Understanding LB&I “Campaigns” – The Second Webinar: Examination Process
On March 28, 2017, EY and the Internal Revenue Service (IRS) held a joint webcast presenting the Large Business & International’s (LB&I) new “Campaign” examination process. This was the IRS’s second in a planned eight-part series about Campaigns. The IRS speakers for the presentation were Tina Meaux (Assistant Deputy Commissioner Compliance Integration) and Kathy Robbins (Enterprise Activity Practice Area). We previously blogged about Campaigns on February 1, 2017 (link), and the first Campaigns webinar on March 8, 2017 (link).
How Campaigns Are Developed: LB&I’s new organizational structure includes Subject-Matter Practice Areas, Geographic Practice Areas, where the employees who conduct audits are located, and Headquarters and Support. Headquarters and Support (Compliance Integration) reviews ideas for new Campaigns and assigns the potential Campaigns to the appropriate Subject-Matter Practice Area for further review and development. For example, Enterprise Activities (a Subject-Matter Practice Area) which is responsible for financial products and institutions, corporate issues and credits, and penalties, will analyze a potential Campaign submission to determine the government’s position, what guidance exists, and how the government should handle the issue. Enterprise Activities will then coordinate with the geographic practice area directors to determine what resources would be needed to conduct a Campaign. Potential Campaigns are then shared with LB&I’s Compliance Integration Council, which determines whether to allocate resources. The Compliance Integration Council includes the LB&I Commissioner, Deputy Commissioner, all senior managers over the subject matter and geographic practice areas, Headquarters and Support directors, and Division Counsel. Each Subject-Matter Practice Area is connected and must decide whether to allocate resources.
Goal of Campaigns: LB&I’s stated goal is not to audit more returns, but to respond with a variety of treatment streams to maintain high compliance across the filing population. LB&I expects, at some point in the future, the Campaigns program will be the majority of LB&I’s work. There will still, however, be issue-focused examinations.
Interplay Between Campaigns and Examinations: Exams that result from Campaigns will be focused on the Campaign issue, but agents will be able to add additional Campaign issues with managerial approval. LB&I is still finalizing the process for adding issues. If other issues are identified by the examiner, LB&I will track those new issues to see if there are any other trends. If there are trends, it could lead to new Campaigns or prioritization of issues being considered for Campaigns.
Publicly Available Materials About Campaigns: Publicly available materials relating to specific Campaigns will be developed, if and when necessary. There may be standard Notices of Proposed Adjustments (NOPAs) or Information Document Requests (IDRs) developed. The facts and circumstances of every taxpayer will be different, but the law section could be consistent. For the Industry Issue Resolution (IIR) Campaign, LB&I does not envision a practice unit. Two recently announced Campaigns, repatriation and related party transactions, do not have practice units. LB&I may identify needs to develop practice units later on.
Interaction with CIC and CAP Examinations: It is possible that a Coordinated Issue Case (CIC) audit or Compliance Assurance Process (CAP) audit could have a Campaign issue, but it is not automatic. If a Campaign issue is not raised in the initial examination plan but raised later, the taxpayer should have a conversation with the examination team if they have concerns. LB&I may be able to re-open examinations through its standard procedures. The issue would have to be material for that to happen. Campaigns do not change any of the IRS procedures or taxpayer rights.
LB&I Examination Process: Examinations that involve Campaigns will involve the same LB&I examination process. Traditional resolution approaches, including working with the IRS’s Office of Appeals, remain available. Taxpayers should have access to the subject matter personnel if a subject matter expert was involved in the exam. Taxpayer should reach out to the issue manager, manager or case manager. LB&I is willing to make those experts available. In addition, LB&I noted that it is considering changes to the timing of Acknowledgment of Fact IDRs in its examination process.
Focus on Midmarket Taxpayers: A few Campaigns highlight that they will be focused on midmarket taxpayers. To be an LB&I taxpayer, a taxpayer must have assets of $10 million or more. Midmarket could be anything other than what would traditionally fall under the current CIC program. CIC taxpayers are the largest corporations that are under continuous audit—usually in the billion dollars of assets range.
Potential for Campaign Examinations to Be Conducted Remotely: Campaign examinations may need to be conducted remotely in some places in the country where there are a large number of CIC cases that tie up a lot of the IRS’s resources.
More Campaigns Are Coming: LB&I is developing a number of additional Campaigns for release within the “upcoming months.” All Campaigns will be announced publicly, so long as the announcement does not impair tax administration.
LB&I Wants Feedback: LB&I is soliciting feedback and is open to recommendations for how to receive feedback. LB&I participates in panels and also receives feedback through a mechanism for LB&I employees to share feedback. There may also be more webinars. The presenters said emails and phone calls are welcomed. In the Compliance Integration Council, changes to resource allocation may be made in response to feedback.
How Success Will Be Measured: LB&I will look at changes in analytics and in taxpayer behavior. A Campaign will be considered successful if LB&I can increase compliance or determine that a perceived compliance risk is actually less than was perceived. Campaigns could be closed if there is less risk than was perceived. LB&I envisions that Campaigns will conclude when taxpayer behavior changes. All changes will be vetted with all the LB&I senior directors, LB&I Commissioner, Deputy Commissioners, Division Counsel and Deputy Counsel.
Soft Letters: A soft letter requests only information, not books or records, and thus it does not rise to the level of an examination. Taxpayers are not required to respond, but if they do not respond, LB&I will have to consider potential next steps for the Campaign issue. That could include initiating an examination. LB&I has not fully evaluated if it will respond to taxpayer responses to soft letters. In a potential non-filer situation, LB&I will use whatever address is in database to address a soft letter. Soft letters will be published to the public domain when there are practice units for particular Campaigns. Content, or use, of soft letters may be revised over time.
Practice Point: As stated in our March 8, 2017 post, the new Campaign process marks a change in the direction of IRS examinations. Our clients are seeing the changes on the ground, with Exam teams packing up and closing continuous audits that have persisted for decades. The IRS clearly does not have sufficient resources to examine returns in the same manner that was done over the last 30 years. With limited resources, the new Campaign process may ease the burden on taxpayers of protracted audits mired in the details of the return, while the IRS misses the real compliance risks. Only time will tell whether this new direction bears fruit.