Increase in audit campaigns, carrots and sticks for taxpayers

The IRS Large Business and International Division conducted the first of eight planned public webinars on March 7 to underscore its new way of doing business. This alert discusses the key takeaways from the webinar.

The IRS Large Business and International Division (LB&I) conducted the first of eight planned public webinars on March 7 to underscore its new way of doing business. The webinar was facilitated by the KPMG accounting firm, and its Director of IRS Policies, Michael P. Dolan (an IRS veteran himself), led the questioning of an IRS team who explained the new Thirteen Campaigns.

The first two of the planned eight webinars deal generally with the new auditing paradigm. Webinars three through eight will get into the specifics of what IRS suspects might be wrong in tax returns that contain one of the thirteen publicly announced tax characteristics.[1]

The theme emphasized by the IRS representatives was that the audit-selection techniques are new, and some of the “Tailored Treatments” are new, but the audits themselves will be conducted using the same procedures as always. Taxpayers can also rely on all the customary protections of their due-process rights.

The Tailored Treatment being used for some of the new campaigns is a “soft letter,” sent to taxpayers who engaged in certain transactions. In substance it will say:

We noted that you engaged in a (transaction) last year. We want you to know that the IRS position on these transactions is (explain.) We hope that you reported your transaction in last year’s return the way we expect to see it. If you did not, we hope you will take this opportunity to file an amended return to conform to our desired treatment.

The carrot: Although no promises are being made, the clear implication is that taxpayers who voluntarily amend their returns to conform to the soft-letter suggestion will not be penalized or audited.

The stick: Taxpayers who receive a soft-letter and do not conform to the IRS view will presumably be audited, and their tax treatment will be considered to be “willful.” This could increase their penalty exposure.

The main takeaways from the webinar are:

  1. There will be more audit “campaigns” directed at additional specific issues—these 13 are just the first use of this new audit selection methodology. Over time, this will become the principal way LB&I selects tax returns for audit. IRS leadership believes this is a more effective way to utilize its resources.
  2. As we are already seeing in current audits, when a specific transaction or characteristic drives the audit selection process, this is the only item on which the revenue agents spend any time. The old-fashioned broad brush audit approach is history.
  3. The IRS is trying to incentivize taxpayer compliance by using “carrots” in addition to “sticks.” The soft-letter is only the first example.