Large Corporate Compliance/LCC Archives

IRS Announces New Compliance Initiatives to Collect More Corporate Tax Using Inflation Reduction Act Funds

On October 20, 2023, the Internal Revenue Service (IRS) announced new initiatives “to ensure large corporations pay taxes owed.” These initiatives leverage the substantial additional congressional funding that was given to the IRS thanks to the Inflation Reduction Act of 2022 (IRA). (We previously reported on how IRS enforcement is impacted by IRA funding here.) The announcement explains:

The IRS is working to ensure large corporate and high-income individual filers pay the taxes they owe. Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to hide their income and evade paying their share. The IRS is now taking swift and aggressive action to close this gap.

The announcement also outlines three new initiatives aimed at collecting tax revenue from large corporations:

1. The large foreign-owned corporations transfer pricing initiative. The IRS will focus its attention on US subsidiaries of foreign companies that distribute goods in the United States. Based on data likely received through the now retired Inbound Distributor Campaign, the IRS believes that some of these foreign companies “report losses or exceedingly low margins year after year through the improper use of transfer pricing to avoid reporting an appropriate amount of U.S. profits.” To jump start its initiative, the IRS will be notifying 150 subsidiaries of large foreign corporations “to reiterate their U.S. tax obligations and incentivize self-correction.” These “soft letters” can be a prelude to an audit.

2. The IRS will expand its Large Corporate Compliance (LCC) program. We previously reported on the LCC program, which focuses on noncompliance by using data analytics to identify large corporate taxpayers for audit. With an increased number of staff as a result of IRA funding, the IRS will commence examination of an additional 60 corporations that were selected using a combination of artificial intelligence and subject matter expertise. Key selection metrics will include factors from the various active compliance campaigns.

3. Cracking down on the abuse of former Internal Revenue Code (IRC) Section 199 domestic production activity deduction. The IRS has been battling taxpayers’ IRC Section 199 deductions since its promulgation. We have reported extensively on this topic over the years. The battle between the IRS and taxpayers has heated up in the wake of the repeal of IRC Section 199, which precipitated taxpayers filing billions of dollars of refund claims. The recent $1.8 billion taxpayer loss in Bats Global Market Holdings, Inc., No. 22-9002 (10th Cir. July 12, 2023), aff’g 158 T.C. No. 5 (2022), has clearly emboldened the IRS to intensify its existing Section 199 audit campaign to address noncompliance and review high-risk claims.

In the announcement, the IRS also reported that it has been pursuing high income, high-wealth individuals who have either not filed their taxes or failed to pay recognized tax debt. The IRS is focused on taxpayers with more [...]

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IRS Strengthens Its Large Partnership Audit Teams

Back in October 2021, the Internal Revenue Service’s (IRS) Large Business and International (LB&I) division announced the Large Partnership Compliance (LPC) program. This new audit program adopted features of the Large Corporate Compliance (LCC) program, such as its audit selection method. Similar to the LCC’s audit selection process, the LPC’s audit selection process has two general steps. The first step subjects large partnership returns to a basic automated review of certain key threshold criteria (e.g., gross assets and gross receipts). The second step further refines the pool through data analytics and artificial intelligence tools, which have been recently enhanced by enforcement funds from the Inflation Reduction Act of 2022. LB&I personnel, specifically those in the Pass-Through Entity office, review the preliminary audit pool and make the final call for selection.

Accompanying LPC technological improvements in the audit selection process, the LB&I announced a new pass-through entity work unit: “The new work unit will be housed in the IRS Large Business and International (LB&I) division” and “will leverage Inflation Reduction Act funding to disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying the taxes they owe.” (See IR-2023-176 (September 20, 2023).) New hires in this unit will focus on those with financial services experience. (See IR-2023-172 (September 15, 2023) (reporting plans to hire 3,700 agents “well versed in the financial services industry”).) This announcement came on the heels of an earlier announcement that by the end of September 2023, the LPC will begin audits of 75 of the largest US partnerships, including hedge funds, real estate investment partnerships and publicly traded partnerships. (See IR-2023-166 (September 8, 2023).)

Practice Point: Because of the significant resources devoted to the LPC program, these audits promise to be thorough and will be conducted by an LB&I exam team primed to find substantial audit adjustments. To successfully navigate these audits, partnerships should work to ensure that the IRS examination team sticks to the timeline, respond timely to all reasonable requests for information, and be prepared to assert all applicable privileges, such as the attorney-client privilege, Internal Revenue Code Section 7525 privilege, and work product where appropriate. We anticipate that aggressive IRS examination teams will try to obtain this information over a partnership’s initial objections on these grounds. It’s never too late to prepare for an IRS examination, and if you are a large partnership, it’s in your best interest to consult with your tax team now!