IRS-Practices-&-Procedures

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IRS-Practices-&-Procedures

  1. 1. 47thBANK & CAPITAL MARKETS TAX INST IT U T Eannual B-2: IRS PRACTICES & PROCEDURES Fantasia C-F November 8th, 3:45pm – 5:15pm 47th ANNUAL BANK & CAPITAL MARKETS TAX INSTITUTE DISNEY CONTEMPORARY HOTEL Speakers: BOB ADAMS PATTI BURQUEST DEAN M. FISCHBECK SUSANNE MARIE MULLER 47 BANK I N S T I T U MARKET th annual TA X & CAPITAL TE NOVEMBER 7-9, 2012 E.COM WWW.BANKTAX I N ST I T U T D I S N E Y C O N T E M P O R A RY H OT E L | ORLANDO
  2. 2. 10/26/2012IRS practice & procedure update:New developments affecting financial institutions andfinancial services companies © 2012 McGladrey LLP. All Rights Reserved. © 2012 McGladrey LLP. All Rights Reserved.Today’s Presenters Panelist Co-Moderator Bob Adams Dean Fischbeck Partner Senior Vice President IRS Practice and Procedure Bank of America Washington National Tax Federal Tax Audit and Controversy Executive bob.adams@mcgladrey.com dean.fischbeck@bankofamerica.com Panelist Co-Moderator Patti Burquest Susanne Muller Partner Director, Senior Tax Counsel Tax Controversy Services Citigroup Washington National Tax mullers@citi.com patti.burquest@mcgladrey.com 1 © 2012 McGladrey LLP. All Rights Reserved.Agenda IRS headlines affecting examinations - Tiered issue process ends - Network approach introduced (IPGs/IPNs) - Messaging from the top IRS examination program developments and issues - Quality Examination Process - Managing “draft” IDRs and key dates - Planning for issue resolution during the examination - New rapid appeals program Update on proactive IRS programs - Pre-Filing Agreements - The new phases of the Compliance Assurance Process - Industry Issue Resolution 2 © 2012 McGladrey LLP. All Rights Reserved. 1
  3. 3. 10/26/2012Recent IRS headlines © 2012 McGladrey LLP. All Rights Reserved.Headline: Tiered issue process ends LB&I commissioner on Aug. 27, 2012 announces the end of the tiered issue process - Effective immediately, all Tier I, II and III issues are no longer tiered - Each issue should be risk-assessed and examined in the same manner as any other issue - Resolution of these issues is now in the hands of the local team handling the examination 4 © 2012 McGladrey LLP. All Rights Reserved.Headline: IDDs are withdrawn - All tiered issue Industry Director Directives (IDDs) are withdrawn and should no longer be consulted or followed - All guidance tools included with the IDDs or relevant to risk assessing the issues continue to be available to the examination team - References to tiered issues in IRS administrative guidance, including the Internal Revenue Manual, coordinated issue papers or industry guides are no longer valid - After further review, administrative guidance will be updated and revised 5 © 2012 McGladrey LLP. All Rights Reserved. 2
  4. 4. 10/26/2012 Impact of tiered issue and IDD announcements  Resolution of issues is back in the hands of the Examination or Appeals teams - What about Industry Specialization Program (ISP) issues? - What about Appeals Coordinated Issues (ACIs)?  Significant IDDs affecting banks - Conformity election for bank bad debts (2001) • Suggests that staffing to examine the conformity election is not usually an effective utilization of resources; examination guidelines provided 6 © 2012 McGladrey LLP. All Rights Reserved. Impact of IDD announcement  Interchange and merchant discount fees (IDD 1 and 2, 2008 and 2010) - Instructs that the IRS will no longer challenge whether interchange fee income earned in connection with a credit card transaction by a credit card issuer creates or increases OID - However, IRS will review the OID computation and look at accounting method issues - Proforma IDRs  Nonperforming loans (2010) - Issue, if present, should be considered in all examinations of regulated, accrual-method banks - Instructs agents to follow Rev. Rul, 2007-32 and Rev. Proc. 2007-33 - Required coordination with the Banking Technical Advisor for advice and assistance - Proforma IDR 7 © 2012 McGladrey LLP. All Rights Reserved.Headline: Network approach replacestiered issue process Issue practice groups (IPGs) and international practice networks (IPNs) - New knowledge management strategy - Change from single technical specialist (TS) model to more collaborative model involving holistic view of an issue and its resolution • Transfer, retention of knowledge - Many legacy agents are retiring or will soon - Many new agents coming from private sector • Blend into each IPG or IPN the best of the wide spectrum of experience and knowledge in LB&I and Chief Counsel 8 © 2012 McGladrey LLP. All Rights Reserved. 3
  5. 5. 10/26/2012IPGs IPGs – how they will function? - As internal consulting firms for LB&I personnel who need assistance in making decisions, perhaps other divisions - Render written advice and consultation based on collaboration within the IPG - No mandates – decision-makers to make their own decisions, do not have to report final decisions to the IPG • Copy of each IPG response also goes to the requestor’s supervisor and/or ultimate decision maker • The IPG does not follow up to see what decision is made • IPGs to record and index the advice they issue for reference in future cases with similar issue; repository of knowledge, expertise in designated subject areas 9 © 2012 McGladrey LLP. All Rights Reserved.IPGs (cont.) IPGs – how they will function? - Example. Team manager seeks from an IPG some advice or the confirmation of the applicability of the law to a set of facts in an audit situation. Members of the IPG would discuss the matter and within five days render a written memo of advice that is responsive to the team manager’s question or concern. The team manager then makes a decision with the benefit of the advice in hand, but the team manager could decide differently. There would be no follow-up by the IPG to disturb the team manager’s decision since the team manager is the owner of the audit and is supposed to make the final decisions concerning the resolution of issues 10 © 2012 McGladrey LLP. All Rights Reserved.IPGs (cont.) IPGs – makeup of an IPG - Experts in the particular subject matter area - Will include • The current subject matter TS (who may be the coordinator) • Senior auditors who have deep practical experience auditing the subject • Less-senior auditors that have good practical experience auditing the subject • Counsel that is dedicated to LB&I • Others with expertise in the subject, like agents recently hired from the private sector with relevant hands-on experience 11 © 2012 McGladrey LLP. All Rights Reserved. 4
  6. 6. 10/26/2012IPGs (cont.) Pilot program - currently 11 IPGs 1. Changes in accounting method 2. Deductible and capital expenditures 3. Non-life insurance 4. Life insurance 5. RICs, REITs and REMICs 6. Inventory costs and accounting 7. Flow-throughs (partnerships and TEFRA, S corporations and cooperatives) 8. General business credits, including R&E credit 9. Financial instruments 10. Penalties 11. General corporate issues (income, losses and consolidated returns, corporate distributions and adjustments, executive compensation) 12 © 2012 McGladrey LLP. All Rights Reserved.IPNs IPNs - Similar to IPGs in some respects • Transfer, retention of knowledge • Blend into each practice group or network the best of the wide spectrum of experience and knowledge in LB&I and office of Chief Counsel • Collaboration - Different in that: • IPNs will focus on broader subject matter areas that generally align with newly identified areas of emphasis in LB&I’s international strategy • Based on how taxpayers do their tax planning for international activity 13 © 2012 McGladrey LLP. All Rights Reserved.IPNs (cont.) Commissioner Doug Shulman, ABA Joint Fall Meeting, Sept. 15, 2012 - “Historically, IRS pursued international issues through the lens of individual code sections . . . and that must change. For example, when a U.S. corporation shifts income to a low-tax jurisdiction, you have to look at the entire structure that was created to accomplish this. You have to understand the overall planning paradigm. You have to ask the questions that get right to the heart of the matter. - Whats motivating the company? What are the benefits? What are the most aggressive positions? How are they managing tax exposure? In other words, why are they trying to do this? - Put another way, were shifting our approach to be more strategic, and to view taxpayers through the prism of their business objectives and tax planning strategies." 14 © 2012 McGladrey LLP. All Rights Reserved. 5
  7. 7. 10/26/2012IPNs (cont.) LB&I International Function IRS Commissioner Commissioner Large Business & EOI Program IRS Deputy International Commissioner for Treaty Unit Services & Enforcement Deputy Commissioner JITSIC (International) Foreign Posts Assistant Deputy Comm’r (Int’l) Service-wide Strategy Director, International Director, International Director, Transfer Individual Compliance Business Compliance Pricing Operations (IIC) (IBC) International International Exam Function APMA Transfer Pricing Exam Function Program Practice 15 © 2012 McGladrey LLP. All Rights Reserved.IPNs (cont.) 16 © 2012 McGladrey LLP. All Rights Reserved. IPNs (cont.)  It can be seen from these figures that International has organized its areas of emphasis in accordance with the areas taxpayers might focus on when doing international tax planning 17 © 2012 McGladrey LLP. All Rights Reserved. 6
  8. 8. 10/26/2012Impact of IPGs/IPNs on the Banking and FinancialServices Industry  Opportunity for industry to bring commercial knowledge to IPGs/IPNs? - IRS - taxpayer collaboration - Roundtables, focus groups  Will IPGs, IPNs share advice, resolution parameters?  Will speedier formal guidance result, perhaps?  Team manager is once again the Decision maker - Industry may have to manage consistency across country • Cite previous IPG/IPN advice, resolution parameters  Industry may want more IIRs - What types of issues lend themselves to IIRS? - What types of issues do not? © 2012 McGladrey LLP. All Rights Reserved. Messages from the top  Remarks of Steven T. Miller, IRS Deputy Commissioner, Service and Enforcement (March 26, 2012, TEI Mid- Year Conference) - IRS will remain a visible and vibrant enforcement presence in the large corporate sector - LB&I is requesting Appeals to send back cases where taxpayers bring significant new facts or information to light for the first time in Appeals, so that LB&I can consider the new facts - IRS will continue to ramp up on international - IRS will move more deeply into the mid-market – firms and partnerships between $10 and $250 million in assets - IRS will find more resources to examine and study financial products 19 © 2012 McGladrey LLP. All Rights Reserved. Messages from the top (cont.)  Remarks of Heather Maloy, Commissioner, LB&I (May 20, 2012, ABA Tax Section Meeting) - The goal of the government should not be to win, but instead to find and follow the correct interpretation of the law - Transparency, for the IRS, means that taxpayers should know at the beginning, middle and end of the examination, the issues the examiner is considering raising and the legal arguments the examiner is relying on and the examiner’s views on the issue - If others in the organization are consulted to develop a position, the fact should be shared with the taxpayer, and if the taxpayer wants to speak to those individuals, it should be arranged 20 © 2012 McGladrey LLP. All Rights Reserved. 7
  9. 9. 10/26/2012Messages from the top (cont.) Remarks of Ruth Perez, Deputy Commissioner of SB/SE, (Sept. 14, 2012, ABA Tax Section Meeting) - LB&I and SB/SE are developing a joint strategy for addressing partnership issues - The IRS envisions a three-tier approach that involves workload and issue identification, as well as additional training for agents 21 © 2012 McGladrey LLP. All Rights Reserved.Impact of IRS management messages on IRSexaminations Increased areas of focus - Pass-throughs - Mid-market - International - Financial products Transparency initiatives - Two-way street - More taxpayer access to decision makers 22 © 2012 McGladrey LLP. All Rights Reserved.IRS examination processissues © 2012 McGladrey LLP. All Rights Reserved. 8
  10. 10. 10/26/2012The Quality Examination Process (QEP) Steps in the QEP - Pre-audit planning; review of publicly available information and other IRS-only information (transcripts, etc.) - Preliminary meetings and discussions; meetings with the taxpayer to discuss roles, expectations and responsibilities; IRS introduction of the rules of engagement (IRM 4.5.11); IRS discussion of a communication agreement (Form 4764 – IRS examination plan) - Issue initial information document request (IDR) – for examination planning and risk analysis 24 © 2012 McGladrey LLP. All Rights Reserved.Steps in the QEP (cont.) - Formal opening conference held to discuss examination plan; establishment of timeframes and milestones and the monitoring of progress for the examination plan; establishment of exam team site requirements and taxpayer-provided arrangements (office space, internet access, building security, information data/security) - Additional meetings held as necessary; introduction of specialist resources, including IRS counsel, technical advisors, etc. - Issuance of mandatory IDRs: tax shelters, transfer pricing - Taxpayer advised of potential examination areas/issues and business units it plans to review - Sign examination plan that addresses timeframes, response times, access to records and source documents 25 © 2012 McGladrey LLP. All Rights Reserved.Using the QEP to your advantage Note important dates (completion of field work, last IDR, etc.) and timeframes (IDR response times, responses to Form 5701) Use these timeframes to keep exam on track Make requests of your own - Request “LIFE” or “LIFE-like” agreements/approach - Coordination of all IDRs prior to issuance (to ensure a more focused examination) - Ensure all communications come through you - Involvement of the team manager (Note: New announcement that team managers spend 50 percent of their time in the field) 26 © 2012 McGladrey LLP. All Rights Reserved. 9
  11. 11. 10/26/2012Using the QEP to your advantage (cont.) Understand the rules of engagement and be prepared to use them (They are needed to get back on track or get issues resolved) Control the statutes of limitation and extensions thereof 27 © 2012 McGladrey LLP. All Rights Reserved.Managing problem IDRs The overbroad IDR The time crunch IDR The “close but off” IDR Standardized IDRs IDRs that ask for privileged or confidential information 28 © 2012 McGladrey LLP. All Rights Reserved.Planning for issue resolution during theexamination Resolving issues during the examination - Agreed, partially agreed, unagreed • When can the IRS assess tax? • Affirmative issues, offsets and refunds • Penalties • Technical advice and chief counsel advice • Alternative Dispute Resolution (ADR) approaches - Fast track (settlement and mediation) - Early referral to Appeals - IRS Appeals 29 © 2012 McGladrey LLP. All Rights Reserved. 10
  12. 12. 10/26/2012New rapid appeals program Resolving issues at Appeals - Settlement negotiations: Agreed or statutory notice • Rapid appeals - Post-appeals mediation - Post-appeals arbitration - Litigation 30 © 2012 McGladrey LLP. All Rights Reserved.New Rapid Appeals Program (RAP) Voluntary process for LB&I cases Appeals opening conference is a joint session, Appeals, taxpayer and LB&I Areas of agreement and disagreement are isolated, providing Appeals with an improved roadmap to begin settlement discussions Expected to be in IRM Impact - Relationship with exam team - Speed of settlement process - Future exam cycles 31 © 2012 McGladrey LLP. All Rights Reserved.Update on IRSissue resolution tools © 2012 McGladrey LLP. All Rights Reserved. 11
  13. 13. 10/26/2012 Pre-Filing Agreements (PFAs) PFAs - reach agreement on contentious issue with closing agreement before the return is filed User fee of $50,000 Any taxpayer under LB&I’s jurisdiction may apply Eligible issues – factual, apply well-settled law 33 © 2012 McGladrey LLP. All Rights Reserved. PFAs (cont.)  Banking issues that might “fit” the PFA model - Valuation of assets - Worthless securities and bad debts - Basis/FMV of stock acquired - Deductibility of merger/acquisition costs - Investigatory costs - Abandonment loss - Like-kind exchange - Deductibility of parachute payments - Discharge of indebtedness - Deductibility of payments to retire debt - Stock basis computation - Deductibility of fees incurred in a reorganization 34 © 2012 McGladrey LLP. All Rights Reserved. The three phases of the Compliance Assurance Process (CAP)  Six-year old pilot of CAP permanentized March 2011  Pre-CAP (like usual audits with expectation of going into CAP) provides interested taxpayers with a clear roadmap of the steps required for gaining entry into CAP  Participating taxpayers work collaboratively with IRS team to identify and resolve all tax issues before the tax return is filed each year - Full acceptance letter - Partial acceptance letter  CAP maintenance program intended for taxpayers who: - Have been in CAP - Have fewer complex issues - Have established a track record of working cooperatively and transparently with the IRS 35 © 2012 McGladrey LLP. All Rights Reserved. 12
  14. 14. 10/26/2012Industry Issue Resolution (IIR) Goal – resolve through published guidance “uncertain” issues with a broad impact (Rev. Proc. 2003-36) - Available to all SB/SE and LB&I taxpayers - Issues submitted by taxpayers, associations, etc. are screened and selected by IRS, Chief Counsel and Treasury - Cross-functional IIR team finds facts, provides analysis and recommends guidance to resolve the issue Banking and financial services issue IIRs - 2001: bad debt conformity election (Rev. Rul. 2001-59 issued) - 2004: determining interest income on non-performing loans (Rev. Rul. 2007-32 and Rev. Proc. 2007-33 issued) 36 © 2012 McGladrey LLP. All Rights Reserved.Questions © 2012 McGladrey LLP. All Rights Reserved.Today’s Presenters Panelist Co-Moderator Bob Adams Dean Fischbeck Partner Senior Vice President IRS Practice and Procedure Bank of America Washington National Tax Federal Tax Audit and Controversy Executive bob.adams@mcgladrey.com dean.fischbeck@bankofamerica.com Panelist Co-Moderator Patti Burquest Susanne Muller Partner Director, Senior Tax Counsel Tax Controversy Services Citigroup Washington National Tax mullers@citi.com patti.burquest@mcgladrey.com 38 © 2012 McGladrey LLP. All Rights Reserved. 13
  15. 15. 10/26/2012DisclaimerThe information contained herein is general in nature and based on McGladrey LLP is the U.S. member of the RSM International (“RSMI”) McGladrey LLPauthorities that are subject to change. McGladrey LLP guarantees neither the network of independent accounting, tax and consulting firms. The memberaccuracy nor completeness of any information and is not responsible for any firms of RSMI collaborate to provide services to global clients, but areerrors or omissions, or for results obtained by others as a result of reliance separate and distinct legal entities which cannot obligate each other. Each Addressupon such information. McGladrey LLP assumes no obligation to inform the member firm is responsible only for its own acts and omissions, and not thosereader of any changes in tax laws or other factors that could affect information of any other party. Citycontained herein. This publication does not, and is not intended to, provide McGladrey, the McGladrey signature, The McGladrey Classic logo, The Phonelegal, tax or accounting advice, and readers should consult their tax advisors power of being understood, Power comes from being understood andconcerning the application of tax laws to their particular situations. Experience the power of being understood are trademarks of McGladrey LLP. 888.811.1023 © 2012 McGladrey LLP. All Rights Reserved.Circular 230 Disclosure www.mcgladrey.comThis analysis is not tax advice and is not intended or written to be used, andcannot be used, for purposes of avoiding tax penalties that may be imposedon any taxpayer. © 2012 McGladrey LLP. All Rights Reserved. 14

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