Is ‘Corporate America’ looking at increased tax enforcement?

November 2019  |  SPECIAL REPORT: CORPORATE TAX

Financier Worldwide Magazine

November 2019 Issue

Recent changes in federal tax law, along with announcements from the Internal Revenue Service (IRS), have provided more than subtle signals that the federal taxing authorities are looking to increase their focus on big business, sometimes referred to as ‘Corporate America’. Signs can be gleaned from provisions included in the recently passed Taxpayer First Act (TFA), focus areas announced by the IRS’s large business and international (LB&I) division’s current campaign lists, significant changes in IRS leadership, and last but not least, a continuing trend of increasing IRS enforcement budgets.

The TFA was signed into law on 1 July 2019. As evidenced by ‘Taxpayer First’, the TFA’s primary goals are to improve customer service, protect taxpayer’s rights and assist low-income taxpayers. There are, however, several provisions contained in TFA which go beyond those areas and are anticipated to have a direct impact on ‘Corporate America’, such as the whistleblower reforms.

In its annual report to Congress, the IRS Whistleblower Office announced a record-setting year with proceeds of $1.441bn collected. Even with this success, a lack of whistleblower protections and the limited instances of the IRS’ authority to disclose taxpayer information were noted as key issues which could increase the incentives for otherwise hesitant whistleblowers to come forward.

To address employees’ fears of reporting a company’s tax violations, and to help the government develop more complete tax cases, the TFA established anti-retaliation provisions aimed at protecting whistleblowers as well as a new provision allowing for limited disclosure of confidential taxpayer return information.

The anti-retaliation provisions, intended to protect an employee who speaks out against their employer’s asserted failure to comply with tax laws, are similar to existing protections found where a whistleblower falls under either the False Claims Act’s qui tam and the Sarbanes-Oxley Act. The TFA provisions, which apply to federal tax matters, preclude an employer from discriminating against an employee in the terms and conditions of said employee’s employment as retaliation for whistleblowing. The provisions for filing a complaint for violations of the anti-retaliation provisions are now formally set forth in the Internal Revenue Code (IRC).

To strengthen these protections, the TFA provides that an employee may be reinstated with the same status prior to retaliation, recovery of 200 percent back pay, 100 percent value of all benefits lost (with interest), and compensation for any special damages sustained as a result of the reprisal including litigation costs, expert witness fees and reasonable attorney fees.

The TFA also created a new disclosure exception applicable to whistleblowers. Generally, with limited exceptions, the IRC requires that tax return and return information remain confidential. This new provision permits “return information related to the investigation of any taxpayer with respect to whom the individual has provided such information, but only to the extent that such disclosure is necessary in obtaining information, which is not otherwise reasonably available, with respect to the correct determination of tax liability for tax, or the amount to be collected with respect to the enforcement of any other provision of this title”.

The LB&I Division of the IRS has 52 active campaigns. Campaigns are established to address areas of significant non-compliance with the effective use of current IRS resources. A number of these campaigns directly affect ‘Corporate America’. The most significant ones are highlighted below.

Corporate Direct Foreign Tax Credit. Many domestic corporations take advantage of the Foreign Tax Credit, which allows for a credit for foreign taxes paid or accrued. The campaign aims to improve taxpayer compliance by focusing on taxpayers in an excess limitation position.

Costs that Facilitate an IRC Section 355 Transaction Campaign. Costs to facilitate a tax-free corporate distribution must be capitalised. However, some taxpayers execute a corporate distribution and improperly deduct the costs that facilitate the transaction in the year the distribution was complete. This campaign will focus on remedying these issues.

Energy Efficiency Commercial Building Property Campaign. Taxpayers who own or lease a commercial building may deduct the costs or portion of the cost of installing energy efficient commercial building property. This campaign will focus on ensuring taxpayer compliance with the deduction.

Forms 1042/1042-S Compliance Campaign. When taxpayers make payments of certain US-source income to foreign persons, they must comply with withholding, deposit and reporting requirements. This campaign addresses individuals who do not meet the compliance duties.

Related Party Transactions Campaign. There are multiple code sections that address transactions between related parties. This campaign focuses on whether taxpayers are following these rules, specifically when there are transactions between commonly controlled entities that provide taxpayers a means to transfer funds from the corporation to pass through entities or shareholders.

Sale of Partnership Interest Campaign. Generally, the sale of a partnership interest will result in a short-term capital gain or loss, or a long-term capital gain or loss, depending on whether the taxpayer held the interest for more than a year. However, LB&I has established this campaign to address those taxpayers who do not report the sale or do not report the gain or loss correctly.

In the past year, the IRS has seen significant leadership changes. On 1 October 2018, Charles P. Rettig was sworn in as the 49th Commissioner of the IRS. On 8 March 2019, Michael J. Desmond was sworn in as the chief counsel of the IRS. Both Mr Rettig and Mr Desmond bring decades of tax experience and a focus on tax enforcement to the leadership of the IRS.

Complimenting this type of tax experience and signalling an increase in fraud referrals from examination to criminal investigation (CI), Eric Hylton, formerly the deputy chief of CI, was recently named commissioner of the IRS Small Business and Self Employed (SB/SE) division and Tamera Ripperda, who was deputy chief of SB/SE, was named as commissioner of the Tax Exempt and Government Entities (TE/GE) division.

Finally, it is no secret that the IRS’s budget has been repeatedly cut back by Congress in recent years, but that has been quietly changing. Over the last two or three budget cycles, there has been a significant increase in IRS funding, including enforcement. Continuing this trend, the Senate appropriation package, HR 6147, which cleared by a 92-to-6 vote on 1 August 2019, approved IRS fiscal year 2019 budget with base funding of $11.2bn, including a $200m increase for enforcement – reflecting bipartisan support for rebuilding IRS enforcement.

The US tax system is based upon voluntary compliance. But for those taxpayers who need a bit more incentive, the IRS is sending signals that tax enforcement is becoming a top priority. Enforcement minded leadership and recent legislation, aided by a more robust IRS budget, make this clear.

 

Steven Toscher and Sandra Brown are principals and Gary Markarian is a law clerk at Hochman Salkin Toscher Perez, P.C. Mr Toscher can be contacted on +1 (310) 281 3200 or by email: toscher@taxlitigator.com. Ms Brown can be contacted on +1 (310) 281 3200 or by email: brown@taxlitigator.com. Mr Markarian can be contacted on +1 (310) 281 3200 or by email: markarian@taxlitigator.com.

© Financier Worldwide

BY

Steven Toscher, Sandra Brown and Gary Markarian

Hochman Salkin Toscher Perez, P.C.

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