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Understanding LB&I “Campaigns”

by Kevin Spencer and Robin L. Greenhouse | Mar 8, 2017 | IRS Audits, IRS Guidance, Uncategorized

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.

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Run for Cover—IRS Unveils Initial “Campaigns” for LB&I Audits

by Kevin Spencer, Robin L. Greenhouse, McDermott Will & Emery and McDermott Will & Emery | Feb 1, 2017 | IRS Audits, IRS Guidance, Uncategorized

They’re here! On January 31, 2017, the Internal Revenue Service (IRS) Large Business & International (LB&I) division released its much-anticipated announcement related to the identification and selection of campaigns. The initial list identifies 13 compliance issues that LB&I is focused on and lists the specific practice area involved and the lead executive for each campaign. Prior coverage of audit campaigns can be found here.

The initial list, along with descriptions of each campaign, is as follows:

Domestic Campaigns

Section 48C Energy Credits

This campaign is designed to ensure that only taxpayers whose advanced energy projects were approved by the Department of Energy, and who have been allocated a credit by the IRS, are claiming the credit. Apparently, there has been confusion regarding which taxpayers are entitled to claim the credits.

Micro-Captive Insurance

This campaign addresses certain transactions described in Notice 2016-66 in which a taxpayer reduces aggregate taxable income using contracts treated as insurance contracts and a related company that the parties treat as a captive insurance company. We previously blogged about Notice 2016-66 here. Captive insurance, along with basketing and inbound distribution, were three subject-matter specific campaigns announced during LB&I’s initial rollout last summer, as we discussed in our prior post on the subject.

Deferred Variable Annuity Reserves & Life Insurance Reserves

This campaign seeks to address uncertainties on issues important to the life insurance industry, including amounts to be taken into account in determining tax reserves for both deferred variable annuities with guaranteed minimum benefits, and life insurance contracts.

Distributors (MVPD’s) and TV Broadcasts

This campaign is targeted at multichannel video programming distributors and television broadcasters that may claim that groups of channels or programs are a qualified film for purposes of the Internal Revenue Code (Code) Section 199 deduction. The description indicates that LB&I has developed a strategy to identify taxpayers impacted by the issue and that it intends to develop training, including the development of a publicly published practice unit, published guidance, and issue based exams, to aid revenue agents. It appears that this campaign stems from various private guidance issued in 2010, 2014 and 2016 on these issues.

Related Party Transactions

This campaign is focused on transactions among commonly controlled entities that the IRS believes might provide a taxpayer a means to transfer fund from the corporation to related pass-through entities or shareholders. The campaign is aimed at the mid-market segment.

Basket Transactions

This campaign focuses on certain financial transactions described in Notices 2015-73 and 74, which relate to so-called basket transactions. Basketing was a topic named during LB&I’s initial campaign announcement last summer, along with captive insurance and inbound distribution.

Land Developers – Completed Contract Method

This campaign addresses the Service’s concern that large land developers that construct residential communities may improperly be using the completed contract method. This campaign appears to be a [...]

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IRS Issues IPU on Identifying Foreign Goodwill or Going Concern

by McDermott Will & Emery | Oct 13, 2016 | IRS Audits, IRS Guidance, Uncategorized

On October 13, 2016, the Internal Revenue Service (IRS) released an LB&I International Practice Unit (IPU), available here, providing guidance to IRS agents relating to the identification of foreign goodwill or going concern value (FGWGC) for purposes of Internal Revenue Code (Code) Section 367. The IPU indicates that it was last updated on September 22, 2016.

The IPU focuses on the threshold question of whether, as a factual matter, FGWGC can exist in the first place in light of all the facts. As an example, the IPU states that because a business operation conducted outside the United States is a prerequisite for the existence of FGWGC, it is necessary to understand whether immediately before a transfer, the transferor of the property was engaged in a trade or business conducted outside the United States.

The IPU discusses the process of identifying foreign goodwill or going concern value, citing to authorities such as Newark Morning Ledger, TAM 200907024, the Bluebook and legislative history. It then discusses the steps that IRS agents should follow to identify FGWGC, with citations to various authorities as resources.

FGWGC is a hot topic right now. On September 14, 2015, the Department of the Treasury (Treasury) and the IRS issued proposed regulations that address the tax treatment under Code Sections 367(a) and (d) of certain transfers of property by United States persons to foreign corporations. As we have discussed here, the proposed regulations would change the law to tax all transfers to a foreign subsidiary of goodwill and going concern value for use in a trade or business outside the United States. These proposed regulations raise serious questions regarding whether Treasury and the IRS exceeded their authority on this point.

IRS Begins Formal Assessment of CAP Program

by McDermott Will & Emery | Aug 29, 2016 | IRS Audits, IRS Guidance, Tax Refunds, Uncategorized

On August 26, the Internal Revenue Service (IRS) announced that its Large Business & International (LB&I) division is in the process of assessing the Compliance Assurance Process (CAP) program. CAP is a real-time audit program that seeks to resolve the tax treatment of all or most return issues before the tax return is filed. CAP began as a pilot program in 2005 with 17 taxpayers and has grown to currently include 181 taxpayers. In 2011, the CAP program was made permanent and expanded to include Pre-Cap and Compliance Maintenance. Pre-Cap provides interested taxpayers with a roadmap of the steps required for gaining entry into CAP, which as noted above is the standard real-time audit program whereby the IRS examines relevant transactions and proposed reporting positions before the tax return is filed. Cap Maintenance is intended for taxpayers who have been in CAP, have fewer complex issues, and have a track record of working cooperatively and transparently with the IRS. Under this phase, there is a reduced level of review with respect to the pre-filing review and the post-filing examination.

We previously wrote about the potential death of the CAP program. Based on the recent announcement, it appears that CAP is now on its deathbed. The recent announcement states that no new taxpayers will be accepted into the CAP program for the 2017 application season that begins in September 2016, which means that only taxpayers currently in the CAP and Compliance Maintenance phases may continue in the program. No new Pre-Cap application will be accepted and taxpayers currently in pre-Cap will not be accepted into the CAP phase. However, taxpayers currently in the CAP phase may be moved into the Compliance Maintenance phase, as appropriate. The announcement is not surprising in light of recent reorganization changes by the IRS and shifts to a “campaigns” approach, which we have written about here and here. The announcement explains that the CAP assessment is necessary given the IRS’s limited resources and constraints, combined with a business need to evaluate existing IRS programs to ensure that they are aligned with LB&I’s strategic vision. We will continue to monitor developments on this front, but for now any taxpayers that were planning on applying for the CAP program will no longer have that opportunity.

Death of the CAP Program?

by Kevin Spencer and McDermott Will & Emery | Apr 13, 2016 | IRS Audits, IRS Guidance, Uncategorized

According to participants in a recent webcast, the Internal Revenue Service’s (IRS) Large Business & International Division (LB&I) is no longer accepting applicants for its Compliance Assurance Process (CAP) program. CAP is a real-time audit program that seeks to resolve the tax treatment of all or most return issues before the tax return is filed. The CAP program began in 2005 on an invitation-only basis with 17 taxpayers, and was subsequently expanded to include pre-CAP, CAP and CAP Maintenance components. Taxpayers and IRS leadership generally praised the CAP program as one of the most successful corporate tax enforcement programs, with surveys showing that over 90 percent of CAP taxpayers reported overall satisfaction with the program.

When the IRS announced its recent shift in the examination process to identifying and focusing on specific areas of risk, as opposed to general return review, the future of CAP became uncertain. High-ranking IRS officials questioned whether it made sense to continue spending time and resources on CAP taxpayers, who are viewed as the most compliant and transparent taxpayers. It remains to be seen whether the IRS will phase out the CAP program entirely for currently participating taxpayers. CAP taxpayers may want to discuss the matter with their Examination Teams to see if they can gain any insight into future developments in this area and to plan ahead if the CAP program is ultimately eliminated.

The end of the CAP program, as well as the end of the continuous audit program, marks a shift in the way that the IRS intends to audit large taxpayers in the wake of very limited resources. The IRS’s shift to auditing issues may be more efficient, but will likely miss more garden-variety adjustments, like depreciation and expense deductions.

IRS Release IPU Materials on Transfer Pricing

by McDermott Will & Emery | Apr 11, 2016 | IRS Audits, IRS Guidance, Transfer Pricing Resource, Uncategorized

As we noted in our initial post, the Internal Revenue Service (IRS) began publishing job aids and training materials developed by its International Practice Units (IPUs). On April 6, 2016, the IRS released another IPU on section 482, available here. The most recent IPU covers the three requirements under section 482: (1) two or more organizations, trades or business; (2) common ownership or control (direct or indirect) of the entities; and (3) the determination that an allocation is necessary either to prevent evasion of taxes, or to clearly reflect the income of any of the entities.

The most recent IPU takes a broad view of the application of section 482 and looks at the substance of transactions. Regarding the first requirement, the IPU instructs examiners that organizations can include almost any type of entity and that a trade or business means a trade or business activity of any kind, regardless of place of organization, formal organization, type of ownership (individual or otherwise) and place of operation. On the common control requirement, the IPU emphasizes that the form of control is not decisive and that the reality of control governs. It also notes the presumption of control if income or deductions are arbitrarily shifted. Finally, the reallocation to clearly reflect income requirement notes that an IRS allocation will be upheld unless the taxpayer can provide that the IRS determination was arbitrary and capricious. Moreover, the IPU provides examples of circumstances that indicate the presence of arbitrary shifting of income, including when the net income of the foreign affiliate is high compared to the net income reported by the US company. Of course, it may be appropriate for the foreign affiliate to have higher net income.

The IPU contains instructions on initial factual development of the requirements and provides references to resources that an agent should consult, including internal IRS resources, IRS guidance and case law. It also identifies the types of documents that should be requested and reviewed during the examination.

As demonstrated by the large number of high-profile transfer pricing disputes currently pending in the courts, the IRS is taking a strong stance on the application of section 482. Moreover, as demonstrated by this IPU, the IRS wants examining agents to be aggressive in identifying circumstances where there may be noncompliance with section 482. Taxpayers with transfer pricing issues may benefit from reviewing all IPUs on section 482, both in documenting their transfer pricing activities and upon commencement of an examination to ensure that they have the documentation that the IRS will request.

Introducing McDermott’s Blog Series on LB&I’s International Practice Units

by Kevin Spencer | Mar 9, 2016 | IRS Guidance, Transfer Pricing Resource, Uncategorized

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!

LB&I Practice Units: Know Your EOI Programs

by McDermott Will & Emery | Feb 10, 2016 | Court Procedure Matters, IRS Audits, IRS Guidance, Transfer Pricing Resource, Uncategorized

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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