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.
Today, the Internal Revenue Service (IRS) released Revenue Procedure 2017-25 extending the Fast Track Settlement (FTS) program to Small Business / Self Employed (SB/SE) taxpayers. The IRS’s SB/SE group serves individuals filing Form 1040 (US Individual Income Tax Return), Schedules C, E, F or Form 2106 (Employee Business Expenses), and businesses with assets under $10 million.
FTS offers a customer-driven approach to resolving tax disputes at the earliest possible stage in the examination process. The program provides an independent IRS Appeals review of the dispute. Under this approach, the IRS Appeals Officer acts as the mediator and has settlement authority.
The purpose of the program is to reduce the time to resolve cases and to provide the IRS Exam Team with the authority to settle cases based on hazards of litigation (which is generally reserved for IRS Appeals Officers). FTS has been considered a great success by the IRS and many taxpayers. The expansion of this successful alternative dispute resolution makes sense in light of the ever-shrinking resources of the IRS.
Two petitions for certiorari pending before the Supreme Court of the United States ask the Court to resolve the question of whether a tax return filed after an assessment by the Internal Revenue Service (IRS) is a “return” for purposes of the Bankruptcy Code (BC). The answer to this question will determine whether a bankrupt taxpayer’s tax debts can be discharged or are permanently barred from discharge. According to these petitions, the courts of appeal are divided as to the answer.
BC § 523(a) generally allows a debtor to discharge unsecured debt, except for, inter alia, tax debts of debtors who: (1) failed to file tax returns; (2) filed fraudulent tax returns; or (3) filed late tax returns, where a bankruptcy petition is filed within two years of the date the late return was filed. See BC § 523(a)(1)(B)(i), (B)(ii), (C).
On January 31, the Internal Revenue Service (IRS) announced 13 Large Business & International (LB&I) “campaigns.” One campaign targets deductions claimed by multi-channel video programming distributors (MVPDs) and TV broadcasters under section 199 of the Internal Revenue Code (IRC). According to the IRS’s campaign announcement, these taxpayers make several erroneous claims, including that (1) groups of channels or programs constitute “qualified films” eligible for the section 199 domestic production activities deduction, and (2) MVPDs and TV broadcasters are producers of a qualified film when they distribute channels and subscription packages that include third-party content.
IRC section 199(a) provides for a deduction equal to 9 percent of the lesser of a taxpayer’s “qualified production activities income” (QPAI) for a taxable year and its taxable income for that year. A taxpayer’s QPAI is the excess of its “domestic production gross receipts” (DPGR) over the sum of the cost of goods sold and other expenses, losses or deductions allocable to such receipts. IRC section 199(c)(1). DPGR includes gross receipts of the taxpayer which are derived from any lease, rental, license, sale, exchange, or other disposition of “any qualified film produced by the taxpayer.” IRC section 199(c)(4)(A)(i)(II). A “qualified film” is “any property described in section 168(f)(3) if not less than 50 percent of the total compensation relating to the production of such property is compensation for services performed in the United States by actors, production personnel, directors and producers.” IRC section 199(c)(6). However, “qualified film” does not include property with respect to which records are required to be maintained under 18 U.S.C. § 2257 (i.e., sexually explicit materials). Id. Under regulations issued in 2006, “qualified film” also includes “live or delayed television programming.” Treas. Reg. § 1.199-3(k)(1); see also Notice 2005-14, 2005-1 C.B. 498, §§ 3.04(9)(a), 4.04(9)(a). “Qualified film” includes “any copyrights, trademarks, or other intangibles with respect to such film.” IRC section 199(c)(6). The “methods and means of distributing a qualified film” have no effect on the availability of the section 199 deduction. Id. IRC section 168(f)(3), entitled “Films and Video Tape,” provides an exclusion from accelerated depreciation for “[a]ny motion picture film or video tape.”
Though the January 31 announcement did not explain the IRS’s position on these issues in detail, the IRS rejected both claims in two Technical Advice Memoranda (TAMs) issued in late 2016. The IRS determined in TAM 201646004 (Nov.10, 2016) and TAM 201647007 (Nov.18, 2016) (the 2016 TAMs) that a subscription package of multiple channels of video programming transmitted by an MVPD to its customers via signal is not a “qualified film” as defined in IRC section 199(c)(6) and Treas. Reg. § 1.199-3(k)(1). It also determined that an MVPD’s gross receipts from its subscription package are not from the disposition of a qualified film produced by the MVPD and are therefore not DPRG included in calculating a section 199 deduction. The MVPD would only have DPRG from the subscription package to the extent its gross receipts are derived from an individual film or episode within the subscription [...]
On March 3, 2017, KPMG and the Internal Revenue Service (IRS) held a joint webcast presentation regarding the Large Business & International’s (LB&I) new “Campaign” examination process. The IRS speakers for the presentation were Tina Meaux (Assistant Deputy Commissioner Compliance Integration) and Kathy Robbins, Director (Enterprise Activities Practice Area). On February 1, 2017, we blogged about this new IRS program.
The IRS explained that Campaigns are a fundamental change in the way the IRS will conduct examinations in the future, and are the result of the IRS’s ever-shrinking resources. The Campaigns reflect the LB&I Division’s need to focus on risks, drive compliance objectives, and efficiently and effectively respond with a variety of work streams.
The general principles that guide the Campaign program are:
Flexible and well-trained work force. Because of funding cuts, the IRS has not been able to hire examiners in recent years. In connection with the Campaigns, the IRS will implement additional training, including “just-in-time” training, to help the IRS react to a dynamic examination environment.
Better selection of work. The IRS is using data analytics and internal and external feedback to assist in shaping Campaigns.
Tailored treatment. The IRS is developing an integrated process to identify compliance risks, and identify the work streams needed to address those risks.
Integrate feedback loop. This is the cornerstone of the Campaign program. The IRS admitted that it cannot implement an effective and efficient process without feedback from both internal and external stakeholders. To be successful the feedback needs to be “just-in-time,” not merely post-audit.
“The IRS and Treasury recently issued final regulations under Code Sec. 367(a)and (d) that make a monumental change in how those provisions have applied since they were enacted over 30 years ago. For the first time, the regulations subject to taxation the otherwise tax free 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.”
The Treasury and IRS recently issued final regulations under §385 that reclassify certain indebtedness as equity. While the final regulations have limited application to U.S.-based multinationals, they do apply to obligations of domestic corporations to related controlled foreign corporations (‘‘CFCs’’). It is critical to avoid such debt being reclassified as stock under the regulations because of the significant adverse U.S. tax consequences.
On March 1, 2017, the Internal Revenue Service (IRS) released a new International Practice Unit (IPU) summarizing foreign and domestic loss impacts on foreign tax credits (FTC). The IPU provides a summary of the law regarding worldwide taxation and FTC limitations, followed by explanations and analysis for IRS agents examining FTC issues. As we have noted previously, this high-level guidance to field examiners signals the IRS’s continued focus on international tax issues.
This week, the Internal Revenue Service (IRS) Criminal Investigation Division (CID) released its annual report for 2016, continuing a message sent for several years now: that IRS CID’s staffing declines are affecting its core mission tax work. Core mission tax work is distinguished from other types of IRS CID investigations—such as terrorism or health care fraud—where tax elements are not the central focus of the investigation. Over the past four years, since 2012, the division has lost 447 agents, and this loss has resulted in a decline in “core mission” prosecutions (485 fewer cases than in 2012).
Despite these challenges, IRS CID continues to possess a high success rate, with an incarceration rate at or around 80 percent for at least the last 4 years. In 2016, IRS CID initiated 3,395 investigations, down from 5,314 in 2013. Of those, 2,699 were sentenced, with an average sentence of 41 months.
Practice Point: The 2016 annual report is yet more documentation of the long-term decline in IRS CID investigations; however, practitioners and taxpayers cannot count on this trend continuing in the new administration. In his confirmation hearings, Steven Mnuchin, the new Treasury Secretary expressed concern about lowered IRS staffing levels overall, but it is unclear whether these comments will result in substantive changes to reverse this trend. In this report, IRS CID is sending a clear message that budget restrictions and staffing attrition are impacting the division’s core mission of encouraging voluntary compliance through criminal deterrence.
Here at McDermott, we value giving back to the community through pro bono efforts. In particular, we provide substantial assistance in pro bono tax cases to low-income individuals through our relationships with low-income taxpayer clinics throughout the country. Over the years, we have settled dozens of cases for low-income taxpayers in docketed tax cases and routinely reduced or eliminated deficiencies asserted by the Internal Revenue Service (IRS). When settlement has not been possible, we have litigated cases in the Tax Court and obtained favorable results not just for our clients but for the low-income taxpayer community as a whole. For example, we represented a husband and wife on a penalty issue involving an issue of first impression and convinced the Tax Court that the IRS had for years been improperly asserting and collecting penalties on improperly claimed refundable tax credits. In a recent article, we detail some of the pro bono efforts by low-income taxpayer clinics and private practitioners.
Practice Point: In addition to assisting low-income individuals who cannot afford legal representation, providing pro bono tax services benefits tax practitioners in many ways. It provides the opportunity for younger attorneys to take responsibility for a case and to get valuable experience in dealing with clients, negotiating with the IRS, and potentially gaining courtroom experience. Assisting taxpayers on a pro bono basis is also rewarding and can make a significant difference in the lives of low-income individuals.
Subscribe
