IRS EXAMINATIONS & PROCEDURES

Agenda

• 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 chartChief Counsel

Appeals

National Taxpayer Advocate

EEO and Diversity

Research, Analysis,and Statistics

Communications and Liaison

CommissionerChief of Staff

Services and Enforcement

Operations Support

Small Business /

Self Employed

Large and Mid-size Business

Tax Exempt andGov’t Entities

Criminal Investigation

Chief InformationOfficer

Agency-wideShared Services

Chief Financial Officer

Human Capital Officer

Mission Assurance

Wage and Investment

Office of Professional

Responsibility

WhistleblowerOffice

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

• 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. Service center2. Correspondence3. Office 4. 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.)

• 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• 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

• Tier III issues represent the highest compliance risk for a particular industry segment– Require consistent treatment for taxpayers within the industry

• 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

• 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* Issue or sub-issue moved to “monitoring status”

LMSB industry issue focus/tier strategy – tier 1 issues

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:

• 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 30-day 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

• 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

– 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– 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.)• Compensation/

individual planning– 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

• Financial instruments– 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, low-income 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 optionsPre-return filing► Compliance assurance process► Pre-filing agreement ► Industry issue resolution ► Private letter ruling

Under exam

Audit process (post-filing)► Limited issue focused exam► Accelerated issue resolution ► Early referral appeals ► Fast track settlement

Post-appeals process► Mediation ► Arbitration

ADRProvides value through:► Lower admin costs► Speedier resolution► More favorable

settlements

Before thereturnis filed

Appeals

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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