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TAX CONTROVERSY 360
McDermott’s Real-Time Tax Disputes Insights
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McDermott’s Real-Time Tax Disputes Insights
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IRS Audits and IRS Appeals — A Year in Review

by | Jan 6, 2017 | , , ,

This year has been marked with substantial changes in the manner in which the Internal Revenue Service (IRS) operates. Shrinking resources and retiring IRS professionals have marred the IRS and its efficiency. The pervasive theme for 2016 was trying to do the job with fewer resources.  For example, IRS audits continue to devolve with standardized information document requests (IDRs), international practice unit guides and issue-focused examinations (mostly focused on international tax issues). We say “goodbye” to old friends [au revoir Compliance Assurance Process (CAP) Program] and hello to new rules (e.g., partnership entity audit rules and adjustments). And we have born witness to the slow evisceration of the independence of IRS Office of Appeals.

As we turn the corner to a new year, we expect the IRS’s war on taxpayers to manifest itself in “campaign” after “campaign,” reminiscent of the tiered issue system of days gone by. We expect coordination on a national level to reside with IRS “issue specialists” controlling and dictating audits and appeals, which will increasingly challenge the efficiency of pre-litigation resolution techniques. The end result of these contractions may very likely be an increase in tax litigation as frustration with the administrative process boils over. But the wild card, of course, is what changes will be ushered in by the new administration. Will it be business as usual, or will we see a complete overhaul of the system? Only time will tell, as we wait with bated breath for the ball to drop.  (more…)



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IRS Announces New Chief of IRS Appeals

by and | Nov 29, 2016 | ,

In further changes to the Internal Revenue Service (IRS) Appeals Division, it was recently announced that Donna C. Hansberry will replace Kirsten B. Wielobob as chief of IRS Appeals. Ms. Hansberry is currently the deputy commissioner of the Tax Exempt and Government Entities Division. She started as a trial attorney for the IRS Office of Chief Counsel in 1987 and was previously assistant to the commissioner (attorney-advisor for tax). Ms. Weilobob will move to the position of deputy commissioner for services and enforcement.

There have been very significant changes to IRS Appeals during the last several months that challenge whether the division will continue to be a successful tool for taxpayers and the IRS to resolve difficult cases that are stuck at the Exam Division. The “changing of the guard” may be a sign of more changes to come. Indeed, Ms. Hansberry was formerly a trial attorney and was in charge of the Joint International Tax Shelter Information Centre, director of global high wealth and abusive transactions. For prior coverage on changes at IRS Appeals, see our previous articles:

“More Changes to IRS Appeals Procedures”

“IRS Appeals – Changes Afoot?”

“IRS Updates Rules Regarding Appeals Conferences”



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More Changes to IRS Appeals Procedures

by | Nov 4, 2016 | , , , ,

In a letter dated November 4, 2016, IRS Chief of Appeals Kirsten Wielobob provided some clarification regarding the authority of the Appeals Team Case Leaders (ATCLs) to settle cases, revisions to IRM section 8.6.1.4.4 permitting other IRS employees to attend conferences, clarifications to conference practices, and revisions to how Appeals handles section 9100 relief determinations. After a month of speculation, of interest to most taxpayers and practitioners is the news that, although settlement authority will remain with the ATCLs, Appeals will revise its procedures to make it clear that an Appeals Manager must review a case prior to an ATCL finalizing a settlement. In an apparent attempt to thread the proverbial needle, the letter indicates that the Appeals Manager “will not be accepting or rejecting settlements,” but if the ATCL and Appeals manager “disagree about a settlement,” the next higher level manager supervising ATCL Operations will resolve any disagreement. Although this procedure is contemplated in IRM section 8.7.11.3.1  (03-16-2015), the letter suggests that there will in fact be a procedural shift. It remains to be seen whether, as some have feared, this will lead to increased delays in resolving cases.



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The Interplay Between Tax Planning and IP Planning

by and | Nov 4, 2016 | , ,

On November 3, 2016, we presented at the Chicago Tax Club’s symposium regarding tax planning and intellectual property (IP) planning within a multinational corporation. The presentation covered various areas, including the importance of coordination between IP and tax groups when engaging in IP planning, the differences in the IP arena and the tax arena with respect to IP matters that can impact tax planning positions, and tax planning with IP holding companies. From a tax controversy perspective, we discussed being prepared for an Internal Revenue Service (IRS) audit with respect to IP planning, with a focus on contemporaneous documentation to support the taxpayer’s position, having audit ready files (including adhering to document retention policies), reviewing IRS audit materials (e.g., International Practice Units) to understand what the IRS may ask for during the audit, and being cognizant of the various privileges (e.g., attorney-client, tax practitioner and work product) and recent positions taken by the IRS with respect to whether certain advice provided by accountants is privileged.



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Tax Controversy Options

by | Oct 11, 2016 | , , , , , , ,

Knowing your options for a US Federal tax controversy is helpful in creating a sound and efficient strategy. The attached chart depicts the typical options involved in a US Federal tax controversy, from the IRS’s examination of the return, through administrative appeals, litigation in Tax Court, Circuit Court appeal, and to ultimate assessment of tax.



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IRS Appeals – Changes Afoot?

by and | Oct 4, 2016 | , , ,

IRS Appeals cases within the Large Business and International (LB&I) division that involve a significant number of issues, a significant amount of money, or highly complex issues are typically assigned to a “team” of IRS Appeals officers. The Appeals Team Case Leader (ATCL), however, has “complete control” of the case, is “independent” from the IRS Examination Team and, except for certain coordinated issues, has settlement authority for all work assigned to the Appeals team. See I.R.M. 8.7.11.2 (09-25-2013). Currently there are 35 ATCLs.

Rumors are rampant, however, that the IRS may soon eliminate the ATCL’s settlement authority and require review and approval of settlements by an Appeals Team Manager (ATM), of which there are only a handful. On September 22, 2016, at an annual conference sponsored by the Internal Revenue Service and the New York Chapter of the Tax Executives Institute, Reinhard Schmuck, an ATCL for Area 9 in New York, confirmed that the IRS is considering changes to ATCL’s settlement authority. He indicated that the review was initiated in response to a report filed by the Treasury Inspector General for Tax Administration that determined that in a sample of penalty Appeals cases, the case files did not always support Appeals’ decisions to abate penalties as required by Appeals criteria. See TIGTA Report Number:  2015-10-059 to the Internal Revenue Service Chief of Appeals (July 30, 2015). He cautioned, however, that the IRS had not made any final decisions.

Attendees at the conference, including former Appeals Officers and practitioners, expressed dismay at the proposed change because the LB&I Appeals process, which has worked well and instilled confidence in taxpayers, is not broken. This change may be a devastating blow to resolution at Appeals, and may cause a chilling effect on seeking redress at Appeals before heading to court. What is the use of spending a significant amount of time and effort to negotiate at Appeals if the decision maker is not even part of the negotiations?

What can we expect if the rumors ring true:

(1) Additional delays at Appeals;

(2) Unhappy ATCLs and ATMs;

(3) Unfair and unreasoned settlements;

(4)  Increased assertion of penalties; and

(5) Taxpayers avoiding Appeals and an increase in tax litigation.

The new procedures were rumored to be effective October 1. We do not have confirmation of a change in policy, but once the rumors are confirmed, we will report back.



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IRS Updates Rules Regarding Appeals Conferences

by , , , , and | Sep 22, 2016 | , , ,

The Internal Revenue Service (IRS) has revised the Internal Revenue Manual (IRM) regarding Appeals Conferences.  Below is a summary of material changes to IRM 8.6.1, effective October 1, 2016:

  • The IRM was revised to reflect that most conferences in Appeals will be conducted by telephone.  The revision also provides guidance for when in-person conferences are appropriate (e.g., when there are substantial books and records to review that cannot be easily referenced with page numbers or indices, or when there are numerous conference participants that create a risk of an unauthorized disclosure or breach of confidentiality).
  • IRM 8.6.1.4.1.2, In-Person Conferences: Circuit Riding was added.  If the assigned Appeals employee is in a post of duty that conducts circuit riding, circuit riding will be permitted when the address of the taxpayer, representative or business (for business entities) is more than 100 miles from a customer-facing virtual conference site or 150 miles from the nearest Appeals Office.  Area Directors have the discretion to deviate from these mileage limitations.  Circuit riding will also be allowed if the nearest Appeals Office cannot take the case due to high inventories or lack of technical expertise, or if there is no convenient alternative.
  • Language was added in IRM 8.6.1.4.4 to state that Appeals has the discretion to invite Counsel and/or Compliance to the conference.  The IRM notes that the prohibition against ex parte communications must not be violated and references Rev. Proc. 2012-18.
  • The definition of a new issue was updated in IRM 8.6.1.6.1(2).  The IRM retains prior language stating that a new issue is a matter not raised during Compliance’s consideration and adds that any issue not raised by Compliance in the report (e.g., 30-Day Letter) or rebuttal and disputed by the taxpayer is a new issue.

The revised IRM 8.6.1 is available here.



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Protecting Confidential Taxpayer Information in Tax Court

by , and | Jul 21, 2016 | , , , , , , ,

Taxpayers value confidentiality, particularly if there is a dispute with the IRS that involves highly-sensitive trade secrets or other confidential information. Not surprisingly, complex tax litigation often raises the question of what confidential information has to be “made public”—through discovery responses or the introduction of exhibits or testimony in a deposition or at trial—so that a taxpayer can dispute IRS adjustments in court if administrative efforts to resolve the case are not successful. Fortunately, the Tax Court tends to protect highly-sensitive trade secrets or other confidential information from public disclosure even when the judge must review the information to decide the case.

In the Tax Court, the general rule is that all evidence received by the Tax Court, including transcripts of hearings, are public records and available for public inspection. See Internal Revenue Code (Code) Section 7461(a). Code Section 7458 also provides that “[h]earings before the Tax Court . . . shall be open to the public.” Code Section 7461(b), however, provides several important exceptions. First, the court is afforded the flexibility to take any action “which is necessary to prevent the disclosure of trade secrets or other confidential information, including [placing items] under seal to be opened only as directed by the court.” Second, after a decision of the court becomes final, the court may, upon a party’s motion, allow a party to withdraw the original records and other materials introduced into evidence. In our experience, the trend appears to be erring on the side of protecting information from disclosure.

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Some Questions Posed by Declining Audit Rates and Audit Campaigns

by | Jul 8, 2016 | , ,

The IRS is spending increasingly less time auditing large companies. This is a good thing, right?  But wait, the IRS is starting to launch audit campaigns. And some large taxpayers are still being audited even if they are not caught up in a campaign. What could be some of the consequences of these dynamics?

A recent report confirmed that IRS audits of large companies have fallen steeply in recent years. The report conducted by TRAC (Syracuse University’s Transactional Records Access Clearinghouse) (available here) analyzed IRS audit history of large companies from 2010 through 2015.  The study found the IRS spent 34 percent less time on average auditing companies with $250 million or more in assets (Big Corps) in 2015 than it did in 2010.  Audits of the largest companies are declining even more sharply: the IRS spent 47 percent less time auditing companies with assets of $20 billion or more (Giant Corps). Further, the total number of large businesses audited by the IRS’s LB&I (Large Business & International) Division in 2016 is 22 percent lower than it was last year during this time period.

Large taxpayers may take a deep breath once their continuous audit cycle becomes less continuous or stops altogether. This is understandable. But if you are a taxpayer that is audited, a number of important questions immediately come to mind:

  • Will we have good rapport with a new IRS audit team? We spent years building our relationship with the previous IRS team—has all that very important work gone out the window? Will I have the time to build rapport with the new IRS team, or will they be under such time pressure to audit discrete issues that we will have little opportunity to interact with the team and shape the audit plan?
  • Will the IRS team arrive with a preconceived idea of the “proper outcome”? Will information document requests (IDRs) be standardized? Will we be able to effectively negotiate the scope of IDRs? Or will the IRS team simply be fact-gatherers for a more centralized committee that makes decisions?
  • Will we be able to meet with actual decision makers? Or will the decision makers be a committee in the background that we never truly get to engage in a meaningful discussion? Will centralized decision makers take into account the specifics of our situation, or will we be “lumped in” with other taxpayers?
  • Will the IRS issue “fighting regulations” in an attempt to chill legitimate transactions? Will IRS audit teams attempt to apply these fighting regulations to transactions that predate the effective date of the new regulations? After all, doesn’t the IRS often contend that the new regulations are not really a change and simply reflect existing law?
  • Will fewer audits mean bigger adjustments? What institutional pressure is IRS Exam under to propose very large adjustments? What about penalties?
  • Will IRS Appeals exercise true independence and concede improper adjustments? Or will IRS Appeals simply “split the baby” based on inflated numbers? Will this combination of factors [...]

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IRS Updates List of Items Requiring National Office Review

by and | Jul 7, 2016 | , , , , ,

On June 30, 2016, the Internal Revenue Service (IRS) issued Chief Counsel Notice 2016-009, which can be found here. In the notice, the IRS updated the list of issues that require IRS National Office review (the List). The List indicates those issues or matters raised by IRS field examiners that must be coordinated with the appropriate IRS Associate office.

There are several new items on the List. Notably, corporate formations with repatriation transactions, certain spin-off transactions and transactions that may implicate Treasury Regulation § 1.701-2 partnership anti-abuse rules are now also included. Debt-equity issues pursuant to Section 385 continue to be on the List.

In addition, now included are issues designated for litigation and issues that for technical tax reasons will not be referred to the IRS Office of Appeals under Revenue Procedure 2016-22, Section 3.03 (also relating to issues designated for litigation). We discussed Revenue Procedure 2016-22 in a recent posting. (more…)



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