April 4, 2011
Thank you and it’s my pleasure to be with you for your mid-year meeting. I hope you are enjoying the Spring in Washington.
One of my core leadership principles is that individuals and institutions must always be evolving and getting better. Clearly, no one can afford to be captive to the past. We can’t be entrenched in our thinking. We have to adapt to new realities and squarely meet emerging issues and trends. And that applies to dynamic public institutions, such as the IRS.
Like spring cleaning, we must take a regular and hard look at the way we do business and see what has become calcified and no longer works. In other words, we must evolve. We must build on our past. We must innovate. And this includes evolving and transforming our relationship with our large corporate taxpayers… to find that intersection of mutual interests.
At last April’s TEI meeting, I spoke of the need to work smarter and to be more efficient … to create innovative strategies for issue resolution that are less time and resource intensive for both the IRS and you… and the corporations you represent. Let me bring you up-to-date on where we stand on our evolutionary game plan.
First up is the CAP program. As most of you know from our announcement last week, we are making CAP permanent. This should not come as any great surprise to anyone in this room as we put a great deal of stock in CAP. What we basically did is formalize the process.
One of the big changes in CAP is that you no longer have to be invited to join the program. Any corporation that meets the program’s requirements and wants to enjoy the benefits of open, cooperative, and transparent interactions can now apply. Like those veteran CAP participants, these corporate taxpayers coming into the program for the first time should achieve tax certainty sooner and with less administrative burden than conventional post-filing examinations.
Although we have no set goal, I would also not be surprised to see a growth spurt in CAP participation. The number of corporate taxpayers in the program has already grown from 17 in the 2005 tax year – when the pilot began – to 112 last year, and we anticipate almost 140 taxpayers in the 2011 tax year. We’ve also expanded CAP by adding two new programs.
The first is a new pre-CAP program that will provide interested taxpayers with a clear roadmap of the steps required for gaining entry into CAP.
The second is a new CAP maintenance phase that’s intended for LB&I taxpayers who have been in CAP for several years and have established a track record of working cooperatively with the IRS. CAP maintenance allows for varying levels of review based on the taxpayer’s history of compliance and risk during CAP. CAP maintenance will also allow both the IRS and the taxpayer to minimize the amount of resources used in the maintenance phase while still ensuring compliance, and will allow taxpayers to resolve issues with the IRS as they arise.
As I mentioned, CAP is now open to all taxpayers who meet the program’s requirements. However, participating in CAP requires a resource commitment, although you will save resources in the long-run. And you have to meet all of CAP’s requirements and rules, such as signing a Memorandum of Understanding, or you will no longer be able to participate in the program.
The Quality Examination Process is another prime example of the IRS evolving. We are engaging and involving our large corporate taxpayers in the examination process, from the earliest planning stages through resolution of all issues and completion of the case. QEP streamlines processes; reduces burden and duplication; and improves our communications and consistency in our dealings with taxpayers.
When boiled down to its essence, QEP is all about keeping things moving. QEP is all about an ongoing dialogue between the audit team and taxpayers. And QEP is all about mutual accountability.
QEP stresses accountability on the part of the taxpayer and the IRS. Both sign the examination plan acknowledging their understanding of the plan and a commitment to achieving its milestones and timelines.
Now, I have also heard a lot from taxpayers about our examiners not having, or not thinking they have, the authority to resolve issues. This defeats the whole purpose of QEP and accountability and should not happen. So, if you have any issues during the audit, and your exam team is not being responsive, please elevate it through the appropriate management chain.
I should also mention in the exam context that Heather Maloy, the Commissioner of our Large Business & International division, and her senior team are engaging in a review of closed cases in order to get a real feel for the level of technical quality exhibited in our current casework. They will use the results of this baselining exercise to ensure that we are focused on the right issues with corporate taxpayers and that our work remains high quality.
Now, it’s a given that tax complexity is only getting worse. Last year, the IRS calculated that there were approximately 4,500 changes to the Code since 2000…not the type of evolution you want to see. These frequent changes to the Tax Code layer complexity upon complexity… like shingles on a roof. They make tax planning more difficult as greater complexity begets greater uncertainty.
While there have been numerous calls for tax law simplification, the reality is that the Code has gotten more complex, not less. That leaves both the IRS and our taxpayers in the unenviable position of trying to find clarity and certainty where there is vagueness and doubt.
However, we have one important tool in our toolkit that can help us cut through the complexity and uncertainty. The Industry Issue Resolution Program – or IIR – can help the IRS and corporate taxpayers reach administrable, common sense solutions for uncertain tax areas. When you think about it, IIR is really another form of guidance that helps reduce uncertainty on business tax issues within particular industries.
And by using IIR, we will, as of today, finally lay to rest a long-standing controversy that had been plaguing the telecommunications industry for years. And that’s whether maintenance, repair and improvements of both wireline and wireless network assets must be capitalized.
First, a bit of background. Applying capitalization principles to network assets can be particularly difficult, largely because the property consists of a network of interconnected items, such as in wireless networks, mobile telephone switching offices, and property located at cell sites.
These taxpayers and the IRS often don’t agree on which items within this network constitute discrete units of property, and whether the replacement of a particular item materially increases the value, or substantially prolongs the useful life of a unit of property.
Enter the Telecom IIR whose goal was to minimize disputes regarding the deductibility or capitalization of expenditures to maintain, replace, or improve network assets. As a result of our work on the IIR, today, we issued three revenue procedures that provide two alternative safe harbor approaches.
These revenue procedures permit taxpayers to adopt a network asset maintenance allowance safe harbor method of accounting. This will allow them to determine the amount of network asset expenditures for a taxable year that may be currently deducted, and the amount required to be capitalized for both wireline and wireless network assets.
And let me point out the substantial dollar figures involved. The network asset capitalization IIR project resolves $3.6 billion in accounting method disputes affecting 80 percent of the wireless and wireline telecommunications industry. The wireless depreciation IIR project resolves depreciation disputes with respect to the recovery period of assets in the telecommunications industry. In 2007 alone, this industry placed in service $8 billion of new fixed assets.
However, as we evolve and try to solve issues before they show up in an exam – such as through IIR’s or CAP – it often bumps up against our current measurement systems. When it comes to enforcement, our measures haven’t really changed that much. It’s number of exams, audit coverage and dollar adjustments and the like. It’s very much green eyeshades, roll top desk and last century.
So how do you measure the success of programs such as IIR and CAP that resolve issues quickly? How do you measure the intangible of settling a dispute without dollar figures? How do you measure keeping corporations in compliance? What is the value to the taxpayer that is able to resolve a tax controversy in a year versus three or five years?
I ask these questions because I think those outside organizations and stakeholders that monitor and measure the IRS’ performance also need to evolve. They need to evolve with us as we change the way we do business. They need to look beyond the dollars signs and percentages and seek new approaches and ways to measure how well we are doing our job in areas such as certainty, consistency, saving resources and keeping taxpayers compliant.
While the issue of uncertainty is still fresh on everyone’s minds, let me turn to our uncertain tax position reporting requirement that was unveiled last year. Let me do a quick recap.
In September 2010, we released the Final Schedule UTP and Instructions effective for 2010 tax years. We expect the bulk of returns to start coming in during September of this year. We also issued a directive to the field to provide guidance to IRS examiners and other personnel regarding how we will implement UTP reporting and how we modified our Policy of Restraint.
This new requirement gets to the heart of information we need, while respecting a taxpayer’s internal analysis and deliberations. I believe that it helps achieve what most taxpayers and the IRS strive for and basically want: certainty, consistent treatment and the efficient use of government and taxpayer resources by focusing on issues and taxpayers that pose the greatest risk of tax noncompliance.
The Final Schedule UTP fulfills these goals in a very balanced and sensible fashion and addresses important concerns expressed by affected taxpayers and the practitioner and business community. I would like to acknowledge the very thoughtful and constructive comments we received from TEI and others that helped us craft a final product that moves us towards our shared objectives. Indeed, we made some significant changes to the schedule based on the feedback we received. These include:
- A five-year phase-in for filing the schedule;
- Elimination of the maximum tax adjustment requirement;
- Clarification of concise description of an issue; and
- Clarification and strengthening of our policy of restraint.
As with any new and innovative program, training and education are critical for both the IRS and taxpayers. We are providing a lot of general awareness and specific training to our people in the field on how to handle UTPs, and I know that TEI is educating its members on the requirements.
I also know that we have to keep the dialogue open on UTP as issues will arise that we had not anticipated. For example, one might expect that a taxpayer with a very aggressive tax position might have a large reserve. However, that may not always be true. A very conservative corporate taxpayer might also have a large reserve because they like to play it very safe. So, we have to make sure that a cautious taxpayer is not disadvantaged for being risk averse.
And as part of our continuing outreach and education on Schedule UTP, we recently posted on the IRS.gov web site seven frequently-asked-questions and responses. Three of the questions deal with the policy of restraint, and the remaining four with completing the schedule.
Our LB&I division is not the only important operation within IRS when it comes to large business taxpayers. Our Appeals function is also critical to fair and balanced large business tax administration, so I want to talk about Appeals for a few minutes.
Although very much an integral part of the IRS and the overall tax system, the heart of Appeals is its independence. That was foremost in the minds of the authors of the IRS Restructuring and Reform Act when they mandated that the Commissioner ensure an independent appeals function within the IRS. I take that mandate very seriously and believe that the independence of Appeals is important to an effective tax system.
Appeals is a forum where taxpayers can expect an impartial and fair adjudication of issues. It also provides taxpayers that very important opportunity to resolve an issue before heading down that expensive and time consuming road of litigation.
Indeed, Appeals personifies what I believe most taxpayers and the IRS strive for…not protracted and costly court cases…but again, certainty, consistent treatment and the efficient use of both government and taxpayer resources.
This is not to say that every decision by Appeals will be in favor of the taxpayer…or the government. As I told you last year, our responsibility across the IRS 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. And the effectiveness of Appeals rests on its ability to uphold that responsibility while considering all points of view fully.
Now in order for Appeals personnel to do their job, they need detailed knowledge of issues to help them develop settlement parameters, draft Appeals Settlement Guidelines, and ultimately to reach the right resolution for taxpayers and the government.
It was this desire for knowledge that led the IRS to put Appeals personnel on issue management teams soon after their formation eight years ago. While there is always a balance between expertise and independence, I have concluded that the benefits of having Appeals personnel on issue management teams to help gain expertise are outweighed by the perception that having them on those teams compromises their independence. Therefore, I have decided that Appeals personnel should no longer sit on issue management teams. I believe this action strikes the right balance for tax administration.
Despite this decision, I want to ensure that Appeals personnel have the information they need to properly evaluate the litigating hazards and develop settlement parameters in a timely way. To this end, we will provide alternative venues so Appeals personnel gain the knowledge they need to resolve taxpayer issues and formulate Appeals settlements.
They can do so by reviewing other available information, such as the revenue agent reports and taxpayer protests as the cases come through the traditional appeals process. Or, they can secure the information through established alternative dispute resolution procedures, such as Early Referral and Fast Track. Also, Appeals personnel can continue to hear issue management team briefings as they do with taxpayer coalition meetings. The key here is balance – and that is what we are trying to achieve.
I should also mention that we are taking a close look at our ex parte communication rules to ensure we focus on these important issues.
Let me do a quick segue to Fast Track Settlement which is another resolution tool we are encouraging our agents to use. We’re training our agents how to use Fast Track, and the LB&I and Appeals functions have removed internal barriers that may have discouraged the use of the program.
While it’s too early to say whether more taxpayers will take advantage of Fast Track, I am committed to expanding our ability to resolve issues more quickly with taxpayers who want to do so.
Before I wrap up, I want to touch upon one last area that fits into this evolutionary new relationship with corporate taxpayers: the joint audit. Currently I serve as Chairman of the OECD’s Forum on Tax Administration. As we envision it, the joint audit will be more sensible and efficient for the participating business because the business will not have the burden of two exam teams conducting two audits, and it will make sure both countries receive the same information and presentations from the taxpayer. And we’re already taking action. We have three joint audits underway, involving two other countries, and we’re in discussions with several other countries about the possibility. Mike Danilack, our LB&I Deputy Commissioner for International, will be discussing this and other international issues at TEI tomorrow.
Once again, thank you for this opportunity to share some thoughts with you about our evolving relationship with our largest corporate taxpayers. The Nobel Prize Physicist Richard Feynman once wrote that, “The worthwhile problems are the ones you can really solve or help solve; the ones you can really contribute something to.” And I firmly believe that we are helping to solve many of the problems in our tax system through the type of open dialogue that the IRS and TEI have enjoyed for decades… and which I hope will continue for many years to come. Thank you and I would be happy to take a few questions.