The changes include a move toward more issue-focused and efficient audits, which should benefit both the IRS and its taxpayers.
It seems like the Internal Revenue Service (IRS) reorganizes its Large Business and International (LB&I) Division every few years, changing its audit priorities and the manner in which its revenue agents are expected to conduct audits.
In large part, the IRS has been forced to rethink its priorities due to substantial budget cuts and increased responsibilities, including responsibilities for supervising compliance with employer health insurance mandates under the Affordable Care Act.
On September 17, 2015, Douglas O’Donnell, IRS Commissioner of LB&I, announced the latest round of changes. The IRS is attempting to redevelop its large-case audit program to perform more efficiently in an era when the IRS’s resources are limited.
To that end, the IRS will be ending the Coordinated Industry Program, under which large corporations are audited for each tax return that they file in two- or three-year cycles. The IRS has indicated that the change in the program does not mean that continuous audits of large corporations will be completely eliminated, but rather that the number of such audits is likely to diminish and the focus of the IRS’s examinations will change.
The IRS also indicated that it is attempting to develop more issue-focused and efficient IRS audits. Under this approach, an IRS examination team might have three or four core issues identified at the start of an audit of a large company, rather than conducting a more comprehensive review of the company’s books and records to identify issues.
The IRS will restructure LB&I into an anticipated nine "practice" areas, which will be organized geographically as well as by subject matter. The practice areas will include (1) pass-through entities, (2) financial institutions and products, (3) corporate tax, (4) cross-border activities, (4) withholding and international tax compliance and (5) transfer pricing and tax-treaty compliance.
One way in which LB&I plans to create more issue-focused and limited audits is to develop audit "campaigns." It appears that LB&I, through its practice groups and the work of its revenue agents in the field, will identify areas of noncompliance and then will focus on those types of "campaign" tax issues in industries in which the issues are likely to be present.
The news that IRS LB&I exam teams will be conducting more focused and efficient IRS audits is certainly welcomed by large taxpaying entities as well as their advisors. IRS audits involving detailed examinations of a taxpayer’s books and records to identify issues required a great deal of internal and external resources to manage. Companies and their tax advisors will welcome audits that are limited to a smaller number of key issues and that can be completed in more reasonable time frames.
The IRS has yet to provide, however, the details of the new program and the processes that will be used to develop the IRS LB&I campaigns. If the IRS uses its resources to develop thoughtful campaigns that identify significant tax issues, and if the LB&I "campaign" audits are limited to those companies and taxpayers that have a substantial risk of noncompliance in areas and issues identified by the IRS campaigns, LB&I’s restructured organization and refocused audit strategy might help streamline the audit process for large companies and benefit both the IRS and the LB&I constituent taxpayers.