update on lb&i enforcement campaigns · life insurance reserve issues industry issue resolution...

UPDATE ON LB&I ENFORCEMENT CAMPAIGNS

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DID YOU GET YOUR BADGE SCANNED?

Presenters

► Moderator: Matthew Cooper, Senior Manager, Ernst

& Young LLP

► Panelists:

► John Hinding, Director, Cross Border Activities

Practice Area, Large Business & International

► Steven Miller, National Director of Tax, alliantgroup

LP

► Jennifer Breen, Partner, Morgan, Lewis & Bockius

LLP

Agenda

► Large Business & International (LB&I) Enforcement

Campaigns

► LB&I Examination Process, Publication 5125

► Acknowledgement of Facts IDR

► Changes to IRS Appeals Consideration

LB&I Enforcement Campaigns

Presentation title

LB&I campaigns – background

► LB&I announced 13 campaigns in a January 31, 2017

news release.

► 11 new campaigns were announced November 3, 2017

► Campaigns are a new workload selection tool that LB&I

plans to use for more than 50% of their examinations.

► Campaigns have different treatment streams, including

soft letters.

► First campaigns are not necessarily issues with the

highest compliance risk.

► LB&I plans more campaigns in the future.

► Cornerstone of campaigns is internal and external

feedback.

LB&I campaigns – issues

Campaign Description Treatment stream Exec champ

IRC Section 48C Credit Whether DOE allocated credits properly claimed 1. Soft letter

2. Issue-based exams

Kathy Robbins

OVDP Declines-Withdrawals Denied or withdrawn qualified applicants should

reapply

Variety, including issue-based exams Pam Drenthe

199 Multi-Channel Video Whether groups of channels or films are qualified

films and software is for customers’ direct use

1. Practice unit

2. Published guidance


Kathy Robbins

Micro Captive Insurance Transaction of Interest

Notice 2016-66

1. Training


Gloria Sullivan

Related Party Transaction Related party transactions in the mid-market Issue-based exams Peter Puzakuilcs

Deferred Annuity Life

Insurance

Life insurance reserve issues Industry Issue Resolution Kathy Robbins

Basket Transactions Structured financial transactions under Notices

2015-73, 74


2. Soft letters to material advisor

3. Practitioner outreach

Gloria Sullivan

LB&I campaigns – issues


Land Developers CCM Developer improperly deferring gain until projects

complete

1. Practice unit

2. Soft letters


Peter Puzakuilcs

TEFRA Linkage Revise linkage strategies Internal guidance on linkage Cliff Scherwinski

S Corp losses claimed in

excess of basis

S Corp SHs claim losses and deduction in excess

of stock or debt basis


2. Soft letters/self-correction

3. Outreach

4. New basis form

Holly Paz

Repatriation Repatriation strategies resulting in tax-free

repatriation – mid-market

1. Improved issue selection


John Hinding

Form 1120F Non-Filer Use external data to identify 1120F non-filers 1. Soft letters


John Hinding

Inbound Foreign Distributors Inbound transfer pricing 1. Training


Sharon Porter

NEW LB&I campaigns – issues


Swiss bank program

campaign

Under the US Department of Justice Swiss Bank

Program, verify compliance by identified US

persons with beneficial ownership of foreign

financial accounts.

Variety, including exams John Cardone

Foreign earned income

exclusion campaign

Individuals who did not meet the requirements to

qualify for the foreign earned income exclusion

and/or the foreign housing exclusion or deduction.


Verification of Form 1042-S

credit claimed on Form

1040NR

Before a refund is issued or credit is allowed,

verify the withholding credits reported on the Form

1042-S.


Individual foreign tax credit

(Form 1116)

Individuals who incorrectly compute the foreign tax

credit limitation on Form 1116.

Variety, including exams Paul Curtis

International (corporate)

Form 1120-F Chapter 3 and

Chapter 4 withholding

campaign

Verify withholding at source for Form 1120-Fs that

claim refunds, before the claim for refund or credit

is allowed.


Corporate direct (Section

901) foreign tax credit (FTC)

Domestic corporate taxpayers that are in an

excess limitation position for credits for foreign

taxes paid or accrued in lieu of a deduction.


2. Future FTC campaigns may address

indirect credits & IRC 904(a) FTC limitation

issues

John Hinding

Section 956 avoidance A Controlled Foreign Corporation (CFC) that

makes a loan to its US parent, but does not

include a Section 956 amount in income.

Issue-based exams John Hinding

NEW LB&I campaigns – issues


Agricultural chemicals

security credit campaign

For the section 45O agricultural chemicals security

credit, verify that there are qualified expenses and

eligible taxpayers, and that facilities are properly

defined.

Issue-based exams Judith McNamara

Deferral of cancellation of

indebtedness (COD) income

campaign

Verify that taxpayers who properly deferred COD

income in 2009/2010 properly report it in

subsequent years beginning in 2014.

Issue-based exams with the use of soft letters

under consideration.

Delon Harris

Energy efficient commercial

building property campaign

Verify compliance with the requirements of the

Section 179D energy efficient commercial building

deduction.

Issue-based exams Scott Ballint

Economic development

incentives campaign

Taxpayers that improperly treat government

incentives (e.g., tax credits, grants) as non-

shareholder capital contributions, exclude them

from gross income and claim a tax deduction

without offsetting it by the tax credit received.

Issue-based exams Paul Curtis

LB&I campaigns – scope

► Campaigns are a return selection tool. Not all LB&I activity

will be in the form of campaigns.

► An audit can start solely as a campaign and then move

into a more comprehensive audit.

► A campaign issue can be included in a CIC audit. Different

campaign treatment streams can be used in that audit.

► Campaign issues can also be applied to Compliance

Assurance Process (CAP) taxpayers.

► Mid-market taxpayer is defined as any taxpayer not under

CIC audit.

LB&I campaigns – soft letters

► The following campaigns list soft letters as a treatment

stream:

► IRC Section 48C Credit

► Land Developers CCM

► S Corp Losses Claimed in Excess of Basis

► Form 1120F Non-Filer

► A soft letter is not an examination.

► A taxpayer is not required to respond to a soft letter.

► If a taxpayer does not respond, IRS may start exam or

take other appropriate action.

Large Business & International Examination Process, Publication 5125

Presentation title

LB&I shift in audit approach

► LB&I is moving to a centralized issue selection and return

selection approach over the next few years.

► LB&I seeking to create a more flexible and knowledgeable

workforce, using data analytics to better identify areas of

noncompliance, and creating tailored treatments to respond to

issues.

► Aligns to the introduction of new exam and “campaign” process

that alters how issues and taxpayers are identified for audit.

► Recent LB&I organizational changes seeks to improve alignment

of resources to execute new examination process given new

budget and resource realities.

► Future of the Compliance assurance process (“CAP”) has yet to

be determined

LB&I Commissioner Transfer Pricing

Instructions► On January 12, 2018, LB&I Commissioner issued five set of

instructions for examiners regarding the handling of transfer

pricing cases

► Interim Instructions on Issuance of Mandatory Transfer Pricing

Information Document Request (IDR) in LB&I Examinations

► Instructions for Examiners on Transfer Pricing Issue Examination

Scope - Appropriate Application of IRC §6662(e) Penalties

► Instructions for Examiners on Transfer Pricing Issue Selection-

Reasonably Anticipated Benefits in Cost Sharing Arrangements

► Instructions for Examiners on Transfer Pricing Issue Selection- Cost-

Sharing Arrangement Stock Based Compensation

► Instructions for LB&I on Transfer Pricing Selection and Scope of

Analysis - Best Method Selection

LB&I examination process (“LEP”) Publication 5125 (February 2016)

► Replaces the “Quality Exam Process” and incorporates by

reference

► Information Document Request (“IDR”) Directive

► Appeals Judicial Approach and Culture (“AJAC”)

► Transfer Pricing Roadmap

► Updates to Internal Revenue Manual (“IRM”) 4.46

sections 1–6 issued in March 2016

► Process in effect for examinations starting as of May 1,

2016

► Articulates expectations for LB&I exam teams and

taxpayers or their representatives:

https://www.irs.gov/Businesses/Corporations/Large-

Business- and-International-Examination-Process

https://www.irs.gov/Businesses/Corporations/Large-Business-and-International-Examination-Process

LB&I examination process (“LEP”) Publication 5125 (Cont.)

► Sets clear expectations for LB&I examiners, taxpayers

and representatives

► Provides a Pro-Forma information document request

(“IDR”) for Acknowledgment of Facts (“AOF”) on unagreed

Issues

► Provides rules for informal claims for refund

► Must be provided to the exam team within 30 days of the opening

conference

► Requires discussion of an exit strategy

► Must include efforts to resolve tax controversy for certainty

► Joint critique of the exam process to recommend improvements

► Address future tax treatment of issues to eliminate

carryover/recurring issues

LB&I examination process (“LEP”) Publication 5125 (Cont.)

► Three stages to the Examination Process:

1. Planning

► Communication

► Issue Team Concept

► Examination Plan

2. Execution

► Issue Development Process

► Written Acknowledgement of Facts

3. Resolution

► Issue Resolution and Exit Strategy

17

Acknowledgement of Facts IDR

Presentation title

Acknowledgement Of Facts IDR (IRM 4.46.4.9)

► LB&I requires that all information, including all relevant

facts and supporting documentation, be submitted to LB&I

for consideration in the development of an issue.

► The taxpayer has primary responsibility for ensuring the

facts have been fully provided to LB&I, so that the law is

applied to the full set of facts.

► The issue team should collaborate with the taxpayer to

develop all facts before issuing a NOPA.

► The issue team is expected to conduct on-going

interactive discussions throughout the execution phase to

resolve any factual disputes and discuss tax positions on

issues examined.

Acknowledgement Of Facts IDR (IRM 4.46.4.9)

► Before an unagreed issue is sent to Appeals, the issue

team will solicit a written acknowledgment of the facts to

ensure all relevant facts, including those favorable to the

taxpayer, are fully developed.

► The issue manager should review the taxpayer’s

response to the acknowledgement of facts to assess the

strengths and weaknesses of each side’s position and to

ascertain if the issue can be resolved at the examination

level.

► The taxpayer must be reminded that the case will be

returned to exam's jurisdiction for consideration or

examination if new information is provided by the taxpayer

after a case is closed to Appeals.

Preparation of Form 886-A (IRM 4.46.4.9.2)

► If the taxpayer does not agree with LB&I’s tax

determination and the issue is likely to go to Appeals, the

issue team will prepare and provide to the taxpayer a

Form 886-A containing all facts and will solicit the

taxpayer’s written acknowledgment of the facts.

► To obtain an acknowledgment of the facts, a

comprehensive Facts section of the Form 886-A must

document all relevant facts both in favor of the taxpayer

and the government.

Preparation of Form 886-A (IRM 4.46.4.9.2)

► The extent of development of the other sections of the

Form 886-A may vary depending on the complexity of the

tax issue.

► Without an understanding of LB&I’s tax position and the

law applied, the taxpayer may not have the context

needed to ascertain whether all of the relevant facts have

been identified for the tax issue.

► Therefore, judgment is left to the issue team to determine

the extent of detail necessary in each section of the Form

886-A.

Issuing the Form 886-A with a Pro-Forma IDR (IRM 4.46.4.9.3)

► Use a pro-forma IDR (see Exhibit 4.46.4-3) along with the

Form 886-A to solicit a written acknowledgment of the

facts (AOF).

► The contents of the pro-forma IDR and contents of the

Form 886-A will be discussed with the taxpayer.

► The discussion will also establish a reasonable time for

the taxpayer to respond.

► Explain to the taxpayer that the pro-forma IDR will not be

followed by a summons and that their response to the IDR

does not indicate agreement to the issue or any proposed

adjustments.


► The purpose of the pro-forma IDR is to acknowledge that

all relevant facts have been identified and provides the

taxpayer the opportunity to submit additional relevant

facts and supporting documentation or to identify disputed

facts.

► The taxpayer should review the Form 886-A and respond

to the points below in writing within an agreed upon date.

► Taxpayer agrees to the facts as written.

► Taxpayer provides additional relevant facts and supporting

documentation.

► Taxpayer identifies disputed facts and provides clarification and/or

supporting documentation


► If the response is not received by the agreed response

date, do not follow the IDR enforcement process.

► The issue manager should inquire about the reasons for

the delay and determine if the taxpayer intends to

respond.

► The taxpayer’s response or lack of response to the IDR

will be included in the Form 886-A when the NOPA is

issued.

► To identify this IDR as one that will not be followed by a

summons, it is recommended to use the alpha indicator

prefix, AOF, in IMS to identify an IDR issued for the

purposes of obtaining an acknowledgement of the facts.

Incorporate Response in the Form 886-A Issued with the NOPA (IRM 4.46.4.9.4)

► A statement indicating the taxpayer's response to the IDR

must be included in the opening of the Facts section.

► The issue team will determine the appropriate method to

take when preparing the Form 886-A to ensure that all of

the relevant facts have been incorporated and considered.

► In addition, an explanation of whether the issue team

agrees or disagrees with the additional or disputed facts

provided by the taxpayer must be included.


► The issue team will identify the additional or disputed

facts provided by the taxpayer in a sub-section of the

Facts section in the Form 886-A or, if voluminous, include

the taxpayer’s response as an attachment to the Form

886-A.

► It is impossible to capture every scenario you may

encounter, however, some examples are provided for

options to use in documenting the response.


► Example 1: Taxpayer Agrees with the Facts -"The

taxpayer was issued IDR AOF#___ on January 1, 20xx to

acknowledge all relevant facts have been provided. The

taxpayer agreed with the facts as written."

► Example 2: Taxpayer Provided Additional Facts -"The

taxpayer was issued IDR AOF# __on January 1, 20xx to


taxpayer provided additional facts, which LB&I has taken

into consideration. The tax determination was modified to

reflect the additional facts provided, however the issue

remains unagreed. The additional facts provided by the

taxpayer are detailed in the Facts section. " OR "...are

included as an attachment."

Incorporate Response in the Form 886-A Issued with the NOPA (IRM 4.46.4.9.4) ► Example 3:Taxpayer Identifies Disputed Facts - "The

taxpayer was issued the IDR AOF#__ on January 1, 20xx to


taxpayer identified disputed facts. The disputed facts have

been included in a sub-section at the end of the Facts section."

OR "…have been included as an attachment to the Form 886-

A. "

► Example 4:Taxpayer Did Not Respond to the Pro-Forma

IDR - "The taxpayer was provided the IDR AOF#__ on January

1, 20xx to acknowledge all relevant facts have been provided.

The taxpayer did not respond to the IDR by the agreed upon

response date. A follow up discussion between the taxpayer

and the issue manager was held on January 15, 20XX. During

the discussion the taxpayer stated that…"

IRSAC Report Recommendations on AOF IDR

► Require a clear description of the legal issue. It may not

be possible to know what facts are relevant without a

clear exposition of the legal issues involved. In the

proffered AOF, the examination team should explain what

the legal issue is before setting forth the relevant facts.

► Ensure the AOF posits facts and not legal arguments.

Some examination teams use the AOF as an advocacy

piece to get the taxpayer to accept their legal theory. The

AOF should be limited to facts.

IRSAC Report Recommendations on AOF IDR

► Include all relevant facts. The AOF should include not only

the facts relied upon by the examination team, but also

those considered relevant by the taxpayer. We

understand that the process allows the taxpayer to

present additional facts for inclusion or to separately state

disputed facts, but not all taxpayers understand they have

those options.

► Provide training. This is a complex area and examination

teams may need additional ongoing training to better

understand the process and the intended goals.

Taxpayers may also benefit from better information on the

process, including, if appropriate, access to training

materials.

Pro forma IDR: IRM Exhibit 4.46.4-3

Sample Language on Recently Received AOF IDR

► “The purpose of this IDR is to ensure that all relevant facts,

whether favorable to the taxpayer or LB&I, are being

considered before the Form 5701, Notice of Proposed

Adjustment (NOPA) is issued and to secure the Taxpayer’s

Position.

► Appeals will return the case to exam if the taxpayer presents

new information during the Appeals process that was not

shared with LB&I during the examination. Therefore, the

taxpayer has the primary responsibility to ensure all relevant

facts are provided to the LB&I issue team.

► While the interpretation of the law or the amount of the

proposed adjustment may be unagreed, all relevant facts

should be included in the Form 886-A.”

Sample Language on Recently Received AOF IDR

► “Your response to the facts does not indicate agreement to the

issue or any proposed tax adjustment. It is only to

acknowledge that all of the relevant facts have been identified.

► Please review the attached Form 886-A and respond

accordingly in writing to the LB&I issue team by the agreed

upon date.

1. Taxpayer agrees to the facts as written.

2. Taxpayer provides additional relevant facts and supporting

documentation.

3. Taxpayer identifies disputed fact and provides clarification and/or

supporting documentation.

4. Taxpayer provides its position.

► Within 2 weeks of receiving a response, taxpayer will be

notified if response is incomplete.”

Strategy Considerations in Responding to AOF IDR

► Whether to respond?

► When to respond?

► How to respond?

► Why respond?

Changes to IRS Appeals Consideration

Appeals Judicial Approach and Culture (“AJAC”)

► AJAC is generally effective for cases received in IRS Appeals on or

after September 2, 2014

► Appeals will not raise new issues.

► If taxpayer raises a new issue, the case will be released to Exam for

examination of the issue.

► If taxpayer provides new information related to an issue in Appeals,

the case will be returned to Exam for review of the new information.

► If taxpayer raises a new theory or argument related to an issue in

Appeals, the new theory or argument will be shared with Exam for

review within a specified time frame.

► Appeals will attempt to settle an issue on factual hazards where the

issue submitted by Exam was not fully developed.

► There must be one year remaining on the statute of limitations prior to

the case being accepted by Appeals.

Participation in Appeals Conferences

► IRM Section 8.6.1.4.4 was revised in October

2016 and states:

► Appeals has the discretion to invite Counsel and/or

Compliance to the Appeal’s conference.

► The prohibition against ex parte communications must

not be violated.

► Appeals may also request that other experts attend

conferences.

► Taxpayers have raised a number of concerns

about this policy

Participation in Appeals Conferences - Pilot

► Appeals has undertaken a pilot to test attendance

by Compliance in large cases

► Pilot applies to all cases of participating Appeals

Team Case Leaders (“ATCLs”)

► Approximately one-third of ATCLs are participating in

pilot

► Pilot is scheduled to run for 2 years

► Participating ATCL’s will invite Compliance and Counsel

to participate in all cases assigned to that ATCL.

► Taxpayer cannot opt out of the pilot

Settlements Contrary to National Office Advice

► Manual Section 8.6.3.3 sets out procedures Appeals must

follow when recommending partial or full concessions

adverse to a revenue ruling, a TAM issued to the taxpayer

under consideration, or other guidance that falls within the

meaning of a "letter ruling.”

► Appeals will not partially or fully concede an issue where

Chief Counsel has issued a decision on the issue that is

subject to an abuse of discretion standard when reviewed

by a court (for example, the denial of non-automatic

change of accounting method requests).

Settlements Contrary to National Office Advice (Cont.)

► When full concession of other “letter ruling” issues are

recommended, Appeals must request and consider the

views of the Associate Chief Counsel.

► Appeals must also coordinate consideration of issues

listed in Chief Counsel Directives Manual (CCDM) Exhibit

31.1.1-1 with the Associate Chief Counsel office.

► List includes cases of first impression, positions inconsistent with

published guidance and positions inconsistent with Chief Counsel

Advice issued in the case.

Questions?

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