Industry Director Directive on Government Settlements Directive #2
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D. C. 20224
Large and Mid-Size Business Division
LMSB Control No.: LMSB-04-0707-050
Impacted IRM 4.51.2
September 14, 2007
MEMORANDUM FOR INDUSTRY DIRECTORS
DIRECTOR, FIELD SPECIALISTS
DIRECTOR, PREFILING AND TECHNICAL GUIDANCE
DIRECTOR, INTERNATIONAL COMPLIANCE STRATEGY
DIRECTOR OF EXAMINATION, SBSE
FROM: John Risacher /s/ John Risacher
Retailers, Food, Pharmaceuticals and Healthcare
SUBJECT: Tier I Issue: Government Settlements Directive #2
This directive is intended to clarify the roles and responsibilities aligned with rules of engagement on the Tier I issue relating to deductibility of settlements with a governmental agency under Sections 162(a) and 162(f).
Rules of Engagement:
Roles and Responsibilities
The Government Settlements Directive #1 issued on May 30, 2007 addressed the examination of two types of governmental settlements. The first governmental settlements addressed in Directive #1 are those settled with the Department of Justice (DOJ) for False Claims Act (FCA) violations. Secondly, Directive #1 addressed the Environmental Protection Agency (EPA), DOJ or other environmental agency violation settlements which include Supplemental Environmental Projects (SEP). In addition, Directive #1 provided examiners with the minimum mandatory risk analysis thresholds and included as attachments audit technique guides specific to both the FCA and SEP issues.
This second directive clarifies the mandatory steps that must be taken by the examiners to involve the Issue Management Team (IMT) in the development and resolution of these issues. These steps will include discussions and coordination with the Technical
Advisors (TA’s) and if appropriate, a TA case visit. The Health Care Technical Advisor team will serve as liaison between the IMT and examination teams for the FCA issue, and the Environmental TA will serve as a liaison between the IMT and examination teams for the environmental settlements and SEPs.
The role of the manager and the manager's team begins with the pre-audit analysis and the opening interview to determine if the taxpayer has engaged in a settlement with another governmental agency. If this type issue appears to exist, the manger and the team’s next step is to research the web site and contact the TA outlined in the ATG that has been issued as an attachment to IDD # 1 (Industry Director Directive on Government Settlements Directive #1).
Throughout the development and resolution of the issue, the manager or their delegate will continue to utilize the TA as a resource in conjunction with the ATG. This will ensure that the appropriate information is being ascertained. Where a taxpayer has entered into a settlement, the first step is to determine whether it deducted a part or all of the settlement it entered into. This should include analysis of Schedule M-1 and/or Schedule M-3, and asking the taxpayer how the settlement was treated for tax purposes. Where a deduction is taken, the examination team should next obtain a copy of the settlement agreement in order to determine the nature of the settlement and whether the potential for a penalty exists. The settlement document will typically contain the facts and information the TA needs in order to initiate contact with the government agency. If contact is appropriate, it will be initiated by the TA. The TA will identify the appropriate contact at the government agency for the team, who can then conduct its issue development with the person(s) identified. When the issue is fully developed, utilizing both the information provided by the taxpayer and the information secured from the other agency, the manager and the TA will jointly develop the Service's position, obtain concurrence of the IMT, and share the Service's position with the taxpayer. Forms 5701 and the RAR must be reviewed by the TA prior to issuance to the taxpayer. The TA will be responsible for obtaining the concurrence of the IMT. Should the taxpayer not agree with the Service's position, the manager and team will work with the TA to determine if issue resolution tools are appropriate. The TA or other IMT member will represent the IMT during any issue resolution process which also requires the IMT’s concurrence.
Questions regarding all settlements other than environmental settlements should be addressed with the Health Care Technical Advisor team, John Tucker or Danny Zink. John Tucker may be reached at (615) 250-5194 or John.Tucker@irs.gov, while Danny Zink may be reached at (615) 250-5195 or Daniel.Zink@irs.gov.
Questions regarding environmental settlements should be addressed to David Carter, PFTG Technical Advisor Manager at 404-338-9444.
This Directive is not an official pronouncement of law and cannot be used, cited or relied upon as such.
cc: Commissioner, LMSB
Deputy Commissioner, Operations
Deputy Commissioner, International
Division Counsel, LMSB
Directors, Field Operations
Director, Planning, Quality, Analysis & Support
Director, Strategy, Research and Program Planning