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Tax Accrual Workpapers Frequently Asked Questions

Q1- How should an examiner determine if a taxpayer has engaged in a listed transaction or a transaction that is substantially similar to a listed transaction for purposes of making a request for tax accrual workpapers?

A - In 2002, the Service announced that it was modifying its historical policy of restraint with respect to tax accrual workpapers. Under the modified policy, the Service will, under certain specific circumstances, seek tax accrual workpapers relating to a taxpayer if the taxpayer has claimed the benefits of a listed transaction on a return. A listed transaction is defined in Treas. Reg. § 1.6011-4 and specifically includes transactions that are "substantially similar" to a listed transaction.

In order to proceed with a request under the modified policy, the examiner must have a reasonable belief that the taxpayer engaged in a listed transaction or a transaction that is substantially similar to a listed transaction. Such a belief may arise from any number of sources of information that an exam team may receive during the course of an examination of the taxpayer. If the taxpayer has filed a disclosure form with the Office of Tax Shelter Analysis ("OTSA") or otherwise acknowledged that it has engaged in a listed transaction, the examiner should proceed with a request for tax accrual workpapers under the procedures set forth in IRM 4.10.20. If the exam team has a question about whether the taxpayer has engaged in a listed transaction or a transaction that is substantially similar to a listed transaction, the examiner should consult Field Counsel to assist in making this determination. The examiner may have to do some examination of the transaction before a call can properly be made. Where the issue is whether a transaction is substantially similar to a listed transaction, Field Counsel will consult the particular office of the Associate Chief Counsel that wrote the listing notice (or the applicable revenue ruling or regulation) in order to get a definitive determination. In general, the taxpayer should be given an opportunity to explain why it believes the transaction is not a listed transaction or substantially similar to a listed transaction. In addition to support from Counsel, a cadre of PFTG technical advisors has been established to assist examiners with questions related to securing tax accrual workpapers.

Q2 - How does the filing of a protective disclosure affect the requirements regarding requests for tax accrual workpapers?

A - A taxpayer may file a disclosure statement on both its return and with OTSA, which details its involvement in a particular transaction for statutory reporting purposes, but preserves the taxpayer's opportunity to assert that the transaction is not a listed transaction or substantially similar to a listed transaction. This is known as filing a protective disclosure. See Treas. Reg. § 1.6011-4(f)(2).

When an examiner receives information regarding a transaction reported through a protective disclosure filed by the taxpayer, the examiner must determine whether the reported transaction is a listed transaction or a transaction that is substantially similar to a listed transaction before a request for tax accrual workpapers based on that transaction is proper. (See Q1, supra). This may require that the transaction be examined in more detail than simply a review of the filed disclosure statement. Where there is any question as to whether the transaction is a listed transaction or substantially similar to a listed transaction, the examiner should consult Counsel (See Q1 supra) for assistance in resolving the matter. In general, the taxpayer should be given an opportunity to explain why it believes the transaction is not a listed transaction or substantially similar to a listed transaction.

If, after review, the examiner concludes that the taxpayer did engage in a listed transaction or a transaction that is substantially similar to a listed transaction, the fact that the taxpayer labeled its disclosure as "protective" does not affect the requirements of IRM 4.10.20 for requesting tax accrual workpapers. The examiner should make a request for the appropriate tax accrual workpapers under those standards. The Service does, however, treat the filing of a protective disclosure as the filing of a regular disclosure for purposes of applying the standards for making requests for tax accrual workpapers under the IRM. Thus, if on a return filed on or after July 1, 2002, a taxpayer files a protective disclosure for a transaction found to be substantially similar to a listed transaction and that is the only listed transaction in which the taxpayer has engaged, the Service will request the tax accrual workpapers for only that particular transaction (See IRM 4.10.20.3.2.3 (1)). If the taxpayer is found to have engaged in more than one listed (or substantially similar) transaction on a return filed on or after July 1, 2002, even if disclosed, the Service will ordinarily request all of the tax accrual workpapers for the year under examination and not merely those related to the particular listed (or substantially similar) transactions. (See IRM 4.10.20.3.2.3 (3)).

Q3 - What constitutes the claiming of a tax benefit for purposes of making a request for tax accrual workpapers?

A - Under Treas. Reg. § 1.6011-4(c)(6), a tax benefit includes deductions, exclusions from gross income, nonrecognition of gain, tax credits, adjustments (or the absence of adjustments) to the basis of property, status as an entity exempt from Federal income taxation, and any other tax consequences that may reduce a taxpayer's Federal income tax liability by affecting the amount, timing, character, or source of any item of income, gain, expense, loss, or credit. Where a taxpayer claims a tax benefit from a listed transaction or a transaction that is substantially similar to a listed transaction on a return, including a net operating loss that results from the transaction that was entered into in a prior or subsequent period, a request for tax accrual workpapers may be appropriate. In the event that a transaction provides tax benefits for more than one tax year, strong consideration should be given to requesting the tax accrual workpapers for the year the transaction was entered into, regardless of which year is the current year under examination. (See Q6, infra).

Q4 - If a transaction becomes "listed" subsequent to the filing of a tax return and the transaction was not disclosed, should the tax accrual workpapers be requested?

A - Yes. IRM 4.10.20.3.2.3 (5) provides that as long as the transaction is a listed transaction (or substantially similar to a listed transaction) at the time of the request, the tax accrual workpapers should be requested. The fact that the transaction was not listed at the time the taxpayer filed its return is not relevant. Some listing notices and delisting notices contain effective dates that should also be considered in making a determination whether a transaction is listed. The examiner should work closely with Field Counsel to make these determinations.

Q5 - Are multiple investments in the same type of listed transaction considered to be multiple listed transactions for purposes of applying the IRM?

A - Yes. Under IRM 4.10.20.3.2.3, for returns filed on or after July 1, 2002, the Service will generally request all tax accrual workpapers for a year under examination when an examiner determines that the taxpayer claimed tax benefits from multiple listed transactions, even if properly disclosed. For these purposes, more than one investment in the same type of listed transaction is considered an investment in multiple listed transactions and the examiner should request all of the tax accrual workpapers for the appropriate tax years and not merely the tax accrual workpapers related to the particular listed transactions at issue. Thus, for example, if a taxpayer has claimed tax benefits from two LILO transactions in a tax year, this would be claiming benefits from multiple listed transactions, even though both transactions were the same type of listed transaction.

Q6 - How are multiple-year transactions treated in terms of making a request for tax accrual workpapers?

A -When the Service makes a request for tax accrual workpapers for a particular tax year under examination, the Service may also request tax accrual workpapers for any related year (even if that year is not under examination), if those workpapers may be directly relevant to the Service's audit of any known listed transactions for the year under examination. See IRM 4.10.20.3.2.3.

The Service has broad discretion to request workpapers for any year if it can articulate a reason why those workpapers may be directly relevant to the examination of the transaction in the year that is under examination. Thus, for example, a taxpayer may enter into a listed transaction, claiming benefits each year from 1999 through 2004. Assume that the tax year under examination is 2003. The tax accrual workpapers for the transaction should be requested for 2003. If the Service can articulate a reason why the tax accrual workpapers for 1999, 2000, 2001, 2002, or 2004 may be directly relevant to the audit of the 2003 listed transaction, the Service may request the workpapers pertaining to the known listed transaction from those years, even if those years are not under examination. The origination year of a transaction may be seen as particularly relevant as may any intervening years in which the taxpayer or its independent auditors may have logically reevaluated their initial determinations of the tax contingencies of the transaction. This is necessarily a facts and circumstances standard that must be addressed on a case-by-case basis.

Q7 - What are the requirements regarding a request for tax accrual workpapers when a taxpayer resolves a listed transaction and enters into a closing agreement with the Service?

A - There are several possibilities for how this situation may arise and how the Service may handle the issue of tax accrual workpapers in each situation.

A) Assume that the taxpayer resolves the listed transaction and all penalties, either through concession or as a part of a national resolution initiative by the Service, for the tax year in which the Service would otherwise request tax accrual workpapers under the IRM. Assume also that there are no other tax years where the transaction may be at issue. In that situation, assuming that a specific matters closing agreement has been executed, the exam team may seek permission from the Director, Field Operations ("DFO") not to seek the tax accrual workpapers for the particular transaction for the specific tax year at issue. If the exam team has any evidence that the taxpayer may have engaged in more than one listed transaction, it would not be appropriate for the DFO to grant permission not to request the tax accrual workpapers. In that event, the general rule is that all of the tax accrual workpapers for the year at issue, and not merely those related to the identified listed transactions, should be requested. Note that concession, for these purposes, generally means a full concession, including penalties. If, however, there is a national settlement position set forth in an Appeals Settlement Guideline or a published initiative, conformity with the settlement position generally will be sufficient. In addition, the taxpayer must have entered into a specific matters closing agreement with respect to the issue. Note that in the event that the DFO exercises discretion not to seek the workpapers under these circumstances, the Service will not agree to include any language in the closing agreement or in a memorandum to the taxpayer that limits its ability to seek those workpapers in the event they become relevant to an examination of the taxpayer in the future (See scenario 7C, infra, for example).

B) Assume the same facts as scenario A, except that the taxpayer entered into multiple listed transactions, which it fully concedes (along with all penalties). Again, assuming that a specific matters closing agreement has been executed, the examiner may seek permission from the DFO not to seek all of the tax accrual workpapers for the tax year at issue. In exercising this discretion, the DFO should consider, among other things, whether the returns reflect the benefits of any other listed transaction besides the transactions being resolved and whether the taxpayer failed to properly disclose the transactions in accordance with Treas. Reg. § 1.6011-4. If either one of those conditions is met, it would not be appropriate for the DFO to grant permission not to request the tax accrual workpapers. Note that concession, for these purposes, generally means a full concession, including penalties. If, however, there is a national settlement position set forth in an Appeals Settlement Guideline or a published initiative, conformity with the settlement position generally will be sufficient. In addition, the taxpayer must have entered into a specific matters closing agreement with respect to the issue. Note also that in the event that the DFO exercises discretion not to seek the workpapers under these circumstances, the Service will not agree to include any language in the closing agreement or in a memorandum to the taxpayer that limits its ability to seek those workpapers in the event they become relevant to an examination of the taxpayer in the future (See scenario 7C, infra, for example).

C) Assume that multiple disclosed listed transactions were resolved with the Service for an earlier tax year, but in accordance with that resolution, the taxpayer is allowed to claim tax benefits from the transactions in the years currently under examination.  Further assume that returns for these years were filed before the resolution with the Service and the taxpayer had already claimed tax benefits from these listed transactions on those returns prior to the resolution with the Service.  Under these circumstances, the listed transactions would not be counted for purposes of determining whether the taxpayer engaged in multiple listed transactions in the years under examination, unless the taxpayer claimed tax benefits from at least one other unsettled listed transaction in the year at issue.

For example, a taxpayer entered into multiple SILOs (a listed transaction) in 2002, claimed benefits from the multiple SILOs in 2002, 2003, and 2004, and then entered into a resolution of the multiple SILOs for the 2002 tax year in November 2005 that allowed it to claim some benefit in 2002 and subsequent years.  The agreement for the 2002 taxable year resolved the transactions and the transactions are considered to have been fully conceded, as the settlement was consistent with an IRS national settlement position.  Consequently, for the 2002 year, the examiner may seek permission from the DFO not to seek all of the taxpayer’s tax accrual workpapers for the 2002 year.

The Service currently has 2003 and 2004 under examination.  If, in examining these returns, the Service determines that the taxpayer has not entered into any other listed transactions, then the taxpayer would be treated as though the taxpayer had not claimed the benefits of the listed transaction for these years.

Alternatively, if the Service finds that the taxpayer has disclosed its investment in a section 461(f) Contested Liability tax shelter (another listed transaction). The Service would count both the settled SILOs and the section 461(f) Contested Liability tax shelter for purposes of determining whether the taxpayer claimed the benefits of multiple listed transactions in 2003 and 2004.  Accordingly, the Service should request all of the tax accrual workpapers for 2003 and 2004 and not merely those related to the section 461(f) Contested Liability transaction.

Finally assume that the 2005 settlement allows taxpayer to claim tax benefits from the settled SILOs on any unfiled returns, and the Service later opens that return for examination.  The tax benefits claimed by the taxpayer from the prior year resolution of the SILOs on the 2005 return would not count as listed transactions for the 2005 year.  This is so even though the taxpayer in 2005 is claiming some benefits from the settled SILOs as provided in the specific matters closing agreement in the 2005 year.  Consequently, for the 2005 year, the examiner may not rely on the SILO settlement benefits alone in the 2005 year to seek the tax accrual workpapers for the 2005 year.

Q8 - Will the Service seek tax accrual workpapers from a taxpayer that claims the benefits of a listed transaction by filing a claim for refund or amended return?

A - The Service initially applied the policy of Announcement 2002-63 only to listed transactions claimed on an original return. The policy has now been extended to listed transactions on an amended return or a claim for refund. Under the expanded policy, the general rule is that the examiner will request tax accrual workpapers in connection with an examination of an amended return or a claim for refund under the same standards as if the benefits of the listed transaction had been claimed on an original return. Thus, if on the original return the taxpayer had claimed the benefits of only one listed transaction and now claimed the benefits of another listed transaction on an amended return, the taxpayer would be treated as having claimed tax benefits from multiple listed transactions under the policies and procedures described in the IRM and all of the tax accrual workpapers would be requested. See IRM 4.10.20.

Q9 - What constitutes proper disclosure of a listed transaction for purposes of applying IRM 4.10.20?

A - The rules for determining whether a listed transaction was properly disclosed by the taxpayer for purposes of applying IRM 4.10.20 will depend on the date for which the taxpayer is claiming any benefit from the listed transaction. One reason for this is that the Service's modification of its tax accrual workpaper request policy was intended to be primarily prospective from July 1, 2002. Another reason is that the forms and methods required for proper disclosure vary because the regulation setting forth the disclosure requirements underwent changes at various times between 2000 and the present and different formulations of the regulation had slightly different requirements and standards for proper disclosure. Accordingly, in making a determination of whether a taxpayer properly disclosed a listed transaction, an examiner must be certain to consult the correct version of the regulation for the tax year at issue.

For returns filed after February 28, 2000, but before July 1, 2002, disclosure could properly be made, for purposes of the Service's modified tax accrual workpaper request policy, by one of three potential methods: (1) on the return, under the standards of Treas. Reg. § 1.6011-4T (applying the appropriate version for the particular tax year at issue); (2) pursuant to Announcement 2002-2, 2002-1 C.B. 304; or (3) under Rev. Proc. 94-69, 1994-2 C.B. 804, if applicable. To properly disclose a listed transaction under Treas. Reg. § 1.6011-4T (as applicable during the relevant tax year during this time period), the taxpayer must have attached a disclosure statement to its return and sent a copy of the disclosure statement to OTSA. For returns filed during this time period, a disclosure using Form 8275, 8275R, 8886, or any similar statement would be considered adequate disclosure. Under Announcement 2002-2, taxpayers had a limited opportunity to disclose their participation in tax shelters in return for a waiver of certain penalties under section 6662. All disclosures made under this announcement were filed with OTSA. For returns filed during this time period, if a taxpayer disclosed its participation in a listed transaction under Announcement 2002-2, this would constitute proper disclosure for purposes of the application of the Service's tax accrual workpaper policy. Under Rev. Proc. 94-69, the Service provided Coordinated Industry Case (formerly Coordinated Examination Program) taxpayers under audit with a mechanism for making an adequate disclosure of a listed transaction. For returns filed during this time period, if a taxpayer disclosed under the procedures set forth in Rev. Proc. 94-69, this may constitute proper disclosure for purposes of the application of the Service's tax accrual workpaper policy.

For returns filed on or after July 1, 2002, proper disclosure is determined solely under the standards of the version of Treas. Regs. §§ 1.6011-4 or -4T that is applicable for the particular tax year at issue. For transactions entered into on or after January 1, 2003, the taxpayer must have attached a Form 8886 "Reportable Transaction Disclosure Statement," to the taxpayer's tax return for each taxable year for which the taxpayer participates in the transaction. A copy of the disclosure statement must have been sent to OTSA at the same time that any disclosure statement was first filed by the taxpayer. The use of a form other than Form 8886 would not be proper. For transactions entered into on or before December 31, 2002, a disclosure on the taxpayer's return and to OTSA in the format of or containing the information shown in the example in subsection (c)(2) of the pre-T.D. 9017 version of Temp. Treas. Reg. § 1.6011-4T (found at the top of the page of 2000-1 C.B. 752, part of T.D. 8877) would be considered adequate disclosure.

 

Q-10 - If a transaction becomes listed after a taxpayer has filed its return, when must disclosure be made in order to be timely?

A - Under Treas. Reg. § 1.6011-4, if at the time the taxpayer files its return the transaction was neither a listed transaction, nor otherwise a reportable transaction, and later the transaction becomes listed, the taxpayer must attach a Form 8886 (Reportable Transaction Disclosure Statement) to its next filed income tax return disclosing the transaction and send a copy to OTSA, regardless of whether the transaction affects the taxpayer's income tax liability for that year. See Treas. Reg. § 1.6011-4(e)(2) (or the applicable version of that regulation for transactions entered into prior to January 1, 2003, which permit another type of form for disclosure other than Form 8886 (see Q9, supra)). Note that for returns filed on or after July 1, 2002, disclosure under Rev. Proc. 94-69 or by using Form 8275 or Form 8275R will not satisfy the disclosure requirements for the tax accrual workpapers policy.

Q11 - What is the unusual circumstances standard for requesting tax accrual workpapers and when does it apply?

A - The general standard for requests for tax accrual workpapers is the "unusual circumstances" standard that is set forth in IRM 4.10.20.3.1. This standard applies to all requests for tax accrual workpapers that do not involve a listed transaction, as defined in Treas. Reg. § 1.6011-4, and to any request for tax accrual workpapers involving a listed transaction for returns filed on or before February 28, 2000 (except those requested under the "directly relevant" to a later tax year under examination standard of IRM 4.10.20.3.2).

Under the "unusual circumstances" standard, a taxpayer's records are to be the primary source of factual data to support the tax return. Tax accrual workpapers normally should be sought only when factual data cannot be obtained from the taxpayer's records or from available third parties, and then only as a collateral source for factual data. Note that in LMSB cases, approval to issue a request for tax accrual workpapers under the unusual circumstances standard must be obtained from the Director, Field Operations.

When an examiner is unable to obtain important factual data from the taxpayer or from available third parties that is reasonably believed to exist, and the examiner wants to explore the possibility of finding the unavailable factual data within any tax accrual workpapers prepared with respect to the taxpayer's tax year(s) at issue, the unusual circumstances standard requires that the examiner must first: (1) seek a supplementary analysis (not necessarily contained in the tax accrual workpapers) of facts relating to the identified issue; and (2) perform a reconciliation of the taxpayer's Schedule M-1 or M-3 as it pertains to the identified issue. IRM 4.10.20.3.1(2).

The primary purpose of the required supplementary analysis is to see whether the factual information the examiner has not yet been able to obtain from the taxpayer or from available third parties may finally be obtained by the request, and thereby avoid the necessity of the Service giving further consideration to asking for tax accrual workpapers on the issue to complete its understanding of the facts. The supplementary request may resolve prior IDR or summons disputes between the Service and the taxpayer or available third parties. The supplementary request may also provide some clue as to what the taxpayer and other persons may have told the taxpayer's independent auditors regarding the issue, and how the independent auditors may have viewed the issue.

The primary purpose of the Schedule M-1 or M-3 reconciliation in relation to a potential tax accrual workpaper request under the "unusual circumstances" standard is to help the examiner to form an informed opinion, insofar as possible, of whether it is likely that the taxpayer actually established a "reserve" for contingent tax liabilities regarding the tax issue for which the examiner is interested in obtaining more factual data. In some cases, a thorough understanding of the source of all of the likely book-to-tax differences between a company's tax return and financial statement for a particular period, may help the examiner reach the conclusion (by process of elimination) that the taxpayer most likely did not establish a reserve for a particular tax transaction. This procedural requirement represents a further opportunity for the examiner to obtain information that would eliminate a potential need for tax accrual workpapers regarding a taxpayer's particular tax return positions. If, after reconciling the taxpayer's Schedule M-1 or M-3, the examiner is confident that the taxpayer did not establish a reserve for tax contingencies with respect to the transaction at issue, then the examiner would expect there to be no tax accrual workpapers regarding the transaction.

As its name suggests, the "unusual circumstances" standard applies only in rare instances. By necessity, the standard requires careful factual and legal analysis on a case-by-case basis. The following are two examples of circumstances where the application of this standard would be appropriate because the Service's IDR and summons tools would not be adequate to obtain missing factual information regarding a significant aspect of an important transaction from the taxpayer or available third parties.

A) Assume that a taxpayer and its agents within the United States arranged their affairs so that the Service reasonably came to believe that important factual information regarding a transaction engaged in by the taxpayer and under audit for the year in question could only be obtained from a foreign individual who resided outside the United States and who could not be reached by any discovery means reasonably available to the Service. If the other requirements of the "unusual circumstances" standard were met, it would be appropriate to issue an IDR seeking the tax accrual workpapers related to the identified issue.

B) Assume that the Service developed a reasonable suspicion (e.g., through the warnings of an informant or a whistleblower) that the taxpayer or available third parties already had or were in the process of destroying important factual information regarding a transaction entered into by the taxpayer and under audit for the tax year in question. If the other requirements of the "unusual circumstances" standard were met, it would be appropriate to issue an IDR seeking the tax accrual workpapers related to the identified issue.

In both of these hypothetical situations, the tax accrual workpapers in the hands of the taxpayer or the taxpayer's independent auditor regarding the transaction could potentially contain factual leads or documents that might allow the Service to reconstruct the factual information it had been unable to obtain via the ordinary means of civil discovery. Under those circumstances, the examiner would not need to show any positive evidence that the missing, important factual information in the case would actually be found within the tax accrual workpapers sought; instead, it would be sufficient to show that a review of the subject matter (and of the particular factual information the Service is missing) should have been performed by the independent auditor reviewing or preparing the tax accrual workpapers, if the independent auditor had performed its job in a reasonable manner, based upon the facts and circumstances of the transaction being reviewed.

Q12 - What is meant by the term "reported financial irregularities" as used in IRM 4.10.20.3.2.3(3)?

A - For returns filed on or after July 1, 2002, IRM 4.10.20.3.2.3(3) provides that the Service, as a discretionary matter, will request all tax accrual workpapers for the year under examination if "in connection with the examination of a return claiming tax benefits from a single listed transaction that was disclosed, there are reported financial irregularities with respect to the taxpayer." IRM 4.10.20.3.2.3(4) explains that the term "as a discretionary matter" is to be interpreted as imposing a presumption that the Service will request all tax accrual workpapers for years under examination that present those circumstances, but that in rare instances, it might not be appropriate to request all of the workpapers. In the ordinary circumstances described above where the Service will request all tax accrual workpapers for a year under examination, the Service may also request tax accrual workpapers pertaining to the known listed transaction or pertaining to the reported financial irregularities for years not under examination. In the preceding sentence and in IRM 4.10.20.3.2.3, a year "not under examination" is determined by looking at each tax year separately. For example, a taxpayer's year ending September 30, 2001, might actually be under examination, but would not be counted as one under examination when considering whether a "directly relevant" year request may be made in relation to the taxpayer's year ending September 30, 2002, a year also under examination and in which the reported financial irregularities standard is met.

The "reported financial irregularities" standard requires careful factual and legal analysis on a case-by-case basis. It includes, but is not limited to, cases in which the Service becomes aware of evidence that a company has made a restatement of earnings resulting from what may be earnings manipulation (such as improper acceleration of revenue recognition or recognition of nonexistent revenue), expense manipulation, fraudulent accounting practices, corporate mismanagement, or any other improper activities. These are not the only examples of what may constitute "reported financial irregularities," but are the most common situations in which the Service would request tax accrual workpapers under this standard.

Note that under the reported financial irregularities standard, for the Service to request all of the company's tax accrual workpapers for the year in question, the company must also have a disclosed listed transaction. There is no requirement that the reported financial irregularities be connected to the disclosed listed transaction in order to request the tax accrual workpapers. In the event a company had reported financial irregularities and had an undisclosed listed transaction, the Service would request all of the tax accrual workpapers for the tax year at issue, not under the reported financial irregularities standard, but under the nondiscretionary undisclosed listed transaction standard of IRM 4.10.20.3.2.3(2).

Q13 - Are there types of taxpayers that may have claimed the tax benefits of a listed transaction on their tax returns, within the time frames and circumstances covered by Announcement 2002-63, where the Service may be confident that the taxpayer had no reason to create or have created any certified [or audited] financial statements for the tax periods at issue, so that examiners do not need to seek authorization from the DFO in order not to request tax accrual workpapers from such taxpayers?

A - Yes.  Taxpayers who do not create or have created certified or audited financial statements do not create tax reserves or accruals for their potential unpaid federal tax liabilities.  As such, there would be no reason to create tax accrual workpapers reflecting the computation of the accrual or reserves for their potential unpaid federal tax liabilities.  In these circumstances, examiners do not need to consider requesting from the taxpayer or seeking DFO approval not to request tax accrual workpapers from these types of taxpayers, even though these taxpayers may have claimed the benefits of a listed transaction on their returns.  These types of taxpayers include individual taxpayers and taxpayers treated for federal tax purposes as subchapter S corporations or as partnerships (excluding publicly traded partnerships treated as corporations).  They may also include corporations that have effectively liquidated before the end of the tax periods at issue.

On the other hand, publicly traded corporations and partnerships are required to obtain certified financial statements and therefore are likely to have created tax accrual workpapers.  Non-publicly traded companies that are treated as corporations for federal tax purposes are also likely to have created tax accrual workpapers if these entities require or otherwise seek periodic certified financial statements for obtaining or retaining financing or for other purposes.  For these types of taxpayers, examiners will request tax accrual workpapers in accordance with Announcement 2002-63, even if the examiners are uncertain whether the taxpayer or its independent auditor created any tax accrual workpapers for the tax period at issue.

Q14 - Under the policy described in Announcement 2002-63, will the Service request tax accrual workpapers from taxpayers subject to potential transferee liability for their involvement in a listed intermediary transaction identified in Notice 2001-16?

A - Yes.  The Service will request tax accrual workpapers from taxpayers subject to potential transferee liability for their involvement in a Notice 2001-16 (or substantially similar) transaction, unless the Service knows that these potential transferee taxpayers are of a type that would have no reason to create any tax accrual workpapers for any questionable tax transactions they were involved with in the tax period at issue.  See FAQ 13 above. 

The Notice 2001-16 transaction is commonly recognized as a “collection” shelter, designed specifically to leave behind a judgment-proof shell entity.  The transaction as described involves multiple parties and depending upon the facts of the case could be treated as either an asset sale or a stock sale.  Where a transaction is treated as an asset sale to the promoter intermediary entity rather than a stock sale, the original shareholders may be liable as transferees of the target corporation.  The target corporation, while under the control of the original shareholders/transferees obtained a tax benefit from the Notice 2001-16 shelter in that it paid no corporate-level tax on the sale of corporate assets.  By causing the target corporation to avoid the payment of tax, the original shareholders also benefited from the shelter.  The original shareholders received greater proceeds from the asset sale of the target assets than they otherwise would have had the corporate-level taxes been paid.  Other transferees of the target corporation may be pursued for their tax accrual workpapers.  Their tax benefits, like those of the original shareholders/transferees, are derivative of the transferor target corporation's return.

The listing Notice recognizes that there is more than one party benefiting from this transaction; as such, tax accrual workpapers reflecting any tax reserve for this transaction for any such party benefiting from the transaction could be prepared and should be subject to a request for tax accrual workpapers under Announcement 2002-63.  For purposes of evaluating whether timely and proper disclosure of a Notice 2001-16 transaction occurred in relation to the policy of Announcement 2002-63, the Service will consider the transaction so disclosed if such proper and timely disclosure was either made by the transferor target corporation or by the particular transferee at issue.

Q15 - Should the Service entertain offers to resolve tax shelter issues in lieu of requesting the taxpayer to produce tax accrual workpapers through an IDR or summons pursuant to the policy described in Announcement 2002-63? 

A - No.  The Service should not use requesting or not requesting tax accrual workpapers as an inducement to encourage a taxpayer to enter into one of the national settlement initiatives or as any other type of bargaining tool.  In particular, it is not appropriate to delay the issuance of an IDR or summons requesting tax accrual workpapers for the purpose of negotiating participation by the taxpayer in national resolution initiatives or any other type of settlement.  Also the Service must not offer either the withdrawal or non-issuance of such an IDR or summons as an inducement to enter into a national resolution initiative or any other type of settlement.  Nor should they entertain the taxpayer’s attempt to negotiate such a delay or withdrawal.

Q16 - For purposes of FAQ 5, what are some of the facts that may help an examiner determine if the taxpayer has engaged in multiple or just one LILO or SILO transaction?

A - If the LILO or SILO activity of the taxpayer involves any of the following circumstances, the examiner should treat the transaction as multiple transactions, rather than as one transaction: (1) different closing dates for the leases; (2) different members of the taxpayer’s consolidated group entering into the leases; (3) different tax indifferent counter-parties to the leases; (4) different types of leased property; or (5) leased property in different cities.  Questions on whether a particular taxpayer has entered into multiple LILO or SILO transactions should be coordinated with the Technical Advisor assigned to that taxpayer.

Q17 - Can the Service accept tax accrual workpapers that a taxpayer produces voluntarily during an examination and use them to develop issues?

A - The Supreme Court confirmed the Service’s right to obtain Tax Accrual Workpapers (TAW) under its summons authority in United States v. Arthur Young & Co., 465 U.S. 805 (1984).  Despite the broad scope of authority recognized by the Supreme Court, the Service has historically acted with restraint, declining to request TAW as a standard examination technique.  The Service will, however, accept TAW volunteered by a taxpayer to an exam agent for use in the course of an examination.  This might happen, for example, if the taxpayer thinks the TAW will expedite the examination or wants to provide the TAW as an alternative means to substantiate a position on the return.  If an exam agent receives TAW from a taxpayer that were not requested during the course of an examination, the agent should verify that the taxpayer intended to voluntarily provide the TAW and document it in the exam file before using it for any purpose.  If the taxpayer provided TAW inadvertently or by mistake, the exam agent must return the TAW to the taxpayer and cannot use the TAW for any purpose.  

Page Last Reviewed or Updated: 27-Nov-2013