayer Rights was held in Vienna, Austria. More than 150 individuals from more than 40 countries attended the conference, which connects government official, scholars and practitioners from around the world to explore how taxpayer rights globally serve as the foundation for effective tax administration. This is the first of two posts recapping the issues discussed at the conference.

Four panels were held on March 13: (1) The Framework and Justification for Taxpayer Rights; (2) Privacy and Transparency; (3) Protection of Taxpayer Rights in Multi-Jurisdictional Disputes; and (4) Access to Rights: the Right to Quality Service in an Era of Reduced Agency Budgets.

(more…)

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