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IRS Issues IPU on Corporate Inversions

by | Jul 7, 2016 | , , ,

On June 7, 2016 , the Internal Revenue Service (IRS) released an LB&I International Practice Unit (IPU), providing high-level guidance to IRS field examiners on the application of the anti-inversion rules of Internal Revenue Code section 7874 and certain of the regulations and notices issued thereunder (see here). The IPU notes that it is meant to provide only high-level conceptual guidance, and that many aspects of the highly complex notices and regulations recently issued in this area are beyond the scope of the IPU. Some of these issues will be addressed in future IPUs.

This high-level guidance to field examiners signals the IRS’s continued focus on international tax issues.



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IRS Issues New Procedures to IRS Appeals for Requesting Assistance from Exam in Docketed Tax Court Case

by , , and | Jul 1, 2016 | , , ,

On June 24, 2016, the Internal Revenue Service (IRS) issued a memorandum (AP-08-0616-0003, available here) to the IRS Appeals Division (Appeals) providing new, uniform procedures for requesting assistance from the Examination Division (Exam) in docketed Tax Court cases. The guidance implements standard procedures that would treat petitioners similarly. Currently, when petitioners provide new information to Appeals that was not previously considered by Exam, Appeals requests Exam’s assistance based on local procedures, which sometimes result in disparate treatment of petitioners. The guidance is effective on August 29, 2016.

Under the new procedures, Appeals will send a request for Exam’s assistance if Appeals determines that the new information merits additional analysis or investigation. If Exam approves the request, an Exam Agent may recommend changes to the proposed adjustment, including an increase in tax, based upon the new information. Appeals, however, is not required to adhere to Exam’s recommendations. Where acceptance of the Exam Agent’s recommended changes results in a new issue or an increased deficiency, the IRS generally must bear the burden of proof on such changes from the notice of deficiency pursuant to Tax Court Rule 142. If Exam denies the request, Appeals will consider settlement offers based on all information in the case file, and the probative value of the new information.

 



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IRS Wages ‘Campaigns’ against Taxpayers

by , and | Jun 29, 2016 | , , ,

Late last year, the Internal Revenue Service’s (IRS’s) Large Business and International (LB&I) division announced that it would restructure its organization. The restructuring was precipitated by shrinking resources and a shifting environment. A primary feature of the restructuring is the end of the continuous audit program (where the IRS audits a large taxpayer year after year for decades) and a move to an issue focused, coordinated attack—to wit, the new IRS “Campaign” methodology. Although this program is clearly in its infancy, practitioners are starting to see how the IRS is implementing their latest project.

In essence, IRS campaigns are a centralized risk identification strategy. The IRS has leveraged its knowledge throughout its system, identified the most serious tax issues and allocated its resources to those issues. The emphasis then, is off specific taxpayers and on to specific tax issues. (more…)



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IRS Publishes IPU on Penalties for Failure to Report Transfer of Property to a Foreign Corporation

by and | Jun 16, 2016 | , ,

On June 14, 2016, the Internal Revenue Service (IRS) published an International Practice Unit (IPU) on the monetary penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation (available here).  Under IRC section 6038B(a)(1)(A), a US person who transfers property to a foreign corporation in an exchange described in IRC sections 332, 351, 354, 355 or 361 is required to file Form 926 and accompanying information with the IRS.  The Form 926 and accompanying information must be filed with the US person’s income tax return for the taxable year that includes the date of the transfer.

Failure to comply with the reporting requirements (e.g., failure to timely file a Form 926 or providing false or inaccurate information) can result in a penalty equal to 10 percent of the fair market value of the transferred property for which there was a failure to comply, up to $100,000.  However, the penalty is not limited if the failure to furnish was due to intentional disregard.  The penalty may be waived if the US person demonstrates that the failure to comply was due to reasonable cause and not to willful neglect.  If there is a failure to comply, the statute of limitations on assessment of tax for the year of noncompliance potentially remains open until three years after the date on which the required information is provided.

The IPU contains detailed instructions to IRS revenue agents for purposes of examining this issue and determining whether to assert a penalty.  In our experience, the IRS in recent years has been more aggressive in asserting penalties for failure to comply with information reporting requirements and has imposed a heavy burden on taxpayers to demonstrate that the reasonable cause exception applies.  This IPU states that additional IPUs on information reporting penalties in other situations (e.g., failure to file Form 5471, issues associated with offshore bank accounts and check-the-box rules for foreign entities) will be forthcoming.  Given the increased focus on penalties in this area and statute of limitations issues, taxpayers subject to these information reporting requirements should ensure that they are complying with the IRS rules in this area.



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New Issue of ‘Focus on Tax Strategies and Developments’

by , , , , and | May 12, 2016 | , ,

We recently released the May 2016 issue of “Focus on Tax Strategies and Developments,” which can be viewed in its entirety here or through the links below. The issue includes four articles of interest to taxpayers:

Proposed Debt-Equity Regulations Have Dramatic Implications for Corporate Tax Planning and Compliance

By Thomas W. Giegerich and Michael J. Wilder

On April 4, 2016, the Internal Revenue Service (IRS) and US Department of the Treasury (Treasury)—without advance warning—released proposed regulations under Section 385 (the Proposed Regulations) that will, if finalized in their current form, have dramatic implications for US corporate tax planning and compliance.

The 2016 UK Budget – BEPS Measures and Tax Cuts

By James Ross

The 2016 UK Budget has generally been seen as good news for corporates, but it is not without potential concern, particularly for multinationals and private equity groups, who may need to re-evaluate longstanding financing structures.

Prescriptions of the Blue Book on the New Partnership Audit Rules

By Thomas W. Giegerich, Gary C. Karch, Kevin Spencer and Madeline Chiampou Tully

The Bipartisan Budget Act of 2015, signed into law in November, instituted a new regime for federal tax audits of entities treated as partnerships for US federal income tax purposes (the New Audit Rules) effective 2018. In March 2016, the Joint Committee on Taxation released its “General Explanation of Tax Legislation Enacted in 2015” (the Blue Book), which provides some background and explanation with respect to the New Audit Rules—this article discusses certain of the highlights of the Blue Book explanation.

Changes to China’s High and New Technology Enterprise (HNTE) Regime Both Sharpen Its Focus and Make Its Advantages More Broadly Available

By Robbie Chen

With the promulgation of the Corporate Income Tax (CIT) law in 2008, many preferential tax regimes (e.g. lower tax rates for foreign invested companies) were revoked. Under the CIT, the HNTE treatment, which reduces a qualified taxpayer’s applicable CIT rate from the standard 25 percent to 15 percent, is one of the few remaining tax preferences. As a result, any change to the HNTE rule attracts a great deal of attention.



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IRS Adds More Enforcement Employees

by and | May 5, 2016 | ,

In an internal memo to agency employees, Internal Revenue Service (IRS) Commissioner John A. Koskinen announced the IRS’s intention to hire between 600 and 700 enforcement personnel.  It is estimated that between 2010 and the end of 2016, the IRS will have lost more than 17,000 employees, 5,000 from the enforcement area.  The hiring, which is to occur in two waves, should fill key gaps in the IRS’s enforcement workforce created by years of attrition.  This will be the IRS’s first significant enforcement hiring in more than five years.

Whether an increase in enforcement personnel will change the trend of a lax IRS remains to be seen.  Taxpayers, however, should pay close attention to how this increase in IRS personnel affects the audit of their returns and the level of depth of an IRS examination.  Stay tuned!

More details can be found at: https://www.washingtonpost.com/news/powerpost/wp/2016/05/04/youre-more-likely-to-get-audited-as-irs-adds-700-employees-to-chase-tax-cheats/



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Death of the CAP Program?

by and | Apr 13, 2016 | , ,

According to participants in a recent webcast, the Internal Revenue Service’s (IRS) Large Business & International Division (LB&I) is no longer accepting applicants for its Compliance Assurance Process (CAP) program.  CAP is a real-time audit program that seeks to resolve the tax treatment of all or most return issues before the tax return is filed.  The CAP program began in 2005 on an invitation-only basis with 17 taxpayers, and was subsequently expanded to include pre-CAP, CAP and CAP Maintenance components.  Taxpayers and IRS leadership generally praised the CAP program as one of the most successful corporate tax enforcement programs, with surveys showing that over 90 percent of CAP taxpayers reported overall satisfaction with the program.

When the IRS announced its recent shift in the examination process to identifying and focusing on specific areas of risk, as opposed to general return review, the future of CAP became uncertain.  High-ranking IRS officials questioned whether it made sense to continue spending time and resources on CAP taxpayers, who are viewed as the most compliant and transparent taxpayers.  It remains to be seen whether the IRS will phase out the CAP program entirely for currently participating taxpayers.  CAP taxpayers may want to discuss the matter with their Examination Teams to see if they can gain any insight into future developments in this area and to plan ahead if the CAP program is ultimately eliminated.

The end of the CAP program, as well as the end of the continuous audit program, marks a shift in the way that the IRS intends to audit large taxpayers in the wake of very limited resources.  The IRS’s shift to auditing issues may be more efficient, but will likely miss more garden-variety adjustments, like depreciation and expense deductions.



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IRS Release IPU Materials on Transfer Pricing

by | Apr 11, 2016 | , , ,

As we noted in our initial post, the Internal Revenue Service (IRS) began publishing job aids and training materials developed by its International Practice Units (IPUs).  On April 6, 2016, the IRS released another IPU on section 482, available here.  The most recent IPU covers the three requirements under section 482: (1) two or more organizations, trades or business; (2) common ownership or control (direct or indirect) of the entities; and (3) the determination that an allocation is necessary either to prevent evasion of taxes, or to clearly reflect the income of any of the entities.

The most recent IPU takes a broad view of the application of section 482 and looks at the substance of transactions.  Regarding the first requirement, the IPU instructs examiners that organizations can include almost any type of entity and that a trade or business means a trade or business activity of any kind, regardless of place of organization, formal organization, type of ownership (individual or otherwise) and place of operation.  On the common control requirement, the IPU emphasizes that the form of control is not decisive and that the reality of control governs.  It also notes the presumption of control if income or deductions are arbitrarily shifted.  Finally, the reallocation to clearly reflect income requirement notes that an IRS allocation will be upheld unless the taxpayer can provide that the IRS determination was arbitrary and capricious.  Moreover, the IPU provides examples of circumstances that indicate the presence of arbitrary shifting of income, including when the net income of the foreign affiliate is high compared to the net income reported by the US company.  Of course, it may be appropriate for the foreign affiliate to have higher net income.

The IPU contains instructions on initial factual development of the requirements and provides references to resources that an agent should consult, including internal IRS resources, IRS guidance and case law.  It also identifies the types of documents that should be requested and reviewed during the examination.

As demonstrated by the large number of high-profile transfer pricing disputes currently pending in the courts, the IRS is taking a strong stance on the application of section 482.  Moreover, as demonstrated by this IPU, the IRS wants examining agents to be aggressive in identifying circumstances where there may be noncompliance with section 482.  Taxpayers with transfer pricing issues may benefit from reviewing all IPUs on section 482, both in documenting their transfer pricing activities and upon commencement of an examination to ensure that they have the documentation that the IRS will request.



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IRS Requires “Whole Story” from Taxpayers Seeking to Qualify under Streamlined Filing Compliance Procedures

by and | Apr 7, 2016 | , ,

The Internal Revenue Service (IRS) recently modified the non-willfulness certification form that individual taxpayers must submit to enroll in the streamlined filing compliance procedures (SFCP).  One requirement under the SFCP is that that the taxpayer certify that his or her failure to disclose foreign assets was not due to willful conduct.  Before the recent change, the IRS only provided minimal direction, which caused it to receive non-willfulness narratives that did not provide adequate information.  This resulted in certifications that were either questioned or rejected.

On February 16, 2016, the IRS revised the certification forms to include more robust direction and instructed the taxpayer to draft his or her non-willfulness narrative to include the whole story including favorable and unfavorable facts.  A more detailed analysis of the recent changes can be found here.



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