In prepared remarks before the Tax Executives Institute (TEI) Midyear Meeting in Washington, D.C., on Apr. 4, Commissioner Douglas H. Shulman reported on various IRS strategies for issue resolution that he said are designed to be less time consuming and resource intensive for both IRS and the corporate taxpayer.
Compliance Assurance Process (CAP) program. Under the CAP program, participating corporations work collaboratively with an IRS team to identify and resolve potential tax issues before the tax return is filed each year through a contemporaneous exchange of information on the taxpayer's proposed return positions and transactions that may affect its tax liability. Shulman noted that IRS has formalize the CAP program (see ¶7), and that it is now open to any corporation that meets the program's requirements (which include signing a Memorandum of Understanding). CAP has been expanded by adding two new programs: (1) a pre-CAP program that will provide interested taxpayers with a clear roadmap of the steps required for gaining entry into CAP; and (2) a CAP maintenance phase that's intended for Large Business & International (LB&I) division, for use by taxpayers that have been in CAP for several years and have established a track record of working cooperatively with IRS.
Quality Examination Process (QEP). QEP engages large corporate taxpayers in the examination process, from the earliest planning stages through resolution of all issues and completion of the case. It is designed to streamline processes; reduce burden and duplication; and improve communications and consistency in IRS's dealings with taxpayers. Shulman noted that taxpayers have complained that examiners don't have, or think that they don't have, the authority to resolve issues. He stated that this defeats the whole purpose of QEP and accountability and shouldn't happen. Taxpayers that have any issues during the audit, and the exam team is not being responsive, should elevate it through the appropriate management chain, Shulman said. He also noted that the Commissioner of IRS's LB&I division, Heather Maloy, and her senior team were engaging in a review of closed cases in order to get a feel for the level of technical quality exhibited in IRS's current casework. They will use the results of this base lining exercise to ensure that IRS is focused on the right issues with corporate taxpayers and that IRS's work remains high quality.
Industry Issue Resolution (IIR) Program. While there have been numerous calls for tax law simplification, Shulman commented that the reality is that the Code has gotten more complex, not less. He said IRS had found that there were approximately 4,500 changes to the Code since 2000. Shulman called the IIR program an important tool that can help both IRS and corporate taxpayers cut through complexity and uncertainty and reach administrable, common sense solutions for uncertain tax areas. He characterized the IIR program as another form of guidance that helps reduce uncertainty on business tax issues within particular industries. As an example of its efficacy, Shulman noted that the use of the IIR program had finally put to rest a long-standing controversy that had been plaguing the telecommunications industry for years—whether maintenance, repair and improvements of both wireline and wireless network assets must be capitalized. (For more coverage of this issue, see ¶3.)
Uncertain tax position (UTP) requirement. In September of 2010, IRS released the Final Schedule UTP and Instructions effective for 2010 tax years. Shulman defended the requirement as providing the information IRS needs to focus on issues and taxpayers that pose the greatest risk of tax noncompliance while respecting a taxpayer's internal analysis and deliberations. He said that the final Schedule UTP fulfills these goals in a very balanced and sensible fashion, addressing important concerns expressed by affected taxpayers and the practitioner and business community. He acknowledged that significant changes to the schedule had been made based on feedback, including:
... a five-year phase-in for filing the schedule;
... elimination of the maximum tax adjustment requirement;
... clarification of concise description of an issue; and
... clarification and strengthening of IRS's policy of restraint.
Shulman said that IRS and the taxpayers have to keep the dialogue open on UTP requirements as unanticipated issues will arise. For example, he noted that one might expect that a taxpayer with a very aggressive tax position might have a large reserve. However, that may not always be true. A very conservative corporate taxpayer might also have a large reserve because it liked to play it very safe. So, he said, IRS had to make sure that cautious taxpayers were not disadvantaged for being risk-adverse.
Appeals Division. Shulman called Appeals the forum where taxpayers can expect an impartial and fair adjudication of issues and an opportunity to resolve an issue before heading down the expensive and time consuming road of litigation. He said the heart of Appeals was its independence. To do their job, Appeals personnel need detailed knowledge of issues to help them develop settlement parameters, draft Appeals Settlement Guidelines, and ultimately reach the right resolution for taxpayers and the government. It was this desire for knowledge that led IRS to put Appeals personnel on issue management teams soon after their formation eight years ago. Shulman has now concluded that the benefits of having Appeals personnel on issue management teams to help gain expertise are outweighed by the perception that having them on those teams compromises their independence. Accordingly, Shulman announced that he has made the decision that Appeals personnel will no longer sit on issue management teams.
Joint audit. Shulman, noting that he currently serves as Chairman of the Organization for Economic Cooperation and Development's (OECD's) Forum on Tax Administration, stated that joint audits with other countries would be more sensible and efficient for the participating business. Shulman said that “We have three joint audits underway, involving two other countries, and we're in discussions with several other countries about the possibility.”