On May 5, 2016, the Internal Revenue Service issued Revenue Procedure 2016-30 to announce the expansion of the existing pre-filing agreement program and changing procedures for resolving issues with corporate taxpayers through pre-filing agreements. The IRS also announced a significant increase in the user fee to participate in the program.
Revenue Procedure 2016-30 revises Revenue Procedure 2009-14, 89 which outlines the procedures to resolve issues through a pre-filing agreement (“PFA”). The program permits eligible taxpayers90 to request that the Service examine specific issues relating to tax returns before those returns are filed with the Service. The desired effect is that the Service and the taxpayer will memorialize their agreement by executing a PFA with LB&I. The PFA procedure often resolves issues more effectively and efficiently with the Service through a pre-filing examination rather than a post-filing examination, because the taxpayer and the IRS have more timely access to the records and personnel that are relevant to the issues. A prefiling examination also provides the taxpayer with certainty regarding the examined issue at an earlier point than a post-filing examination. The procedures benefit both taxpayers and the IRS by improving the quality of tax compliance while reducing costs, burdens and delays.
The Revenue Procedure now permits an eligible taxpayer to request a PFA for the current taxable year, any prior taxable year for which the original tax return is not yet due, and for future taxable years (limited to four taxable years beyond the current taxable year).91 The Service will consider entering into a PFA on any issue that requires either a determination of facts or the application of well-established legal principles to known facts. The Service also will generally consider entering into a PFA regarding an accounting methodology used by a taxpayer to determine the appropriate amount of an item of income, allowance, deduction or credit. However, a PFA may not be used to obtain consent to change a taxpayer’s method of accounting, except when the Service has first issued a letter ruling granting consent to make an accounting method change under Revenue Procedure 2015-13.
There is no list of eligible domestic and international issues. Any domestic or international issue that requires either a determination of facts or application of well-established legal principles to known facts is permissible. However, the Revenue Procedure identified a list of issues that a taxpayer may not request a PFA, which includes: (i) transfer pricing; (ii) reasonable cause, due diligence, good faith, clear and convincing evidence or any other similar standard under Subtitle F; (iii) issues involving the applicability of any penalty or criminal sanction, or (iv) issues that are the subject of pending litigation or issues designated for litigation. Additionally, the Service may, in its sole discretion, refuse to address an issue in a PFA based on consideration of sound tax administration.
Rev. Proc 2016-30 provides the framework within which a taxpayer and the IRS can work together in a cooperative environment to resolve, after examination, the issues accepted into the program. Unlike letter rulings and other forms of written advice provided by the Offices of the Associate Chief Counsels, however, the PFA does not determine the tax treatment of prospective or future transactions or events, but only of completed transactions or events whose tax treatment has not yet been reported on a return.
Finally, the user fee for the PFA program is currently $50,000, but will increase to $134,300 for PFA requests submitted on or after June 3, 2016, and to $218,600 for PFA requests submitted on or after January 1, 2017. A fee will be assessed for each separate and distinct issue. The user fee is required to be paid before the orientation meeting or the first substantive meeting with the taxpayer to discuss the PFA issues. Payment of the user fee must be made within 15 business days of notification that the issues have been selected for the PFA program.