Managing Tax Controversies - Crowell & Moring · 13-02-2019 · TEI DETROIT CHAPTER February 13,...

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Crowell & Moring | 1

Managing Tax ControversiesTEI DETROIT CHAPTER

February 13, 2019David Blair, Brad Anwyll, and Teresa Abney


• Government shutdown and state of LB&I

• Exam update

• Appeals update

• Partnership update

Managing Tax ControversiesAgenda

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Government Shutdown and the State of LB&I


Current State of IRS

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Current State of IRS


Current State of LB&I

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• It may take up to 18 months for the IRS to recover

• IRS lost 25 information technology specialists a week during the shutdown

• Backlog of unanswered written inquiries increased to 5 million

• Difficulty hiring seasonal workers (hired 10,000 last year)

• Ability to hire and retain quality employees hampered

Government shutdownImpact on IRS


• Ask revenue agent or Appeals officer what to do if submissions are due during the shutdown

o E.g., responses to IDRs

o Mail? Email? Hold until government reopens?

• Agree to “drop dead” date for scheduled meetings

o E.g., if government is closed 7 days before a meeting, the meeting is canceled

o Saves travel expenses and wasted preparation time

• Keep records!

• IRS resources: https://www.irs.gov/newsroom/irs‐activities‐following‐the‐shutdown

Government shutdownTips for future shutdowns

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Exam UpdateIssue‐Focused Exams and IRS Campaigns


Issue‐Focused Exams

Source: The New Yorker

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• To be provided to taxpayers at opening conference

• Goal: To complete exam in an efficient and effective manner through collaborative efforts

• Provides expectations for both IRS and taxpayers

• Outlines 3‐Phase Exam process

o Planning Phase

o Execution Phase

o Resolution Phase

• Details set forth in IRM 4.46.1, .3, .4, and .5

Publication 5125: LB&I Examination Process


• Issue Team to take responsibility

• Collaboration with taxpayer emphasized

• Resolve issues at earliest appropriate point

o Exam to seek taxpayer agreement on facts before NOPA

o Exam Team required to consider Fast Track Settlement

• Rules of engagement

o Prior system relied on domestic chain, which failed to resolve problems on international issues

o New “principles of collaboration” allow moving up substantive, geographic chains

o May not be one decision maker for all audit issues. Accountability is diffused

Issue‐Focused Exam Process

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• Case Manager – holds overall responsibility for the examination; but is not granted “51% control” over the case

• Issue Manager – oversees planning, execution, and resolution of the issue; one issue manager per issue under examination

• Other member – Team Coordinator; Issue Team member

o Principles of Collaboration (IRM 4.46.1.4) replace Rules of Engagement (formerly IRM 4.51.1)

• Emphasis on collaboration among all parties and timely elevation of concerns

• Provides guidelines for determining when internal elevation may be appropriate

Roles and Responsibilities (IRM 4.46.1)


Issue‐Focused Exams: Campaigns

• Where to Find Campaigns:o https://www.irs.gov/businesses/full‐list‐of‐lb‐large‐

business‐and‐international‐campaigns

• Campaign Example: RepatriationPractice Area = Cross Border Activities; Lead Executive = John Hinding

“LB&I is aware of different repatriation structures being used for purposes of tax free repatriation of funds into the U.S. in the mid‐market population. It has also been determined that many of the taxpayers do not properly report repatriations as taxable events on their filed returns. The goal of this campaign is to simultaneously improve issue selection filters while conducting examinations on identified, high risk repatriation issues and thereby increase taxpayer compliance.”

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• Campaign Development Portal

o LB&I employees submit a recommendation for a campaign

o LB&I evaluates proposals and designs campaigns using tailored treatment streams and integrated feedback loops

• Data analytics to support identification and evaluation of potential campaign issues

• Consider potential treatment streams

• Decide what resources to deploy

• Identify training, mentoring, networking, and tools needed

How IRS Develops Campaigns


Source: GAO “TAX GAP: IRS Needs Specific Goals and Strategies for Improving Compliance” (Oct. 2017)

Tax Gap Study: Corporate Compliance Issues

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Pending IRS Compliance Studies

Source: GAO “TAX GAP: IRS Needs Specific Goals and Strategies for Improving Compliance” (Oct. 2017)


• Issue Practice Groups (IPGs), International Practice Networks (IPNs)

o Facilitated knowledge management, collaboration

o Developed practice units on various issues

• Practice units (PUs) are available

o https://www.irs.gov/businesses/corporations/international‐practice‐units

o 18 new PUs in 2018 – not all international

• LB&I Directives also published

o https://www.irs.gov/businesses/corporations/large‐business‐and‐international‐lbi‐industry‐director‐guidance

o 7 new LB&I Directives for 2018

Role of Subject Matter Experts

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Exam UpdateProminence of International Issues at Exam


U.S. International Tax

Deputy Assistant Secretary (International Tax Affairs)

LG Chip Harter

Deputy Assistant Secretary(Tax Policy)(Vacant)

International Tax CounselTom West

Deputy International Tax Counsel

Brian Jenn

Chief Counsel, IRSWilliam M. Paul (Acting)

Associate Chief Counsel (International)

(Vacant)

Deputy Associate Chief Counsel (International)

Daniel M. McCall

LB&I Deputy Division Counsel (International)

Kathryn Patterson (Acting)

LB&I CommissionerDouglas O’Donnell

LB&I Deputy CommissionerNikole Flax

Director, Treaty & Transfer Pricing Operations

Jennifer Best

Director of Field OperationsTransfer Pricing Practice

John Hinman

U.S. Treasury Department IRS Office of Chief CounselIRS Large Business &

International

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LB&I Campaigns on International Tax IssuesCampaign Practice Area Lead Executive

Repatriation Cross‐Border Activities John Hinding (director, Cross‐Border Activities)

Repatriation via Foreign Triangular Reorganization

Cross‐Border Activities John Hinding; Barbara Harris (director, Northeastern Compliance)

Section 956 Transition Tax Cross‐Border Activities John Hinding

Section 956 Avoidance Cross‐Border Activities John Hinding

Foreign Earned Income Exclusion Withholding & International Individual Compliance

John Cardone

Corporate Direct (Section 901) Foreign Tax Credit

Cross‐Border Activities John Hinding

Inbound distributor campaign Treaty and Transfer Pricing Operations Sharon Porter

Individual Foreign Tax Credit (Form 1116) Western Compliance Practice Area Paul Curtis


• Publication 5300, June 29, 2018, updated August 2018

o Designed as a guide more than as a template

o Phases are planning, execution and resolution

o Contains relevant Practice Units, LB&I case team management, and best practices

o The Initial Transfer Pricing Documentation IDR is no longer required for all cases

• LB&I‐04‐0618‐012, June 29, 2018

o Communicates to LB&I employees that TPEP will be used in conjunction with the LB&I Examination Process, Publication 5125

o Transfer Pricing Roadmap is retired

Transfer Pricing Examination Process (TPEP)

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• Joint review of transfer pricing risks by several jurisdictions cooperatively

• Pilot program launched in January 2018: US / Canada lead

o Participation by 8 OECD countries: Australia, Canada, Italy, Japan, the Netherlands, Spain, the UK, the US

• Handbook: “risk assessment process”

o Transfer pricing documentation, country‐by‐country reports

o Kickoff meeting, share information with all countries

o Participating countries each assess risks

o Each country prepares “CAP outcome letter”

• Assessment of “high risk” will result in examination in country

ICAPInternational Compliance Assurance Program


Exam UpdateStrategies for Responding to NOPAs and AOF IDRs

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• IRS is required to prepare a statement of facts on Form 886‐A as part of its consideration of each issue

• IRS is also expected to issue a pro‐forma IDR to seek a written AOF from the taxpayer and to incorporate any additional facts in the write‐up

• IRM provides instructions to Exam if the taxpayer

o Agrees with the facts,

o Provides additional facts,

o Identifies disputed facts, or

o Does not respond to the AOF IDR

Acknowledgment of Facts (AOF) (IRM 4.46.4.9)


Acknowledgment of Facts IDR

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Exam UpdateChanges to CAP


Changes to CAP

• Compliance Assurance Processo Like pre‐filing agreement, provides certaintyo Very popular – expanded from 17 (2005) to 169 taxpayers (today)o Resource intensive for IRS; few metrics to measure successo CAP Maintenanceo IRS froze program in 2016

• Recently announced changes IR‐2018‐174 (Aug. 27, 2018)o Program continues for current CAP taxpayerso Applications due October 1, 2018o Preliminary list of issues, including transfer pricing, research credits

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Changes to CAP

• Recently announced changes IR‐2018‐174 (Aug. 27, 2018) (cont’d)

o CAP Team and taxpayer develop issues list for review o IRS seeking to better allocate resources:

• Issues lists to direct IRS resources; not all issues reviewed• 90‐Day goal for issue resolution• Some transfer pricing issues sent to APA program• Tighter timelines for taxpayer representation letter and post‐file review• Unagreed issues sent to Appeals sooner (Fast Track?)

• In future, taxpayers may need to provide certification of tax controls framework• CAP Maintenance to be modified; may skip review some years for low‐risk taxpayers• In future, IRS may use “issue‐based resolutions” in CAP cases


Questions?

David Blair

202.624.2765

[email protected]

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Appeals UpdatePositioning Your Case for Appeals on the Facts and Issues


• Two guiding principles:

o Appeals will not engage in fact finding

o Appeals will not raise new issues not considered by Exam and it will not reopen an issue on which the taxpayer and Exam are in agreement

• What is a “new” issue?

• What if taxpayer raises a new issue?

• What if taxpayer raises new facts?

Appeals PoliciesNo new facts, no new issues

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• Problematic if it is issued before the IRS’s proposed adjustment

• Do not have to respond (not subject to summons enforcement) but need to be strategic

Appeals PoliciesAcknowledgment of Facts IDR


Appeals UpdateExam’s Presence at Appeals

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• Historically, Exam would be present only for the Pre‐Submission Conference

• May 2017 IRS announced a pilot program for Exam attending Appeals conferences

o Goal = facilitate communication between Taxpayer and Exam to more quickly identify central issues and assess the strengths and weaknesses

o Exam not present for settlement discussions

o Appeals remains the decision‐maker

Exam’s presenceExam may attend some Appeals conferences


Exam’s presenceIRS says it is worthwhile

https://www.irs.gov/pub/irs‐utl/atclfaqs.pdf

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Exam’s presenceTaxpayers’ and Taxpayer Advocate’s Concerns

https://taxpayeradvocate.irs.gov/Media/Default/Documents/2017‐ARC/ARC17_Volume1_MSP_18_AppealsCounsel.pdf


• Concerns on when Exam gets excluded (thin line between case presentation and settlement discussion)

• Exam has begun to issue post‐Protest IDRs to prepare to advocate its position at Appeals

• More people at Appeals conferences

• Appeals claims it is helping

Exam’s presenceHow it is working

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Appeals UpdateAppeals Settlement Authority


• ATCL manager concurrence

• Appeals Coordinated Issues

• Appeals Settlement Guidelines

Appeals settlement authorityIs ATCL settlement authority eroding?

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Appeals settlement authorityIs ATCL settlement authority eroding?

https://www.irs.gov/pub/irs‐utl/tg_issues_index.pdf


Appeals settlement authorityAppeals Settlement Guidelines

https://www.irs.gov/pub/irs‐utl/irc‐section‐118‐salt‐asg‐redacted.pdf

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Appeals UpdateTaxpayer Right to Appeals


• New procedures in Rev. Proc. 2016‐22 limit ability to go to Appeals in docketed cases

• General rule = if taxpayer hasn’t previously gone to Appeals, they can go to Appeals when case docketed in Tax Court

• Exceptions

o Designated for litigation

o Not in interest of sound tax administration

Right to AppealsDocketed cases

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• Facebook filed a petition in U.S. Tax Court

• IRS refused to refer the case to Appeals (“not in the interest of sound tax administration”)

• Facebook sued in district court claiming under APA that:

o Rev. Proc. 2016‐22 was invalid

o Under Taxpayer Bill of Rights, Facebook had a right to Appeals

• Court ruled no enforceable right to Appeals

Right to AppealsFacebook, Inc. v. IRS (N.D. Cal. May 2018)


Questions?

J. Bradford Anwyll

202.624.2780

[email protected]

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Centralized Partnership AuditsOverview


Bipartisan Budget Act of 2015

Regulations

Consolidated Appropriations Act of 2018 (technical

corrections)

Regulations

Centralized partnership audit regimeBBA Developments

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Centralized partnership audit regimeTreasury regulations


Centralized Partnership AuditsMechanics

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• Assessment and collection of tax is done at partnership level

• Partnership is liable for resulting tax

Centralized partnership audit regimeBasic rule


Partnerships subject to new regimeEffective date / Electing‐in

• Effective for tax years starting after December 31, 2017

• Partnerships can elect in for tax years starting after November 2, 2015

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Partnerships subject to new regimeElecting out

• Which partnerships can elect out?

o Must have 100 or fewer partners (special rules for S corporations and QSubs)

o Partners must be individuals, C corporations, any foreign entity that would be treated as a C corporation were it domestic, and S corporations

• Election must be made each taxable year

• Election made on partnership’s tax return

o Must include the name and TIN for each partner in the partnership

o Must notify each partner of the partnership’s election out of the regime


• Centralized partnership audit regime applies to partnership‐related items

o Partnership‐related items = any item or amount with respect to the partnership that is relevant in determining the income tax liability of any person, without regard to whether the item or amount appears on the partnership’s return and including an imputed underpayment and an item or amount relating to any transaction with, basis in, or liability of, the partnership

Scope of the new regimeWhat does it apply to?

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Scope of the new regimeIRS Notice 2019‐06

• Forthcoming regulations: IRS allowed to directly audit a partner without applying the new regime

• IRS can decide the regime does not apply to a partnership‐related item if:

o The item does not arise in the audit of a partnership

o Partnership‐related adjustment is made as part of an adjustment to non‐partnership‐related item

o The treatment of the partnership‐related item is based on information from the person under examination


• Reviewed year

• Adjustment year

• Partnership representative

• Imputed underpayment

Centralized partnership audit regimeKey terms

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ExampleIn 2020, XYZ’s 2018 partnership tax return is audited and the IRS increases the partnership’s income by $1 million. In 2018, XYZ had three equal partners: A, B, and C.

• Imputed underpayment = $1,000,000 x 37% [highest applicable tax rate] = $370,000

• A, B, and C should have paid $370,000 more in taxes for 2018


Notice of Administrative Proceeding

Notice of Proposed Partnership Adjustment (NOPPA)

Submit modification information (270 days)

Final Partnership Adjustment

(FPA)

“Push out” election

(45 days)

Petition in court (90 days)

Centralized partnership audit regimeStages of BBA audit

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• Partnership pays the imputed underpayment

• Review year partners file amended returns for the reviewed year

• Partnership elects to push out to reviewed year partners

• Pull‐in procedure (review year partners pay the tax but don’t file an amended return)

Centralized partnership audit regimeFour ways to pay resulting tax


ExampleIn 2020, XYZ’s 2018 partnership tax return is audited and the IRS increases the partnership’s income by $1 million. In 2018, XYZ had three equal partners: A, B, and C. In 2020, XYZ has three equal partners: A, B, and D.

Imputed underpayment

Amended return

Push out election

Pull‐inprocedure

Who pays?

A, B, and D A, B, and C A, B, and C A, B, and C

On which return?

2020 2018 2020 None (payment remitted with IRS form)

Interest rate

General underpaymentrate


General underpayment rate PLUS 2%


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• BBA as enacted: push‐out adjustment includes only increases to partner’s income

• Technical corrections: push‐out adjustment includes increases and decreases to partner’s income

Push‐out electionTechnical Corrections: increases and decreases


XYZ’s 2018 tax return is audited; IRS makes an adjustment in 2020; A was a partner in 2018 but sold his interest in 2019 for $500,000. His outside basis was $300,000 so A reported $200,000 of gain on the sale.

XYZ pushes the adjustment out to reviewed year partners; A’s share is $100,000. XYZ issues a Schedule K‐1 to A reporting $100,000 of income.

Because A has an additional $100,000 of income from the partnership, his outside basis increases to $400,000 and he should have had only $100,000 gain on the sale of his XYZ partnership interest. Under the technical corrections, A can decrease the gain he reported on the sale.

Push‐out electionDecrease adjustment example

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Push‐out electionMulti‐tiered partnerships

Partnership makes push‐out election

Partnership sends K‐1s to partners

UTP files “partnership adjustmenttracking report”

UTP pays imputed tax

UTP pushes out to its partners

UTP’s partners pay or push out


In 2020, XYZ’s 2018 partnership tax return is audited and the IRS increases the partnership’s income by $900,00. In 2018, XYZ had three equal partners: A, B, and C. C is partnership with three partners during 2018: M (individual), N (individual), and O (partnership). O is partnership with three partners during 2018: R (individual), S (individual), and T (individual). XYZ is a calendar year taxpayer.

Push‐out electionMulti‐tiered partnerships example

XYZ

A B C

M N O

R S T

All push outs must be made by September

15, 2021

All push outs must be made by September

15, 2021

Red partners report the adjustment and pay the resulting tax

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Centralized Partnership AuditsPartnership Representative


• Eligibility to serve as Partnership Representative

o Substantial presence

o Designated Individual

• Designating or changing a Partnership Representative or Designated Individual

• IRS designation of Partnership Representative

• Authority of Partnership Representative

Partnership representativeFinal regulations

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On its 2018 return, XYZ designates PR1 as its partnership representative. On its 2021 return, XYZ designates PR2 as its partnership representative. In 2022, IRS mails XYZ a Notice of Administrative Proceeding with respect to XYZ’s 2018 tax return.

Partnership representativePartnership Representative example

Who is the partnership representative for the 2018 return?


On its 2018 return, XYZ designates PR1 as its partnership representative. In 2020, XYZ and PR1 have a falling out. XYZ does not want PR1 as its partnership representative.


What can XYZ do?

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On its 2018 return, XYZ designates PR1 as its partnership representative. XYZ’s 2018 return is selected for audit in 2020. In 2021, XYZ has three partners: A, B, and C. A is the majority partner. B is a general partner. A and C are limited partners.

On January 1, 2021, A signs and mails a form revoking PR1 as the partnership representative and designating PR2.

On January 15, 2021, B signs and mails files a form revoking PR2 as the partnership representative and designating PR3.

On February 27, 2021, C signs and mails a form revoking PR3 as the partnership representative and designating PR1.


Who is the partnership representative?


On its 2018 return, XYZ designates PR1 as its partnership representative. XYZ’s partnership agreement says PR1 cannot extend the period of limitations without the consent of partners A and B.

The period of limitations for making adjustments is March 15, 2022. The IRS asks to extend the period of limitations to March 15, 2023. A and B tell PR1 not to agree to the extension, but he does. PR1 signs the extension.


Is the extension valid?

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On its 2018 return, XYZ designates PR1 as its partnership representative. XYZ’s partnership agreement says PR1 cannot extend the period of limitations without the consent of partners A and B.

The period of limitations for making adjustments is March 15, 2022. The IRS asks to extend the period of limitations to March 15, 2023. A and B tell PR1 not to agree to the extension, but he does. PR1 signs the extension and then resigns as a partnership representative.


Is the extension valid?


Questions?

Teresa Abney

202.624.2667

[email protected]

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Managing Tax Controversies - Crowell & Moring · 13-02-2019 · TEI DETROIT CHAPTER February 13,...

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Transcript of Managing Tax Controversies - Crowell & Moring · 13-02-2019 · TEI DETROIT CHAPTER February 13,...