24th Annual Health Sciences
Tax Conference
Evolving model of IRS examination
December 8, 2014
Disclaimer
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EY refers to the global organization, and may refer to one or more, of the member firms of Ernst &
Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving
member firm of Ernst & Young Global Limited operating in the U.S.
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This presentation is © 2014 Ernst & Young LLP. All rights reserved. No part of this document may be
reproduced, transmitted or otherwise distributed in any form or by any means, electronic or
mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any
information storage and retrieval system, without written permission from Ernst & Young LLP. Any
reproduction, transmission or distribution of this form or any of the material herein is prohibited and
is in violation of U.S. and international law. Ernst & Young LLP expressly disclaims any liability in
connection with use of this presentation or its contents by any third party.
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Views expressed in this presentation are those of the speakers and do not necessarily represent the
views of Ernst & Young LLP.
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This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does
not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s
facts and circumstances.
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These slides are for educational purposes only and are not intended, and should not be relied upon,
as accounting advice.
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Evolving model of IRS examination
Presenters
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Dave Courtney
Vice President – Tax
Ardent Health Services
Nashville, TN
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Mark Mesler
Ernst & Young LLP
Atlanta, GA
+1 404 817 5236
mark.mesler@ey.com
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Frank Ng
Ernst & Young LLP
Washington, DC
+1 202 327 7887
frank.ng@ey.com
Evolving model of IRS examination
Discussion topics
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IRS organization updates
Large Business & International examination update
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Coordinated Industry Case pilot
Quality Examination Process
Issue Practice Groups
Information Document Requests Directive
Transfer pricing examinations
International Practice Networks
Pre-Filing Agreements
Compliance Assurance Process
Appeals Judicial Approach & Culture (AJAC) Project
Global Tax Risk Management Survey
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Evolving model of IRS examination
IRS organization updates
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Evolving model of IRS examination
IRS organization
Appeals
Communications & Liaison
Commissioner
Office of Research, Analysis
and Statistics
Chief of Staff
Deputy Chief of Staff
National Taxpayer Advocate
Office of Compliance
Analytics
Chief Counsel*
Equity, Diversity & Inclusion
Services & Enforcement
Operations Support
Agency-Wide Shared
Services
Chief Financial Officer
Chief Technology
Officer
IRS Human Capital
Officer
Privacy, Governmental
Liaison and Disclosure
Criminal Investigation
Large Business &
International Division
Office of Professional
Responsibility
Office of Online
Services
Return Preparer
Officer
Small Business/Self
Employed Division
Tax Exempt &
Government Entities
Division
Wage and Investment
Division
Whistleblower Office
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Evolving model of IRS examination
Recent IRS organization changes
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Established Assistance Commissioner (International)
within Large Business & International (LB&I) Division to
manage IRS-wide international compliance programs
Moved jurisdiction of Tax Exempt/Governmental Entities
(TE/GE) Counsel organization to Office of Chief Counsel
(previously reported to TE/GE Division Commissioner)
Realignment of pre-filing compliance programs to Wage &
Investment Division (WI) and post-filing compliance
programs to Small Business/Self-Employed Division
(SB/SE)
Identity theft victim assistance centralized under WI
Creation of Office of Compliance Analytics and Chief Risk
Officer reporting to Commissioner
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Evolving model of IRS examination
New IRS Taxpayer Bill of Rights
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Evolving model of IRS examination
FY 2013 IRS statistics
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Operating budget was approximately $11.5 billion
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Enforcement
Taxpayer services
Operations support
Business system modernization
$5.0 billion
$2.3 billion
$4.0 billion
$0.2 billion
Costs 41 cents, on average, to collect $100
More than 240 million federal tax returns filed
Gross revenue collected was $2.5 trillion
Revenue from all enforcement activities is $53.35 billion
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Recommended additional tax after audit was $37.09 billion
Civil penalties assessed of $25.9 billion
Civil penalties abated of $11.4 billion
Evolving model of IRS examination
FY 2013 audit coverage rates
Category
Coverage rate
Overall individual
1.0%
Individual with income over $200,000
2.7%
Individual with income over $1 million
10.8%
Small corporation under $10 million in assets
1.0%
Large corporation $10–50 million in assets
7.0%
Large corporation $50–100 million in assets
15.5%
Large corporation $100–$250 million in assets
19.4%
Large corporation $250 million to $20 billion and
over in assets
Partnership
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22.5%–91.2%
.4%
Evolving model of IRS examination
IRS FY 2015 budget priorities
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Enforcement priorities
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Identify theft and refund fraud
Foreign Account Tax Act compliance implementation
Affordable Care Act (ACA) statutory requirement
implementation
Enforcement priorities
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International and offshore compliance
Expand audit coverage, focus on high-wealth individuals
Improve coverage of partnerships and flow-through entities
Enhance collection coverage
Expand compliance coverage in tax-exempt sector
Tax return preparer compliance and professional
responsibilities
Fraud referrals, employment taxes and abusive tax schemes
Leverage data to improve audit selection
Evolving model of IRS examination
LB&I examination update
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Evolving model of IRS examination
LB&I organizational chart
LB&I Commissioner
Heather C. Maloy
Deputy commissioner
(domestic)
Deputy commissioner
(international)
Shared support
Pre-filing and technical
guidance
Sergio Arellano (A)
Doug O’Donnell (A)
Susan Latham, Dir.
Tina Meaux, Dir. (A)
Communications,
technology and
media
Cheryl Claybough, Dir.
Kimberly Edwards,
DFO NW (A)
Rosemary Daley, DFO SW
Assistant deputy
commissioner,
international
David Varley (A)
Business systems
planning
Dean Wilkerson, Dir.
Financial services
Rosemary Sereti, Dir.
Jo McGready, DFO
Fin Prod
Barbara Harris, DFO NY
International
business
compliance
Sharon Porter, Dir. (A)
Orrin Byrd, DFO W (A)
Jolanta Sanders, DFO E
William Holmes, Dir. IDM
Management and
finance
Keith Walker, Dir.
Global high
wealth
Cheryl Claybough, Dir. (A)
International
Individual
compliance
David Horton, Dir.
Pam Drenthe, DFO
Planning,
analysis,
inventory and
research
Christopher Larsen, Dir.
(A)
Transfer pricing
operations
Hareesh Dhawale, Dir.
APMA (A)
Equity, diversity
and inclusion
Rona Evans, Dir.
Foreign Payments
Practice
Theodore Setzer, Dir.
Division planning,
oversight
reporting and
liaison
Michael Boccarossa (A)
Heavy
Rosemary Sereti, Dir. (A)
manufacturing and Catherine Jones, DFO NE
Lavena Williams, DFO SE
pharmaceutical
Natural resources
and construction
Retailers, food,
transportation
and healthcare
Kathy Robbins, Dir.
Katheryn Houston, DFO W
Dennis Figg, DFO E (A)
Steve Whitaker, DFO Eng (A)
Lori Nichols, Dir. (A)
Margaret Von Lienen,
DFO E (A)
Lori Caskey, DFO W
Paul Curtis, DFO CAS
(A) = Acting
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Evolving model of IRS examination
Deputy director
Deborah Palacheck (A)
LB&I update
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Organizational leadership changes
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Domestic and international resource alignment
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Implementation challenges of 2010 LB&I restructuring
Rumor of pending LB&I organization changes
Impact to taxpayers
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Five top executive departures including Deputy Commissioner
(International, Transfer Pricing Director, Director Advance
Pricing Agreement Mutual Agreement, Director International
Strategy, Acting Deputy Commissioner (Domestic)
Departure due to retirements and general tenure of private
sector recruitments
Potential change of upper management on audits
Potential delays in examination process
Uncertainty on decision-making authorities
Decline in experienced workforce
Evolving model of IRS examination
LB&I Coordinated Industry Cases (CIC) pilot
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IRS – LB&I initiated a new CIC pilot 30 April 2014
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Currently, CIC cases are:
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Front-end loaded into the compliance plan
Limit flexibility to allocate resources to other compliance activities
Under the new process, all CIC cases would:
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Pilot will run for 18 months
Undergo a consistent classification process to determine return
compliance risk and to identify issues
Be entered into the workload delivery system
New classification process will include:
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Issue identification and written explanations on compliance risks
and documentation to support compliance risk conclusions
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All information will be included in case file for use in examination
Evolving model of IRS examination
Quality Examination Process
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Evolving model of IRS examination
Quality Examination Process (QEP)
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Evolving model of IRS examination
Quality Examination Process – a
collaborative process
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Steps for conducting a quality audit
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Planning
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Execution
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Information document request and analysis
Monitoring audit team performance and audit scope
Discussion of issues with taxpayer
Resolution
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Pre-audit analysis
Planning meetings to scope issues with taxpayer
Taxpayer orientation and initial financial and transaction data
Finalize exam plan and milestones
Confirming facts
Consult with specialists and experts
Issue resolution strategies
Determine areas of agreement
Evolving model of IRS examination
Issue Practice Groups
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Evolving model of IRS examination
Formation of Issue Practice Groups (IPGs)
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Creation of Issue Practice Groups for domestic issues to
enhance knowledge management structure, employee
development and collaboration among examiners
IPGs led by IPG Coordinator with one or more full-time subject
matter experts (SMEs), part-time SMEs who spend less than
25% of their time as Collateral SMEs, and an IPG analyst
On August 17, 2012, the IRS announced the termination of the
tiered issue process
All prior Industry Director Directives (IDDs) relevant to the tier
issues are withdrawn and should not be followed by examiners
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Evolving model of IRS examination
Current list of domestic IPGs
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Partnerships and TEFRA
RICs, REITs and REMICs
S-Corporations and
Cooperatives
Non-Life Insurance
Compensation and
Benefits
Penalties
Deductable and Capital
Expenditures (DCEs)
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Evolving model of IRS examination
Corporate Distribution and
Adjustments
Corporate Income and
Losses
Business Credits
Energy Credits
Life Insurance
Financial Instruments
Inventory and 263A
Methods of Accounting and
Timing – previously CAM
Information Document Requests Directive
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Evolving model of IRS examination
LB&I Directive on Information Document
Requests (IDRs) – issued 2/28/14
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Reiterates requirement that all IDRs must be:
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Issue focused (i.e., identify and state the issue that has led the
examiner or specialist to request the information included in the
IDR)
Discussed with taxpayer prior to issuance, both in regard to
content and determining a reasonable response time frame
Outlines mandatory three-step IDR enforcement process:
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Delinquency Notice
Pre-Summons Letter
Summons
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Effective date 3/3/2014
Evolving model of IRS examination
LB&I Directive on IDRs
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Examiners and specialists are permitted to grant taxpayers
one extension of up to 15 business days before the
enforcement process begins.
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If no response is received by the IDR due date and no
extension is granted, the IDR enforcement process begins on
the date the extension determination is communicated to the
taxpayer.
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IDR enforcement process – The examiner or specialist and
taxpayer will determine a reasonable response due date to an
IDR.
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Evolving model of IRS examination
LB&I Directive on IDRs
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Delinquency Notice – Signed by team manager, discussed with
taxpayer and issued by examiner or specialist within 10 business
days of the application of the enforcement process – new response
date no more than 10 business days from date of Delinquency
Notice
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Pre-Summons Letter – Signed by territory manager, who will issue
and discuss the next steps with taxpayer at equivalent level within 10
business days after the Delinquency Notice due date – new
response date no more than 10 business days from date of Letter
(unless DFO approval)
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Summons – If information is not provided, a summons will be issued
for enforcement by IRS Counsel and Department of Justice
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Evolving model of IRS examination
New IDR enforcement process – timeline
Within 10
business days
IDR
deadline
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No more than 10
business days
Delinquency
Notice
No more than 10
business days
Response
date
Delinquency
Notice
10 business days
PreSummons
Letter
No timeline
specified but likely
quickly
PreSummons
Letter
response
date
Summons
Under the new directive, the IDR process - from the date of the initial draft IDR to the
initiation of the summons process - can take approximately 140 days.
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Transfer pricing examinations
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Evolving model of IRS examination
New Transfer Pricing Audit Roadmap
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On February 14, 2014, the Transfer Pricing Operations
(TPO) released the Transfer Pricing Audit Roadmap (the
Roadmap).
The Roadmap provides IRS transfer pricing practitioners
with recommended audit procedures and links to useful
reference material.
The Roadmap provides insight into what to expect during
a transfer pricing examination.
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This transparency is intended to help improve communications
and efficiency, for the benefit of both the IRS and taxpayers.
The 24-month cycle guideline is not fixed.
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Evolving model of IRS examination
Transfer Pricing Audit Roadmap
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Organized around a 24-month audit timeline, the Roadmap breaks
down a transfer pricing audit into three phases:
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Planning
Execution
Resolution
Emphasis is placed on coordination within LB&I throughout the
process, including the exam team, IRS transfer pricing specialists and
the taxpayer, and encourages constant communication among all
three groups of stakeholders.
The stated purpose of the Roadmap is: “To provide the transfer pricing
practitioner, whether employed in TPO or International Business
Compliance (IBC), with audit techniques and tools to assist them with
the planning, execution and resolution of transfer pricing
examinations.”
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Evolving model of IRS examination
Transfer Pricing Audit Roadmap
Quality Examination Process (QEP)
QEP phases
Planning
Execution
Resolution
Transfer pricing audit stages and timeline
Cycle time in months
Non-cycle time
1st to 2nd
3rd
4th
5th
6th
7th to 15th
16th
17th
18th
19th
20th to 23rd
24th
Pre-examination analysis
Opening conference,
transfer pricing orientation
Preparation of initial
risk analysis, exam plan and
key milestones
Fact finding and additional IDRs, functional analysis
Mid-cycle risk
assessment
Issue development
and preliminary
reports
Pre-Notice of
Proposed
Adjustment
(NOPA) issue
presentation
Resolution
discussions
Final NOPA and case
closing
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Evolving model of IRS examination
International Practice Networks
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Evolving model of IRS examination
IRS International Practice Networks
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Integrated international program
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International matrix is a framework for international strategy, training,
networks and data management
Organizes all international issues into four areas: Business Outbound,
Business Inbound, Individual Outbound and Individual Inbound
Four cross-over issues including Foreign Currency, Information Gathering,
Corporate Organizations/Transactions and Treaties
International Practice Networks (IPNs) aligned with the
matrix strategy
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Most international matrix issue areas represented by an IPN
IPNs led by Steering Committee – technical specialist staff, an
international manager sponsor, LB&I, SB/SE and Associate Chief Counsel
(International) attorneys
IPNs intended to allow international personnel organization wide and
counsel to share and collaborate on strategic international issues
Evolving model of IRS examination
International Practice Network
Income
shifting
Inbound
financing
Repatriation/
withholding
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International Business Compliance (IBC) inbound
Income
shifting
Deferral
planning
Foreign tax
credit
management
Repatriation
International Business Compliance (IBC) outbound
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Jurisdiction
to tax
US activities
US investments
International Individual Compliance (IIC) inbound
Jurisdiction
Offshore
to tax
arrangements
Foreign tax
credits
Pass-thru
entities
Foreign
corporations
International Individual Compliance (IIC) outbound
Corporate
organizations/transactions
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Evolving model of IRS examination
International
Practice Networks
will focus on
international
issues and will
replace the tiered
issue process
The International
Practice Network
will report to LB&I
Deputy
Commissioner
(International)
Goals for the International Practice Networks
Tap into technical expertise:
► Facilitate the Knowledge Management model to broaden technical
expertise and increase technical advice output
► Coordinate and support identification and publication of guidance
Expand collaboration:
► Facilitate and engage additional resources to identify expertise
throughout LB&I and the IRS to augment the development of technical
positions
► IPNs do not command or control issues
Improve quality and institution building:
► Sharing institutional knowledge and best practices to improve quality
across the organization
► Concurrent opportunities to teach and learn
Improve line of sight:
► LB&I is emphasizing line of sight into technical positions and
consistent application of issue guidance across the organization
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Evolving model of IRS examination
Pre-Filing Agreements
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Evolving model of IRS examination
Pre-Filing Agreements (PFAs)
Revenue Procedure 2009-14
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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 examinations
If successful, results in a closing agreement
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An agreed-upon methodology may be used for up to four
subsequent years
Provides full resolution of issue earlier than traditional
return filing and examination
Benefits taxpayer and IRS by improving the quality of tax
compliance while reducing its costs, burdens and delays
Affords heightened certainty for financial statements
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Evolving model of IRS examination
Pre-Filing Agreement (PFAs)
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Excluded issues
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Transfer pricing, change of accounting method
Penalties or criminal sanctions and reasonable cause
determinations.
Pending or proposed request for Private Letter Ruling (PLR) or
Technical Advice Memorandum (TAM) or contrary to an issued
PLR or TAM involving the taxpayer
Issues subject of pending litigation with the IRS
Issues designated for litigation by IRS Office of Chief Counsel
Issues that involve a tax shelter
Issues that require a determination of whether the taxpayer, rather
than another entity, is the common law employer
Evolving model of IRS examination
Pre-Filing Agreement (PFAs)
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Acceptance of request into PFA program is subject to
discretion of LB&I management
$50,000 filing fee upon acceptance into PFA program
Either party may withdraw at any time
Return filing requirements are not suspended or waived
Inspection of records pursuant to the PFA process does
not preclude a later examination
Selection criteria include:
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Impact on other years, issues and taxpayers
Availability of IRS resources
Probability of completing the PFA by the date for filing the earliest
affected tax return
Evolving model of IRS examination
Compliance Assurance Process
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Evolving model of IRS examination
What is CAP?
The Compliance Assurance Process (CAP) is a program in which
taxpayers and the IRS work together to achieve real-time tax return
certainty.
► The program allows taxpayers to have a proactive relationship with
the IRS, while managing their tax controversy and risk
► Key CAP component is real-time taxpayer interaction with issue
identification and resolution
► Cooperative joint effort to resolve all issues and reach agreement
prior to return filing
► Earlier certainty on the tax return is driven by taxpayer participation
and cooperation, contemporaneous disclosures and issue resolution
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Evolving model of IRS examination
Three CAP phases
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Pre-CAP
phase
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CAP
phase
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Compliance
maintenance
phase
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The IRS and the taxpayer develop a plan to eliminate open years within a
set time frame.
They work in a cooperative and transparent post-file environment.
The ultimate goal is meeting the selection criteria and progressing to the
CAP phase.
The taxpayer and the audit team work in a real-time environment to identify
and resolve issues prior to filing (same as current CAP process).
The taxpayer works with the audit team by identifying transactions and
providing information to resolve material issues.
The taxpayer receives full acceptance if all material issues are disclosed
and the tax return filing is consistent with the agreed tax treatment.
The IRS will adjust the level of review work and time applied.
The level of review will be adjusted based on the taxpayer’s unique
experience in CAP and history of compliance and risk.
Material transactions and issues are periodically disclosed.
Evolving model of IRS examination
LB&I Pre-CAP & CAP taxpayers
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YEAR
# of CAP taxpayers
# of CAP
maintenance
taxpayers
2005
17
Not applicable (NA)
NA
2006
34
NA
NA
2007
71
NA
NA
2008
91
NA
NA
2009
100
NA
NA
2010
112
NA
NA
2011
139
NA
NA
2012
161
10
NA
2013
169
43
27
2014
186
64
20
Evolving model of IRS examination
# of pre-CAP
taxpayers
Appeals Judicial Approach and Culture
(AJAC)
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Evolving model of IRS examination
Appeals Judicial Approach and Culture
(AJAC) Project
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AJAC Project returns appeals to a quasi-judicial approach
to case management with goal of enhancing internal and
external customer perception of a fair, impartial and
independent Office of Appeals
AJAC guidance was issued in two phases and applies to
examination, collection and penalty cases handled by
Appeals
AJAC guidance generally applies to non-docketed cases;
similar procedures for docketed cases are forthcoming
Provides guidance on pre-conference meetings and
ongoing communications with LB&I
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Evolving model of IRS examination
AJAC – Phase 1 Interim Guidance on
Examination
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AP-08-0713-01 effective 7/18/13
Revised Policy Statement 8-2 (formerly P-8-49)
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Appeals will not raise new issues or reopen issues agreed to by
taxpayer and Compliance
Appeals will attempt to settle a case on factual hazards
when cases submitted by Compliance are not fully
developed and taxpayer presents no new information
Clarifies that Appeals officers are not examiners and
should not participate in assisting Compliance with case
development
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Evolving model of IRS examination
AJAC – Phase 2 Implementation of AJAC
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AP-08-0710004 effective for all new Appeals cases
received on or after 9/2/14
Effective 10/1/14 for assistance between Appeals and
Counsel on docketed cases
At least 365 days remaining on statute of limitations, at
least 180 days for cases returned to originating function
for consideration of new information or issue
If taxpayer provides new information or new evidence, at
least 210 days remaining on the statute of limitation when
case will be received by originating (exam) function
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Evolving model of IRS examination
AJAC – Phase 2 Implementation of AJAC
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Case returned to examination for further development of
new information, taxpayer raises new issue(s), failure to
secure timely consent, pending technical advice
If Appeals Officer determines taxpayer or practitioner
unreasonably delays the process with intentionally
submitting new information or raising new issues multiple
times, the Appeals Officer can make a determination
based on factual hazards without consideration of new
information or issues
Specific procedures for returning a case to Large
Business & International Division
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Generally return case to LB&I or allow opportunity to review and
comment on information with at least 45 days
Evolving model of IRS examination
Global Tax Risk Management Survey
Page 48
Evolving model of IRS examination
EY 2014 Tax risk and controversy survey
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Methodology and survey base:
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830 tax and finance executives representing more than 20 industries in 25 jurisdictions
Four key areas of tax risk identified
1
Reputation risk
2
BEPS and legislation risk
3
Enforcement risk
4
Operational risk
www.ey.com/taxriskseries
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Evolving model of IRS examination
Reputation risk, base erosion profit shifting
risk
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89% of the largest companies surveyed
are somewhat or significantly concerned
about the media coverage of the taxes
some companies are paying or their
seemingly low effective tax rates. This is
up from 60% in 2011. Conversely, just
9% say they are unconcerned now,
compared with 40% in 2011.
65% of the largest companies say they
have developed a more structured
approach to managing their public tax
profile.
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Evolving model of IRS examination
94% of the largest companies having an
opinion on the matter think that global
disclosure and transparency
requirements will continue to grow in the
next two years.
74% of the largest companies say they
feel that tax administrators are now
challenging existing structures due to
changes in the law or changes in their
enforcement approach.
51% of the largest companies said that,
in the last two years, they have
experienced an increased focus by the
tax authorities in their HQ’s country on
the economic and operational substance
of foreign entities in their group.
Tax enforcement risk, operational risk
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Transfer pricing is thought to be the
highest-perceived tax risk area, followed
by indirect taxes and permanent
establishment risk.
68% of the largest companies report that
they feel tax authorities globally have
increased their focus on cross-border
transactions in the last two years.
68% of the largest companies report that
they feel tax audits have become more
frequent or aggressive in the last two
years.
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Evolving model of IRS examination
Leading sources of operational tax risk
for the largest companies (in order of
prevalence):
► 75% cited insufficient resources to
cover tax function activities
► 64% cited insufficient internal
communication
► 57% cited a lack of processes or
technology
Only 45% of large companies globally
have “complete visibility” over open tax
audits and disputes globally.
43% of all companies use internally
developed software or templates to track
open tax audits, while 43% use no
technology tools at all. Only 12% use a
specialist third-party tool from a vendor
or professional services company.
Questions?
Page 52
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