IRS Commissioner reports on new strategies for issue resolution for corporations 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, 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. 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.” IR 2011-32 IRS has announced that the six-year-old Compliance Assurance Process (CAP) pilot program for certain large corporations (i.e., with assets of at least $10 million) has been expanded and made permanent. Background. The CAP pilot program began in 2005 with 17 taxpayers and has grown to 140 taxpayers participating in fiscal year 2011. 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. The CAP program focuses on issue identification and resolution through transparent and cooperative interaction between taxpayers and IRS through a contemporaneous exchange of information on the taxpayer's proposed return positions and transactions that may affect tax liability. Only corporations with assets of $10 million or more are eligible to participate in the CAP program. With its major potential tax issues largely settled before filing, a corporation is generally subject to shorter and narrower post-filing examinations. Changes in CAP. In IR 2011-32 , IRS announced that the CAP program has been made permanent and has been expanded to include two additional components: (1) a new Pre-CAP program will provide interested taxpayers with a clear roadmap of the steps required for gaining entry into the CAP program; and (2) a new CAP maintenance program (Compliance Maintenance) is intended for taxpayers who have been in the CAP program, have fewer complex issues, and have established a track record of working cooperatively and transparently with IRS. Thus, as outlined in the Internal Revenue Manual (IRM), the CAP program now consists of three phases: Pre-CAP, CAP, and Compliance Maintenance. The IRM notes that in the Pre-CAP phase, a corporation works with IRS in the traditional post-file examination process to close examinations of filed tax returns. The corporation and IRS develop an action plan to examine tax returns of open years within an agreed upon time frame. During the Pre-CAP phase, corporations are expected to display the same level of transparency and cooperation that is required of them in the CAP phase. They should make open, comprehensive, and prompt disclosures of the transactions, material issues within the transactions, and other tax return items and issues related to the positions taken on their filed tax returns. In the IRM, IRS notes that taxpayers that do not have an examination open for any tax year may bypass the Pre-CAP program and apply for the CAP program. IRS, however, will examine open years should circumstances warrant. Prior year returns will be inspected for purposes of risk assessment pursuant to normal audit procedures. Corporations that continue to meet the CAP eligibility requirements and expectations may progress to the Compliance Maintenance phase. During this phase, they must execute a CAP Memorandum of Understanding (MOU) in order to participate and provide the required information. In the Compliance Maintenance phase, IRS reduces the level of review based on the complexity and number of issues and the corporation's history of compliance, cooperation, and transparency in the CAP program. In this phase, taxpayers are expected to continue making open, comprehensive, and contemporaneous disclosures of their completed business transactions. IRS may move taxpayers between the CAP phase and the Compliance Maintenance phase depending on the complexity and/or volume of transactions and other factors 2011-22, 2011-18 IRB , Rev Proc 2011-27, 2011-18 IRB , Rev Proc 2011-28, 2011-18 IRB Three new revenue procedures provide detailed guidance for the telecommunications (telecom) industry with the aim of resolving disputes involving the capitalization and depreciation of network assets. The new guidance resulted from recently completed Industry Issue Resolution (IIR) Program projects addressing big-dollar disputes over how to capitalize network asset repair and replacement costs and the recovery period of assets in the wireless telecom sector. Rev Proc 2011-22 . This provides a safe harbor method of accounting for determining the recovery periods for depreciation of certain tangible assets used by wireless telecommunications carriers. Sec. 5 of Rev Proc 2011-22 , prescribes recovery periods for a number of different, highly technical types of assets located at a mobile telephone switching office and cell sites, which have functions comparable to those of a wireline telephone central office and the associated land line cables. Under Secs. 6 and 7 of Rev Proc 2011-22 , affected taxpayers choosing to change to the safe harbor method of accounting generally may use pre-existing change-of-accounting method procedures. However, taxpayers that placed their covered assets in service before Dec. 30, 2003, may treat the change to the recovery periods in Sec. 5 of Rev Proc 2011-22 , as not being a change in accounting method, and instead file amended returns to implement the change in depreciation method for covered assets. Rev Proc 2011-27 . This provides two alternative safe harbor approaches for determining whether expenses to maintain, replace, or improve wireline network assets used primarily to provide wireline telecommunication or broadband services must be capitalized under Code Sec. 263(a) . Wireline network assets are all personal and real property used by a wireline carrier to provide telecommunication or broadband services, but don't include personal or real property not directly used to provide wireline telecommunication or broadband services, such as a corporate office building and the furniture and equipment used in an office building. Sec. 5 of Rev Proc 2011-27 , essentially permits 12% of the specially computed cost of wireline network assets to be treated as a currently deductible maintenance allowance percentage, with the 88% balance treated as capital expenditures under Code Sec. 263(a) . Sec. 6 of Rev Proc 2011-27 , provides that IRS will not challenge the unit-of-property determinations carried in Sec. 6 for purposes of the application of Code Sec. 263 . Under proposed regs issued in 2008, the cost of routine maintenance performed on a unit of property would be treated as not improving that unit of property (and therefore would be currently deductible).Weekly Alert ¶ 5 03/13/2008 . IRS officials have said final regs on this subject will be issued “soon.” Sec. 7 of Rev Proc 2011-27 , explains the automatic change in a method of accounting that applies to a change to one of the methods permitted by Rev Proc 2011-27 . Rev Proc 2011-28 . This provides two alternative safe harbor approaches for determining whether expenses to maintain, replace, or improve wireless network assets used primarily to provide wireless telecommunication or broadband services must be capitalized under Code Sec. 263(a) . Wireless network assets include all personal and real property used by a wireless telecommunications carrier to provide wireless telecommunication or broadband services by mobile phone, but don't include personal or real property not directly used to provide wireless telecommunication or broadband services by mobile phone, such as a corporate office building and the furniture and equipment used in an office building. The two alternative safe harbor approaches are similar to those provided by Rev Proc 2011-27 for wireline network assets, but the maintenance allowance percentage method allows only 5% of the specially computed cost of wireless network assets to be treated as a currently deductible maintenance expense, with the 95% balance treated as capital expenditures under Code Sec. 263(a) . www.irstaxattorney.com 888-712-7690