Most taxpayers are familiar with concept of an IRS examination. A taxpayer files a return, receives a letter in the mail notifying them that they have been selected to have their work double-checked, and then proceed to worry. For most taxpayers, examinations do not uncover any serious errors or illegal activity, but it is an event that is known to strike fear in taxpayers, big or small. One of the reasons for this is the fact that the process is so unknown. For many individuals and business that receive an examination notification, it will be their first time having their financial histories extensively questioned and scrutinized. Taxpayers may wonder what the IRS is looking for or whether the agents they will meet with have a good grasp on some of the more technical provisions of our tax law. But earlier this year, the IRS shared a key piece of information that could help taxpayers and their attorneys prepare for an examination and is giving the world a look at the tools that IRS agents use to identify potential issues in tax examinations.
The Internal Revenue Service (IRS) is an extremely large entity. It consists of several groups called “divisions”. Divisions are mostly divided up based on the type of taxpayer or taxable entity that the group is responsible for working with. Some of the larger divisions include the Wage and Investment, Small Business/Self Employed, Tax-Exempt and Governmental Entities, and finally, Large Business and International. Each division typically creates their own initiatives that can assist their examination agents perform examinations quickly, efficiently, and on an informed basis.
Earlier this year, the Large Business and International Division (LB&I) released 46 of the tools that they recently created for their examination agents. International Practice Units (IPUs) are Powerpoint slides that aim at educating examiners within LB&I on some of the more complex issues that they may come across in their daily examination activities.
Although many of the topics involve complex issues that arise when a U.S. business entity transacts with a related entity located overseas, there are plenty of IPUs that can affect an individual taxpayer living here in the Untied States. It’s true that the LB&I is responsible for extremely large businesses and their tax matters, but another group of taxpayers that the group is responsible for are those with international ties, such as taxpayers who may be utilizing foreign tax credits or have taken a position as to their residency under one of the several tax residency tests. Furthermore, LB&I handles most of the Foreign Account Tax Compliance Act (FATCA) and the Foreign Bank Account Reporting (FBAR) initiatives. The IPUs have a broad reach and can affect taxpayers who are living, working, or have family members or a business overseas.
The IPUs that were released include an educational overview of the particular topic that they are meant to cover, examples, and resources for the agent that include the types of questions to ask in hopes that the taxpayer may disclose additional information that will be used to adjust the amount owed to the IRS or even to be used by the Criminal Investigations Division or Department of Justice in a future prosecution.
The IPUs are constantly being updated and are available for public view on the IRS website. They are sorted by the date that they were uploaded. Some of the Process Units include:
- Computing Foreign Base Company Income
- Asset Valuation Using the FMV Method for Interest Expense Allocation to Calculate FTC Limitation
- Exhaustion of Remedies
- How to Allocate and Apportion Research and Expense Expenses
- Interest Expense Limitation Computation Under 163(j)
- Issuing a Formal Document Request When a U.S. Taxpayer is Unresponsive to an IDR
- Comparability Analysis for Tangible Goods Transactions – Inbound
- Review of Transfer Pricing Documentation by Inbound Taxpayers
- Review Procedure 99-31 Outbound Guidance
- Comparability Analysis for Tangible Goods Transactions – Outbound
- Determining Tax Residency Status of Lawful Permanent Residents
- Substantial Presence Test
- Election Under IRC Section 6013(g)
- Election under IRS Section 6013(h)
- First-Year Election Under IRC Section 7701(b)(4)
Although the information may not be particularly useful for a taxpayer alone, it is valuable for tax attorneys and other practitioners who will be advising clients on the types of issues that are covered in the newly released IPUs. Whether you are being examined or in need of tax planning advice, an experienced tax attorney can take the tools that are provided by the IRS and get a feel for their litigating position and create a plan that is tailored for nearly any situation.
Contact An Experienced Tax Examination Attorney Today
Businesses or individuals who receive examination notifications should contact an experienced tax attorney as soon as possible. A tax attorney who has extensive experience in civil and criminal examinations will be aware of tools that are available to IRS agents (such as IPUs) and will create a strategy that can be used during the examination.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have a plethora of experience in representing businesses and individuals in civil and criminal examinations as well as providing extensive tax planning advice. Being summoned for an IRS examination does not have to be terrifying. Ensure that you have a zealous advocate working hard for you and your business. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.
