On Tuesday, 7 March 2017, the IRS held a webinar to discuss its new campaign-based approach to compliance. This webinar was the first of eight public webinars the IRS will hold on this new approach. The first two webinars are designed to cover the campaign approach broadly and the remaining six will cover specifics around the 13 campaigns announced on 31 January (and any others that may be rolled out). A list and description of the initial 13 campaigns is available at https://www.irs.gov/businesses/large-business-and-international-launches-compliance-campaigns. Given that these webinars are designed to inform taxpayers as to how the IRS intends to conduct audits going forward, and will likely guide Exam teams as well, it’s important to keep abreast of these developments as they unfold.
The first 75-minute webinar entitled “Understanding LB&I Campaigns” featured two officials from the Large Business and International Division of the IRS (LB&I):
- Tina Meaux, Assistant Deputy Director, Compliance Integration, LB&I
- Kathy Robbins, Director of Enterprise Activities practice area, LB&I
Impetus for the Campaign Approach
The IRS explained that it decided to pursue a “campaign” approach to compliance due to dwindling resources and budget constraints. The IRS hopes that this “fundamental change” to its identification of compliance issues will help “focus on the right issues by using the right combination of treatment streams.” Instead of focusing on particular types of taxpayers (e.g., based on size) and pouring through taxpayer returns to identify potential issues, IRS examiners will focus on spotting campaign issues on taxpayer returns.
The IRS outlined four “guiding principles” that underlie the campaign-approach:
- Flexible, Well-Trained Workforce: Cultivate an environment of continuouslearning to support a flexible workforce with focused training,foundational skillsets, specialized knowledge, and dynamic tools;
- Selection of Better Work: Utilize data analytics and examiner feedback toselect better work with intended compliance outcomes;
- Tailored Treatments: Employ an integrated set of tailored treatmentstreams to improve flexibility to address current and emerging issues andachieve compliance outcomes; and
- Integrated Feedback Loop: Drive continual collection and analysis of data and feedback to enhance ability to focus, plan, and execute work, and promote innovation and feed-back based improvement.
Emphasis on Feedback
The IRS placed special emphasis on implementing a continuous feedback loop (mentioned above), calling it the “cornerstone” of the campaign approach.
Under its new approach, the IRS is encouraging real-time feedback (as a opposed to only post-audit feedback) from both internal and external sources so that IRS examiners can respond immediately to issues and make adjustments accordingly. While there do not appear to be any new formal channels for taxpayer feedback, the IRS referenced the following channels:
- Conferences, webinars, and other public events;
- Audit site checks;
- Executive Lead for each campaign (their names are published in the link above); and
- Asst. Deputy Director Meaux (she welcomed direct feedback from taxpayers)
Potential “Treatment Streams”
The IRS may rely on one or more “treatment streams” as options for addressing various issues, taxpayers, and scenarios. Potential treatment streams include:
- Soft letters (e.g., a letter to a taxpayer indicating that its return position is inconsistent with the government’s position and allowing the taxpayer to remedy its position);
- Changes to forms and instructions;
- Examinations; and
Impact on the Examination Process and Other Resolution Processes
The IRS stressed that the campaign-based approach will not impact current audit procedures or the general conduct of an audit or other related dispute resolution processes, such as Coordinated Industry Cases (CIC), the Compliance Assurance Process (CAP), and Fast Track Settlement. Instead, the campaign-based approach is focused on improving the IRS’s workload selection system.
Think You May Be the Subject of a Campaign?
The IRS said it will not formally notify taxpayers that an issue is being audited pursuant to a campaign, but if asked, the IRS will confirm whether such is the case. A taxpayer may have a return that touches on multiple campaigns, and thus may face an audit focused on multiple campaigns simultaneously.
The IRS assured that just because a taxpayer is tagged by a campaign does not mean the taxpayer will automatically be subject to an adjustment. IRS examiners are to look at the facts and the taxpayer’s level of compliance under those facts.
Coordination of these campaigns will be handled at the case manager level. Issues can be escalated by either the case manager or the taxpayer to the Execution Lead for each campaign, who will have a “line of sight” into all examinations related to that campaign.
Role of IRS Chief Counsel
The IRS confirmed that the Office of Chief Counsel has and will continue to play a role in advising on and assisting with the development of campaigns. Its role otherwise remains unchanged.
Role of Appeals
The IRS emphasized that Appeals remains independent and is not involved in developing campaigns.
Campaign Metrics to Evaluate the Effectiveness of Campaigns
The IRS will rely on various metrics (which will not be made public) to gauge the effectiveness of various campaigns. Examples of metrics may include the number of soft letters issued and the number of amended returns filed following an announcement of a campaign. Notably, the IRS does not seem to have developed clear standards for determining when a given campaign will end.
The initial list of 13 campaigns announced on January 31 reflects those that were fully developed and ready to be announced at that time. They do not necessarily reflect the top compliance priorities of the IRS. More campaigns will be rolled out over the coming months.
Taxpayer Impact & Considerations
As mentioned above, the IRS does not seem to be implementing any new mechanisms for obtaining feedback from taxpayers. Indeed, at times the IRS seemed to be referring to the normal escalation processes currently in effect. That said, taxpayers should identify optimal ways of providing feedback to the IRS. Note also that this first webinar had a way to submit questions to the IRS in advance of and during the webinar.
As the IRS continues to inform the public about the campaign approach, taxpayers should not shy away from obtaining insight from their IRS examiners regarding the campaign approach, which may give taxpayers a sense of the extent to which the new approach has been implemented.
What about Transfer Pricing?
The current list of 13 campaigns includes one campaign directly related to transfer pricing, specifically inbound distributors. Baker McKenzie expects more guidance regarding this campaign in the upcoming webinars. In addition, taxpayers should watch for additional transfer pricing campaigns.
With the campaign-based approach, the IRS is effectively telegraphing the issues it intends to examine. Baker McKenzie encourages taxpayers to stay on top of identified campaigns to better assess audit exposures underlying transactions, structures, and tax return positions that may touch on one or more campaigns. Of course, the IRS has not said that audits will be strictly limited to identified campaign issues and thus tax planning should always ensure appropriate compliance and assessment of audit risk.