Shulmand at ABA Bar meeing

Shulman discusses efforts to improve relationship between IRS and large corporate taxpayers

In prepared remarks before the American Bar Association's (ABA's) Joint Fall Meeting, IRS Commissioner Douglas Shulman discussed the historically disfunctional and adversarial relationship between IRS and large corporate taxpayers, and described a number of IRS's key efforts to improve that relationship and work more efficiently. He also briefly spoke about challenges facing IRS, its new approach to international tax compliance, its vision of a “real time” tax system, and the potential need to re-examine the “speed of refund paradigm” in light of identity theft and other types of fraud.

Large corporate programs. Shulman described the historical relationship between IRS and large corporate taxpayers as “frequently unconstructive,” often consisting of protracted litigation and wasted resources for both the taxpayers and IRS. This relationship, he commented, was inconsistent with the nation's system of voluntary compliance, which is predicated on the assumption that taxpayers will generally be forthcoming and that the government needn't be an adversary.

To this end, Shulman discussed a number of programs that have been integral to “transforming” this relationship. These include:

... Compliance Assurance Process (CAP) program. The CAP program, which allows participating large corporations to work collaboratively with an IRS team to identify and resolve potential tax issues before the tax return is filed each year, was made permanent last year. Another recent change is that corporations no longer have to be invited to join the program. Rather, any corporation that meets the program's requirements can apply. The number of corporate taxpayers in the CAP program has increased from 17 in the 2005 tax year to 161 this year. Additionally, there is a pre-CAP program that provides interested taxpayers with a “clear roadmap” for how to participate, and a CAP maintenance phase for large corporate taxpayers that have been in CAP and working cooperatively with IRS for several years.

... Quality Examination Process (QEP). QEP allows IRS to engage large corporate taxpayers in the examination process from the earliest planning stages through resolution of all issues and completion of the case, reducing burden and duplication, and improving communications and consistency in IRS's dealings with taxpayers. IRS has completed its first year of QEP and is currently reviewing closed cases to get a “real feel for the level of technical quality exhibited in our current casework.”

... Fast Track Settlement (FTS). FTS allows a taxpayer to settle an issue with an Appeals officer during the audit process. IRS has trained its technical employees to use FTS and has “removed internal barriers that may have discouraged its use.” Shulman noted that although the number of FTS participants is small, it grew last year by 50%.

... Industry Issue Resolution (IIR) Program. IIR is a mechanism for IRS to resolve long-standing, industry-specific areas of uncertainty. For instance, it was used this year to allow insurance companies to elect a safe harbor for partial worthless deductions for certain complex securities in an insurance company's portfolio, which saves the companies and IRS from having to independently value these securities.

Schedule UTP. Shulman also spoke about Schedule UTP (Uncertain Tax Position), which he believes will promote transparency and faster issue resolution while still respecting a taxpayer's “internal analysis and deliberations.” He thanked the ABA for comments on the initial Schedule UTP proposal and said that the final product is better as a result. Changes to the proposal included the phased-in implementation of the schedule, the elimination of the requirement to calculate and include a maximum tax adjustment for each position, and the elimination of administrative practice positions. IRS also “clarified and strengthened the policy of restraint,” which included adopting a policy of not seeking privileged documents even if the taxpayer disclosed them to a financial auditor. Shulman also emphasized the deterrent effect of Schedule UTP, noting that it “will likely help corporations from pushing the envelope too far.”

Advance Pricing and Mutual Agreement (APMA) Program. IRS's Advance Pricing Agreement (APA) and Mutual Agreement programs were combined this year into APMA, which is aligned with IRS's transfer pricing practice. Shulman noted that IRS is taking a “streamlined approach” for bilateral APAs, allowing one professional to lead the development and negotiation of a bilateral case.

International tax issues. Shulman also addressed IRS's changing approach to international tax issues, which reflects a shift to taking a broader view of corporations' motivations and structures. IRS's goals in its international tax compliance programs are to figure out the “obvious drivers of tax behavior,” then adopt a strategy that identifies the highest compliance risks and resolves issues as efficiently as possible.

Challenges facing IRS. Shulman briefly spoke of the unresolved tax issues facing Congress, including the EGTRRA/JGTRRA sunsets, the AMT patch, and the expired and expiring tax extenders, and said that these are issues “that will affect us profoundly at the IRS.” He referred to the AMT as the “biggest and thorniest problem,” and also stated that IRS's tight budget makes it difficult to provide the desired quality of service, especially in light of its added responsibilities implementing the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148) and the Foreign Account Taxpayer Compliance Act (FATCA).

Real time tax system. Shulman discussed IRS's exploratory efforts of a “real time” tax system, under which IRS would essentially use information return data on taxpayers' returns and provide them with an opportunity to correct a return prior to processing, instead of the traditional after-the-fact model of examining returns years after filing. He opined that this system would be better for taxpayers and could ensure more accurate returns.

Speedy refunds. Shulman stated that taxpayers like to get returns as quickly as possible, and that IRS has made “great strides” in doing so. However, he cautioned that the desire for quick refunds must be balanced against the integrity of the tax system, especially in light of issues like identity theft. To this end, IRS has implemented new filters to detect fraudulent returns and new processes for handling returns. So far this year, IRS has stopped $15 billion in fraudulent payments (compared to $11 billion over the same period last year). Shulman cautioned that the “speed of refund” paradigm may need to be further re-examined.

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