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National Taxpayer Advocate 2016 Report – IRS Appeals and Alternative Dispute Resolution

by and | Jan 24, 2017 | , , , ,

In its annual report to the US Congress, the Taxpayer Advocate Service (TAS) had a lot to say about IRS Appeals and the (lack of) use of other alternative dispute resolution (ADR) techniques. In this post, we will highlight what the TAS had to say in this area.

IRS Appeals

Undoubtedly, one of the Internal Revenue Service’s (IRS) most successful dispute resolution techniques has been IRS Appeals. Briefly, after the IRS’s Examination Division proposes a tax adjustment, taxpayers have the statutory right to seek an “appeal” of the decision. IRS Appeals is a separate and seemingly independent division of the IRS where one or more appeals officers review the redeterminations and adjustments made by the Examination Division, and attempt to settle the dispute directly with the taxpayer based upon a “hazards of litigation” analysis, much in the same manner as a judge would rule. The TAS acknowledged the success and utility of the IRS Appeals program and mission, but requested that Congress expand the program, giving the IRS the resources it needs to manifest the full intent of the program.

The TAS reported that funding for IRS Appeals has diminished sharply—by about 11 percent from 2013 to 2016, with staff reduced during the same period by 24 percent. In response to shrinking resources, but hobbled by the same duties and similar case load, IRS Appeals has been forced to implement procedures and policies that hamper its long-term mission of providing a fair and impartial review of the Examination Division’s adjustments. The TAS pointed out that these policies have resulted in (1) creating an inhospitable Appeals environment; (2) limiting in-person Appeals conferences; (3) reducing the Appeals officer’s ability to perform a quality substantive review; and (4) failing to protect the rights of taxpayers when conducting collection Appeals hearings. The TAS noted that there has been a large increase of cases docketed in the US Tax Court before seeking an IRS appeal. The TAS believes that docketing a case before it goes to Appeals has added inefficiency and unnecessarily increased the case load of the Tax Court.

The TAS suggested the following solutions:

  1. Expand the locations in which Appeals Officers hear matters. Presently, there are numerous states in which there are no IRS appeals officers. As a result, taxpayers who seek an appeal and request an in-person conference are forced to travel to the states in which an IRS appeals officer is located.
  2. Hold more in-person appeals conferences. The TAS report argues that in-person conferences facilitate the efficient and expeditious settlement of matters.
  3. Revise procedures and policies to allow IRS appeals officers additional discretion and time to undertake factual development and provide more substantive review of matters.

Practice point: We have recently reported about many of the issues facing taxpayers seeking review by IRS Appeals. The TAS confirms our critiques of the system. IRS Appeals is a very good and useful technique that has a high probability of settling cases. Generally, appeals [...]

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National Taxpayer Advocate 2016 Report – Summons Enforcement

by | Jan 19, 2017 | , , , ,

In its Annual Report to Congress, the Taxpayer Advocate Service (TAS) recently reported summons enforcement actions under Internal Revenue Code (Code) Sections 7602, 7604, and 7609 as one of the “Most Litigated Issues” this year. Below, we summarize the general law related to summons enforcements actions and the findings set forth in the Annual Report.

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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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Ready or Not, Here They Come! The New Partnership Audit Rules

by , and | Dec 27, 2016 | , ,

On November 2, 2015, the Bipartisan Budget Act of 2015, (the Act), H.R. 1314, 114 Congress/Public Law No. 114-74, made significant changes to the rules governing US federal income tax audits of partnerships (New Audit Rules). The New Audit Rules are codified at Internal Revenue Code Sections 6221 through 6241. On August 4, 2016, the IRS released temporary and proposed regulations relating to certain aspects of the New Audit Rules. And, on December 6, 2016, technical corrections to the New Audit Rules (Technical Corrections) were introduced in both the House of Representatives, H.R. 6439, and in the Senate, S. 3506.

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Formal Document Requests – The IRS’s Tool for Collecting “Foreign-Based Documentation”

by | Nov 14, 2016 | , ,

One important feature of every audit is the request and collection of relevant taxpayer materials by the Internal Revenue Service (IRS). Such materials are typically collected through the rules and procedures associated with an Information Document Request (IDR).  However, for audits that involve the collection of foreign-based documentation, the Internal Revenue Code (Code) provides a modified set of rules under the Formal Document Request (FDR) procedures outlined in Code Section 982.

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‘Medtronic v. Commissioner’: A Taxpayer Win on Transfer Pricing, Commensurate with Income, and Section 367 Issues

by | Nov 9, 2016 | , , , , ,

On June 9, 2016, the US Tax Court released its opinion in Medtronic, Inc. and Consolidated Subsidiaries v. Commissioner. The Internal Revenue Service had taken issue with the transfer pricing of transactions between Medtronic, Inc. and its Puerto Rican manufacturing arm under §482 of the Internal Revenue Code. Finding the IRS’s application of the comparable profits method (CPM) to the transactions arbitrary and capricious, and taking issue as well with the taxpayer’s comparable uncontrolled transaction (CUT) methodology, the court ultimately made its own decision as to arm’s-length pricing, arriving at new allocations by making adjustments to the taxpayer’s original CUT approach.

Read the full Tax Management International Journal article.

© 2016 Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc.



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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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IRS Issues IPU on Identifying Foreign Goodwill or Going Concern

by | Oct 13, 2016 | , ,

On October 13, 2016, the Internal Revenue Service (IRS) released an LB&I International Practice Unit (IPU), available here, providing guidance to IRS agents relating to the identification of foreign goodwill or going concern value (FGWGC) for purposes of Internal Revenue Code (Code) Section 367. The IPU indicates that it was last updated on September 22, 2016.

The IPU focuses on the threshold question of whether, as a factual matter, FGWGC can exist in the first place in light of all the facts. As an example, the IPU states that because a business operation conducted outside the United States is a prerequisite for the existence of FGWGC, it is necessary to understand whether immediately before a transfer, the transferor of the property was engaged in a trade or business conducted outside the United States.

The IPU discusses the process of identifying foreign goodwill or going concern value, citing to authorities such as Newark Morning Ledger, TAM 200907024, the Bluebook and legislative history. It then discusses the steps that IRS agents should follow to identify FGWGC, with citations to various authorities as resources.

FGWGC is a hot topic right now. On September 14, 2015, the Department of the Treasury (Treasury) and the IRS issued proposed regulations that address the tax treatment under Code Sections 367(a) and (d) of certain transfers of property by United States persons to foreign corporations. As we have discussed here, the proposed regulations would change the law to tax all transfers to a foreign subsidiary of goodwill and going concern value for use in a trade or business outside the United States.  These proposed regulations raise serious questions regarding whether Treasury and the IRS exceeded their authority on this point.



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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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