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Weekly UpdatesOn Wednesday, March 19, 2008, representatives of the New Jersey Chapter of TEI met eye-to-eye with representatives of the Internal Revenue Service at the IRS's office at Metro Park in Iselin, New Jersey. In preparation for the meeting, chapter leadership sought input from its members on the topics they would like discussed. A list was made and narrowed down to twelve items, which were submitted to the IRS in advance.
Attending for the New Jersey Chapter were President Ron Lerner, Director Glen Strobel, Institute Director Joanne Bonfiglio, and Communications Chair James Goldie. Attending from the IRS's LMSB Division were Carl A. Stewart, Territory Manager, and John G. Mezquita, Supervisory Internal Revenue Agent.
Tax Accrual Workpapers
The IRS will continue its policy of forbearance with regard to requesting tax accrual workpapers. A standard part of any audit, however, is to review the annual and quarterly filings of the company. With regard to issues disclosed in the financial statements, the IRS may issue information requests with regard to these issues. Generally speaking, the IRS will not request workpapers pertaining to discussions of the taxpayer with outside tax advisers.
Quantity and Scope of Examinations
The IRS is conducting more limited scope audits than in the past. These examinations are more "focused" in that they are directed toward areas of greater interest or significance. One objective is to address the issues that need to be addressed. Another is to obtain greater exposure, which is necessary to drive overall compliance.
Timing issues have not taken on added significance. If anything, permanent differences are more in focus.
The CAP Program
The Compliance Assurance Process (CAP) Program, formally inaugurated in Announcement 2005-87, 2005-50 I.R.B., involved 17 taxpayers nationally in 2005. In 2008, it had 70 participants. From that standpoint alone, the program has been successful. The CAP program, however, is "not for everybody." It is information-robust, and requires a free flow of information to the auditors. The goal is to put the cards on the table and resolve the issues before the filing of the return. For it to be successful, it requires the taxpayer be willing to bring transactions to the attention of the auditors, as opposed to allowing auditors to discover transactions on their own.
A relationship is needed before entering the program. It is unlikely that the IRS would accept an applicant into the program if there was a history of hidden transactions. Another reason the program is not for everybody is that the process is resource intensive. Certain taxpayers, who otherwise would be prime candidates for the program, have been unable to participate because of resource limitations indigenous to the company.
There is no generic "transaction threshold" that delineates what transactions should be brought to the auditor's attention. The threshold is different for each taxpayer.
Mr. Stewart took care to emphasize that acceptance into the program does not mean open audit cycles will be leapfrogged. Stated differently, a taxpayer, having three open years, that is accepted into the program should not expect these three years to escape audit. Entering the program does not reduce audit activity in years not covered by the CAP program.
Some of the benefits of being in the CAP program are significant. If, during the audit, there is an "unagreed" item, the IRS will facilitate taking it to Appeals for resolution. Accordingly, where there is a difference of opinion, the CAP program may lead to a much faster resolution of the matter. When there are other issues that are not fully developed, or which may subsequently become unagreed, however, submission to Appeals may be delayed. "We like to bring the whole package together," observed Mr. Stewart.
Treaties and Binding Arbitration
The chapter noted that under the new treaty with Canada, a clause was introduced that would allow a taxpayer to elect binding arbitration, requiring the participation of competing revenue authorities in such arbitration. Was this a developing trend? Mr. Stewart observed that the new treaty had not yet been ratified, but in any event, it was Treasury that set that policy. Thus, he could not offer further insight into whether the development was a trend or aberration.
Speaking for the chapter, Mr. Strobel stressed the importance of the development, which would provide relief from double taxation.
Caseloads, Supervisory Review, Fast-Tracking
In response to inquiries, Mr. Stewart conceded that agents are required to handle more cases at the same time. "Retirements are forcing the emphasis on significant issues," he admitted. Another trend has been additional supervisory review. A key tool in this development has been the use of a system known as "IMS," that is to say, the Issue Management System. Mr. Mezquita provided some general background information on the system. He believed it to be a beneficial tool in managing the heavy caseloads that the IRS faces.
The conversation again turned to fast-tracking (to Appeals) as a way to resolve thorny issues. Mr. Stewart observed that issues generally do not get "fast-tracked" at the beginning of an audit, but may qualify by mid-cycle where the issue has been fully developed. Where the taxpayer is less forthcoming, it takes longer. Initially, Appeals' involvement is limited to mediation. Observed Mr. Stewart, "The Service likes going to Appeals when it has the effect of moving things along." When it does not, Appeals is less attractive.
Hiring Examiners from Outside the IRS
Mr. Stewart observed that the IRS has had mixed success hiring from the outside, varying from wildly successful to less so. New hires must adjust to the adversarial nature of being an Internal Revenue Agent. Another challenge is the grade-based system used to categorize positions within the IRS. New hires enter as Grade 13, which is the starting point within the LMSB. In contrast, the experience requirement for auditors, generally speaking, is five years and an MBA, CPA, or law degree.
On the plus side, government work carries with it some attractive benefit plans. Agents who have been covered by the government's insurance policy for five years may qualify for continued health benefits after retirement, a significant benefit. Also, assuming they qualify for a pension, agents receive an amount equal to one percent of their base salary (average of last three years) times the number of years worked. This, of course, is a broad overview of the government's plans, and interested parties (or Agents) should contact the IRS directly.
Electronic Filing and Paper Copies
Mr. Stewart conceded that in instances where the taxpayer filed an electronic return, the agent is not supposed to request a paper copy. "I understand the taxpayer's perspective," he said. "If you made me file electronically, why do I have to provide a paper copy, too," empathized Stewart. Conversely, the representatives for the chapter observed that in most instances, they provided a paper copy to the agent despite having filed electronically.
Officers Information and Officer's Returns
The chapter asked about the extent to which the IRS expects full compliance with officer information requested on Form 1120, Schedule E, Officer's Compensation. As Ms. Bonfiglio observed, the main issue is confidentiality and identity theft of social security numbers. From the conversation, it became clear that the full completion of Schedule E was not a major issue. Mr. Mezquita emphasized that the IRS had not relaxed the requirement, and that, notwithstanding omissions from the tax return itself, social security numbers and compensation detail are required on audit. Mr. Stewart agreed, indicating that a taxpayer's refusal to provide the information on audit would present a problem. He also observed that, ordinarily, the IRS will "look at" the tax returns of a taxpayer's officers, and, in the case of a Coordinated Industry Case (CIC) audit, it may happen without their knowledge. "Looking at the return is a requirement," said Mr. Stewart, "but it may go no further than confirming a tax return was filed."
Foreign Earnings Repatriation--A Tier One Issue
Mr. Stewart observed that although foreign earnings repatriation was a Tier One issue, it is not mandatory for the auditor to request detail. The Tier One categorization requires the auditor to review the issue, not request detail. Consistency is an objective in that regard, but every issue is different and has different criteria. Different fact patterns and a lack of flow of information from the taxpayer hinder the formulation of a single approach. To promote consistency, the Industry Director Directives (IDDs) provide guidance to the auditor as how to proceed.
Research Credit--Consistency Among Regions
Mr. Stewart said that consistency was also a goal with regard to the research credit. Each region, however, may have its own technical adviser and this degree of separation does not help. Part of the problem is that the inherent nature of the credit, which is a single item applied to different industries. "Fact patterns differ across the board," observed Mr. Stewart. "In addition, the Service has no control over consistency in Appeals."
Refund claims for the research credit are a Tier One issue. The research credit itself, however, is not a Tier One issue.
Restricted Interest
Restricted interest is computed by a unit in Ogden and has been for a few years. Mr. Goldie observed that where a taxpayer has a refund and an assessment arising from different years within the same audit cycle, Ogden may request payment of the interest on the assessment without granting a credit for the refund. Mr. Stewart conceded that was possible. Where a wide discrepancy arose between the taxpayer's computation and that of the Ogden unit, the audit Team Manager may get involved to facilitate a discussion between Ogden and the taxpayer.
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