Tax Executives Institute--Internal Revenue Service Large and Mid-Size Business Division liaison meeting.

February 3, 2004

On February 3, 2004, Tax Executives Institute met with Deborah Nolan, Commissioner of the IRS' s Large and Mid-Size Business Division, and other representatives of LMSB. TEI President Raymond G. Rossi led the Institute's delegation to the meeting. The agenda for the meeting is reprinted below. Minutes of the meeting will be published in a future issue of the magazine.

I. Introduction

II. The Audit Breakthrough Initiative

a. Currency

* IRS Commissioner Everson has announced an initiative for making audits more current. A recent survey of TEI members reveals that the push for currency is moving forward in the field. TEI supports this initiative, but cautions that a balanced approach to enforcement, and to taxpayer rights, is needed. Flexibility and communication remain the keys to efficient and timely audits.

* To further its currency goal, LMSB has held meetings to engineer a fundamental shift in the agency's approach to and process for ensuring compliance with the tax laws for large corporate taxpayers. TEI is pleased that several TEI members and staff participated in the meetings on December 18 and January 15.

* During the liaison meeting, we invite discussion of the breakthrough initiative and other related issues, including:

* The effect of the currency initiative on taxpayers. already undergoing a Limited Issue Focused Examination (LIFE). Is it intended to affect agreements already worked out with taxpayers? Several TEI members have reported that the time limits agreed upon in their LIFE memorandum of understanding have been adjusted to respond to this new initiative.

* Corporate governance issues. One topic discussed during the reeingeering meetings is how corporate governance developments (at the Securities and Exchange Commission and other agencies) may affect tax administration. Has LMSB been in touch with other government agencies to discuss such issues? Will the IRS request copies of a taxpayer's documentation prepared for purposes of complying with the Sarbanes-Oxley Act? During the liaison meeting, we request a status report on this aspect of the initiative.

* The effect of becoming more current on Appeals. Speeding up the conduct of examinations will undoubtedly have an effect on Appeals. What steps are being taken to ensure that Appeals has the resources it needs to consider cases in a timely and efficient manner?

* The time required to respond to an information document request. One proposal under consideration is a 15-day response time. TEI urges LMSB to recognize that not all IDRs can be responded to in such a short time frame. For example, complex issues relating to net operating loss carry forwards or information regarding a foreign subsidiary may not easily be addressed in a 15-day--or even 30-day--response time. In addition, information requested from business units may require more time to produce. Finally, response time may depend on what other matters the tax department is contending with, e.g., year-end closings.

The audit team and the taxpayer should work together to ensure an audit plan that is reasonable--as envisioned by the LMSB-TEI Joint Audit Planning Process initiative. In addition, LMSB should institutionalize a discussion of IDRs with the taxpayer before they are issued. Narrowly focused, clear IDRs can be answered more quickly that those that offer a broad-brush approach.

* The need to hold LMSB examiners to the same standards as taxpayers. If the currency initiative is to succeed, the audit team must respond to taxpayers in a timely manner. Are steps being taken to include such a measurement in the managers' and agents' performance evaluations?

* The use of specialists. LMSB should consider additional training in respect of its specialists. Although a recent informal survey of TEI members showed that LMSB's currency efforts are beginning to have some effect on speeding up audits, our members still report that the integration of specialists into the audit process remain a problem. In addition, the increased use of specialists in prefiling activities--as well as training and vacation activities--has made scheduling such personnel for examinations more problematic.

Additional training in areas such as accounting principles, the latest technology, and business practices is also needed for these functions. What steps are being taken to ensure that specialists are used effectively mid efficiently in the audit process? In addition, more guidance may need to be issued to Team Managers explaining their role in overseeing the specialists.

b. Schedule M Project

* TEI has been working with LMSB on a project to consider changes to the Schedule M, perhaps adding two new schedules or a new form to address permanent and timing differences in more specific detail. A meeting on the project is scheduled for January 23 and we understand a draft of the revised schedule will be issued on January 29. We also understand that the revised form will be applicable for 2004 returns. During the liaison meeting, we invite a discussion of this project, including how these and other reengineering initiatives will affect our members.

c. Tax Shelters 

* In December, the IRS and Treasury Department issued final regulations that narrow the "confidential transaction" category of reportable transactions that must be disclosed under section 6011 of the Internal Revenue Code. The new regulations also remove the presumption against confidentiality for transactions containing a provision for a "tax confidentiality" waiver.

TEI commends the government for working with taxpayers to make these regulations more manageable.

* Another means of narrowing the focus of the regulations would be to create an exemption for tax planning transactions aimed solely at reducing foreign tax liabilities. Has the government considered such a clarification?

* TEI members report an increased interest in tax shelters at the audit level, particularly in respect of disclosure and the issuance of a standardized IDR. What has been the overall response to the increased activity? How will LMSB handle tax shelter disclosures and their related increase in the agency's workload? What level of reasonableness will be applied to the findings? How will the IRS handle protective disclosures in respect of any requests for tax accrual workpapers?

* At end of December, the IRS issued proposed changes to Circular 230. What is the intended effect of these rules on opinions issued by in-house counsel on tax planning ideas?

III. The APA Program

* One initiative begun more than a decade ago that has worked well is the advance pricing agreement (APA) program. This process permits taxpayers to work with the IRS to determine the appropriate price for transferring goods and services across international borders between related entities. A study performed last year found that 86 percent of parent companies identified transfer pricing as the most important international issue they face. (1) Transfer pricing is not a tax shelter; it is the inevitable (and unavoidable) consequence of a global economy. And the APA program is designed not to "give away the store"--as some have intimated--but to reach a fair and equitable resolution of contentious issues between governments before the return is filed. As the program has expanded into the use of more bilateral agreements, it has eased pressures on competent authorities and taxpayers over the inevitable "tug of war" that occurs when several governments claim the same revenues. TEI is concerned that recent congressional inquiries may be adversely affecting the APA program. (2) Indeed, in TEI's view, the APA program is a model dispute avoidance and resolution program that is working well in the current structure. While it is appropriate to review the program, it would be a serious error to walk away from it.

IV. Relationship Issues

* Even before the creation of the LMSB Division, the IRS began a partnership with taxpayers to provide better customer service, to reduce administrative burdens, and to ensure efficient administration of the nation's tax laws. The division has shown a commendable openness to new and different ways of doing business. The partnership has resulted in several "pre-filing" initiatives that emphasize the need to resolve issues before a return is filed. The increased attention to "front-end" activities--by the use of pre-filing agreements and industry issue resolution techniques--may reduce contentious audits and prolonged litigation.

The LMSB-taxpayer partnership has also resulted in several important initiatives to empower agents to settle cases at the lowest possible level. TEI is pleased to have participated in one recent project to develop an audit planning process, which was rolled out to taxpayers and LMSB personnel in October. The goals of the LMSB-TEI Joint Audit Planning Process are two-fold: (i) to establish accountability in executing a jointly developed audit plan and (ii) to develop an issue-focused plan that will increase audit efficiency. Other projects in which TEI members have participated include the breakthrough initiative and the Schedule M revision.

The LMSB-TEI relationship has also benefitted from the conduct of several joint educational programs to discuss issues in the various industry groups. We urge LMSB to continue to work with taxpayers to emphasize that the keys to a successful audit are communication, trust, and openness.

* One issue that has the potential for affecting affects the environment is the IRS's examination of not only the annual corporate Form 1120, but also the individual income tax returns of the top corporate executives for the years under audit. It is unclear what procedures the IRS will use to obtain these Form 1040 tax returns, since it is unlikely that the companies under audit would have the individuals' tax returns in their possession. It is also unlikely the corporate tax department would (or should) handle the executives' tax return audit. What is the scope of the initiative? What is the envisioned role of the tax department? What will the agent's reactions be to the corporate response that the tax department has no access to the individual's tax return information? If the W-2 is correct, the IRS matching program should pick up whether the executive includes the same amount on his/her individual return.

V. Conclusion

(1) See Tropin, Concern Increasing Over Lack of Uniformity in Transfer Pricing Enforcement, E&Y Says, BNA DAILY TAX REP., No. 218, at G-4 (November 12, 2003).

(2) See Moses, APA Case Processing Grinds to Halt under Senate Inquiry, Practitioners Say, BNA DAILY TAX REP., No. 11, at G-1 (January 20, 2004).