April 12, 2010
It’s always a great pleasure to speak at the Tax Executives Institute. And it’s especially meaningful this year as you celebrate your 60-year milestone.
The story of TEI’s last 60 years has many chapters – and over the past 60 years they have included many interactions with the IRS. During this time, 59 TEI presidents have ably represented the corporate community before the IRS. And over time, this discourse and dialogue has matured into what I would describe as a very beneficial relationship for both of our organizations and our nation’s tax system.
While I could speak to you today about many important issues, from our international efforts, to our interest in corporate governance, to our litigation strategies, to our appeals programs, today I want to focus on our recent transparency proposal and our evolving approach to the examination process.
As I stand before you today, I believe we are entering a new and important chapter in our history at the IRS. We are undertaking a new approach to achieve our mission of balanced tax administration with respect to our large taxpayers. And based on our long and productive history together, I am hopeful that TEI will be an active participant in helping us write this new chapter – one that I hope will be the best yet with respect to the relationships between TEI member taxpayers and the IRS.
This new chapter, or evolving relationship, stems from the simple belief that at the end of the day, taxpayers and tax authorities pretty much want the same thing out of a tax system, whether it is the U.S., or a foreign, state, or local system. That is, a balanced tax administration system that provides:
- Certainty regarding a taxpayer’s tax obligations sooner rather than later;
- Consistent treatment across taxpayers; and
- An efficient use of government and taxpayer resources by focusing on the issues and taxpayers that pose the greatest risk of tax noncompliance.
And while we have a long constructive history with TEI, I am the first to recognize that the relationship between the IRS and large corporate taxpayers has often been adversarial and contentious. And being a realist, I also recognize that there continues to be a fair amount of distrust, or at least skepticism, on both sides of the audit table. As a result, there are many situations where cases are not resolved during the examination process and end up either in our appeals process or in the courts.
Our evolving relationship starts with a realization that this paradigm benefits no one – not the IRS and not corporate taxpayers. From my perspective, this paradigm is certainly contrary to our shared goals of greater certainty, consistency, and efficiency for your organizations… and the IRS.
This evolving relationship begins with a reminder of the IRS’ mission and our responsibilities with respect to our large corporate taxpayers. Our mission is to collect the proper amount of tax and to efficiently use our compliance tools to foster on-going compliance by all taxpayers.
Our responsibility is the same as the responsibility of our taxpayers. Apply the law as it currently exists… not how we would like it to be… and do so with neither a thumb on the scale in favor of the government, nor in favor of the taxpayer. This is the key to balanced and fair tax administration.
With our mission and responsibility in mind, our goal for this next chapter in our shared history is to ensure our large corporate taxpayers are in compliance and to keep them there with strategies that are less time and resource intensive for both the IRS and for you.
There are several interlocking pieces to this transformation. In essence, it involves more transparency on your part; a re-tooling of our audit approach on our part; and a commitment by us to enhance our ability to resolve issues quickly and clarify uncertainty in the law.
Let me talk about each of these in turn. The first is transparency. In a broader context, I have been clear since my first day on the job that I thought transparency and increased information flow were the key to the future of sound, fair and efficient tax administration.
If we receive information with tax returns and from third parties, we can identify potential non-compliance more efficiently and target our resources more effectively. In the individual taxpayer context, we will soon receive information on basis of stock sales. In the business context, we will soon receive information on credit card payments to merchants. Both will help us better target our audits and not spend time and resources with compliant taxpayers.
I also believe the concept of more transparency is consistent with our nation’s historic framework of a voluntary compliance system. Our tax system is set up in such a way that taxpayers fill out their own return. This self-assessment system reflects the fact that it is the taxpayer, and not the IRS, who possesses all of the information relevant to tax liability. We then use information reported by the taxpayer to make judgments about issues to pursue, and returns to audit. Inherent in this system is the basic assumption that a taxpayer will be forthcoming.
When it comes to large corporate taxpayers, the most successful foray into enhanced transparency to date has been our CAP program. In essence, in exchange for more openness and transparency before filing, we help resolve issues early and ensure accurate returns are filed. The CAP program allows taxpayers that are transparent with us with respect to their tax issues to get certainty with respect to their tax obligations at the time their return is filed, rather than waiting for us to look at their issues during the regular audit process.
We are in the process of making our CAP pilot program permanent. We envision the permanent CAP program to include elements that were missing from the pilot, namely a pre-CAP process that provides taxpayers a defined path to get into CAP and a CAP maintenance program for taxpayers that have been in the CAP program for a number of years, where we address and resolve issues with a taxpayer as they arise with less than a full audit process.
Now, as everyone in this room knows, in January, the IRS took a major step towards transparency with Announcement 2010-9 which describes changes we are proposing to reporting requirements regarding business taxpayers’ uncertain tax positions.
The goals of our proposal are simple:
- Create certainty sooner for taxpayers;
- Cut down the time it takes to find issues and complete an audit, which benefits both the IRS and taxpayers;
- Ensure that both the IRS and taxpayer spend time discussing the law as it applies to their facts, rather than looking for information;
- Help us prioritize taxpayers for examination;
- Help us prioritize selection of issues during an audit; and
- Obtain key information regarding uncertain tax positions without getting into the heads of the taxpayers or their advisors, as it relates to quantifying risk.
As I have said before, I believe we have taken a reasonable approach. We could have asked for more… but chose not to. We believe we have crafted a proposal that gives us the information we need to do our job without asking taxpayers to divulge the strengths or weaknesses of their uncertain tax positions. And, we are maintaining our current policy of restraint concerning tax accrual workpapers.
While I believe our approach is reasonable, let me be clear – I also understand that it is a “game-changer” with respect to our relationships with and responsibility to our large corporate taxpayers. We are moving away from what I would describe as a contentious relationship where we spend too much of our time identifying issues, to one where we know the issues from the outset and spend our time engaging on appropriate issues.
Now our job is to make sure we use the information we receive efficiently and effectively, for the benefit of the entire tax system. To do this I believe we need to focus on three critical areas:
- Eliminating uncertainty as quickly as possible;
- Evolving our approach to auditing; and
- Providing training to our agents.
Let me address the first point. Essential to our success is ensuring that everyone understands – both IRS agents and taxpayers – that uncertain tax positions are uncertain for a number of reasons, including ambiguity in the law and a lack of published guidance on issues. As a result, we need to engage with taxpayers early – in pre-filing venues, if possible – to eliminate uncertainty as quickly as possible, whenever possible.
The most obvious way to do this is to publish guidance. IRS Chief Counsel Bill Wilkins will work with me and our colleagues at the Treasury Department to eliminate as much uncertainty as possible through published guidance that is grounded in business realities and practical administration of the law. In addition, we won’t hesitate to go to Congress when we see issues that are ambiguous, difficult to administer and need clarification. We look forward to working with you on identifying and addressing the areas in most need of clarification.
The second area we need to focus on is our approach to audits. We understand that with a list of uncertain tax positions at the start of an audit, we cannot approach the audit in the same way we have in the past. We cannot spend the same amount of time, and we cannot ask for the same information we have in the past. We need to engage more effectively and efficiently on the right issues.
To accomplish this, we will work on several fronts. First, with issues becoming more and more complex, we need to develop new approaches to work these issues as quickly and efficiently as possible.
A good example of this is our approach to the issue regarding whether certain expenditures are repairs – and allowed to be deducted currently – or whether, instead, they must be capitalized and expensed over time. This is an example of an issue that is fact-intensive and therefore, resource-intensive to audit. Rather than approaching this issue in the traditional sense by auditing every return, we are working with groups from industry on several Industry Issue Resolution requests – or IIRs – on this topic.
Our goal with this approach is to resolve these issues through published guidance that is administrable in a pre-filing environment. This allows us to use our resources and taxpayers’ resources in a more efficient manner. We plan to employ this process on a number of other issues in the coming year.
Another way we are changing our approach to audits is through a review of LMSB’s current issue management process – known as the “tiered issue process.” We have asked for, and received, a lot of constructive feedback on the tiered issue process both internally from our agents and from taxpayers. Let me share some of that feedback with you.
We have heard that under the “tiered issue process,” it is sometimes unclear who in the audit stream controls the outcome of a particular issue or case, making it difficult for taxpayers to engage in a meaningful discussion about the merits of a particular issue.
We have also heard that when an issue becomes “tiered,” it takes too long for the IRS to reach a position on, and ultimately resolve, that issue.
We are using this feedback to improve our issue management process… to clearly delineate responsibility… and to effectively deal with the information we receive under the transparency proposal in a timely and efficient manner.
With respect to our approach to audits, we also plan to encourage more widespread use of what I describe as our issue resolution tools and to develop new tools wherever the opportunity arises.
Current tools include pre-filing agreements, or PFAs, the fast track appeals process and early referral to Appeals.
While these programs have been used by a number of taxpayers – maybe even by a few of you in the room today – we need to make them more attractive and accessible to both taxpayers and our agents. We can achieve this in a number of ways, including how we measure performance. As we move our focus toward eliminating uncertainty both during an audit and in a pre-filing environment, we understand that we must also adjust how we define a successful compliance program.
The last area we need to concentrate on is training for our agents. We need to provide our agents with the training necessary to effectively and efficiently use a taxpayer’s list of uncertain tax positions, since it will be a new schedule.
Part of this training needs to set clear expectations about how we expect the list to be used – that is, to audit the right issues and the right taxpayers and not a wholesale audit of issues that appear on the list. In addition, as new, complex issues emerge, our agents need training to work them effectively and efficiently.
Let me briefly address some of the other specific concerns I have heard around the proposal.
First, the schedule of uncertain tax positions is not intended as a list of issues for which deficiencies will always be established. It is entirely consistent with the spirit of this initiative that there are issues for which the correct examination outcome is “no change.”
Second, people have raised concerns about our request for maximum tax adjustment. An important thing for you to realize is that a major goal of this proposal is to use the schedule for audit selection, not just as information in audits. That is why we need to obtain disclosure at the time of the return, and why we need some order of magnitude, or materiality, of the issues.
Indeed, part of the challenge was the fact that knowing the company’s risk-adjusted number for each issue held the potential to be extremely helpful for purposes of prioritizing issues within an audit… for identifying returns for audit… and for identifying emerging issues of potential concern.
We understand that a $100 million issue with low risk to the company is less interesting to the IRS than a $100 million issue that has a high risk to the company where the taxpayer believed that the IRS was more likely than not to win if the issue was litigated. We also understand that, if there is no adjustment for risk, both issues would appear to be the same size on the schedule.
However, we were determined to honor the policy of restraint. Therefore, we chose not to ask for a risk percentage or a reserve number. Given these self-imposed restraints, we came up with a maximum number so we have something to use for return selection, while recognizing that the maximum number does not reflect the precise value of the issue.
However, we have also asked for comments on alternative approaches for ascertaining materiality, including use of ranges. We very much welcome your feedback on this. We also recognize that we need to wrestle with the issues of transfer pricing and valuation in the context of sizing an issue.
Finally, I have had discussions with taxpayers about redundancy of information reported to us. These are legitimate concerns and ones which I encourage you to comment on specifically.
One particular area where I encourage your feedback is the overlap of this new schedule and the M3. While the M3 has been a useful tool in specific areas for specific taxpayers, I believe the new schedule has the potential to be a much more valuable tool for fair and effective tax administration. I welcome input regarding the future filing requirements of the M3.
As part of this proposal, we also plan to allow the new schedule of uncertain tax positions to serve as adequate disclosure for penalty protection in areas that would now call for filing a Form 8275 or 8275-R, for example, in the case of positions that are inconsistent with published guidance.
As I stated earlier, I believe we are beginning a new chapter in balanced tax administration. I understand that all of what I have described may not be easy, but I believe it is necessary to achieve our shared goals of greater certainty, consistency, and efficiency for your organizations and the IRS.
In conclusion, I want to emphasize some of our goals as we move forward:
- To collect the proper amount of tax and to efficiently use our compliance tools to foster ongoing compliance;
- To evolve programs and keep getting better. While I’m sure we will disagree on some issues, we should engage and try to clean up inefficiency in the system;
- To move away from auditors hunting around for issues for years;
- To make sure our people are trained, so they aren’t arguing based on their beliefs, but rather the law;
- To innovate to create certainty sooner;
- To expand tools like CAP and fast track; and
- To use transparency to make our audits less time-consuming and resource-intensive, and benefit the overall tax system.
I know these are ambitious goals for our next chapter, but I believe we have the team and the tools in place to make real progress. I look forward to continuing the IRS’ long standing relationship with TEI, and I look forward to our continued dialogue in the years to come.
Thank you again for inviting me and congratulations again on your 60-year milestone.