TEI New Jersey Chapter IRS New Jersey District Liaison Meeting February 1, 2000
The following minutes have been edited for length and to reflect intervening events.
IRS District Director Frank Nixon noted that the purpose of the meeting is to provide a valuable forum for the exchange of information and to address issues between representatives of the Internal Revenue Service and Tax Executives Institute and expressed his appreciation for the opportunity to meet with the TEI members. His office and the offices of the Examination Division Chief and Branch Chiefs are available if any concerns or questions on procedures, progress, etc., arise concerning Examinations, he stated.
Mr. Nixon thanked the TEI members for their participation in the operation of the tax system. Through their contact with a significant number of taxpayers, their expertise and knowledge, and their respect for the integrity of the tax code, the members keep the system operating in the way it was intended. These efforts are greatly needed and appreciated, he said.
Mr. Nixon discussed the modernization of America’s tax agency, stressing the focus on the customers and the mission to provide a top-quality service that will enable those customers to understand and meet their tax responsibilities. He detailed the four new operating divisions, elaborating on the Large and Mid-Size Business (LMSB) Division. The emphasis is on the industry-based makeup of the new organization, with five major industries, each with separate headquarters. For example, the headquarters for Heavy Manufacturing, Construction, and Transportation will be located in New Jersey. Focus will be on specialization and coordination of issues within an industry on a nation-wide basis, striving for consistent, uniform interpretation of the tax law.
Mr. Nixon explained the new structure would not affect current audits. Once an examination is completed, however, the new organization will come into place, utilizing a highly skilled workforce trained to the specific industry, focusing on technical issues, and applying innovative up front issue resolution techniques. He explained that managers and employees were trained to respond to the needs of the taxpayer and to provide “one-stop customer service.” He referred to the questionnaires dealing with customer satisfaction being sent to taxpayers and practitioners and stressed the importance of completing the surveys.
TECHNICAL AND ADMINISTRATIVE ISSUES
Update on IRS Restructuring Act
Ron Hartman, Technical Adviser to the Director, provided information concerning the taxpayers’ rights portion of the IRS Restructuring and Reform Act of 1998. He discussed the changes regarding the notice of third-party contacts and the letters used to implement the notice. Mr. Hartman also discussed Revenue Procedure 9943, which provides guidance on the application of the interest netting rules under Code section 6621(d).
Referring to the “same taxpayer” rule of the revenue procedure, Karen Caretsky of Tax Executives Institute inquired about the IRS’s position with respect to the netting of underpayment and overpayment interest rates when the taxpayers involved were a foreign sales corporation (FSC) and its parent corporation. The IRS representative replied that such underpayment and overpayment interest rates cannot be netted to zero because the parent and FSC are two different taxpayers and no consolidated return is possible.
Effect of IRS Reorganization on Specialists
Robert Shore, Chief, Examination Branch 1, explained that the international examiners will be located within the market segments and report to the market segment director. Other specialists (i.e., engineers, economists, and computer
audit and financial products specialists) will report to the Director of Field Specialists under the LMSB Division. Issue specialists will be located within the Pre-Filing & Technical Guidance segment, which also reports to the LMSB Division. The Case Manager will remain the manager charged with planning and conducting audits; his or her authority will not change.
In response a question concerning immediate changes in the conduct of audits of taxpayers in the Coordinated Examination Program (CEP), Mr. Shore explained that processes already in place are expected to continue, but increased emphasis would be placed on pre-filing approaches to achieve tax compliance.
Internal Use Software for R&E Purposes
In respect of the audits of internal use software for research and experimental purposes, Mr. Shore reported that these claims are examined no differently from any other issue. The National Office is contacted for services of experts, but the Issue Specialization Program is the focal point. There is an emphasis on attempting to resolve the claims as early in the audit process as possible.
In Winn-Dixie, the court concluded that the corporate owned life insurance transaction under scrutiny was a sham. Mr. Shore stated that fact patterns similar to the COLI transaction at issue in the case will result in adjustments. These and other tax shelters were under review and taxpayers were urged to consult their team coordinators and case managers for advice before they took a position.
Early Referral Program
Mr. Shore reported that the Early Referral to Appeals program is in place, but few taxpayers are using it. He stressed the value of taking an issue to Appeals before the examination is completed.
LLCS & Check-the-Box Elections
Joan Bratsch, Examination Division, responded to inquiries in respect of limited liability companies (LLCs) and the check-the-box rules that replaced the long standing facts-and-circumstances test for entity classification. She explained that few unique issues for audit with respect to entity classifications were being addressed. The conversion of a corporation to an LLC, however, could produce a taxable event. In response to a question, the IRS explained that an eligible entity may select (or change) its federal tax classification by either doing nothing (default classification) or electing a classification on Form 8832. The regulations are designed to provide, as a default classification, the classification most eligible entities would ordinarily choose. In addition, a separate taxpayer identification number may be required, depending upon the form of the entity chosen. In response to a question concerning the ramifications of conversion to an LLC, the IRS agreed to provide a written response.
Pre-Filing Agreement Program
John Kaffenberg, Chief, Examination Branch 5, explained that the purpose of the pre-filing agreement (PFA) program is to reduce examination time, cost, and burden through pre-filing guidance and issue resolution before the Appeals level or Tax Court is reached. Goals of the program include provision of pre-filing guidance services with respect to the treatment of issues; better coordination of litigation and legislation strategy; resolution of issues using available alternative dispute resolution tools; increased authority to resolve issues at the lowest possible level; enhanced use of industry agreements; and uniform resolution of issues.
Transfer Pricing Issues
Mr. Kaffenberg reported that the section 6662 Treasury Regulations discuss the contemporaneous documentation taxpayers should maintain to support amounts charged between related parties and to support the methodology used. He stressed that maintenance of the documentation described in the regulations would facilitate a faster examination of this issue.
Mr. Kaffenberg explained that both the district and National Office encourage taxpayers to submit requests for an advance pricing agreement (APAs), which is one of the most effective pre-filing agreement tools as well as a method to resolve audit issues. The IRS makes every effort to expedite the bilateral agreement process, he added.
Mr. Silvestri raised a question concerning Technical Advice Memorandum 200001006 (September 23, 1999) that appears to permit the IRS to set aside a closing agreement in order to correct a taxpayer’s improper method of accounting. The IRS agreed to provide a written response to the question.
Mr. Nixon thanked the TEI members for their efforts in preparing for the meeting and reminded them that problems did not need to wait for Problem Solving Days to be resolved.
Internal Revenue Service:
Frank P. Nixon District Director
Karen Ammons Acting Chief, Examination
Sadie Towler Branch Chief, Criminal Investigation
Andria Greenidge Chief, Collection Division
Ron Hartman Technical Adviser to the Director
Robert Shore Chief, Examination Branch 1
Joan Bratsch Group Manager, Examination Division
John Kaffenberg Chief, Examination Branch 5
Denise Perry District Electronic Filing Coordinator
John Gostel Chief, Quality Measurement Staff
Christopher Clonan Group Manager, Collection Division
Cynthia Moody Chief, Customer Service – Examination
Michael J. McCormick Chief, Research & Analysis
Laura Tanis Taxpayer Advocate Service
Gwendolyn James Taxpayer Advocate Service
Rosemary Daley Group Manager, Examination (Engineers)
Gregg Semanick Public Affairs Officer
Tax Executives Institute:
Joanne Bonfiglio BICC Cables Corp.
President, TEI New Jersey Chapter
James P. Silvestri PSEG Energy Holdings Inc.
First Vice President, TEI New Jersey Chapter
Karen Caretsky BASF Corporation
Paul L. Cevoli Metromedia Company
Alan R. Kelsey Bush, Boake, Allen Inc.
Vincent G. Urso ICI Americas Inc.
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