This year has been marked with substantial changes in the manner in which the Internal Revenue Service (IRS) operates. Shrinking resources and retiring IRS professionals have marred the IRS and its efficiency. The pervasive theme for 2016 was trying to do the job with fewer resources. For example, IRS audits continue to devolve with standardized information document requests (IDRs), international practice unit guides and issue-focused examinations (mostly focused on international tax issues). We say “goodbye” to old friends [au revoir Compliance Assurance Process (CAP) Program] and hello to new rules (e.g., partnership entity audit rules and adjustments). And we have born witness to the slow evisceration of the independence of IRS Office of Appeals.
As we turn the corner to a new year, we expect the IRS’s war on taxpayers to manifest itself in “campaign” after “campaign,” reminiscent of the tiered issue system of days gone by. We expect coordination on a national level to reside with IRS “issue specialists” controlling and dictating audits and appeals, which will increasingly challenge the efficiency of pre-litigation resolution techniques. The end result of these contractions may very likely be an increase in tax litigation as frustration with the administrative process boils over. But the wild card, of course, is what changes will be ushered in by the new administration. Will it be business as usual, or will we see a complete overhaul of the system? Only time will tell, as we wait with bated breath for the ball to drop.
New partnership rules are here to stay. Entity level tax for partnership—yes you read that correctly. Revamp your LLC and partnership agreements immediately.
Audits focus on international issues. The IRS increasingly is issuing “Formal Document Requests” to seek foreign based documentation. The IRS has issued over 100 international practice units. The IRS continues to issue summonses to get the documents it believes it needs to prove its case.
Lessons Learned: The IRS is focusing on international issues, and so should taxpayers. Documentation is the key to support the positions claimed on your returns. Make sure you have what you need to sustain your burden. Expect audits that are broader in scope, but less technical in depth, as over-worked and under-supported IRS agents do their best to examine your issues.
In 2016, IRS Appeals began a major transformation—changes at the top and changes to day-to-day operations. Indeed, substantial power has been taken away from IRS Appeals officers, resulting in a dramatic slow-down of the appeals process. Exam gets a bigger role in the IRS Appeals process. And appeals are still favored, even when you get to court.
Lessons Learned: Appeals is just not what it used to be. The ranks of Appeals officers have been decimated with retirements and natural attrition. Expect less in-person appeals conferences, much longer completion times and the involvement of national specialists injected in your case. It may be strategically beneficial to docket your case in Tax Court first and then go to Appeals.