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Template to Respond to Irs Request for Tax Return - PDF

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					                                     Americas Tax




Ernst & Young
Tax Educators’ Symposium 2006
Tax Controversy Current Issues
Bill O’Meara, Vince Canciello and Mark Siegel

1                November 17, 2006
IRS Approach to Tax Compliance
•   Comprehensive Transparency Regime
•   More Effective Processes
•   Areas of Increased IRS Scrutiny
•   Collaboration Between Tax Authorities
•   Strategic Use of Alternative Dispute Resolution Options




2                      November 17, 2006
Comprehensive Transparency Regime
• Heightened transparency through:
    Schedule M-3 disclosure requirements
    Disclosure requirements for reportable transactions –
    Form 8886
    Foreign disregarded entities - Form 8858
    Foreign information reporting – Forms 5471, 5472, and
    926



3                  November 17, 2006
More Effective Processes
• Compliance Assurance Process
• Establishment of Issue Management Teams
• Industry issue focus through coordinated issues and
  industry specialists
• Ongoing research via public domain information




4                   November 17, 2006
  Areas of Increased IRS Scrutiny
                       The Commissioner’s List

• Transfer of Intangibles Offshore /   • Research Credit Claims
  Cost Sharing
                                       • Abusive Hybrid Instrument
• Transfer Pricing                       Transactions
• Abusive Foreign Tax Credit           • Mixed Service Cost
  Transactions
                                       • Universal Service Fund
• Sec. 199 Issues
                                       • Foreign Earning Repatriation (Sec.
• Executive Compensation (Sec.           965)
  409A)
 5                         November 17, 2006
Areas of Increased IRS Scrutiny (cont.)
•   Stock Option Grant Timing
•   Contribution of Intellectual Property
•   Sec. 1441 Noncompliance
•   Tax Exempt abuse areas
•   Heightened use of revised penalty regime per AJCA-2004
•   Employment Tax Audits




6                     November 17, 2006
Areas of Increased IRS Scrutiny (cont.)
• Abusive foreign tax credit (FTC) transactions
    Inappropriate separation of the FTCs from related foreign-source
    income
    Use of partnerships, foreign consolidated regimes, or “check the
    box” reverse hybrid entities to obtain FTCs before related foreign
    income is subject to U.S. tax
    Cross-border financing transactions using structures designed to
    exploit inconsistencies between U.S and foreign laws




7                      November 17, 2006
Areas of Increased IRS Scrutiny (cont.)
• Transfer pricing
    Involves the pricing between related parties
    Use of arm’s-length principle
    Necessity for adequate documentation / penalty potential
    Sec. 936 termination strategy issue




8                     November 17, 2006
Areas of Increased IRS Scrutiny (cont.)
• Research & Experimentation Credit Claims
    Claims based on unsupportable amounts, nonqualified
    expenditures, or estimates for which the taxpayers do not have
    contemporaneous documentation
    Identifying the business entity within a consolidated group that is
    claiming the credit
    Prototype issues
    Re-computation (or computation for the first time) of base period
    historical information
    Start-up company issues


9                      November 17, 2006
Areas of Increased IRS Scrutiny (cont.)
• Universal Service Fund
     Funds paid to reduce rates
     Telecom Act of 1996 requirements
     Taxable income vs. non-shareholder contributions to capital (Sec.
     118)




10                     November 17, 2006
Areas of Increased IRS Scrutiny (cont.)
• Stock option grant timing issues
     Situations where exercise price was less than the fair market value
     of the stock on actual grant date
     Expense deduction limitation under Sec. 162(m)
     Withholding and employment tax issues
     Deferred compensation rules under Sec. 409A




11                      November 17, 2006
Areas of Increased IRS Scrutiny (cont.)
• Tax exempt organizations
     Executive compensation
     Pervasive problems in the credit counseling industry
     Employee plan funding obligations




12                      November 17, 2006
Areas of Increased IRS Scrutiny (cont.)
• Contribution of intellectual property
     Designated “Appeals Emerging Issue”
     Primary issue involves appropriate valuation of contributions




13                      November 17, 2006
Areas of Increased IRS Scrutiny (cont.)
• Penalties enacted under AJCA 2004
     Sec. 6707A: Failure to disclose a reportable transaction
      • Includes SEC disclosure requirement with separate penalty
     Sec. 6662A: Increased accuracy-related penalty for listed and
     “reportable avoidance” transactions
     Sec. 6662: Revisions to substantial understatement penalty




14                     November 17, 2006
Areas of Increased IRS Scrutiny (cont.)
• Heightened penalty enforcement
     Revised penalty Policy Statement 20-1
     Chief Counsel Notice directing attorneys to support imposition of
     penalties
     Appeals officers no longer able to trade penalty issues
     Implementation of “Reasonable Cause Assistant”




15                      November 17, 2006
Collaboration Among Tax Authorities
• Agreements for broader cooperation for states and IRS
• Multinational tax authority agreements
• More formal structure for tax authorities to notify one
  another when they uncover abusive tax shelters or
  illegal transactions that are engineered to avoid
  state/foreign taxation of corporations and pass-throughs.



16                  November 17, 2006
Alternative Dispute                                      Pre-Return Filing
Resolution Flow            Before the
                                              Advance Pricing Agreement
                                              Advance Valuation Determination
Chart                        return
                                              Pre-Filing Determination
                                              Private Letter Ruling
                            is filed          Pre-Filing Agreement
                                              Industry Issue Resolution
                                              Compliance Assurance Program
          ADR
Provides value through:                            Audit Process (Post-Filing)
• Lower admin costs                           Accelerated Issue Resolution
• Speedier resolution      Under exam         Early Referral Appeals
• More favorable                              Delegation Order 4-24
  settlements                                 Delegation Order 4-25
                                              Fast-Track Settlement


                                                        Appeals Process
                                              Simultaneous Appeals/Competent Authority
                           Post-Exam          Mediation
                            appeals           Arbitration
                                              Collection Appeal Program
                                              Tax-Exempt Bonds


17                        November 17, 2006
Alternative Dispute Resolution ( ADR)
Options
• Pre-Filing Agreements - Rev. Proc. 2005-12
• Compliance Assurance Pilot Program – Ann. 2005-87
• Industry Issue Resolution - Rev. Proc. 2003-36
• Fast Track Settlement - Rev. Proc. 2003-40
• Delegation Orders 4-24 & 4-25
• Accelerated Issue Resolution – Rev. Proc. 94-67
• Early Referral - Rev. Proc. 99-28
• Appeal of Adverse Determination for Tax-Exempt Bonds – Rev. Proc.
  2006-40
• Post-Appeals Process
   – Mediation - Rev. Proc. 2002-44
   – Arbitration – Rev. Proc. 2006-44
18                     November 17, 2006
 Pre-Filing Agreement (PFA)
• Enables taxpayers and the IRS to resolve, before the filing of a return,
  the treatment of an issue otherwise likely to be disputed in post-filing
  audits
• If successful, results in a closing agreement under §7121 for current
  year and/or four year methodology agreement
• Provides full resolution of issue earlier than traditional return
  filing/examination
• Benefits both taxpayer and the Service by improving the quality of tax
  compliance while reducing its costs, burdens, and delays
• Affords heightened certainty for financial statement

19                        November 17, 2006
 Compliance Assurance Process (CAP)
• Allows taxpayers and the IRS to resolve issues before tax returns are
  filed through near-real time auditing of tax returns
• Complements current corporate governance and accountability
  responsibilities by facilitating compliance with SOX and providing
  certainty that the return complies with the tax laws
• Provides greater certainty for financial statement purposes
• The CAP pilot program began in January 2005 with 17 large corporate
  taxpayers for 2005 returns. According to Service, 19 new taxpayers
  have signed up for 2006.


20                       November 17, 2006
LIFE Audit
• LIFE audit is a limited scope examination in which
  taxpayers and the IRS sign a memorandum of
  understanding, agreeing to focus only on certain
  “material” issues.
     Presents opportunities for taxpayers under continuous examinations from
     cycle to cycle to partner with the IRS to limit scope of audit
     Effort by LMSB to institutionalize best practices and provide consistency
     in the treatment of taxpayers



21                        November 17, 2006
Industry Issue Resolution (IIR) Program
• Designed to resolve issues common to many business
  taxpayers and establish a consistent IRS position on
  industry issues
• Service collects issues from taxpayers year round, but only
  reviews submissions semi-annually
• For each issue selected, an IIR team of IRS and Treasury
  personnel gather relevant facts from taxpayers and
  stakeholders with the goal of recommending guidance to
  resolve the issue

22                   November 17, 2006
Fast Track Settlement (FTS)
• Uses mediation techniques to help the IRS and taxpayer settle
  the issue in a 120-day timeframe
     Gives LMSB personnel and LMSB taxpayers an opportunity to mediate
     their disputes with an Appeals Official acting as a neutral party
• If any issues remain unresolved at the conclusion of the FTS
  process, the taxpayer retains all of its applicable appeal rights
• Once an agreement through FTS is reached, the settlement
  cannot be modified after the FTS session report is signed



23                      November 17, 2006
Accelerated Issue Resolution (AIR)
• Taxpayers in the Coordinated Issue Case (CIC) Program
  (formerly CEP) may accelerate the resolution of the same/similar
  issues arising out of the examination by extending the
  examination of the issues from the examination periods to more
  current tax periods ending before the date of the agreement
• Does not give the case manager additional settlement authority,
  but does have definite advantages in resolving issues affecting
  other tax years



24                    November 17, 2006
Early Referral Appeals

 • Optional method by which the taxpayer may request
   the early referral of one or more unresolved issues
   from the Examination or Collection Division to the
   Office of Appeals




25                 November 17, 2006
 Post-Appeals Mediation
• Nonbinding process that uses the services of a mediator, as a
  neutral third party, to help Appeals and the taxpayer reach their
  own negotiated settlement
• The mediator acts as a facilitator, assists in defining the issues, and
  promotes settlement negotiations between Appeals and the
  taxpayer
• Although the mediator has no authority to impose a decision, if
  successful, mediation can save time and money by resolving the
  case without litigation


26                       November 17, 2006
Post-Appeals Arbitration
• The procedure allows taxpayers to request binding arbitration for
  factual issues that are already in the Appeals administrative
  process
• Under the procedure, the taxpayer and Appeals must first attempt
  to negotiate a settlement
• If those negotiations are unsuccessful, the taxpayer and Appeals
  may jointly request binding arbitration
• Binding arbitration will only be used to resolve factual disputes



27                    November 17, 2006
Strategic Approach to Tax Controversy
Participate in Joint Audit Planning & LIFE Processes
     Development of the audit plan is not a “spectator sport” - Get
     involved
     Be strategic – anticipate questions, this enables you to participate
     in planning the direction of audit from start to finish
     Work on setting realistic due dates and expect the IRS to do the
     same regarding responses




28                      November 17, 2006
Strategic Approach to Tax Controversy
Respond to IDRs timely
     Provide clear and concise response to all questions
     Focused answers expedite resolution of issues timely
     Anticipate agent’s next steps




29                     November 17, 2006
Relationship of Transparency and Controversy

• “Transparency” is primarily a financial statement concept
• Transparency may be required to utilize some of the new IRS
  controversy resolution concepts (e.g., PFAs, LIFE audits, etc.)
• IRS promotes “transparency” for taxpayers, but does it adhere to
  the concept in controversy?
• Privileges are often applicable in controversy, which is not
  inconsistent with general meanings of “transparency”




30                     November 17, 2006
 Tax Accrual Workpapers
• IRS views as a potential “roadmap” for audit
• Not generally privileged
• IRS request policy governed by I.R.M. 4.10.20
• IRS has historically exercised “restraint”
• IRS restraint recently modified
     Listed transactions

• Emerging FIN 48 issues


31                         November 17, 2006
Current IRS Tax Accrual Workpaper Request
Policy
• General standard for requests for audit or tax accrual
  workpapers is the “unusual circumstances” standard
• Revised IRS policy pertains to when Listed Transactions are
  involved:
     If one disclosed, IRS will request tax accrual workpapers pertaining only to the
     listed transaction
     If not disclosed, IRS will request all tax accrual workpapers
     If benefits from more than one listed transactions are claimed on return, IRS will
     request all tax accrual workpapers, regardless of disclosure
       • IRS counts actual transactions, not types of transactions
     If there are financial accounting irregularities, IRS will request all tax accrual
     workpapers

32                          November 17, 2006
Summary
• Note revamped approach to tax compliance
     Transparency is the rule of the day

• Prepare for controversy prior to an IRS audit
• Maximized use of ADR process




33                      November 17, 2006
Ernst & Young Tax Educators’ Symposium 2006

  Questions?




 34                  November 17, 2006
                                     Americas Tax




     Thank you for your participation and
                 feedback!

35               November 17, 2006

				
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