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IRS Campaigns

SEMINARRecent Developments:Tax Controversy and Tax Reform

Thomas Kittle-Kamp

Partner, Chicago

(312) 701-7028

[email protected]

Brendan Sponheimer

Associate, New York

(212) 506-2489

[email protected]

William McGarrity

Partner, Chicago

(312) 701-8928

[email protected]


Background

• In September 2015, LB&I announced that it was undergoing a majorreorganization to better address emerging compliance risks with fewerresources.

• LB&I also announced that it would begin new issue-specific compliance“campaigns” as part of this larger initiative.“campaigns” as part of this larger initiative.

• The IRS made a number of comments during informalpanels/presentations that the campaigns would effect a sea change in theway that LB&I would identify compliance risks and deploy its resources.

• LB&I released no formal guidance on campaigns in late 2015 or 2016.

› A purported pilot program for “inbound distributors” was apparently in process during thisperiod.

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First Wave of Compliance Campaigns

• LB&I Announcement (January 31, 2017) identified 13 campaigns.

› First “wave” will be fully rolled-out in 2017.

› Campaigns directed at purported high-risk, low-hanging fruit.

› Presence of “Lead Executives” for each campaign.

› “Treatment Streams” identify a variety of approaches.› “Treatment Streams” identify a variety of approaches.

• Issue-based examinations, soft letters, development of new forms.

› Mid-Market focus.

› Not limited to international issues.

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IRS Campaigns

Campaigns Treatment Stream Lead Executive

1. IRC 48C Energy Credit Campaign Soft letters and issue-focused examinations Kathy Robbins

2. OVDP Declines-Withdrawals Campaign Variety of treatment streams, includingexamination

Pamela Drenthe

3. Domestic Production ActivitiesDeduction, Multi-Channel Video

Externally published practice unit, publishedguidance, and issue-based exams

Kathy Robbins3. Domestic Production ActivitiesDeduction, Multi-Channel VideoProgram Distributors (MVPD’s) and TVBroadcasters

Externally published practice unit, publishedguidance, and issue-based exams

Kathy Robbins

4. Micro-Captive Insurance Campaign Issue-based examinations Gloria Sullivan

5. Related Party Transactions Campaign Issue-based examinations Peter Puzakulics

6. Deferred Variable Annuity Reserves &Life Insurance Reserves IIR Campaign

Develop published guidance Kathy Robbins

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IRS Campaigns

Campaigns Treatment Stream Lead Executive

7. Basket Transactions Campaign Issue-based examinations, soft letters to MaterialAdvisors and practitioner outreach

Gloria Sullivan

8. Land Developers - Completed ContractMethod (CCM) Campaign

Development of a practice unit, issuance of softletters, and issue-based examinations

Peter Puzakulics

9. TEFRA Linkage Plan Strategy Campaign Developing new procedures and technology for Cliff Scherwinski9. TEFRA Linkage Plan Strategy Campaign Developing new procedures and technology forTEFRA partnership examination

Cliff Scherwinski

10. S Corporation Losses Claimed in Excessof Basis Campaign

Issue-based examinations, soft letters, stakeholderoutreach, new form

Holly Paz

11. Repatriation Campaign Improve issue selection filters for exam John Hinding

12. Form 1120-F Non-Filer Campaign Soft-letter outreach and examinations John Hinding

13. Inbound Distributor Campaign Issue-based examinations Sharon Porter

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Lead Executives

• Responsibilities.

› Drive the implementation of the campaign.

› Address general concerns with campaigns and specific problems with in-process campaignexaminations.

• In a series of webinars, lead executives have expressed a willingness to• In a series of webinars, lead executives have expressed a willingness tolisten to taxpayers who have issues with the campaign process.

› Objective is to get this “right.”

• The presence of a lead executive suggests the campaign hierarchicalarchitecture will resemble that of the IRS’s former Tiered Issue Process.

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Tiered Issue Process Reboot?

• Potential Concerns with a Revisited Tiered Issue Process.

› “Tax Shelter” mindset.

› Unwarranted examinations.

› Rigid audit procedures.

› Frontline agents provided little discretion.

› Longer audit durations.

› Possible “behind the curtain” analyses conducted at the IRS National Office.

› Resolutions postponed until the receipt of the relevant subject matter expert’sapproval.

7


Main Treatment Streams

• Soft Letters.

› Letters notifying taxpayers that their return positions appear contrary to an IRS position.

› Intended to elicit a response from the taxpayer.

› Various responses could include filing an amended return, explaining why the taxpayer’sfacts are distinguishable, acknowledging a difference in views on the law, etc.

• Issue-based Examinations.

› Narrow-focused examinations conducted by trained campaign issue managers and issuespecialists.

• Represents a move towards greater specialization in examinations.

› The selection of taxpayers for campaign examinations does not, in and of itself, suggestnoncompliance, but agents will likely impose a higher degree of scrutiny on taxpayerinformation in those examinations.

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Feedback Cited as Critical to its Success

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What Will a Campaign Exam Look Like?

• LB&I Examination Process (Pub. 5125) remains unchanged.

• Campaigns are envisioned as appendages to LB&I exams.

› IRS views campaigns as a return selection tool. They should help the IRS determine whichissues and taxpayers to focus on.

› Taxpayers can have multiple campaign exams being conducted at the same time.› Taxpayers can have multiple campaign exams being conducted at the same time.

› IRS expects that the majority of LB&I audit activity in the future will be campaign-driven.That said, traditional CIC-style audits will still exist on a reduced scale.

• Traditional alternative dispute resolution options (e.g., IRS Appeals, FastTrack Settlement) remain available in a campaign audit.

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Campaigns Within the Existing Exam Construct

• If a particular issue in an audit coincides with a campaign, then the auditcase manager will coordinate with the campaign specialists and the leadexecutive on an as-needed basis.

• No one IRS agent or function will have 51% control of the exam.

If taxpayer has concerns with the campaign examination, he may escalate• If taxpayer has concerns with the campaign examination, he may escalatethrough the campaign specialist and the lead executive or through thecase manager using traditional channels.

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Adding Campaigns to an Ongoing Exam

• Campaigns may materialize through general examinations processes,including CIC and CAP, and audits that began as single-issue campaignaudits.

› Engrafting a campaign onto an exam requires managerial approval. Generally, the entireexam team would have a discussion/conference before deciding to expand the scope of theexam team would have a discussion/conference before deciding to expand the scope of theexam.

› The IRS has represented that there will be a materiality threshold before adding a campaignto an exam.

• If a campaign issue is identified during an audit, it should becommunicated to the taxpayer and then added to the audit plan.

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Campaign Supporting Materials

• The IRS has represented that practice units, training materials, andstandardized information document requests (“IDRs”) related to campaignissues are in development.

• Supporting materials will vary by campaign.

› Practice units won’t be available for every topic, but the IRS views them as a significant› Practice units won’t be available for every topic, but the IRS views them as a significantpiece of public campaign materials.

› Materials like standardized IDRs or notice of proposed adjustment templates may not beused in all campaigns.

• For certain campaigns—e.g., repatriation and related party transactioncampaigns—there will be fewer supporting materials because the highlyspecialized IRS agents assigned to them do not require those items.

13


Additional Campaigns Going Forward?

• IRS culled its initial list of potential first-wave campaigns from around 700to 13.

› As a result, there remains a large pool of issues being reviewed by the IRS for possiblecampaign development.

• The IRS anticipates that a second wave of campaigns will be released• The IRS anticipates that a second wave of campaigns will be releasedshortly.

› IRS Webinar: “There is a high level of certainty that there will be more announced inupcoming months.”

• Campaigns aren’t anticipated to completely eclipse traditional exams, butthe IRS envisions campaigns composing the majority of its work streamsin the future.

14


Best Practices for Campaign Exams

• Preparation will be critical.

› Taxpayers with issues identified in a campaign with a treatment stream that includes issue-based examinations may want to mobilize their audit response teams and performpreliminary due diligence.

• Evaluate implicated transactions against relevant practice units (e.g., basket transaction,• Evaluate implicated transactions against relevant practice units (e.g., basket transaction,inbound distributors), which set forth transaction-specific audit roadmaps for LB&Iexaminers.

• Identify roles, responsibilities, and authority of the exam team members.

› “Issue Managers” and “Issue Specialists” will feature prominently in the new issue-basedexamination process.

› Understanding the dynamics of the LB&I exam team may enable a smoother audit process.

15


Best Practices for Campaign Exams (cont’d)

• Early and continuing communication with the exam team.

› Taxpayers will not receive formal notification that they are subject to a campaign—thoughthe IRS has represented that taxpayers will have access to campaign specialists.

› Accordingly, taxpayers should always ask at the beginning of the exam whether the auditincludes a campaign item.includes a campaign item.

• Provide feedback and elevate issues if necessary.

› The IRS is relying heavily on taxpayer feedback to help develop campaigns.

› Lead executives have emphasized their accessibility and receptivity to any taxpayer issueswith campaigns.

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Specific Campaign Topics (Examples)

• Mayer Brown has started a series of articles in Bloomberg BNA addressingselect campaign topics:

› 1. Overview and Comparison with Prior IRS Initiatives

• Looking for Clues in the IRS’s Campaign Announcement (Daily Tax Report, March24, 2017)24, 2017)

› 2. Domestic Production Activities Deduction (Section 199)

• DPAD Campaign Implicates Old Wounds and New Wounds (Daily Tax Report,March 30, 2017)

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Specific Campaign Topics (Examples)

• Mayer Brown has started a series of articles in Bloomberg BNA addressingselect campaign topics (continued):

› 3. Transfer Pricing for Inbound Distribution

• IRS Inbound Distribution Campaign: Practical Lessons From Experience (Daily TaxReport, April 3, 2017)Report, April 3, 2017)

› 4. Repatriation Structures

• IRS Campaign Program Continues Focus on Repatriation Transactions (Daily TaxReport, April 20, 2017)

› We will continue to publish articles on campaigns of interest as they areannounced.

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Future Campaign Webcasts

Campaign Topic Lead Executives Webcast Date

Inbound DistributorOVDP Declines- Withdrawals

Sharon PorterPam Drenthe

May 10, 2017Afternoon

Domestic Production Kathy Robbins Week of May 22, 2017

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Domestic ProductionForm 1120 Non-Filer

Kathy RobbinsJohn Hindling

Week of May 22, 2017

RepatriationRelated Party Transactions

John HindlingPete Puzakulics

Week of June 5, 2017

48C Energy CreditLand Developer

Kathy RobbinsPete Puzakulics

Week of June 19, 2017

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