IRS EXAMINATIONS & PROCEDURES
Agenda
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Organization of the IRS
Penalties
IRS examinations
Tier Isuses
Appeals
Section 6011 – Reportable transactions
Alternative dispute resolution procedural
options
Organization of the IRS
Mission of the IRS
• “Provide America’s taxpayers top-quality
service by helping them understand and meet
their tax responsibilities and by applying the
tax law with integrity and fairness to all.”
Today’s IRS organization
• The IRS Restructuring and Reform Act of 1998
prompted the most comprehensive
reorganization and modernization of the IRS in
nearly half a century.
• The IRS is divided into three commissioner-level
organizations:
– Commissioner
– Deputy Commissioner for Services and Enforcement
– Deputy Commissioner for Operations Support
IRS organization chart
EEO and
Diversity
Chief Counsel
Commissioner
Appeals
Research, Analysis,
and Statistics
Chief of Staff
Communications
and Liaison
National Taxpayer
Advocate
Office of
Professional
Responsibility
Services and
Enforcement
Large and
Mid-size
Business
Wage and
Investment
Criminal
Investigation
Operations
Support
Small
Business /
Self Employed
Chief Information
Officer
Chief
Financial
Officer
Tax Exempt and
Gov’t Entities
Agency-wide
Shared Services
Human
Capital Officer
Whistleblower
Office
Mission
Assurance
Commissioner
• Doug Shulman current IRS Commissioner
• Specialized units report directly to the
Commissioner’s office:
– IRS Chief Counsel
– Appeals
– Taxpayer Advocate Service
– Equal Employment Opportunity and Diversity
– Research, Analysis, and Statistics
– Communications and Liaison
What constitutes a valid return
• Who must sign?
– Corporate returns – president, vice president,
treasurer, chief accounting officer, or any other officer
authorized to act (IRC §6062)
– Partnership returns – one of the partners (IRC §6063,
Treas. Reg. §1.6062-1)
• TEFRA – Tax Matters partner
– LLC returns – one of the members
– S corporation returns – president, vice president,
treasurer, chief accounting officer, or any other officer
authorized to act
Who must file – IRC §6012
• Individuals with gross income that equals or
exceeds the exemption amount
– Special rules for nonresident aliens
• Corporations subject to tax under Subtitle A
– Special rules for foreign corporations
• Estates with gross income of $600 or more
• Trusts with any taxable income or with gross
income of $600 or more
• Estates or trusts with nonresident alien
beneficiaries
When returns are due – IRC §6072
• Returns for individuals, estates, and trusts
– If calendar year → April 15
– If fiscal year → 15th day of the fourth month after
close of fiscal year
• Corporations
– Fifteenth day of the third month following the close of
the corporation’s tax year
• Certain nonresident alien individuals and foreign
corporations
– If calendar year → June 15
– If fiscal year → 15th day of the sixth month after close
of fiscal year
Amended returns – superseding vs.
amending
• Service considers an amended return filed on or
before due date to be taxpayer’s return for that
period
– Really a superseding original return
• If a return has been filed and the due date has
passed, Service can accept or reject amended
return, but original return is the operative return
for purposes of the period of limitations on
assessment
– If original return is fraudulent, taint stays even if
amended return is filed
When are returns considered filed?
• “Mailbox rule”
• Timely mailed, timely filed
– Foreign postmarks
• Certified private delivery service
– Annual Rev. Proc. updates list
Confidentiality and disclosure of
returns
• IRC §6103 – statutory limitations to IRS
disclosure of tax return information
• Freedom of Information Act (FOIA) – requires
IRS to make public certain information
• IRC §7216 – criminal penalty imposed on tax
return preparer for unauthorized disclosure of
tax return information
Penalties
IRS stated purpose of penalties
• I.R.M. 20.1.1.2 (2-22-2008), Purpose of Penalties
• Penalties exist to encourage voluntary compliance by supporting
the standards of behavior expected by the Internal Revenue Code.
• For most taxpayers, voluntary compliance consists of preparing an
accurate return, filing it timely, and paying any tax due. Most
penalties apply to behavior that fails to meet any or all of these
obligations.
• Penalties encourage voluntary compliance by:
– Defining standards of compliant behavior
– Defining remedial consequences for noncompliance
– Providing monetary sanctions against taxpayers who do not meet the standard
Failure-to-file/failure-to-pay penalties
• Failure to file tax return (IRC §6651(a)(1))
– Five% of the amount required to be shown on
return as tax per month, with a 25% maximum
• 25% maximum interacts with §6651(a)(2)
– Reasonable cause exception
Failure-to-file/failure-to-pay penalties
(cont.)
• Failure to Pay (IRC §6651(a)(2))
– 0.5% of tax shown on return per month with 25%
maximum penalty if tax not paid by the due date
(without regard to extension) of that return
• 25% maximum interacts with §6651(a)(1)
– Applies to:
• Income, employment, excise, gift, and estate tax
returns
– Reasonable cause exception
Other penalties
• Other penalties apply for failure to file certain
returns or make payments:
– Information returns (See IRC §§6721 and 6722)
• Reasonable cause
– Payments of estimated tax (See IRC §6655 below)
• No reasonable cause
– Partnership returns (See IRC §6698)
• Reasonable cause
Penalty for failing to file certain
information returns
• Sections 6038, 6677 and 6679
– Forms such as 5471, 5472, 926 and 3520
– Penalty assessed for failing to file timely,
regardless of tax liability shown on return
– Reasonable cause exception applies
Civil penalties – accuracy-related
penalties (IRC §6662)
• Accuracy-related penalties (IRC §6662)
– Negligence or disregard of rules or regulations (IRC
§6662(b)(1))
– Substantial understatement of income tax (IRC
§6662(b)(2))
– Substantial valuation misstatement (IRC §6662(b)(3))
– Substantial overstatement of pension liabilities (IRC
§6662(b)(4))
– Substantial estate or gift tax valuation understatement
(IRC §6662(b)(5))
Civil penalties – accuracy-related
penalties (IRC §6662) (cont.)
• Penalty amount = 20% of portion of
underpayment
– Increases to 40% for gross valuation
misstatements
• Imposed only once, even if more than one
violation applies
• Amount of underpayment not reduced by any
carryback or carryover of an NOL, deduction
or credit
Civil penalties – accuracy-related
penalties (IRC §6662) (cont.)
• Negligence = lack of reasonable basis
– Reasonably prudent person standard
– Burden of proof on taxpayer
• Disregard of rules or regulations = failure to follow the
appropriate law
– Careless, reckless, intentional
• Substantial understatement
– Individuals:
• Greater of 10% of tax required to be shown on return, or $5,000
– Corporations:
• Lesser of 10% or $10 million
Penalty relief requirements
• Reasonable Cause
– Internal Revenue Manual (IRM) provides some
examples
• Reliance on written advice of IRS
• Reliance on qualified advisor
– Boyle
• Supreme Court case dealing with reasonable cause
• Substantial Authority
– No IRC §6662(d) penalty if there is substantial
authority for the tax treatment of an item or return
position (objective standard)
• Special rules for tax shelter items
Penalty relief requirements (cont.)
• Adequate disclosure
– No substantial understatement penalty if there is
adequate disclosure and reasonable basis
• Disclosure not protective for tax shelter items
• Form 8275 or 8275-R
Preparer penalties (IRC §6694)
• Section 6694(a) imposes a preparer penalty for an understatement on a
taxpayer’s federal tax return or refund claim if the federal tax return
preparer knew or reasonably should have known:
– that there was not substantial authority for the return position;
– if the position was disclosed as provided in §6662(d)(2)(B)(ii), that there was
no reasonable basis for the position; OR
– if the position related to a tax shelter or a reportable transaction (whether or
not disclosed), that it was not reasonable to believe that the position would
more likely than not be sustained
• Preparer bears burden of proof
• Penalty not assessed under §6694(a) if reasonable cause for the understatement
and the preparer acted in good faith
• This new standard applies for income tax returns due after 31 December
2007
Civil penalties – preparer penalties
(IRC §6694)
• Preparer: any person (including a partnership
or corporation) who prepares for
compensation, or who employs one or more
persons to prepare for compensation, a
substantial portion of any income tax return
or claim for refund of income taxes
– Signing preparer: one who signs a tax return
– Non-signing preparer: one who gives oral or
written advice
Criminal penalties
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Section 7201 – attempt to evade or defeat tax
Section 7203 – willful failure to file
Section 7206 – fraud and false statements
Section 7207 – fraudulent returns, statements, or other
documents
• Section 7215 – offenses with respect to collected taxes
(e.g. employment)
• Section 7216 – disclosure or use of information by
preparers of returns
• 18 USC 1001 – false statements to a government
official
Hot interest
• IRC §6621(c) provides for an increased interest
rate charged on certain large corporate
underpayments in excess of $100,000
• Trigger date:
– A balance due notice for more than $100,000 tax
due may create trigger date.
– Issuance of a 30-day or 90-day letter for greater
than $100,000 in tax may set a trigger date.
– Trigger date not set if amount shown as due is
paid within 30 days of issuance of notice or letter.
Restricted interest
• Interest computed where start and/or stop
dates are other than due date of return to
payment/refund date
• In general, term applies in situations where
interest might be statutorily prohibited or
limited to specific time frames:
– 45-day rule on overpayments
– Signing of Form 870 or 870AD
– Carrybacks
Interest netting
• The application of a zero-rate of interest to the
extent that there are overlapping tax
underpayments and overpayments
• Interest rate differential for corporations
ranging from one to four and a half percent
Statute of limitations
• Taxpayer has six years from allowance of a refund
to receive correct amount of overpayment
interest
– If not received prior to expiration of six years, suit
must be filed to protect right to such refund
• Statute of limitations for requesting a refund of
overpaid underpayment interest is the same as
for requesting refund of overpaid tax
– Generally, three years from date the return is filed or
two years from date interest was paid
IRS examination
• Enforcement program to promote voluntary
compliance with tax laws
• Statutory authority
– IRC §7602 – Authorizes IRS to examine any books,
papers, records, or other data and to take such
testimony, under oath, as may be relevant or
material to such inquiry and to issues summoned
– IRC §§7604(a) and 7402(b) – US district courts
have jurisdiction to enforce summons
Types of exams
1.
2.
3.
4.
Service center
Correspondence
Office
Field
Field exams
• Complex issues
• Open-ended
• Revenue agent goes to taxpayer’s residence or
place of business to examine records
– Agent asks for items to inspect on Form 4564,
Information Document Request
• May interview taxpayers
Types of exams – field exam
• Coordinated industry case (CIC)
– Large corporate taxpayers (assets greater than $250
million)
– Primary corporation and controlled entities treated as
single unit
– Support by national office (directives)
– Exam conducted by team
• Industry case (IC)
– Corporate taxpayers with assets between $10 million and
$250 million
– Generally, exam conducted by single agent with specialist
involvement as needed
LMSB industry issue focus/tier strategy
• Tiered classification designed to require greater national oversight and
ensure consistency in issue resolution
• Potential compliance issues are identified by the field through
examinations, Schedule M-3 reviews, etc.
• Issues prioritized and tiered based on prevalence across industry lines and
level of compliance risk
• Issue management team (composed of Compliance, Counsel, Appeals)
develops guidance/instructions on how to handle issue
• IOE with nationwide jurisdiction ensures appropriate examination
coverage and consistent approach to the development, handling, and
ultimate disposition of the issue.
LMSB industry issue focus/tier strategy
(cont.)
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Tier I issues are issues of high strategic importance
– Large number of taxpayers, significant dollar risk,
substantial compliance risk, and/or high visibility
– Well established legal positions and/or LMSB direction
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Tier II issues involve areas of potential high-noncompliance and/or significant
compliance risk
– Law is fairly well established, but there is a need for
further development, clarification, direction and
guidance on LMSB’s position
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Tier III issues represent the highest compliance risk for a particular industry
segment
– Require consistent treatment for taxpayers within the industry
LMSB industry issue focus/tier strategy – tier
1 issues
• Domestic Production Deduction
• Research Credit Claims
• Transfer of Intangibles
Offshore/Cost Sharing
• Foreign Tax Credit Generators
• Foreign Earnings Repatriation
• Mixed Service Costs*
• Section 118 Abuse*
• Section 936 Exit Strategies
* Issue or sub-issue moved to
“monitoring status”
• Section 162(f) - Government
Settlements*
• International Hybrid Instrument
Transactions*
• U.S. Withholding Agents - §1441:
Reporting and Withholding
• All “Listed Transactions”
• Two other “Tax Shelters”
– Distressed Asset/Debt
– Redemption Bogus Optional
Basis
LMSB industry issue focus/tier strategy
– tier 2 issues
• Backdated stock options*
• Casualty loss: single identifiable
property/capital vs. repairs
• Cost-sharing-stock based
compensation
• Enhanced oil recovery credit
(§43)
• Extraterritorial income exclusion
effective date and transition rules
• Gift cards: deferral of income
• Health care accounting issues:
contractual allowance
• Interchange merchant discount
fees
• Non-performing loans
• Specific liability loss, IRC §172(f)
• Super completed contract
method
• Upfront fees, milestone payments
and royalties in the biotech and
pharmaceutical industries
* Issue or sub-issue moved to
“monitoring status”
LMSB industry issue focus/tier strategy
– tier 3 issues
Communication, Technology, and Media
• Carriage/Launch Fees Paid to Cable/Satellite/Television Operators by
Programmers/Content Providers
• Amortization of Intangibles - Licensed Program Contract Right
Financial Services
• Real Estate Mortgage Investment Conduits (REMICs)
• Premium Deficiency Reserves
Heavy Manufacturing and Transportation
• Motor Vehicle Dealerships and IRC 263A (Uniform Capitalization/UNICAP)
• Loyalty Programs in Service Industries
LMSB industry issue focus/tier strategy
– tier 3 issues (cont.)
Natural Resources and Construction
• Delay Rentals
• Section 198 Expensing Of Environmental Remediation Costs (Federal
Brownfield Tax Incentives)
Retailers, Food, Pharmaceuticals, and Healthcare
• Cost Segregation Studies
• Vendor Allowances
How the IRS collects information
(cont.)
• Information Document Requests (IDRs) (Form
4564) – for specific information on an issue under
Exam (voluntary)
• Interviews of taxpayers/officers/employees or
other persons (IRC §7602(a)(2))
• Summons
– To taxpayer for records (IRC §7602(a)(1))
– Third-party record-keepers (IRC §§7602(a)(2) and
7609)
– John Doe (IRC §§7602(a)(3) and 7609)
How the IRS collects information
(cont.)
• Summons enforcement (IRC §7604)
– Department of Justice must file summons
enforcement petition.
– Appropriate district court has jurisdiction to
compel production of documents and/or
witnesses.
– Failure to comply can result in legal sanctions.
Audit management
• Request copy of audit plan early in process
• Participate in joint audit planning process (LMSB taxpayers)
• Protocol should be established for working with the agent such as:
– Who he/she can deal with
– Who can bind company
• All discussions should be in writing
– Maintain a paper trail of all questions and answers
• Establish internal processes to control flow of information to IRS
– Example: Log of IDRs and responses
Making adjustments
• Revenue agent applies law to facts
• If appropriate, revenue agent sends Notice of Proposed
Adjustment (NOPA), Form 5701, to taxpayer
– If taxpayer agrees – signs, dates copy of NOPA and sends
back to IRS
– If taxpayer disagrees, can:
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Mail additional information for IRS to consider
Discuss position with examiner or examiner’s supervisor
Request Fast Track (Rev. Proc. 2003-40)
Await Issuance of 30-day letter
Request conference with Appeals (Pub. 3498)
Do nothing and get 90-day letter
Making adjustments (Cont.)
• If taxpayer disagrees with NOPA, receives a 30day letter:
– Advises taxpayer of right to appeal
– If taxpayer agrees, signs Form 870, Waiver of
Restrictions on Assessment
• Immediate assessment of deficiency
• Waive right to go to Tax Court
– If taxpayer disagrees, can file a protest and go to
Appeals
• Form 4549: Computations
– Issued with the revenue agent’s report reflecting a
deficiency or over assessment as a result of the exam
Appeals
Role and mission of appeals
• Appeals’ stated mission is to resolve tax
controversies:
– Without litigation
– On a basis that is fair and impartial to both the
government and the taxpayer
– In a manner that will enhance voluntary
compliance and public confidence in the integrity
and efficiency of the IRS
Assessment
Statute of limitations (§6501)
• General rule: assessment must be made
within three years from date return was filed
– Must be a valid return to start SOL
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Contains all data necessary to compute and assess tax
Items of gross income, deductions, credits, etc.
Proper accounting period and accounting methods
Properly executed
– Amended returns have no effect
– Taxpayer has burden of proof
Statute of limitations (§6501) (cont.)
• If return timely mailed but received by IRS
after due date:
– Filing date = postmark date, NOT received date
• If return sent by registered or certified mail:
– Mail receipt = proof of mailing
• When due date of tax return is Saturday,
Sunday, or legal holiday:
– Return mailed on next business day is timely
Statute of limitations (§6501) (cont.)
• Tax returns filed before due date are deemed
filed on the due date
• Tax returns filed after due date, with or
without extension:
– Deemed filed when return received by IRS
– But, if taxpayer has valid extension and return was
timely filed under timely mailed rule:
• Deemed filing date = postmark date
Statute of limitations (§6501) (cont.)
• Exceptions under §6501(c)(4) (no SOL):
– False return or no return or willful attempt to
evade tax
– Extension by agreement
• For income taxes, Forms 872 or 872-A
– Form must be signed before expiration of SOL
– Other exceptions
• Exceptions for certain carryback items
(§6501(h-k))
Types of assessment
• Deficiency: triggered by the statutory notice of
deficiency
– See §§6111, 6212 and 6213
– Before assessing tax, IRS must wait either:
• Until time for taxpayer to file a Tax Court petition
expires
• Sixty days after judgment of a Tax Court becomes final
Types of assessment (cont.)
• Summary
– Math errors
– Tentative carryback adjustments
– Assessment of amount paid
• Jeopardy (§6861)
• Termination (§6851)
Definition of deficiency
• IRC §6211(a) – the amount by which the tax
imposed exceeds the excess of:
– The sum of:
• The amount shown as the tax by the taxpayer on his return,
if return was made by the taxpayer and an amount was
shown as the tax by the taxpayer thereon; plus
• The amounts previously assessed (or collected without
assessment) as a deficiency, over
– The amount of rebates defined in Subsection (b)(2),
made
• IRC §6211(b)(3) – determination by IRS of correct
tax liability (if no return filed)
Statutory notice of deficiency
• Statutory Notice of Deficiency – IRC §6212
– Ticket to tax court
• Time limit for filing petition with Tax Court
– If taxpayer inside United States, 90 days
– If taxpayer outside United States, 150 days
• Purposes for Notice of Deficiency:
– Gives taxpayer notice that IRS intends to make an
assessment of additional tax
– Gives taxpayer opportunity to contest determination in Tax
Court
– Provides Tax Court with jurisdiction to determine true tax
liability
– Gives IRS ability to assess and collect deficiency if taxpayer
does not go to court
Section 6011: Reportable transactions
Reportable transactions
• Treas. Reg. §1.6011-4
– Identifies reportable transaction categories
– Explains taxpayer disclosure requirements
– Not tax shelter regulations, per se
– Focus on greater transparency with respect to tax
reporting
• August 2007 final regulations are generally
effective for transactions entered into on or
before 3 August 2007
Reportable transactions: categories
• August 2007 final regulations identifies five
reportable transactions categories and one
proposed category
– Listed transactions
– Section 165 loss transactions
– Transactions of interest
– Confidential transactions
– Contractual protection transactions
– Patented transactions (Proposed)
Listed transactions
• Corporate/Partnership
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Foreign tax credit planning
BOSS transactions
Fast-Pay Stock
Section 351 contingent liability
Intermediary transactions
Section 302 basis shifting
CARDS transactions
• Insurance
– Section 351 contingent liability
(as above)
• Corporate/Partnership
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Inflated partnership basis
Partnership straddles
Guam trust
ASA investerings
Partnership guaranteed
payments
– S corp income shifting
– S corp securities allocations
• Leasing
– Lease in, lease out
– Lease stripping
Listed transactions (cont.)
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Compensation/
individual planning
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401(k) accelerator
Multiple employer welfare funds
Stock compensation transactions
S corporation ESOPs
Offshore deferred compensation
Collectively Bargained Welfare Funds
(491A)
Compensatory stock option transfers
to related persons
Abusive Roth IRA
Section 412(i) retirement plans
Loss importation transaction
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Financial instruments
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Debt straddles
Notional principal contracts
Offsetting foreign currency options
Loss Importation Transaction
Trusts
– Charitable remainder trusts
– Contested liability trusts
– Abusive Trust Arrangements Utilizing
Cash Value Life Insurance Policies
Purportedly to Provide Welfare
Benefits
– Distressed Asset Trust (DAT)
transaction
Transaction of interest
• A Transaction of Interest is defined as “a transaction that is the same as or
substantially similar to one of the types of transactions that the IRS has
identified by notice, regulation or other form of published guidance as a
transaction of interest.”
• These are transactions that the Treasury and the IRS believe have a
potential for tax avoidance or evasion, but for which Treasury and the IRS
do not have enough information to determine whether the transaction
should be identified specifically as a tax avoidance transaction.
• Taxpayer’s participation in a transaction of interest will be determined in
the published guidance that identifies the transaction of interest.
• Effective for transactions entered into on or after 2 November 2006.
Section 165 loss transactions
• Any transaction resulting in the taxpayer claiming a loss
under §165 above specified minimum amounts:
– $10 million in any one year or $20 million in any
combination of taxable years, for corporations and
partnerships that have only corporate partners
– $2 million in any one year or $4 million in any combination
of taxable years for all other partnerships
– $2 million in any one year or $4 million in any combination
of taxable years for individuals, S corporations, or trusts
– $50,000 in any single tax year for individuals or trusts if the
loss arises with respect to a §988 foreign currency
transaction
Section 165 loss transactions (cont.)
• Cumulative Losses:
– Losses claimed in the taxable year that the transaction is
entered into and the five succeeding tax years
– Losses from sale or disposition transactions (for example,
loss from a sale or exchange of a partnership interest
under §741)
• In assessing a §165 loss in a part year or combination
of tax years, do not take into account offsetting gains
or other income or limitations (for example, do not
take into account capital loss limitations or the §165(d)
limitation relating to wagering losses) but must
aggregate losses from the same transaction
Rev. Proc. 2004-66
• Losses from assets with qualifying bases are not taken into account when
determining whether a transaction is reportable. Basis is qualifying if it is:
– Equal to, and determined solely by reference to, cash paid;
– Determined under §358 by reason of being received in an exchange to which
§§354, 355, or 361 applies;
– Determined under §1015;
– Determined under §1031(d) and any debt instrument issued or assumed by
the taxpayer is treated as a payment in cash;
– Adjusted under §961 or Reg. §1.1502-32; or
– Adjusted under §1272(d)(2) or §1278(b)(4).
• Also, an amount included as compensation under §83 by the taxpayer will
be treated as an amount paid in cash by the taxpayer for an asset if the
amount is included in the taxpayer’s basis.
Rev. Proc. 2004-66 (cont.)
• Eleven types of losses under §165 are not
taken into account, including:
– A loss arising from the sale to a person other than
a related party (within the meaning of §§267(b) or
707(b)) of property described in §1221(a)(4) in a
factoring transaction in the ordinary course of
business.
– A loss arising from the disposition of an asset to
the extent that the taxpayer’s basis in the asset is
determined under §338(b).
Confidential transactions
• A transaction is considered confidential if:
– The taxpayer’s advisor is paid at least $250,000 in
fees ($50,000 for certain taxpayers)
– The advisor limits the taxpayer’s disclosure of the
US federal tax treatment or the tax structure of
the transaction
– Limitation on disclosure protects confidentiality of
advisor’s tax strategy
Contractual protection transactions
• Transactions with contractual protections are
transactions for which:
– The taxpayer has the right to a full or partial
refund of fees if the intended US federal tax
consequences are not sustained
– Fees are contingent on the taxpayer’s realization
of US federal tax benefits
• All facts and circumstances are considered
when determining if fee is refundable or
contingent.
Rev. Proc. 2007-20 (modifies and
supersedes Rev. Proc. 2004-65)
• Provides that certain transactions with contractual
protection are not reportable transactions
• Disclosure obligation does not apply to:
– Transactions in which the refundable or contingent fees
are based on the taxpayer’s liability for taxes other than
federal income taxes
– Transactions where fee related to work opportunity credit,
welfare-to-work credit, Indian employment credit, lowincome housing credit, new markets tax credit,
empowerment zone employment credit, renewal
community employment credit or employee retention
credit
Penalties
• Section 6707A penalty for failure to disclose a
reportable transaction
– Penalty for other than listed transactions
• $10,000 in case of natural person
• $50,000 in any other case
– Penalty for listed transactions
• $100,000 in case of natural person
• $200,000 in any other case
– Strict liability for listed transactions (No reasonable cause
defense)
– SEC reporting requirements
– Only Commissioner may rescind penalty for reportable
transactions that are not listed transactions
Penalties (cont.)
• Section 6662A accuracy-related penalty on understatements relating to
reportable transactions
– Penalty
• 20% of the amount of understatement if disclosed
• 30% of the amount of understatement if undisclosed listed and other avoidance
transactions
– Reasonable cause vs. strict liability (§6664)
• Disclosure
• Substantial authority for position
• Reasonable belief that position was more likely than not the proper treatment
– Disqualified opinion
– Disqualified tax advisor
– Material advisor
ADR options
Pre-return filing
Before the
return
is filed
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ADR
Audit process (post-filing)
Provides value through:
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Lower admin costs
Speedier resolution
More favorable
settlements
Compliance assurance process
Pre-filing agreement
Industry issue resolution
Private letter ruling
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Under exam
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Limited issue focused exam
Accelerated issue resolution
Early referral appeals
Fast track settlement
Post-appeals process
Appeals
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Mediation
Arbitration
Compliance assurance process (CAP)
• Announcement 2005-87
• 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 Sarbanes-Oxley
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 and participation
remains by invitation only.
Industry issue resolution (IIR) program
• Rev. Proc. 2003-36
• 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 reviews submissions only semi-annually
• An IIR team of IRS and Treasury personnel gathers
relevant facts from taxpayers and stakeholders
for each issue selected, with goal of
recommending guidance to resolve the issue
Letter rulings
• Rev. Proc. 2009-1, Rev. Proc. 2009-3, Rev. Proc.
2009-7
• Written statement issued to a taxpayer by the IRS
national office that interprets and applies the tax
laws to the taxpayer’s specific set of facts
• A taxpayer ordinarily may rely on a letter ruling
received from the IRS subject to certain
conditions and limitations, but:
– May not rely on a letter ruling issued to another
taxpayer
– May not rely if letter ruling later found to be in error
LIFE process
• IR-2002-133
• Limited Issue Focus Examination (LIFE) process is
a limited scope examination in which taxpayers
and the IRS sign a memorandum of
understanding (MOU), agreeing to focus only on
certain material issues.
– Presents opportunities for clients 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
Fast track settlement (FTS)
• Rev. Proc. 2003-40
• FTS uses mediation techniques to help the IRS
and the 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
applicable appeal rights.
• Once an agreement through FTS is reached, the
settlement cannot be modified after the FTS
session report is signed.
Accelerated issue resolution (AIR)
• Rev. Proc. 94-67
• 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.
• AIR does not give the case manager additional
settlement authority, but it does have definite
advantages in resolving issues affecting other tax years.
Early referral appeals
• Rev. Proc. 99-28
• 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
• Designed to resolve cases more expeditiously
through the field and Appeals working
together
Simultaneous appeals/competent
authority
• This procedure encourages taxpayers to request
competent authority assistance and the
participation of Appeals while a case is under the
Examination division’s jurisdiction.
• Revenue Procedure 2002-52 contains the
competent jurisdiction and competent authority
procedures.
• Section 8 of Rev. Proc 2002-52 specifies the
circumstances under which the simultaneous
appeals/competent authority procedure may be
requested and describes the role of Appeals.
Mediation
• Rev. Proc. 2002-44
• Mediation is a 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.
• Though the mediator has no authority to impose a
decision, successful mediation can save time and
money by resolving the case without litigation.
Arbitration
• Rev. Proc. 2006-44
• 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 be used only to resolve
factual disputes.
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