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Law Times • February 23, 2009 FOCUS More Canadian companies and their lawyers running into IRS Keeping up with America's tax collector BY JULIUS MELNITZER For Law Times tendant expansion of Canadian interests to the United States, more and more Canadian com- panies and their lawyers are run- ning into the Internal Revenue Service, America's tax collector. The IRS has a big job. Con- W sider the daunting mandate of its large and mid-size business division, which examines busi- ness taxpayers with $10 million or more in assets. LMSB taxpay- ers paid $206 billion in taxes in 2006 (the latest fi gures avail- able) and fi led 175,862 returns with more than a few running to thousands of pages. The longest 2006 tax return, that of General Electric, would have taken up 24,000 printed pages had it not been fi led digitally. "It behooves the IRS to do more with less and to be as effi cient as possible," says Don Rocen, former IRS deputy chief counsel. Rocen is now a partner at Washington, D.C.'s Miller & Chevalier. To be sure, the IRS has tried to do so, but with varying measures of success. One of its more successful measures, however, is the "industry issue focus" process, launched in July 2007. The measure has effect- ed a sea change for taxpayers. "A whole new environment has developed at the IRS," says Walter Goldberg, executive di- rector of Grant Thornton's na- tional tax offi ce in Washington, D.C. "To some extent, it raises cause for concern, but having said that, there are also defi nite benefi ts for taxpayers." IIF is an issue management process aimed at treating specifi c tax issues consistently across in- dustry lines while improving au- dit currency. At its core is a focus on prioritizing and centralizing the administration and resolu- tion of important issues. "It's clear that behind the IIF is a desire on the part of the IRS to get as much as it can out of the resources it has by operating as closely on a business model as it can," says Ellis Reemer, who leads DLA Piper's tax controversy and tax disputes group. To that end, the IRS has designed a tiered system for prioritizing tax compliance is- sues. After the IRS Compliance Strategy Council identifi es the issues, it ranks them based on prevalence and compliance risk. The agency also takes into ac- count visibility and uncertainty due to new legislation and liti- gation; materiality, in terms of the number of taxpayers affect- ed and the resources required for the audit function; and the potential for abusive conduct. Tier I issues are those that have the highest strategic impor- tance and most signifi cant im- pact on one or more industries. Tier II issues refl ect areas of po- tential high non-compliance or signifi cant compliance risk to LMSB or an industry. For Tier I and Tier II issues, the IRS assigns an "issue owner Kranc_North American RL (LT 1-3x4).indd 1 ith the explosion of cross-border com- merce and the at- executive" with nationwide ju- risdiction to co-ordinate the relevant examinations. Issue management teams, including counsel, technical advisers, fi eld staff, and fi eld representatives then develop guidance for exam- iners. This approach of bringing a unifi ed, consistent strategy to an important issue is not dissim- ilar to the process the IRS previ- ously developed to deal with tax- shelter settlement initiatives. "Under the old system, IRS fi eld offi ces in different parts of the country could come up with different answers to the same question, meaning that a taxpay- er in Oregon with an identical problem to that of a taxpayer in Maine might achieve a more-or- less favorable settlement than his counterpart across the country," Goldberg explains. But where there's an up- side, there's almost inevitably a downside. The most frequent criticism of the IIF to date has been that it removes discretion from ex- amination teams. The degree of discretion that remains varies with the tier ranking of the issue in dispute. Examiners will have no choice but to implement centralized guidance in all Tier I cases. Some discretion related to the unique circumstances of each case, however, remains in Tier I and Tier II cases. "There's no question that the fl exibility of examiners to resolve these issues has been signifi cantly limited," Goldberg says. The diminution of discretion also means that appeals will be harder fought. "If you have a Tier I issue, the IRS's centralized approach reduces a taxpayer's chances of settling at any stage of the process," Rocen says. Indeed, any reduction in settle- ment prospects translates into less certainty and effi ciency in a com- pany's tax and fi nancial reporting. "In many cases, the IRS is auditing three, four, or fi ve years back, which makes things un- certain enough," Rocen says. "Anything that adds to that uncertainty is defi nitely not wel- come." This may be why so many taxpayers have embraced the compliance assurance program, another LMSB initiative. CAP began in 2005 as a pilot program to assess an alternative "just-in-time" approach to large corporate tax administration. At its core was an effort to leverage corporate governance and fi - nancial reporting requirements found in the Sarbanes-Oxley Act so as to encourage partici- pants to work with the IRS to resolve tax controversies before making their formal fi lings. "The process involves ex- aminers looking at a company's tax treatment of transactions on day one of the taxable year and throughout the current year," Rocen explains. "In exchange for taxpayers providing information about completed transactions and occurrences in a timely way, they are more likely to achieve tax certainty sooner and with fewer administrative obstacles." In turn, the benefi ts to the IRS from the increased co-op- eration are a signifi cant reduc- tion of the resources required and an enhanced ability to spot emerging issues and risks. The CAP process begins early in the tax year, when business provide a "full acceptance letter." The letter confi rms that the IRS will accept the returns in rela- tion to the resolved issues pro- vided they are consistent with the closing agreements and no post-fi ling examination of the resolved issues is required. The IRS provides a "partial acceptance letter" when some is- sues remain outstanding. Indications that the initiative 'A whole new environment has developed at the IRS,' says Walter Goldberg. taxpayers enter into a memoran- dum of understanding with the IRS. The document outlines the roles and responsibilities of both parties and describes the process, including communication and disclosure responsibilities. After the agreement is signed, the IRS appoints an LMSB account co- ordinator who works with the taxpayer on an ongoing basis to identify and resolve potential tax issues for that year. As the year goes on, the co- ordinator reviews the taxpayer's signifi cant transactions that come within the ambit of the MOU. When issues are resolved, the co-ordinator documents the resolution in an issue resolution agreement. When there are diffi - culties resolving issues, the parties have access to IRS resolution pro- cesses, such as fast-track appeals. At the end of the tax year, the co- ordinator includes the contents of the issue resolution agreement in a closing agreement. If the taxpayer has complied with the MOU, all issues have been resolved, and the co-ordi- nator has verifi ed the proposed return's accuracy, the IRS will was working well was apparent almost from its inception. An independent survey conducted by a consultancy on behalf of the IRS in 2005 confi rmed that both CAP team members at the IRS and participant taxpayers were satisfi ed with the program. CAP team members confi rmed that participants had been trans- parent and open in their dealings, and many had revised internal procedures to accommodate the need to deliver information to the IRS in a timely fashion. Respondent taxpayers de- scribed the IRS's commitment as strong and their interactions with CAP team members as positive. Indeed, the majority believed CAP was a satisfactory way of dealing with the IRS in the future. No surprise, then, that CAP continues to generate a great deal of interest in the business community. "Many of the in-house tax people, especially at large corpo- rations, want access to CAP be- cause of the effi ciencies involved in dealing with the facts under- lying tax issues before they arise, rather than on a historical basis," Rocen says. "CAP participa- tion can also reduce the need to carry tax reserves that can affect fi nancial statements." LT PAGE 13 North American Relocation Law With contributions by a team of practitioners highly-experienced in all aspects of the relocation process The best resource to help you with the North American relocation process, including immigration, tax, employment and other legal issues North American Relocation Law is a practical how-to manual for bringing the right types of personnel to North America. It efficiently guides you through the relocation process from beginning to end. 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