TEI Carolinas Chapter
FEDERAL CONTROVERSY UPDATE:
Recent Exam, Appeals, and
Judicial Developments
March 20, 2015
Charlotte, NC
Julie Bradlow
Moore & Van Allen
Charlotte, NC
Alex Sadler
Ivins, Phillips & Barker
Washington, DC
Agenda
 Budget pressures and impacts on IRS examinations
 Reallocating limited examination resources
 Proposed changes to LB&I examination
procedures
 IPGs and IPNs—how are they working?
 New IDR process—how is it working?
 Recent Appeals initiatives
 Recent Supreme Court cases bearing upon tax
practice and procedure
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Budget Pressures on the IRS
 FY15 budget cut $346M to $10.9B, a record low
from 2009-2014.
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“No challenge facing the IRS today is more critical than
our budget situation.” John A. Koskinen, 2/24/15.
 IRS staffing down from 100K in 2010 to 87K in 2014.
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LB&I revenue agent staffing is down 1K since 2011.
 Training spending is down from $172M in 2010 to
$22M in 2013 (but up to $48M in 2015).
 Implementation of Affordable Care Act and FATCA
provisions placing additional strains on the agency.
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“Doing Less with Less”
 Audits declining
 1.2M audits in FY14, 150K fewer than FY13 and 300K than FY10
 Large corporate audits declined 20% in 2014 to lowest level in 10
years
 Streamlining corporate audits with an issue-based focus
 LB&I taxpayers still receive over 50% of audit resources but produce
only 10% of tax revenues
 Increasing audit coverage of mid-market businesses and flow-through
entities
 191K of 296K LB&I taxpayers are flow-through entities
 IRS audited 0.8% of large partnerships compared to 27% of C corps
 Retraining portion of domestic agents to handle international issues
 Scaling back published guidance and PLRs
 CAP continues to expand, from 184 taxpayers in 2014 to 194 taxpayers in
2015.
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LB&I Coordinated Industry
Case (CIC) Pilot
 Historically, CIC cases—900 of 296K LB&I taxpayers—were
front-loaded into the compliance plan, limiting flexibility to
allocate resources to other compliance activities.
 LB&I is moving toward a risk-based model to shift the focus
from taxpayers to issues.
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Withdrawal from some CIC work
Strategic deployment of freed resources
Assigning cases based on compliance risk rather than taxpayer size
 Under the pilot program, all CIC cases would:
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Undergo a centralized classification process to evaluate return
compliance risk and identify high-risk issues
Classification process to include issue identification and written
explanations and documentation of compliance risks
Risk analysis entered into workload delivery system
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International Audits
 LB&I recognition that exposure is in international issues
 Permanent differences
 Significant profit-shifting
 Account for disproportionate share of revenues and tax gap
 Retraining domestic agents on international issues
 Recently published 46 International Practice Unit (“IPU”)
documents as “best practices,” with more to come.
 Identifying and devoting resources to “corrosive” issues.
 Transfer pricing viewed as the single highest risk for LB&I and will
stay at forefront
 Transfer Pricing Practice (TPP) provides coordinated training,
expertise, and audit resources
 Rolling out the Transfer Pricing Audit Roadmap
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Transfer Pricing Audit Roadmap
 “To provide the transfer pricing practitioner…with audit techniques and tools
to assist them with the planning, execution and resolution of transfer pricing
examinations.”
 Key principles
 Exam teams is accountable for developing facts
 Should approach as a project, with up-front research and planning
 Exam teams should learn the business, know the big picture, keep an open
mind, and not cherry pick issues
 Start-to-finish TPP and Field Counsel involvement
 Focused on building litigation-ready cases (“won or lost on the facts”
 Full and open communications with taxpayer
 Built around non-binding, hypothetical 24-month audit timeline
 Just beginning to be felt by taxpayers, with exam teams requesting early
meetings.
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Transfer Pricing Audit Roadmap
PLANNING
EXECUTION
6 Months
RESOLUTION
6 Months
14 Months
• General review
• Tax return and 5471s / 5472s, UTP,
form 926, and § 6662 documentation
• 10-K / other publicly-available info
• General IDRs
• Opening conference (starts 24-month clock)
• Orientation conference
• Financial systems
• TP overview
• Concludes w/ initial risk analysis / audit plan
• Issue presentation
• Draft NOPA presentation to taxpayer
• Discussions with taxpayer
• Issue resolution
• Final NOPA
• RP 99-32
• Case closing / RAR
• Fact finding – tailored IDRs, plant
tours and site visits, interviews, etc.
• Mid-cycle assessment / fact statement
• Issue development; concludes w/ draft NOPA
• Consideration of penalties
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QEP Revisions
 LB&I re-engineering examination procedures, see Draft
Publication 5125, to replace the Quality Examination Process
(“QEP”).
 Focusing exams on high-risk issues
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Exam team and taxpayer work together to develop examination scope
and procedures
Make the process more issue-focused to ensure resources are
allocated to the highest compliance risks
Utilize an Issue Team Approach for successful development of each
issue examined
 Limitations on informal claims
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Accept and develop informal claims only within 30 days; thereafter all
claims must be formal and filed with Service Center
Claims must comply with Treas. Reg. § 301.6402-2
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QEP Revisions
 Mandating full development of the relevant facts
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Exam team members responsible for documenting the
facts
Team members will work with the taxpayer to resolve any
facts in dispute
Intended to ensure that all relevant facts, including those
favorable to the taxpayer, are fully documented
Require written acknowledgement of facts before NOPAs
are issued
If case is closed to Appeals, and new facts are provided, the
case is returned to Exam’s jurisdiction
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QEP Revisions
 Mandating consider Fast Track Settlement for
unagreed issues
 Mandating post-examination review and critique
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Evaluate effectiveness of concluded examination
Develop recommendations for improving next
examination
Discuss problems and potential solutions
Prepare input for next cycle planning
Obtain information helpful for next examination
Separate from opening conference for next cycle
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Knowledge Management:
IPGs and IPNs
 In August 2012, LB&I announced the development of a
“knowledge management network to replace the Tiered Issue
Process”
 Issue Practice Groups (IPGs) = domestic issues
 International Practice Networks (IPNs) = international issues
 Goals
 Put decision-making responsibility back in the hands of agents
 Provide collaborative, coordinated, and easily-accessible
technical proficiency to facilitate thorough audits
 Promote efficient and consistent case management
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IPG Pilot Organizational
Structure
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S Corporations & Cooperatives
Partnerships & TEFRA
Corporate Income & Loss
Compensation & Benefits
Corporate Distributions & Adjustments
Life Insurance
Non-Life Insurance
REITS, REMICs, RICs & Banking
Deductible & Capital Expenditures
Inventory & Sec. 263A
Methods of Accounting & Timing
Business Credits
Energy & Investment Credits
Penalties
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IPG Composition and Function
 Each IPG includes one coordinator and one or more fulltime subject matter experts (SMEs).
 Collateral SMES can be revenue agents, managers,
specialists, and Counsel from LB&I and National Office.

Spend less than 25% of their direct examination time working
on IPG issues.
 Publish FAQs answering revenue agents’ questions in
advance.
 All 15 IPGs now have their own internal website.
 No policy on IPG members talking with taxpayers.
 IPG framework still a work in progress.
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IPG Experience to Date
 Exam teams are using IPGs frequently.
 Anecdotal experience varies.
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Dependent on personalities involved and relationship between
IPG and exam team.
Is the IPG acting as an advisor or advocate, facilitating or
delaying?
 Observations
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The exam team is responsible for the examination and should
not simply defer to the IPG.
You can ask to speak to the IPG and elevate if denied,
particularly where agent acting as a go-between.
Make sure the IPG has the complete picture.
Consider bringing in your own outside expert(s).
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International Matrix and IPNs
Each section is essentially an IPN.
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International Practice Units
(IPUs)
 In December 2014 LBY released 46 IPUs formalizing the
technical knowledge of IPNs.
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See http://www.irs.gov/Businesses/Corporations/InternationalPractice-Units
Goal is to provide job tools to examiners when preparing for an
audit, or when reviewing a particular transaction.
 The IPUs cover a wide range of international tax
concepts and issues; at least 20 focus on transfer pricing.
 Another 100+ IPUs are reportedly in the pipeline being
vetted and redacted for approval and publication.
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Revised IDR Procedures
 Agent must identify the issue leading to the IDR and
discuss the IDR and a reasonable time frame with the
taxpayer in advance
 Agent has discretion to grant 15-day extension.
 Thereafter, if an IDR is deemed delinquent:
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Step 1: IRS delivers Delinquency Notice within 10 days of
due date. TP has 10 days to respond. Counsel notified.
Step 2: Territory Manager issues Pre-Summons Letter to
next management level. Counsel participates. TP has 10
days to respond.
Step 3: Summons issued.
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IDR Enforcement Timeline
 From the date of the initial draft IDR to the initiation
of the summons process, the IDR process can take
approximately 140 days.
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New IDR Procedures
 Experience to date—IRS and taxpayers are adapting
to the new rules
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Fears that IDRs would be quickly escalated to summonses
generally have not been realized
Relatively few Delinquency Notices have been issued and
in those cases Pre-Summons Notices have not been
necessary
IRS believes the process works well where there is a
mutual commitment to work together and meet deadlines.
Maintaining an open dialogue and clarifying issues that arise
are key.
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Current State of Appeals
FY 2011
FY 2012
FY 2013
FY 2014
Total Staffing*
2,111
1,981
1,829
1,720
Total Receipts
148,327
135,061
123,113
113,608
Receipts Mix
% Collection
% Exam
58%
42%
55%
45%
54%
46%
53%
47%
Total Closures
142,553
144,453
131,176
115,472
*Total On-Rolls at Year End
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Appeals’ Receipts by Case Type
WORKSTREAM
FY 2013
FY 2014
44,684
40,355
Offers-in-Compromise
9,695
9,231
Innocent Spouse
4,284
3,012
Penalty Appeals
10,336
10,213
98
129
2,153
1,469
Examination/TE/GE
38,306
36,919
Other
13,557
12,280
123,113
113,608
Collection Due Process (CDP)
Coordinated Industry Cases
Industry Cases
TOTAL
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Recent Independence Projects
 Real and perceived independence from Compliance is
critical for Appeals to accomplish its mission.
 Recent projects to preserve Appeals independence
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Ex Parte Communication Rules: Rev. Proc. 2012-18 clarifies
areas of confusion, new business practices, and explains
remedies for violations
Rules of Engagement: IRM § 8.1.10.2 (6-21-12) clarifies how
Appeals participates in IRS cross-divisional meetings
Appeals Judicial Approach and Culture (AJAC) Project:
Reinforces Appeals’ quasi-judicial approach to the way it handles
cases, with the goal of enhancing internal and external customer
perceptions of a fair, impartial and independent Appeals (see
Interim Guidance AP-08-0714)
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Key Exam-Related Policy Changes
 Appeals officers are not examiners and should not assist
Compliance in case development.
 Appeals will not raise new issues except in the case of
fraud or malfeasance.
 Appeals will attempt to settle a case based on factual
hazards when the case submitted by Compliance is not
fully developed and the taxpayer has presented no new
information or evidence.
 Appeals will require that at least 365 days remain on the
statutory period of limitations on receipt of the case, and
at least 180 days upon return of the case from the
originating function.
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Key Exam-Related Policy Changes
 If a taxpayer with a non-docketed case before Appeals raises a
relevant new issue or submits new information that merits
investigation and/or requires additional analysis, Appeals will
return the case to Compliance to examine the new issue or
information.
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There must be at least 210 days remaining on the statute, or else
Appeals will not consider the new issue or information.
Also, Appeals reserves the right to keep the case if the taxpayer
“unreasonably delays the process by intentionally submitting new
information or raising new issues multiple times….”
 If a taxpayer raises a relevant new theory or legal argument
on a non-docketed case, Appeals will request review and
comment from Compliance.
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Will generally provide 45 days for LB&I cases.
Normal ex parte communication rules apply.
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Recent Supreme Court Cases

Perez v. Mortgage Bankers Ass’n (March 9, 2015)
 Department of Labor withdrew an opinion letter stating that mortgage
bankers were exempt from the FLSA and issued a new Administrator’s
Interpretation stating the opposite.
 Supreme Court reversed the D.C. Circuit:
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When an agency issues an interpretation of a regulation that differs
significantly from a previously adopted interpretation, it is not required to use
the notice and comment procedures in the APA.
Sotomayor wrote for herself, Roberts, Kennedy, Ginsburg, Breyer and Kagan;
Alito joining in part; concurring opinions by Alito, Scalia and Thomas
Concurrences expressed concerns about Supreme Court precedents giving
deference to interpretive regulations.
Scalia: “Agencies may now use these rule not just to advise the public, but to
bind them. … Interpretative rules that command deference do have the force
of law.”
May lead to reconsideration of those precedents.
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Recent Supreme Court Cases
 Direct Marketing Ass’n v. Brohl (March 2, 2015)
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Colorado’s use tax scheme required out-of-state retailers to file
information reports with the state on out-of-state purchases.
The DMA successfully challenged this statute on dormant Commerce
Clause grounds in district court.
Tenth Circuit reversed, holding that the Tax Injunction Act (“TIA”)
barred the DMA’s suit.
Supreme Court reversed the Tenth Circuit:
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TIA says that federal district courts may not “enjoin, suspend, or restrain
the assessment, levy or collection of any tax under State law where a plain,
speedy and efficient remedy may be had in the courts of such State.”
Relief sought by the petitioner would not “enjoin, suspend or restrain the
assessment, levy or collection” of Colorado’s sales and use tax.
Kennedy’s concurrence called for the Supreme Court to reverse Quill.
Also relevant to interpretation of the Anti-Injunction Act, which provides
that “no suit for the purpose of restraining the assessment or collection of
any tax shall be maintained in any court by any person.”
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Recent Supreme Court Cases
 United States v. Clarke, 134 S. Ct. 2361 (2014)
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IRS auditing Dynamo’s 2005-07 years
Dynamo refused 3rd statute extension
IRS issued four summonses prior to statute expiration; Dynamo
claimed retaliation
11th Circuit: Improper purpose allegation justifies hearing
Justice Kagan for the Court
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“[T]he taxpayer is entitled to examine an IRS agent when he can point
to specific facts or circumstances plausibly raising an inference of bad
faith. Naked allegations of improper purpose are not enough.”
“But circumstantial evidence can suffice to meet that burden; after all,
direct evidence of another person’s bad faith, at this threshold stage,
will rarely if ever be available.”
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Thank You!
JULIE M. BRADLOW
Moore & Van Allen PLLC
100 North Tryon Street
Suite 4700
Charlotte, NC 28202-4003
TEL: (704) 331-2303
FAX: (704) 409-5623
juliebradlow@mvalaw.com
ALEX E. SADLER
Ivins, Phillips & Barker
1700 Pennsylvania Ave, NW
Suite 600
Washington, DC 20006-4723
TEL: (202) 662-3456
FAX: (202) 347-4256
asadler@ipbtax.com
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