On March 9 the Internal Revenue Service (IRS) published on its website additional information regarding its new Industry Issue Focus (IIF) program for large and mid-size corporate taxpayers (see http://www.irs.gov/businesses/article/0,,id=167377,00.html).

The development of the program is important as the IRS attempts to improve compliance and increase audit coverage through focused examinations. The IRS IIF Fact Sheet asserts that corporations with assets of $10 million or more are responsible for $25 billion of the tax gap (the difference between estimates of taxes that should be paid and taxes actually collected).

Tier I Compliance Issues

Specifically, the IRS has identified the following 14 Tier I compliance issues (in addition to previously identified listed tax shelter transactions):

  • Backdated stock options
  • Code section 118 abuse
  • Code section 162(f)—DOJ settlements
  • Code section 936 exit strategies
  • Domestic production deduction (IRC § 199)
  • Foreign earnings repatriation
  • Foreign tax credit generators
  • International hybrid instrument transactions
  • Mixed service costs
  • Non-qualified deferred executive compensation (§ 409A)
  • Research and experimentation (R&E) credit claims
  • Transfer of intangibles offshore/cost sharing
  • Tax shelter—distressed asset/debt
  • Tax shelter—redemption bogus optional basis

Tier I issues are of high strategic importance to the Large and Mid-Size Business Division (LMSB) of the IRS and have significant impact on one or more industries. Tier I issues require "oversight and control" by the IRS Issue Owner Executive (who has been identified for each Tier I and Tier II issue). The disposition or resolution of the issue must be in accordance with that executive’s guidance. Guidance has already been published with respect to the Internal Revenue Code section 118, Code section 936 exit strategies, mixed service costs, and redemption bogus optional basis issues.

Tier II Compliance Issues

  • The IRS has also identified the following 11 Tier II compliance issues:
  • Casualty loss: single identifiable property/capital vs. repairs
  • Cost-sharing-stock based compensation
  • Enhanced oil recovery credit (IRC 43)
  • Extraterritorial income exclusion effective date and transition rules
  • Gift cards: deferral of income
  • Health care accounting issues: contractual allowance
  • Interchange merchant discount fees
  • Non-performing loans
  • Specified liability losses (IRC 172(f))
  • Super completed contract method
  • Upfront fees, milestone payments and royalties in the biotech and pharmaceutical industries

In addition to these 11 issues, the IRS originally also identified deferred home construction contracts (with Paul Cordova as the Issue Owner Executive), but that issue was later removed from the Tier II listing.

Tier II issues reflect areas of potential high non-compliance and/or significant compliance risk and include emerging issues. Tier II issues require "coordination" with the Issue Owner Executive.

It remains to be seen whether the IIR program will lead to more coordinated resolutions or increased controversy.