On May 16, 2019, the Large Business and International (LB&I) Division of the Internal Revenue Service (IRS) announced changes in, and a new name for, a key compliance program (IR-2019-95) to identify the biggest and most complex large corporations.
The IRS program formerly known as the Coordinated Industry Case (CIC) program, which was designed to identify the largest taxpayers and subject them to increased scrutiny, is now known as the Large Corporate Compliance (LCC) program. The CIC program encompassed over 100 taxpayers and represented 82% of all adjustments proposed by LB&I Exam Teams. All CIC taxpayers generally were under continuous examination.
The IRS has abandoned the manual, localized process used to identify CIC participants and instead, the LCC program will use data analytics to identify the taxpayers to be included in the program. The IRS press release announcing the LCC program makes clear that LB&I believes that this new approach will result in “a more objective determination of the taxpayers that should be identified as part of the population.” It is hoped that the use of data analytics will enable LB&I to identify federal income tax returns that “pose the highest compliance risk.”
The LCC program uses “pointing criteria,” which are simply points assigned to various taxpayer attributes, to determine inclusion in the program. IRM 4.50.2, LB&I Compliance Integration, Other Workload Selection – Non-Campaign Workstreams, sets forth more details about the program and the points assigned to various attributes. The attributes used in the LCC program include gross assets, gross receipts, operating entities, total foreign assets, total related transactions, foreign tax and multiple industry status. Each attribute is assigned a potential point value. If the taxpayer’s attributes add up to a total of 15 points or more, the taxpayer qualifies as an LCC case. IRM 4.46.2, Administrative Matters and Annual Compliance Plan, provided the same criteria for the previous CIC program, but had a lower point threshold of 12 to trigger a CIC case.
For example, gross assets up to $500 million earn 1 point; assets between $5 billion and $8 billion earns 5 points. A taxpayer earns 1 point for having one operating entity, 3 points for having between 2 and 5, and up to 9 points for having over 13. Related transactions also accumulate points for the taxpayer, with transactions up to $1 million earning 1 point and 3 points for transactions between $40 million and $1 billion. There are separate asset ranges for taxpayers in financial services businesses.
The LCC pointing criteria are applied to all filed LB&I Form 1120s. Once the populations included in the LCC program are identified, data analytics then identify the tax returns with the highest risk. According to the announcement, the LCC works together with LB&I agents and examiners to enhance efforts to undertake compliance actions and determine compliance treatment streams of the most complex corporate taxpayers.
Taxpayers in the CIC program were audited by teams of examining agents and were entitled to a special procedure, detailed in Rev. Proc. 94-69, 1994-2 C.B. 804, which enabled them to avoid the potential application of penalties by making a disclosure to the Exam team within a 15-day window, which was considered to be a qualified amended return for purposes of the penalty provisions. See Treas. Reg. § 1.6664-2(c)(2) and (3).
On May 21, 2019, the IRS issued a Memorandum to All Large Business and International Division Employees announcing the changes from the CIC program to the LCC program. Beginning with the 2017 tax year, returns that meet the LCC criteria will be classified into categories of risk based on data analytics. LB&I will determine compliance treatment streams to be applied to LCC returns based upon the return’s overall category of risk and available resources. Prior CIC cases will be completed and closed as CIC cases.
The Memorandum further confirms that Revenue Procedure 94-69 will continue to apply to any taxpayer currently in the CIC and the new LCC program. However, it also states that Rev. Proc. 94-69 is currently under review.
LB&I’s reorganization in 2016 moved from the continuous general examination approach to one focusing on issues with “campaigns.” Recent changes by LB&I to its examination approach (advent of issues-based campaigns, focus on areas of significant risks, and use of data analytics) indicate that LB&I is narrowing its focus with respect to the country’s largest taxpayers. Thus, although in 2016, LB&I stated that it would continue to apply a 100% examination rate to the largest taxpayers, it appears that LB&I’s risk assessment and resource constraints may potentially reduce that rate based on risk assessment.
Eversheds Sutherland Observations
The announcement of the LCC program is another step in LB&I’s increasing use of data to drive compliance decisions. LB&I has faced a steep reduction in personnel in recent years,1 and as a result, the IRS has increased its utilization of technology to identify compliance risks. The LCC program reflects IRS’s broader efforts toward “portfolio management,” which aims to maximize and modernize its resources to focus on areas of highest tax compliance risk.
It is unclear whether all taxpayers in the new LCC program will be examined every year. Rather, once identified, the returns of LCC taxpayers will be subject to compliance treatment streams based on their level of risk, as determined by data analytics.
The Memorandum makes clear that taxpayers classified as LCC taxpayers may continue to use Rev. Proc. 94-69 to avoid penalties through disclosure within the 15-day window. This procedure, however, is premised on the start of an audit of an LCC taxpayer. If LB&I determines based on resource constraints to skip a cycle for an LCC taxpayer, the regular procedures to submit a qualified amended return would be required to be followed if penalty exposure was a concern irrespective of audit coverage. The new LCC program will bear watching as LB&I’s approach to auditing the largest and most complex taxpayers continues to evolve.