The White House and Republican congressional leadership released an outline this week to guide forthcoming legislation on tax reform. This outline will serve as a useful framework in structuring what will be an active, and likely contentious, phase of reform activity.
Female tax professionals gathered in McDermott Will & Emery’s New York office for an annual New York rendition of Tax in the City®: A Women’s Tax Roundtable on Thursday, September 14. Featuring a CLE/CPE presentation about Privilege and the Ethics of Social Media by Kristen Hazel and Robin Greenhouse, an update on tax reform by Sandra McGill and an overview of recent state and local tax news by Alysse McLoughlin, the event culminated in a networking reception over cocktails.
Topics covered at the event included:
We invite all tax professionals who identify as female to join Tax in the City®’s official LinkedIn group to continue the conversation and share tax developments in between events and meetings! Click here to join.
Established in 2014 by McDermott Will & Emery LLP, Tax in the City® is a discussion and networking group for women in tax that fosters collaboration and mentorship and facilitates in-person connections and roundtable events around the country. This New York edition of [...]
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According to the Treasury Inspector General for Tax Administration (TIGTA), the Internal Revenue Service (IRS) is underutilizing exchange of information (EOI) capabilities with foreign countries. On September 11, 2017, TIGTA issued a report summarizing its evaluation of the IRS’s current efforts to improve tax compliance by using information obtained from foreign countries through the Exchange of Information Program agreements.
TIGTA’s three main conclusions were: (1) the automatic exchange of information (AEOI) recordkeeping is inadequate and the usefulness of the information is unknown; (2) the Mutual Collection Assistance Request Program (MCAR) may not be used to its full potential; and (3) the spontaneous exchange of information program requires a multitude of enhancements.
TIGTA made several recommendations to the IRS to maximize the use of information received and collection assistance available from foreign countries. The recommendations included:
(1) Conduct an outreach to examination and collection field functions to alert them on the availability and potential usefulness of automatic data provided by treaty partners that can be gained by requesting and obtaining access to an easy search tool;
(2) Expand upon the AEOI Program section of the Internal Revenue Manual (§ 4.60.1) to add recordkeeping requirements to track the incoming and outgoing records;
(3) Create procedures for AEOI personnel that: a) allow AEOI personnel to accurately track the data and/or record counts received by country; b) track the data by country that contractors upload to the AEOI database; and c) monitor the difference in received and posted record counts by country to identify and resolve upload issues in a timely fashion;
(4) Reinforce the IRS’s 2016 international collection strategy related to the MCAR Program to address the importance of issuing MCARs when warranted as an additional collection tool, and prioritize the timely processing of outgoing MCAR requests;
(5) Enhance revenue officers’ awareness of tools to explore international asset identification;
(6) Coordinate with Treasury Department’s Office of Tax Policy to identify additional countries with whom the United States could benefit by adopting MCAR provisions in a treaty; and
(7) Establish criteria for withdrawing issued outbound MCARs when the taxpayer has not fully paid.
The IRS agreed with TIGTA’s recommendations and plans to address those issues by implementing several corrective actions by the summer of 2018.
The final report entitled “Exchange of Information Capabilities Are Underutilized by the Internal Revenue Service” and the IRS’s response to an earlier draft is available here.
Practice Point: The information exchanged among tax administrations has increased significantly since the implementation of the Foreign Account Tax Compliance Act (FATCA). The TIGTA report identified several areas in which the exchange of information is currently being underutilized by the IRS. The IRS is clued into these flaws and is focused on updates to maximize the value of the information. As we previously discussed, the IRS recently announced two new enforcement initiatives in the Criminal Investigation Division (CID) to use FATCA [...]
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Every taxpayer should be aware of the real risk that its own employees could disclose the taxpayer’s confidential and privileged information to the Internal Revenue Service (IRS) for a whistleblower fee. Pursuant to Internal Revenue Code (Code) Section 7623, the IRS is permitted to pay a “whistleblower” who discloses information about a taxpayer who has violated the tax laws. The amount of the payment ranges from 15 to 30 percent of the recovery. We have previously reported about issues pertaining to whistleblowers.
While the flow of information is usually from the whistleblower to the IRS, there is also a risk that the IRS can disclose the taxpayer’s return information to the whistleblower. Code Section 6103(a) deems tax returns and return information as confidential and prohibits the disclosure absent an express statutory exception. Return information is broadly defined and includes the information received by the IRS, from any source, during the course of audit. There are several exceptions to this general rule. For example, Code Section 6103(n) authorizes that tax returns and return information may be shared with the IRS pursuant to a “tax administration contract.” The relevant regulations explain when the IRS may disclose information to a whistleblower and its representative.
A recent memo from the IRS’s Whistleblower Office provides the reasoning behind the IRS decision to enter into a whistleblower contract in order to share the taxpayer’s feeling empowered to share otherwise confidential protected information with whistleblowers. (more…)
Forms 2848 Power of Attorney and Declaration of Representative are intended to authorize the Internal Revenue Service (IRS) to discuss a taxpayer’s confidential tax matters with a designated representative. Generally, the form requires the taxpayer to identify the tax form number (where applicable), a description of the matter and specify the applicable tax year(s) for the authorization to be valid. If the IRS determines that an issue is beyond the scope outlined in the Form 2848 they will not discuss that item with the representative. It is important to understand how the IRS interprets these restrictions.
Importantly, on September 8, 2017, the IRS released TAM 201736021, dated August 1, 2017, which expresses a narrow view of whether certain civil penalties are related to certain tax returns for purposes of a Form 2848 authorization. The TAM notes that “merely listing ‘civil penalties’ on Line 3 of the Form 2848” may no longer be sufficient authorization if the civil penalty relates to a return that is not otherwise enumerated within the Form 2848. For example, the TAM concluded that a Form 2848 only identifying an income tax return, such as a Form 1120 or Form 1040, would not constitute authorization for the IRS to discuss civil penalties related to international information returns that may have to be filed with the income tax return, such as a Form 5471. Under the IRS’s view, the civil penalty would be related to the Form 5471 but not the Form 1120.
The TAM provided a second example, reaching a similar conclusion regarding the relationship between a Form 1040 and a Form 3520. In short, authorization would not exist for the IRS to discuss with a representative whether an IRC section 6677 civil penalty for failure to file Form 3520 is applicable if the Form 2848 only identifies the Form 1040. This result may be more intuitive since the Form 3520 is not attached to the Form 1040 and is required to be filed separately. However, it is still more demanding than having a broader application of the “civil penalties” designation on the Form 2848.
Practice Point 1: Forms 2848 are generally executed at the outset of a matter when it may not be readily apparent in what direction the audit will progress or what issues the IRS may focus on. While we disagree with the IRS’s position as stated in the TAM, taxpayers and practitioners need to be cognizant of the IRS’s position and may need to revisit their Forms 2848 during the course of an audit.
Practice Point 2: As a general matter, the IRS agent handling an audit will tell the practitioner if the agent believes that a current Form 2848 is not sufficient, but that does not always happen. So it is good practice for taxpayers to send the practitioner any correspondence or notices that they receive from the IRS and not merely rely on the presumption that the IRS also mailed a copy to the practitioner listed on the Form 2848.
On May 1, 2017, the IRS issued FAQs concerning its recent practice of inviting IRS Examination Agents (Exam) into the Appeals discussion. The FAQs make clear that Exam will now be routinely invited to Appeals conferences. The release premises this procedural shift on perceived efficiencies of having Exam stay during the taxpayer’s rebuttal presentation. The FAQs explain, however, that settlement discussions with the taxpayer will be held without Exam present. This is an important clarification, and the FAQs explain that this new process is different from Rapid Appeals.
Practice Point: It is clear that diminishing resources have put substantial pressure on the Appeals process. In several recent Appeals sessions, Exam has been invited to stay for our clients’ rebuttal to Exam’s presentation. After the taxpayers’ presentation, Appeal tries to elicit a back-and-forth communication between the taxpayer and Exam, putatively to ensure that all of the relevant facts are developed and agreed upon. Exam typically has counsel at these Opening Conferences, which tends to make Exam more of an advocate as opposed to the traditional developer of the facts and of the IRS’s audit position. This two-way communication seems to be an attempt to morph the Appeals session into some type of mini-mediation akin to a FastTrack session. Taxpayers therefore must take care to plan their settlement strategy, as the line between development of the facts and discussion of the hazards can be blurry. While in some cases it might be useful to negotiate in the presence of the Exam team, we have found that more progress typically is made when Exam leaves the room.
In a press call on August 2, 2017, the Chief of the Internal Revenue Service’s (IRS) Criminal Investigation Division (CID), John D. Fort, announced two new enforcement initiatives: a National Coordinated Investigations Unit and an International Tax Enforcement Group.
The National Coordinated Investigations Unit is intended to be, in Fort’s words, a “cutting edge” group answering directly to CID’s management. It is intended to harness data already being gathered by the IRS’s civil departments to identify areas of non-compliance, so that major investigations can be coordinated at a national level.
The first three areas of inquiry for the new unit will be international tax enforcement, employment tax enforcement and microcap stock fraud (an effort that will be coordinated with the Security and Exchange Commission). In Fort’s words, these efforts will generate “must-work referrals that come out of this group to the field offices.” International tax and employment tax enforcement are already longstanding CID priorities, so it will be interesting to see how CID’s use of data analytics will further those goals and whether greater coordination at the national level will result. (more…)
In early 2017, the IRS updated its Golden Parachute Payments Audit Technique Guide for the first time since its 2005 issuance. While intended as an internal reference for IRS agents conducting golden parachute examinations, the Audit Technique Guide offers valuable insight for both public and private companies, and recipients of golden parachute payments, into how IRS agents are likely to approach golden parachutes when conducting an audit.
We recently wrote here about “John Doe” summonses and a case where an anonymous “John Doe” was allowed to intervene in a summons enforcement action. To refresh, under Internal Revenue Code (IRC) Section 7602 the Internal Revenue Service (IRS) has broad authority to issue administrative summonses to taxpayers and third parties to gather information to ascertain the correctness of any return. If the IRS does not know the identity of the parties whose records would be covered by the summons, the IRS may issue a “John Doe” summons to a third party to produce documents related to the unidentified taxpayers.
In Hohman v. United States, Case No. 16-cv-11429 (E.D. Mich. July 11, 2017), two John Doe summonses directed a banking institution to deliver to the IRS records related to three accounts, which were identified only by account numbers. Two of the accounts were held by limited liability companies (LLCs) and the other was held by an individual. The banking institution notified some of the account-holders that it had received a John Doe summons that sought records for accounts relating to them.
The account-holders filed a civil action, alleging that the IRS’s efforts to obtain their financial records through the use of John Doe summonses violated the federal Right to Financial Privacy Act (RFPA). The RFPA accords customers of banks and similar financial institutions certain rights to be notified of and to challenge in court administrative subpoenas of financial records in the possession of banks. The individual account-holder did not allege that the IRS actually obtained or disclosed any records of account information as a result of the John Doe summons.
The government moved, under Rule 12(b)(1) of the Federal Rules of Civil Procedure (FRCP), to dismiss the RFPA claims for lack of subject-matter jurisdiction. The government asserted that it has sovereign immunity from the account-holders’ RFPA claims. The waiver of sovereign immunity under the RFPA applies only to claims that a government authority disclosed or obtained financial records.
The court agreed with the government. First, the court concluded that the RFPA’s waiver of sovereign immunity applies only to “customers,” and the LLCs were not “customers” as defined under the RFPA. The court reasoned that the plain language of the RFPA does not state that an LLC is either a “person” or a “customer” and the court was not at liberty to expand the definitions. Second, the court concluded that sovereign immunity was not waived with respect to the individual’s claim because the individual had not alleged that the IRS actually obtained or disclosed any financial records or information from the account as a result of the John Doe summons.
Practice Point: Although waivers of sovereign immunity are often construed strictly, taxpayers should consult with their advisors to determine whether their particular facts may allow an action against the government.
In a long-awaited decision, the US Tax Court recently held that gain realized by a foreign taxpayer on the sale of a partnership engaged in a US trade or business was a sale of a capital asset not subject to US tax, declining to follow Revenue Ruling 91-32. The government has yet to comment regarding its intentions to appeal.
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