February 12, 2009
I. Welcome and Introduction
II. Case Management and Risk Assessment
TEI invites a discussion of current case management statistics (2008 v. 2007), specifically:
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Overall coverage rate
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CIC currency rate
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Examination Cycle Time
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Total Cycle Time
What effect have the changes in LMSB examination closure rates and cycle times had on other LMSB priorities? What effect, if any, has the economic downturn had on examinations (e.g., budget limitations, travel restrictions)?
III. Key Compliance Initiatives
Over the past year, the IRS has initiated several compliance initiatives/research efforts in which TEI has been an active participant: the Roundtable on Tax Transparency and Disclosure (June 5, 2008), the IRS Enterprise Compliance Risk Symposium relating to the growing use of pass-through entities (July 22, 2008), and the International Tax Administration Conference (October 7, 2008). We invite a discussion of LMSB’s assessment of these programs. Should taxpayers expect any specific initiatives to flow from these programs and are other programs being planned?
IV. Examination-Related Matters
a. International Examination Program Update
International tax compliance matters occupy an ever-increasing piece of the overall LMSB agenda. U.S. corporations are now doing business in 230 countries and foreign profits of U.S. corporations are becoming a larger percentage of total profits. Total income reported on Form 5471 filings with LMSB now exceeds $1 trillion and foreign tax credits claimed in 2007 totaled more than $80 billion.
Hence, it is unsurprising that more than half of the current Tier I Industry Issue Focus issues involve international tax matters, e.g., transfer pricing, abusive transactions involving hybrid instruments, section 936, section 965 transactions, foreign tax credit "generators," and most recently "withholding taxes."
Recent comments by LMSB Commissioner Frank Ng and Deputy Commissioner Barry Shott confirm LMSB’s desire to reshape its business processes and practices to adapt to taxpayers that are increasingly being characterized as "enterprise structures, multi-tiered and multinational entities."
Against this background, TEI invites a discussion on the following:
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The strategic approach to be taken to reshape LMSB;
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The function and composition of the new International Planning and Operations Council; and
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Resource/Staffing considerations (including external hiring or internal reallocations).
b. Effect of Cost Sharing/Services Regulations
TEI invites a discussion of the reaction LMSB has received from foreign jurisdictions to the section 482 services regulations and final cost sharing regulations. Does LMSB expect that these rules will increase Competent Authority activity?
c. Competent Authority Matters
Recent Competent Authority statistics show the highest inventory of double-tax cases on record even as case processing time generally has improved. At the close of the 2008 fiscal year, the IRS had 578 cases in Competent Authority, compared with 500 at the close of 2007.
TEI invites a discussion on the possible causes for this significant increase in volume (e.g., resources, complexity), as well as the steps being considered to address this growing inventory.
d. Joint International Tax Shelter Information Center
Recent comments by Commissioner Shulman indicate that JITSIC continues to provide information to the United States on abusive international tax shelter activity that might not otherwise come to the IRS’s attention. Further, the Commissioner noted that the IRS international team has been directed to develop a multi-year proposal to expand JITSIC’s traditional role of fighting tax shelters. Discussions with the IRS’s JITSIC partners are expected over the next few months. Can the IRS share anything about the scope and objectives of those discussions? In particular, what are the areas of expanded inquiry under consideration?
e. Tax Data Utilization
Audit currency and compliance risk identification are closely linked. A central tool developed has been the Schedule M-3 (Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More), which was designed to provide greater transparency regarding book-tax differences thereby permitting the IRS to focus attention and resources on higher risk areas.
Now, with several Schedule M-3 filing cycles completed, substantial M-3 information is available to allow an assessment of the schedule’s utility as an audit assessment tool. Accordingly, TEI invites a discussion on the following:
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Overall, has the Schedule M-3 been an effective audit assessment tool?
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What limitations, if any, have been identified with respect to the Schedule M-3 in terms of its scope or compliance patterns?
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What steps are being contemplated to remedy the identified limitations?
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Will external stakeholders be consulted before changes are made?
By all accounts, the expansion of the corporate e-filing mandate seems to have gone well. Are changes planned in the program? Has the IRS achieved its objectives in terms of issue selection and risk assessment?
f. Non-Tax Agency Data Usage
FASB Interpretation No. 48 (FIN48) has increased the volume of publicly available financial statement information pertaining to tax matters. Significant effort and resources have been expended by taxpayers to develop systems and processes to comply with its requirements. TEI invites a discussion of the IRS’s assessment of FIN48 disclosures, including whether the disclosed information has served a useful audit purpose in the selection, risk assessment, and substantive review of corporate tax returns. In addition, which disclosures have caused the IRS to reopen an otherwise closed examination.
g. Industry Issue Focus – Tiered Issues
In March 2007, the IRS announced a new system for setting tax compliance priorities and managing issue and case resolution. The new classification system, styled Industry Issue Focus (IIF), is part of LMSB’s overall strategy to improve consistency in tax disputes across industry lines while better utilizing LMSB resources.
IIF places compliance issues into three categories (with Tier I issues considered as posing the greatest compliance risk). With the program approaching its second anniversary, TEI invites a discussion of the following:
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The effect of IIF on audit currency, issue resolution and case closure, especially in respect of CIC and CAP taxpayers.
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Apropos Tier I issues, who controls the resolution of a Tier I issue when the Issue Management Team and the Examination team disagree?
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Apropos the recent addition of "withholding taxes" to Tier I status, what process was followed in designating withholding taxes a Tier I issue. Are any particular withholding regimes the subject of the designation? h. Compliance Assurance Process
The Compliance Assurance Process (CAP) pilot was designed to reduce taxpayer burden and uncertainty while ensuring the accuracy of tax returns prior to filing, and thereby minimizing the number and scope of post-filing examinations. Since its original roll-out with 17 participants, CAP has grown over five-fold, with 92 taxpayers currently participating.
As CAP enters its fifth year, TEI invites a discussion of the following:
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When will a determination be made regarding the permanent status of CAP? What measures will be used to support that determination?
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With a growing population of participants, does the IRS have sufficient resources to support the size the program?
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What effect will the resource allocation to CAP have on other LMSB priorities?
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Will the IRS consider expanding the CAP program to other participants?
i. Section 6038 Reporting/Automatic Penalties
Beginning January 1, 2009, the IRS will assert penalties with respect to late filed Forms 5471. Many companies are presented with the situation in which a controlled foreign corporation (CFC) has become dormant and has no business activity to be reported on Form 5471. Under the new guidance, it appears that unless a taxpayer continues to file the Form 5471 for a dormant and inactive company, it would be subject to penalty exposure. Was this the intent?
j. Section 6039 Reporting Requirements
In July, 2008, the IRS issued proposed rules (REG-103146-08) on information statement and return requirements under section 6039. The proposed regulations indicate that two new forms will be issued to capture required information. In addition, the regulations reference "reporting/issuing of statements" to participants. To date, the new form and statements have not been released. TEI invites a discussion on the status of that requirement including whether electronic delivery to an employee (i.e., via a website) would satisfy the regulatory requirements.
k. Refundable Credits (Original vs. Amended Return)
Current IRS guidance indicates that an original return should reflect the section 168(k) 50-percent bonus depreciation deduction. If the taxpayer intends to claim the refundable credit, then the taxpayer should not elect out of bonus depreciation (Section 168(k)(2)(D)(ii) election) on the original return. The section 168(k)(4) election to claim the refundable credit should be made on an amended return and not on the original return (for fiscal year taxpayers with year ends after March 31, 2008).
The administrative issues and costs associated with preparing and filing amended returns (and, more specifically the attendant amended state tax returns) would be mitigated by permitting taxpayers to apply the refundable credit depreciation elections on the originally filed return and then to file the amended return to claim the credit. The taxpayer would make the section 168(k)(4) election on the originally filed return and compute depreciation on the qualifying assets without bonus depreciation (section 168(k)(4)(A)(i)) and using the straight line method (section 168(k)(4)(A)(ii)).
TEI invites a discussion on the feasibility of this approach to enable a fiscal year taxpayer to compute depreciation on an originally filed return, consistent with the refundable credit guidelines of section 168(k)(4), with the refundable credit then claimed on the amended return (or, on an originally filed return).
l. Tax Accrual Workpapers/Policy of Restraint
The scope and limitations of IRS access to tax accrual workpapers continues to be of keen interest to the taxpayer community, especially in light of United States v. Textron Inc., 507 F. Supp.2d 138 (D.R.I. Aug. 29, 2007) and the recently settled Regions Financial Corp. v. United States, No. 2:06-cv-00895 (N.D. Ala. May 8, 2008), which discuss whether and under what circumstances tax accrual workpapers are protected from IRS disclosure by the work product doctrine. TEI invites a discussion on the status of and any contemplated changes to the IRS’s policy of restraint.
m. Secure E-Mail Pilot
Recently, LMSB conducted a pilot program involving secure e-mail communications between taxpayers and the IRS. How has this pilot been received and does IRS have any plans to expand it to other taxpayers?
n. Efficient Account Administration
Many TEI members express frustrations in reaching a "live person" to address account, tax deposit, and related matters. Often, they are transferred from one service center to another. To conserve both taxpayer and IRS resources, TEI invites a discussion whether the IRS should return to the practice of assigning CIC taxpayers a single IRS point of contact for administrative and service center matters. In that connection, would the IRS consider a single point of contact for e-filing support and communications concerning e-filing or TIN matching problems?
V. International Financial Reporting Standards
The Securities and Exchange Commission recently issued a proposed roadmap that could lead to mandatory adoption by U.S. domestic financial report filers of international financial reporting standards, beginning as early as 2014. A transition to IFRS by U.S. companies carries with it myriad tax implications for the Internal Revenue Service and the large corporate business community.
TEI invites a discussion on the following:
a. Technical implications
By what process are key technical issues and taxing regimes affected by IFRS being identified? For example, Schedule M-3, record retention, accounting methods, and mark-to-market accounting (IRC section 475) are among the most salient compliance matters affected by the conversion. Other areas where significant tax administration issues will flow from the adoption of IFRS include transfer pricing (all pricing methodologies are linked to GAAP), the foreign tax credit, Subpart F, earnings and profits, etc.
b. Training
How will the IRS educate and train its professionals regarding IFRS? What role does it expect external stakeholders to play in that process?
VI. Conclusion