Incentive and Compliance Facilitation Mechanisms for Large Corporate Taxpayers Frank Y. Ng Commissioner, Large and Mid-Size Business Division Internal Revenue Service United States of America April 21, 2009 Inter-American Center of Tax Administration 43 rd General Assembly Santo Domingo, Dominican Republic

2 Introduction U.S. corporate taxpayers have an incentive to work with IRS to expedite issue resolution to be current and reduce tax exposure. Value certainty and the ability to finalize their tax positions quickly, for purposes of managing cash flow and required regulatory reporting and accounting. Increasingly engaged in international business and transactions crossing multiple national tax jurisdictions. Employ tax strategies reflecting technical legal complexities as well as complex enterprise business structures. Face increasing reporting accountability to federal financial regulatory agencies. Although the U.S. tax law does not provide direct incentives to induce or reward compliance, LMSB has processes to provide taxpayers certainty and enhance tax administration attributes that they value.

3 LMSB Tax Administration Attributes LMSB customer satisfaction research shows that corporate taxpayers value: Reduction in the time required to conduct an examination Reduction of cost, burden and staff time Consideration of taxpayer information Accuracy and propriety of proposed adjustments LMSB values the same characteristics and has adopted a concept of operations to develop these tax administration attributes: Taxpayer transparency and certainty Highly skilled and engaged workforce Technology that enables productivity and informed decisions Issue focused compliance approaches Effective relationships with taxpayers Capability to adapt and respond quickly

4 The Traditional Examination The traditional in-depth tax examination, historically the primary interaction between LMSB and corporate taxpayers, gave rise to taxpayer dissatisfaction and tax administration inefficiencies. Took place long after tax filing, often not starting until years after filing. Labor intensive and time consuming, often taking months to complete. Adversarial and lacked open exchange of information and expectations. Since IRS reorganized in 2000, a number of steps have been taken to improve the post-filing examination process. Emphasis has similarly been placed on developing new approaches to engage taxpayers in pre-filing issue resolution.

5 Issue Focused Compliance Approach Issue focused approach ensures taxpayer and tax administration resources are directed at most important compliance issues. Significant compliance issues are determined using risk and materiality analysis. Issues of strategic importance across the LMSB taxpayer base are assigned to “issue management teams” that develop guidance and resolution approaches. Examiners must consider these issues to determine if further action is needed. Results in consistent consideration of the issue for all taxpayers. Examiners determine if other high risk issues are present. Issue focus approach is reflected in both post-filing and pre-filing compliance improvement processes and interactions.

6 Post-Filing Issue Resolution Processes Tax examinations remain a core compliance activity that is improved by the issue focus analysis and joint audit planning between taxpayer and examiners. Alternatives to the traditional examination include: Accelerated Issue Resolution is a process to resolve similar issues that arise in tax periods other than those under immediate examination. Limited Issue Focus Examination is an alternative to the traditional examination where the examination is limited to specific issues identified through detailed risk analysis and materiality considerations. Fast Track Settlement resolves disagreements on issues through independent Appeals settlement authority and mediation skills while the case remains under the jurisdiction of LMSB.

7 Pre-Filing Issue Resolution Processes Compliance Assurance Process is a “pre-filing examination” that engages taxpayer prior to filing to identify and resolve issues. Provides certainty that corporate taxpayers value in accounting to regulatory agencies such as the SEC and to shareholders. Eliminates need to maintain cash reserves for uncertain tax positions. Dependent upon an open and transparent relationship with taxpayer Other pre-filing issue resolution processes include: Pre-Filing Agreements enable taxpayers to enter into agreements with LMSB to resolve specific issues prior to tax return filing. Advance Pricing Agreements are agreements with IRS in advance of tax return filing on the appropriate methodology to be used in claiming specified transfer pricing transactions. Industry Issue Resolution provides public guidance on tax treatment of specific issues for the benefit of all taxpayers with that issue.

8 Supporting Mechanisms Electronic Tax Filing, implemented in 2004, resulted from extensive interaction with large corporate taxpayer community. Provides complete tax return data to IRS in electronic format quickly. Enables IRS to more quickly analyze and identify issues requiring attention, and bring those issues into resolution process. Schedule M-3, developed in 2004, promotes transparency by providing accounting reconciliation at time of filing. In contrast to time consuming reconciliation only for taxpayers under examination. Improves IRS ability to identify trends and issues, evaluate compliance risk and more accurately engage taxpayer.

9 LMSB Performance Measures Customer Satisfaction has remained relatively constant in recent years at 82% for IC taxpayers and 83% for CIC taxpayers. CAP customer satisfaction is 93%. Quality (technical and auditing standards) has increased significantly since Increase from 77% to 88% for IC taxpayers Increase from 89% to 97% for CIC taxpayers Cycle Time has decreased since Decrease from 42.4 months to 31.8 months CAP cycle time has averaged less than 20 months

10 Tax Administration Impact in an Economic Downturn Balancing tax administration compliance and economic stimulus Quicker need for tax return certainty and affect on business survival Greater need for cash flows affects tax payments and refund processes In the U.S., our corporate net operating loss carryback rules allows for expedited refunds of prior year income taxes Quick refund process and amended tax returns To assist taxpayer, administrative audit and collections procedures require revisions to meet business and individual taxpayer needs Re-adjust installment payments Eligibility for offer in compromise Ensuring refunds are issued quickly

11 Looking Ahead There are benefits to taxpayer in managing their tax risk through transparency -- early disclosure and resolution of issues. Increased transparency and improved analytics enable LMSB to engage taxpayers in least burdensome way to resolve issues. Closer alignment of tax reporting and compliance processes with financial accounting and regulatory filing requirements increases transparency and certainty. A significant challenge is managing compliance risk involving complex taxpayer enterprise structures operating in the expanding and rapidly evolving global economy. Constant need to re-evaluate tax administrative process to help taxpayers with economic hardship to fulfill their tax responsibilities.