The changing IRS controversy landscape

22nd Annual Health Sciences Tax Conference The changing IRS controversy landscape: what’s on the horizon December 5, 2012

The changing IRS controversy landscape: what’s on the horizon Page 2

Disclaimer

► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.


Disclaimer

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Presenters

► Ed Curvin HCA Healthcare Nashville, TN

► Marlin Shaw Health Management Associates, Inc. Naples, FL

► Ned Connelly Ernst & Young LLP Stamford, CT

+1 203 674 3006 [email protected]

► Mark Mesler Ernst & Young LLP

Atlanta, GA +1 404 817 5236 [email protected]

► Frank Ng Ernst & Young LLP

Washington, DC +1 202 327 7887 [email protected]


Agenda

► Large Business and International (LB&I) organizational changes and how they affect you

► The current experience of the health care industry with the compliance assurance process (CAP)

► Effective use of other issue-resolution tools in the health care industry

► Key focus areas of the examination process ► The evolution from the tier initiative to Issue

Practice Groups (IPGs)

LB&I organizational changes and how they affect you


Source: IRS – LB&I


LB&I industries by state — current

CA RI

CTM

F

HMT

NRC

RFPH NR/HMT

RFPH/HMT F/HMT

CTM/RFPH

GA

VA

MD

NJ

CT

MA

NH

VT ME

NY

PA OH

WV

KY

IN

TN

MS

AR

MO

IA

IL

MI

MN ND

SD

NE

KS

WY

CO

NM AZ

UT

ID

NV

OR

WA

AK

MT

OK

TX LA

WI

AL

FL

SC

DE

Manhattan

NC

HI

http://lmsb.irs.gov/industries/ctm/Who/Contact/CTMOrgChart.xls


http://lmsb.irs.gov/industries/nr/WhoWeAre/NRCManagersPersonnel.asp









http://lmsb.irs.gov/industries/rfp/WhoWeAre/Organizational Chart DFO West - RFPH.xls


http://lmsb.irs.gov/industries/mct/WhoWeAre/OrgCharts/DFO-WESTchart(revOCTOBER2006).doc





http://lmsb.irs.gov/industries/rfp/WhoWeAre/Organizational Chart - DFO East- RFPH.xls




http://lmsb.irs.gov/industries/rfhttp:/lmsb.irs.gov/industries/rfp/WhoWeAre/Organizational Chart DFO West - RFPH.xlsp/WhoWeAre/Organizational Chart - DFO East- RFPH.xls






http://lmsb.irs.gov/industries/ctm/Who/Contact/CTMOrgChart.htm

http://lmsb.irs.gov/industries/mct/WhoWeAre/OrgCharts/DFO-EASTchart(rev.OCTOBER2006).doc


http://lmsb.irs.gov/industries/fsh/org/Fin Svcs Directory - 4.28.06.xls



http://lmsb.irs.gov/industries/mct/WhoWeAre/OrgCharts/DFO-EASTchart(rev.OCTOBER2006).doc












LB&I domestic realignment

CA

RI

NJ

MA

NH

VT

ME NY

PA OH

WV

WY

CO

NM AZ

UT

ID

NV

OR

WA

AK

MT

DE

Manhattan

HI

VA

NC

SC

DC

NE

KS

GA MS

OK

TX LA

FL

AL

MD

Communications, technology and media

Natural resources and construction

Heavy manufacturing and pharmaceuticals

Financial services

KY

IN

AR

MO

IA

IL

MN ND

SD WI

MI

Retailers, food, transportation and health care





Deputy Commissioner (Domestic)

Paul DeNard

Financial services Rosemary Sereti

Natural resources and construction Kathy Robbins

LB&I domestic realignment (cont.)

Heavy manufacturing and pharmaceuticals Laura Prendergast

Retailers, food, transportation and health care

James Roosey

Communications, technology and media

Cheryl Claybough

Global high wealth Donna Hansberry

The current experience of the health care industry with the CAP


• The Internal Revenue Service (IRS) and the taxpayer develop a plan to eliminate open years within a set time frame.

• They work in a cooperative and transparent post-file environment. • The ultimate goal is to meet the selection criteria and progress to the

CAP phase.

• The taxpayer and the audit team work in a real-time environment to isolate and resolve issues prior to filing; which is the same as the current CAP process.

• The taxpayer works with the audit team by identifying transactions and issues and providing timely information to resolve those issues.

• Resolution of all material issues with the IRS ensures, prior to filing of the return, that the IRS will accept the return if filed consistent with agreed tax treatment.

• The IRS will adjust the level of review work and time applied. • The adjusted level of review is based on the taxpayer’s unique experience in

CAP and its history of compliance and risk. • There is periodic disclosure of material transactions and issues.

Compliance maintenance

phase

CAP permanency: IR-2011-32 New CAP phases

Pre-CAP phase

CAP phase


Items to consider ► Matters to consider in determining whether CAP is the

right fit for you: ► Past IRS audit history ► Current examination focus ► Disclosing upcoming events with significant tax return impact ► IRS relationships — past and present ► Time to complete intervening years ► Best year to enter CAP


Some thoughts from a CAP taxpayer …

► Increased burden in the first year ► The need for constant communication ► When and what to tell your CAP team ► IRS internal politics ► Access to quicker responses and assistance ► Schedule UTP management ► Lack of consistency in the CAP among taxpayers ► Ability to “pre-work” issues ► Awareness of your additional leverage

Effective use of other issue-resolution tools in the health care industry


Alternative dispute resolution (ADR) options

Pre-return filing ► Compliance assurance process ► Pre-filing agreement ► Industry issue resolution ► Private letter ruling ► Advance pricing agreements

Under exam

Audit process (post-filing) ► Limited-issue focused exam ► Accelerated issue resolution ► Early referral appeals ► Fast-track settlement ► Competent authority process

Appeals process ► Rapid appeal process ► Mediation ► Arbitration

ADR Provides value through: ► Lower admin costs ► Speedier resolution ► More favorable

settlements

Before the return is filed

Appeals

Key focus areas of the examination process


Key focus areas of the examination process

► Proposed major changes to the Information Document Request (IDR) process

► Schedule UTP in examinations ► The rules of engagement ► Changes in organization structure and staffing of exams


IDR process — changing procedures

► To improve audit cycle time, the LB&I Division reviewed the IDR process.

► LB&I is developing new IDR management training. ► It is anticipated that LB&I will set a specific response due

date and expectation. ► Failure to comply will result in a pre-summons letter and

summons action. ► It is anticipated that the LB&I Division will issue directions

to all field examiners. ► This will have a potential negative impact on the

audit process.


Schedule UTP update

► In 2010, 1,900 filers, averaging 3.1 disclosures ► Top three issues: transfer pricing, research credit,

Sec 162 deductions ► 3% of filers notified of filing deficiencies, most with

concise statement ► No penalty or current consideration for requesting penalty ► For 2012, first year for Part II filing, disclosing prior-year

uncertain tax positions ► IRS continuing to monitor Schedule UTP filings to risk-

assess tax returns and to identify potential issues


IRS use of schedule UTP for enforcement programs

► LB&I examiners use 2010 filings to conduct risk assessment

► Centralized unit analyzed 2010 filings to identify trends ► Examiners not permitted to request information on:

► Rationale for determining that the issue was uncertain ► Copies of workpapers used to prepare Schedule UTP ► Information about the hazards of litigation ► Any tax accrual workpapers or documents privileged under

modified policy of restraint

► With managerial approval, the issues reflected on the 2010 Schedule UTP can be opened for examination in a prior tax year based on a risk assessment


Schedule UTP — lessons learned

► Consider UTP disclosure in tax planning ► Review unit-of-account implications ► Assess materiality when recording unrecognized tax benefits ► Consider reserves recorded for tax positions on all forms

and schedules ► Develop process to track expectation to litigate positions ► Develop process to track prior-year positions ► Prepare for questions from corporate leadership, boards and the IRS

related to UTP disclosures ► Develop process to track reserves recorded before the year in which

a position is reported on the return


Schedule UTP — going forward

► Keep abreast of IRS policies and changes related to filing requirements and use of information

► Consider tools available to achieve certainty and minimize risk related to UTP disclosure

► Understand multi-year implications of UTP disclosure and take appropriate actions

► Be watchful of similar requirements on the part of the states or foreign jurisdictions


The rules of engagement

► Apply to case interactions of LB&I executives ► Purposes:

► Clarify roles, responsibilities and lines of authority ► Facilitate the right answer for a case or issue ► Promote consistent treatment ► Reinforce integrity and ethical decision-making

► Protocol for elevating a case within an industry


The rules of engagement (cont.)

► The protocol for elevating a case across industries is: ► Case-related contacts should be made at the team level. ► Strategic issues or requests for assistance should be brought directly to

the specific industry director. ► The taxpayer should rely on any IRS contact to determine the appropriate

industry and level of contact if unclear. ► Taxpayers can elevate unresolved issues to the next level of interaction. ► Taxpayers may elevate unresolved industry-related issues through the

Line Authority Executive to the Issue Owner Executive. ► Taxpayers may directly request industry-aligned involvement and any

disputes will be resolved through industry protocol. ► Field agents and teams are expected to recognize that elevation is part of

the audit process.

The evolution from the tier initiative to IPGs


Formation of new IPGs

► IPGs will focus on domestic issues and will replace the Tiered Issue Process.

► IPGs will be composed of an IPG coordinator, one or more full-time subject matter experts (SMEs), a larger number of part-time SMEs who spend less than 25% of their time working on the IPG (collateral SMEs) and an IPG analyst. The SMEs can be field agents, technical specialists or managers. In addition, each IPG includes representatives from LB&I Counsel and National Office Counsel with jurisdiction over the issue.

► LB&I managers and examiners will have access to the IPGs and can participate on periodic calls to discuss issues or consult with SMEs.

► The IPG will assist in identifying, developing and resolving issues; assist in implementing new legislation; participate in educating internal and external customers; and develop and maintain expertise in subject matters.

► Examiners will have authority to seek assistance from specialists but will have control of the issue on their case.

► The process is intended to reduce the headquarter control and decentralize decision- making to the field.

► The issue manager will report to the Director, Pre-filing and Technical Guidance and will handle systemic issues and coordinate with Counsel.


Formation of new IPGs (cont.)

► Specific tax issues are not publicly disclosed ► Current domestic IPGs include:

► Changes in accounting methods ► RICs, REITs and REMICs ► Life insurance ► Non-life insurance ► Deductible and capital expenses ► Corporate issues ► Financial institutions ► Inventory ► Pass-throughs ► Credits


Formation of new International Practice Network (IPN)

International business compliance inbound

Income shifting

Inbound financing

Repatriation/withholding

Repatriation Income shifting

Deferral planning

FTC management

International business compliance outbound

International individual compliance inbound

Jurisdiction to tax

US activities US investments

Foreign corporations

Offshore arrangements

Foreign tax credits

International individual compliance outbound

Jurisdiction to tax

Pass-thru entities

► The IPN will focus on international issues and will replace the Tiered Issue Process.

► The IPN will report to Mike Danilack, Deputy Commissioner (International), LB&I.

Corporate organizations/transactions


Questions or comments?

Documents

The changing IRS controversy landscape