IRS Participants
Sergio Arellano, Director, RFPH Industry
Katheryn Houston, Director, Field Operations East NRC Industry
James Roosey, Director, Field Operations West RFPH Industry
David Horton, Director, Field Specialists
Thomas Merkle, Manager, LB&I National Research Program
David Oyler, Territory Manager Int'l Business Compliance
Stephen Whiteaker, Director, Field Operations East Field Specialists
James Lanning, Area Counsel - RFPHLB& I Division Counsel
Audit Topics
QEP-Sergio Arellano and Katheryn Houston
A number of TEI participants raised concerns about the agents' use of QEP. Sergio mentioned that some areas have done joint IRS/taxpayer training on QEP and that has been very effective.
Tiered issue-Sergio Arellano and Katheryn Houston
Katheryn said that the team manager has the decision making authority over tiered issues. Tiered issue process is under review now.
Issue Practice Groups-Sergio Arellano and Katheryn Houston
This is an initiative spearheaded by Heather Maloy to encourage collaboration among agents. Two groups have been created: change in accounting method and property and casualty insurance. Three additional will be formed: deductible vs. capital expenditures; life insurance; and RICs, REITs and REMICs. The IPGs are available for agents to use as a technical resource. They are not available for taxpayers to contact.
Fast Track Settlement-Jim Roosey
A number of TEI members in attendance had participated in Fast Track with varying degrees of satisfaction with the process. Jim suggested that taxpayer ask the Territory Manager to attend the settlement meeting as that person is likely not wedded to the issue under review. There have been 699 cases in Fast Track since program began and 83% have been settled. The program goal is to reach settlement in 120 days which is one quarter of the time that appeals cases takes.
Jim said that they have been close to meeting the 120 days. The policy in LB&I has changed so that if a case is in Fast Track that counts as being closed. Cases that aren't settled in Fast Track go to appeals. This is unlike Early Referral to Appeals where there is no opportunity to go to traditional appeals if the matter is not settled in Early Referral.
Jim indicated that matters involving joint committee review (those over $2 million refund) do take more time. We discussed whether it would be appropriate for TEI to advocate to Congress to raise the $2 million to a higher amount.
Industry Issue Resolution-Jim Roosey
This program allows taxpayer groups such as TEI or trade associations to submit request for guidance on specific issues. Jim Lanning pointed out that an individual taxpayer may not submit such a request.
Pre-Filing Agreements-Jim Roosey
Taxpayers may bring a transaction to the IRS, after the transaction but prior to filing the return, to get agreement on tax treatment. There is a $50,000 filing fee.
National Research Program-Dave Horton and Tom Merkle
This is a full scope examination, a replacement for the former TCMP audit. There is currently an employment tax study involving such an examination of a select group of taxpayers to determine what the employment tax gap is. The issues being studied are independent contractor classification, fringe benefits, expense reimbursement and executive compensation. There will be some LB&I taxpayers that will be part of the study. Over a three year period 150 will be selected covering the years 2008 to 2010. CIC taxpayers are currently excluded from the sample. There are discussions currently to determine if CIC taxpayers should be included in the sample. Tom mentioned the following issues have been noted so far: obtaining TINs for vendors, inclusion of cash equivalents gifts (gift cards) in W-2, timely deposit of withholding taxes on stock options, and inclusion of employee settlement awards in W-2 versus 1099.
Cell phones-Dave Horton and Tom Merkle
Under old law cell phones were listed property and taxpayers needed to document business percentage. Last year law was changed so not listed property. Taxpayers will no longer need to document business use as required by the listed property rules, but must still be able to show that there is business purpose. IRS is developing guidance now.
International audits and issues-Dayid Oyler
International is forming International Practice Networks with separate groups for inbound and outbound issues. These will function similar to the Industry Practice Groups mentioned above. Sergio indicated that there is no prohibition from participating in CAP if a taxpayer is in competent authority.
There is transfer pricing pilot program in place that may be expanded.
International agents have access to Capital IQ which has comparables so that the agents can review this against the transfer pricing study. They can then determine if economist needs to be involved.
Dave has two joint audits with Australia in his territory that are in initial assessment stage. He hopes the joint audits will allow for fast track competent authority if adjustments are needed. Joint audits are allowed between Australia, Canada, China, Japan, S. Korea, U.K. and U.S.
Dave noted that reporting and withholding on U.S. source payments to foreign parties is a Tier 1 issue.
R&D Credit-David Horton and Stephen Whiteaker
Dave indicated that the Tier 1 issue is limited to R&D claims, not R&D claimed on original return. They are in process of clarifying this with the agents.
Dave recognized that although IRS would like to see project accounting for documenting the credit, companies generally do accounting on cost center basis. LB&I is in initial stage of developing a template on what constitutes qualifying research and what is appropriate documentation working with internal resources as well as Mitre and the Big Four. Someone raised the question if it was appropriate to use Mitre on this project since the IRS engages Mitre to assist with auditing the credit which creates a potential conflict of interest in that same party is setting a standard and is then evaluating whether it is met.
UTP- Dave Horton
Dave discussed how the schedules filed by taxpayers will be used. Consistent with public comments of several IRS officials (including LB&I Commissioner Heather Maloy at the Midyear Conference), LB&I "has implemented a process for identifying and centrally holding returns with UTP schedules in order to ensure that procedures are fully in place for how the new Schedules will be used by the Division and that training has been provided to LB&I personnel prior to the release of UTP schedules to the Field." Both at the liaison meeting and subsequently, LB&I confirmed that, in the interim, LB&I revenue agents and managers have been asked not to request or accept UTP Schedules directly from taxpayers.
Commissioner Maloy elaborated that the interim rule was adopted while LB&I develops and disseminates its procedures "because it is vital for LB&I to have a coordinated and consistent approach in place regarding the handling and use of the UTP information."
Economic substance doctrine-Jim Lanning
Joint committee explanation on the new law exempts certain transactions: choice of debt or equity for capitalizing a business, choice of entity for making foreign investment, corporate organizations and reorganizations, and use of related parties in arm's length transactions. It also exempts transactions where the realization of such benefits is consistent with the Congressional purpose or plan the benefits were designed to effectuate (e.g., tax credits). It is not clear when the economic substance doctrine will be applied and when the transaction is adequately disclosed on the return (to avoid the 40% penalty). Would disclosure on a partnership return be adequate to product corporate partner if not disclosed on corporate return?
There hasn't been any training provided to IRS agents on this yet.