The IRS has done much to refocus the work of its former Large and Midsize Business (LMSB) Division. Last summer, Commissioner Douglas Shulman announced that the IRS was changing the name of the LMSB to the Large Business and International (LB&I) Division. Like LMSB’s prior jurisdiction, the LB&I will continue to focus on corporations, S corporations, and partnerships with total assets of $10 million or more.
The name change reflects that the IRS’s international strategy is intensifying. In announcing the reorganization, Shulman stated, “Every day, we are moving forward in our international compliance efforts. Bringing together our top international personnel in this new group will help us advance our global tax administration efforts and ensure focus and fairness in a critical area for our nation” (IR-2010-88).
The IRS sees the LB&I realignment as strengthening international compliance by:
- Helping the IRS identify emerging international compliance issues more promptly;
- Allowing the agency to dedicate its professional staff to the most pressing international issues;
- Increasing international specialization among IRS staff;
- Enabling the IRS to coordinate competent authority issues more closely with field staff; and
- Centralizing and enhancing the IRS’s focus on transfer pricing.
This column provides highlights of some of the LB&I’s new or emerging initiatives, including (1) LB&I’s Global High Wealth Industry Group, (2) a second offshore disclosure initiative, and (3) the concept of a joint audit process between the United States and other countries.
Global High Wealth Industry Group Cases
In launching LB&I last summer, Commissioner Shulman announced the establishment of a Global High Wealth Industry Group within LB&I. The group focuses on bolstering the tax compliance of high-wealth persons, with a particular emphasis on reviewing complex legal structures and passthrough entities, such as partnerships, limited liability companies, trusts, private foundations, and other enterprises. Tax Notes Today reports that the new LB&I industry group has approximately 100 staff members reviewing 250 enterprises, with about 40 active cases outstanding (Coder, “IRS Close to Announcing Details of New Offshore Disclosure Program, Official Says,” 2011 TNT 15-1 (January 24, 2011)).
The Global High Wealth Industry Group has been established at a time when the IRS is making a concerted effort to increase the examination rate of wealthy individuals. Specifically, the IRS’s audit rate for individuals with over $1 million in assets increased to 8.36% of returns in 2010, up from 6.42% in 2009.
By creating a major focus on global wealth, the IRS seeks to gain a greater understanding of sophisticated financial and business operations used by taxpayers, enabling the IRS to gain a complete economic picture of a taxpayer’s enterprise. In conducting a high-wealth case, the IRS will rely on information document requests, taxpayer interviews, visits to the taxpayer’s businesses, examination of the taxpayer’s books and records, and other methods to develop the case or further leads.
Offshore Disclosure Initiative
On February 8, the IRS announced a new offshore voluntary disclosure initiative, which will run through August 31. Like the 2009 voluntary disclosure program, the 2011 initiative is designed to bring money held in foreign accounts back into the U.S. tax system and to help taxpayers with income from offshore accounts to comply with federal tax law. Under the program, taxpayers that disclose previously undisclosed foreign accounts and comply with the terms of the program can avoid otherwise applicable civil penalties and criminal prosecution.
About 15,000 voluntary disclosures of offshore accounts were received during the 2009 program, and about 3,000 have been received since the expiration of the 2009 initiative. The IRS has reported that the average tax deficiency per case for the 2009 program was about $200,000. (For more on the 2011 offshore voluntary disclosure initiative, see Tax Practice and Procedures, "Offshore Voluntary Disclosure Initiative.")
Joint Audit Process with Other Countries
At the Pacific Rim Tax Institute held earlier this year, Michael Danilack, IRS LB&I deputy commissioner (international), discussed the concept of joint audits, a potential program in which the IRS and a foreign country would jointly audit a taxpayer. The concept is an outgrowth of discussions by the Organisation for Economic Co-operation and Development Forum on Tax Administration, an international group of which the IRS is a member.
Under the join audit initiative, an individual or business would be subject to a joint audit by two or more countries as opposed to independent audits in several countries. Danilack has stated that the first joint audits may be initiated by U.S. and Australia taxing authorities. The joint audit concept is likely to receive a favorable reaction from taxpayers because it could allow them to save scarce resources by making only one presentation to two taxing jurisdictions, as opposed to two separate presentations. The IRS may initially make the program available to U.S. taxpayers participating in the LB&I’s compliance assurance program.
Benson Goldstein is senior technical manager (taxation) at the American Institute of CPAs in Washington, DC, and is staff liaison to the AICPA’s IRS Practice and Procedures Committee. For more information about this column, contact Mr. Goldstein at email@example.com.