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FEDERAL CONTROVERSY UPDATE: Recent Exam, Appeals, and Judicial Developments March 20, 2015 Charlotte, NC Julie BradlowAlex Sadler Moore & Van AllenIvins,

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Presentation on theme: "FEDERAL CONTROVERSY UPDATE: Recent Exam, Appeals, and Judicial Developments March 20, 2015 Charlotte, NC Julie BradlowAlex Sadler Moore & Van AllenIvins,"— Presentation transcript:

1 FEDERAL CONTROVERSY UPDATE: Recent Exam, Appeals, and Judicial Developments March 20, 2015 Charlotte, NC Julie BradlowAlex Sadler Moore & Van AllenIvins, Phillips & Barker Charlotte, NC Washington, DC TEI Carolinas Chapter

2 Agenda  Budget pressures and impacts on IRS examinations  Reallocating limited examination resources  Proposed changes to LB&I examination procedures  IPGs and IPNs—how are they working?  New IDR process—how is it working?  Recent Appeals initiatives  Recent Supreme Court cases bearing upon tax practice and procedure 2

3 Budget Pressures on the IRS  FY15 budget cut $346M to $10.9B, a record low from  “No challenge facing the IRS today is more critical than our budget situation.” John A. Koskinen, 2/24/15.  IRS staffing down from 100K in 2010 to 87K in  LB&I revenue agent staffing is down 1K since  Training spending is down from $172M in 2010 to $22M in 2013 (but up to $48M in 2015).  Implementation of Affordable Care Act and FATCA provisions placing additional strains on the agency. 3

4 “Doing Less with Less”  Audits declining  1.2M audits in FY14, 150K fewer than FY13 and 300K than FY10  Large corporate audits declined 20% in 2014 to lowest level in 10 years  Streamlining corporate audits with an issue-based focus  LB&I taxpayers still receive over 50% of audit resources but produce only 10% of tax revenues  Increasing audit coverage of mid-market businesses and flow-through entities  191K of 296K LB&I taxpayers are flow-through entities  IRS audited 0.8% of large partnerships compared to 27% of C corps  Retraining portion of domestic agents to handle international issues  Scaling back published guidance and PLRs  CAP continues to expand, from 184 taxpayers in 2014 to 194 taxpayers in

5 LB&I Coordinated Industry Case (CIC) Pilot  Historically, CIC cases—900 of 296K LB&I taxpayers—were front-loaded into the compliance plan, limiting flexibility to allocate resources to other compliance activities.  LB&I is moving toward a risk-based model to shift the focus from taxpayers to issues.  Withdrawal from some CIC work  Strategic deployment of freed resources  Assigning cases based on compliance risk rather than taxpayer size  Under the pilot program, all CIC cases would:  Undergo a centralized classification process to evaluate return compliance risk and identify high-risk issues  Classification process to include issue identification and written explanations and documentation of compliance risks  Risk analysis entered into workload delivery system 5

6 International Audits  LB&I recognition that exposure is in international issues  Permanent differences  Significant profit-shifting  Account for disproportionate share of revenues and tax gap  Retraining domestic agents on international issues  Recently published 46 International Practice Unit (“IPU”) documents as “best practices,” with more to come.  Identifying and devoting resources to “corrosive” issues.  Transfer pricing viewed as the single highest risk for LB&I and will stay at forefront  Transfer Pricing Practice (TPP) provides coordinated training, expertise, and audit resources  Rolling out the Transfer Pricing Audit Roadmap 6

7 Transfer Pricing Audit Roadmap  “To provide the transfer pricing practitioner…with audit techniques and tools to assist them with the planning, execution and resolution of transfer pricing examinations.”  Key principles  Exam teams is accountable for developing facts  Should approach as a project, with up-front research and planning  Exam teams should learn the business, know the big picture, keep an open mind, and not cherry pick issues  Start-to-finish TPP and Field Counsel involvement  Focused on building litigation-ready cases (“won or lost on the facts”  Full and open communications with taxpayer  Built around non-binding, hypothetical 24-month audit timeline  Just beginning to be felt by taxpayers, with exam teams requesting early meetings. 7

8 8 PLANNING EXECUTION RESOLUTION General review Tax return and 5471s / 5472s, UTP, form 926, and § 6662 documentation 10-K / other publicly-available info General IDRs Opening conference (starts 24-month clock) Orientation conference Financial systems TP overview Concludes w/ initial risk analysis / audit plan Issue presentation Draft NOPA presentation to taxpayer Discussions with taxpayer Issue resolution Final NOPA RP Case closing / RAR Fact finding – tailored IDRs, plant tours and site visits, interviews, etc. Mid-cycle assessment / fact statement Issue development; concludes w/ draft NOPA Consideration of penalties Transfer Pricing Audit Roadmap 14 Months 6 Months

9 QEP Revisions  LB&I re-engineering examination procedures, see Draft Publication 5125, to replace the Quality Examination Process (“QEP”).  Focusing exams on high-risk issues  Exam team and taxpayer work together to develop examination scope and procedures  Make the process more issue-focused to ensure resources are allocated to the highest compliance risks  Utilize an Issue Team Approach for successful development of each issue examined  Limitations on informal claims  Accept and develop informal claims only within 30 days; thereafter all claims must be formal and filed with Service Center  Claims must comply with Treas. Reg. §

10 QEP Revisions  Mandating full development of the relevant facts  Exam team members responsible for documenting the facts  Team members will work with the taxpayer to resolve any facts in dispute  Intended to ensure that all relevant facts, including those favorable to the taxpayer, are fully documented  Require written acknowledgement of facts before NOPAs are issued  If case is closed to Appeals, and new facts are provided, the case is returned to Exam’s jurisdiction 10

11 QEP Revisions  Mandating consider Fast Track Settlement for unagreed issues  Mandating post-examination review and critique  Evaluate effectiveness of concluded examination  Develop recommendations for improving next examination  Discuss problems and potential solutions  Prepare input for next cycle planning  Obtain information helpful for next examination  Separate from opening conference for next cycle 11

12 Knowledge Management: IPGs and IPNs  In August 2012, LB&I announced the development of a “knowledge management network to replace the Tiered Issue Process”  Issue Practice Groups (IPGs) = domestic issues  International Practice Networks (IPNs) = international issues  Goals  Put decision-making responsibility back in the hands of agents  Provide collaborative, coordinated, and easily-accessible technical proficiency to facilitate thorough audits  Promote efficient and consistent case management 12

13 IPG Pilot Organizational Structure  S Corporations & Cooperatives  Partnerships & TEFRA  Corporate Income & Loss  Compensation & Benefits  Corporate Distributions & Adjustments  Life Insurance  Non-Life Insurance  REITS, REMICs, RICs & Banking  Deductible & Capital Expenditures  Inventory & Sec. 263A  Methods of Accounting & Timing  Business Credits  Energy & Investment Credits  Penalties 13

14 IPG Composition and Function  Each IPG includes one coordinator and one or more full- time subject matter experts (SMEs).  Collateral SMES can be revenue agents, managers, specialists, and Counsel from LB&I and National Office.  Spend less than 25% of their direct examination time working on IPG issues.  Publish FAQs answering revenue agents’ questions in advance.  All 15 IPGs now have their own internal website.  No policy on IPG members talking with taxpayers.  IPG framework still a work in progress. 14

15 IPG Experience to Date  Exam teams are using IPGs frequently.  Anecdotal experience varies.  Dependent on personalities involved and relationship between IPG and exam team.  Is the IPG acting as an advisor or advocate, facilitating or delaying?  Observations  The exam team is responsible for the examination and should not simply defer to the IPG.  You can ask to speak to the IPG and elevate if denied, particularly where agent acting as a go-between.  Make sure the IPG has the complete picture.  Consider bringing in your own outside expert(s). 15

16 16 International Matrix and IPNs Each section is essentially an IPN.

17 International Practice Units (IPUs)  In December 2014 LBY released 46 IPUs formalizing the technical knowledge of IPNs.  See Practice-Units  Goal is to provide job tools to examiners when preparing for an audit, or when reviewing a particular transaction.  The IPUs cover a wide range of international tax concepts and issues; at least 20 focus on transfer pricing.  Another 100+ IPUs are reportedly in the pipeline being vetted and redacted for approval and publication. 17

18 Revised IDR Procedures  Agent must identify the issue leading to the IDR and discuss the IDR and a reasonable time frame with the taxpayer in advance  Agent has discretion to grant 15-day extension.  Thereafter, if an IDR is deemed delinquent:  Step 1: IRS delivers Delinquency Notice within 10 days of due date. TP has 10 days to respond. Counsel notified.  Step 2: Territory Manager issues Pre-Summons Letter to next management level. Counsel participates. TP has 10 days to respond.  Step 3: Summons issued. 18

19 IDR Enforcement Timeline  From the date of the initial draft IDR to the initiation of the summons process, the IDR process can take approximately 140 days. 19

20 New IDR Procedures  Experience to date—IRS and taxpayers are adapting to the new rules  Fears that IDRs would be quickly escalated to summonses generally have not been realized  Relatively few Delinquency Notices have been issued and in those cases Pre-Summons Notices have not been necessary  IRS believes the process works well where there is a mutual commitment to work together and meet deadlines.  Maintaining an open dialogue and clarifying issues that arise are key. 20

21 *Total On-Rolls at Year End Current State of Appeals FY 2011FY 2012FY 2013FY 2014 Total Staffing* 2,111 1,981 1,8291,720 Total Receipts148,327135, ,113113,608 Receipts Mix % Collection % Exam 58% 42% 55% 45% 54% 46% 53% 47% Total Closures142,553144, ,176115,472 21

22 Appeals’ Receipts by Case Type WORKSTREAMFY 2013FY 2014 Collection Due Process (CDP)44,68440,355 Offers-in-Compromise9,6959,231 Innocent Spouse4,2843,012 Penalty Appeals10,33610,213 Coordinated Industry Cases98129 Industry Cases2,1531,469 Examination/TE/GE38,30636,919 Other13,55712,280 TOTAL123,113113,608 22

23 Recent Independence Projects  Real and perceived independence from Compliance is critical for Appeals to accomplish its mission.  Recent projects to preserve Appeals independence  Ex Parte Communication Rules: Rev. Proc clarifies areas of confusion, new business practices, and explains remedies for violations  Rules of Engagement: IRM § ( ) clarifies how Appeals participates in IRS cross-divisional meetings  Appeals Judicial Approach and Culture (AJAC) Project: Reinforces Appeals’ quasi-judicial approach to the way it handles cases, with the goal of enhancing internal and external customer perceptions of a fair, impartial and independent Appeals (see Interim Guidance AP ) 23

24 Key Exam-Related Policy Changes  Appeals officers are not examiners and should not assist Compliance in case development.  Appeals will not raise new issues except in the case of fraud or malfeasance.  Appeals will attempt to settle a case based on factual hazards when the case submitted by Compliance is not fully developed and the taxpayer has presented no new information or evidence.  Appeals will require that at least 365 days remain on the statutory period of limitations on receipt of the case, and at least 180 days upon return of the case from the originating function. 24

25 Key Exam-Related Policy Changes  If a taxpayer with a non-docketed case before Appeals raises a relevant new issue or submits new information that merits investigation and/or requires additional analysis, Appeals will return the case to Compliance to examine the new issue or information.  There must be at least 210 days remaining on the statute, or else Appeals will not consider the new issue or information.  Also, Appeals reserves the right to keep the case if the taxpayer “unreasonably delays the process by intentionally submitting new information or raising new issues multiple times….”  If a taxpayer raises a relevant new theory or legal argument on a non-docketed case, Appeals will request review and comment from Compliance.  Will generally provide 45 days for LB&I cases.  Normal ex parte communication rules apply. 25

26 Recent Supreme Court Cases  Perez v. Mortgage Bankers Ass’n (March 9, 2015)  Department of Labor withdrew an opinion letter stating that mortgage bankers were exempt from the FLSA and issued a new Administrator’s Interpretation stating the opposite.  Supreme Court reversed the D.C. Circuit:  When an agency issues an interpretation of a regulation that differs significantly from a previously adopted interpretation, it is not required to use the notice and comment procedures in the APA.  Sotomayor wrote for herself, Roberts, Kennedy, Ginsburg, Breyer and Kagan; Alito joining in part; concurring opinions by Alito, Scalia and Thomas  Concurrences expressed concerns about Supreme Court precedents giving deference to interpretive regulations.  Scalia: “Agencies may now use these rule not just to advise the public, but to bind them. … Interpretative rules that command deference do have the force of law.”  May lead to reconsideration of those precedents. 26

27 Recent Supreme Court Cases  Direct Marketing Ass’n v. Brohl (March 2, 2015)  Colorado’s use tax scheme required out-of-state retailers to file information reports with the state on out-of-state purchases.  The DMA successfully challenged this statute on dormant Commerce Clause grounds in district court.  Tenth Circuit reversed, holding that the Tax Injunction Act (“TIA”) barred the DMA’s suit.  Supreme Court reversed the Tenth Circuit:  TIA says that federal district courts may not “enjoin, suspend, or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.”  Relief sought by the petitioner would not “enjoin, suspend or restrain the assessment, levy or collection” of Colorado’s sales and use tax.  Kennedy’s concurrence called for the Supreme Court to reverse Quill.  Also relevant to interpretation of the Anti-Injunction Act, which provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.” 27

28 Recent Supreme Court Cases  United States v. Clarke, 134 S. Ct (2014)  IRS auditing Dynamo’s years  Dynamo refused 3rd statute extension  IRS issued four summonses prior to statute expiration; Dynamo claimed retaliation  11th Circuit: Improper purpose allegation justifies hearing  Justice Kagan for the Court  “[T]he taxpayer is entitled to examine an IRS agent when he can point to specific facts or circumstances plausibly raising an inference of bad faith. Naked allegations of improper purpose are not enough.”  “But circumstantial evidence can suffice to meet that burden; after all, direct evidence of another person’s bad faith, at this threshold stage, will rarely if ever be available.” 28

29 Thank You! 29 JULIE M. BRADLOW Moore & Van Allen PLLC 100 North Tryon Street Suite 4700 Charlotte, NC TEL: (704) FAX: (704) ALEX E. SADLER Ivins, Phillips & Barker 1700 Pennsylvania Ave, NW Suite 600 Washington, DC TEL: (202) FAX: (202)


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