1. High Tech Tax Institute 2007 Federal Tax Controversy Panel Larry R. Langdon Deborah Nolan Maria Hwang David B. Robison Diane Ryan

2. 2 The Tax Controversy Environment SOX/FIN 48 Impacts End of Corporate Tax Shelters Accelerated Resolution and Settlement Tools IRS Currency Initiatives National Coordination of Key Issues

3. 3 Future Trends for Tax Controversy The Income Tax System Will Not Be Abolished Income Tax Codes are Complex The Nature of Global Business Is Complex Increased Need for Taxpayers and Tax Administrators for early resolution of tax controversy issues

4. 4 FIN 48 Disclosures Disclosures of 130 of Fortune 200 for Q1 of 2007 31% positive adjustments--$117M-$11.3B 47% negative adjustments--$79M to $295M 13% immaterial adjustments 9% no adjustment

5. 5 Tax Accrual Workpapers U.S. v. Arthur Young, 365 U.S. 806 IRS Tax Accrual Workpaper policy Policy of restraint – Ann. 84-46 Policy modification – Ann. 2002-63 ETR reconciliation workpapers – CC Notice 2007-15 U.S. v. Textron

6. 6 LMSB Programs and Initiatives Issue Management Compliance Assurance Process (CAP) Pre-Filing Agreement (PFA) Limited Issue Focused Examination (LIFE) Issue Tiering Fast Track Guidance

7. 7 Our Approach to the Issues How do you qualify for these programs? How do you make the program work? What do you do when things go wrong? Concerns about agents and team Concerns about process Concerns about legal issues Concerns about facts What are the IRS concerns? What does the future hold?

8. 8 Compliance Assurance Process CAP is an entirely new approach to tax administration CAP is a compliance review process that allows the IRS to determine tax return accuracy prior to filing. CAP improves taxpayer service and compliance through real time monitoring, review and issue resolution.

9. 9 Compliance Assurance Process Pre-filing environment – Real Time Audit Contemporaneous exchange of information Determine proper treatment of transactions before filing Return correct as filed No audit! SOX compliant!

10. 10 The CAP Process Taxpayers are invited to participate Voluntary joint audit before return filed IRS/TP signed MOU governs process An Account Coordinator (AC) and IRS team work closely with the taxpayer to determine the correct tax treatment of significant transactions Transparency is essential

11. 11 Reaching Agreement in CAP Process If agreement is reached at LMSB level, the taxpayer gets Issue Resolution Agreement and a Closing Agreement If agreement is not reached initially, the AC and the taxpayer use Fast Track Settlement (CAP Fast Track Announcement 2005-87) Fast Track has been used in CAP cases Checks and balances / Due Diligence

12. 12 Pre-Filing Agreement (PFA) Cooperatively resolves an issue prior to filing Pre-Filing Agreement (PFA) effective for current year and up to 4 following years Benefits: Records and people are readily available Fosters a cooperative relationship Faster Compliance burden and costs are reduced Certainty for financial accounting purposes

13. 13 Pre-Filing Agreement (PFA) Rev. Proc. 2007-17 provides guidelines. A $50,000 fee to participate in PFA Program. LMSB Industry Director makes decision to accept Through 2006: 172 of 268 PFA requests accepted 115 closed with an agreement. Estimated Time Savings – PFA Process vs. Post Filing: Taxpayers estimated 48% LMSB estimated 30%

14. 14 LIFE Examination Limited Issue Focused Examination Alternative to the traditional, full scope examination process for LMSB taxpayers (assets in excess of $10 million.) Applies to domestic and all specialists issues Memorandum of Understanding (MOU) signed by taxpayer and Service governs process

15. 15 LIFE Examination Time span of examination reduced due to: Increased communication between taxpayer and Service Greater involvement of taxpayer in planning Elevated materiality threshold Limited number of issues to be addressed Some mandatory compliance checks may be waived including: Income probe, inventory checks, certain information returns

16. 16 LMSB Tier I, II and III Issues To bring consistency across industry lines and provide greater oversight, LMSB prioritizes certain compliance issues into three tiers: Tier I – High Strategic Importance. Significant impact on one or more LMSB Industries Large number of taxpayers, significant dollar risk, substantial compliance risk or high visibility Already established legal positions and/or LMSB direction. Supported by Issue Management Team.

17. 17 LMSB Tier I, II and III Issues Tier II – Significant Compliance Risk. Areas of potential high non-compliance and/or significant compliance risk to LMSB or an Industry. Includes emerging issues. Tier III – Industry Importance. Industry-related issues that examiners should consider in their risk analyses. Examined and resolved using existing guidance.

18. 18 ADR Options LMSB Fast Track Settlement Rev Proc 2003-40 Early Referral Rev Proc 99-28 Post Appeals Mediation/Arbitration Rev Proc 2002-44 & Rev Proc 2006-44 Delegation Order 4-25

19. 19 We are not here to extend your experience with the IRS. We’re here to shorten it! Fast Track Settlement (Collaborative and Accelerated) TaxpayerAppeals LMSB/SBSE

20. 20 LMSB Fast Track Settlement Settlement process limited to 120-days Voluntary Process in audit jurisdiction Available when issue fully developed Factual/legal disputes Uses mediation techniques Taxpayer retains Appeals rights 479 cases, 83% agreed, settled 114-days

21. 21 Early Referral How Does It Work? Return must be under examination Taxpayer can request transfer of an unagreed issue to Appeals Issue must be developed Benefits of Early Referral Early resolution of key issue may encourage TP and Compliance to agree on other issues in case Saves time since Appeals and Compliance are working simultaneously

22. 22 Early Referral Early Referral Since 2000 163 requests, including 35 in FY ’07 Over $7.6 Billion in disputed adjustments considered

23. 23 Post Appeals Mediation After unsuccessful Appeals settlement negotiations Non-binding Non-docketed Appeals cases, except for: Collection cases (certain OIC & TFRP cases are eligible) Where TP did not act in good faith, frivolous issues, issues inconsistent with sound tax administration Issues designated for litigation

24. 24 Post Appeals Mediation Mediators Mandatory use of Appeals mediators TP can use non-IRS co-mediator at their expense

25. 25 Post Appeals Mediation 247 requests since inception, including 36 received on FY 07 63 resolved 49 resolved prior to mediation 40 did not resolve 12 TPs withdrew 3 returned to Compliance 50 did not qualify 30 in process Involved over $18 Billion in disputed adjustments

26. 26 Arbitration After unsuccessful Appeals settlement negotiations Non-docketed cases Factual issues Binding process – no appeal Exclusions Legal issues CCIs or ACIs Whipsaw issues Other exclusions under Mediation procedures

27. 27 Arbitration Fifteen requests since inception Two proceeded to arbitration One is pending Others either closed without arbitration, taxpayer withdrew, or denied because they did not qualify

28. 28 Arbitration Procedures Formalized October, 2006 Revenue Procedure 2006-44

29. 29 Delegation Order 4-25 Delegates authority to specified Compliance Managers to settle specific issues where Appeals has approved settlement guidelines. Includes both Compliance Coordinated and ACI issues.

30. 30 Delegation 4-25 (cont’d) Two general approaches: Settlement requires Appeals review and concurrence; common for LMSB issues No R & C required; used in several SB/SE issues with a high volume of cases

31. 31 The Changing Corporate Environment Globalization Increased Corporate Governance SOX/FIN 48 Impacts Risk Management Profile IRS Currency Initiatives National Coordination of Key Issues Complex law, business models and transactions

32. 32 The IRS Response Enhanced risk assessment Efficiencies appropriately pursued Greater Issue Focus / Specialization Increased Transparency / Disclosure Increased use of dispute resolution and prevention tools Better response to globalization Improved compliance strategies Continued balance of service and enforcement

33. 33 Looking Forward Assess Interests and Objectives Be knowledgeable about and use tools Understand protocols and “rules of engagement” Transparency and collaboration yields results Professional relationship is a two-way street

34. 34 Thank You!