LB&I launches 13 initial campaigns

By Mike Dolan, J.D.

In recent years the IRS has faced a number of challenges that stem at least in part from shrinking budgets. While a variety of factors have contributed to the decreases in funds appropriated for the IRS, it has been obvious to the Service as well as to its "customers" that fundamental change was required. To his credit, rather than just employing the classic bromide to do more with less, IRS Commissioner John Koskinen challenged the four IRS operating divisions to design a future state that involved changes that will improve overall effectiveness within a context of continuing constrained budgets.

The Large Business and International (LB&I) division is currently in the middle of rolling out a major component of its future state. In February of this year, LB&I announced that as part of its redefined approach, it would undertake 13 compliance "campaigns." Those campaigns are now underway, and they reflect a change in the way the IRS intends to influence the compliance behaviors of the roughly 250,000 largest entities that constitute LB&I's segment of the taxpayer universe.

Historically, LB&I has devoted the majority of its resources to examining the largest corporations. As an aside, despite the fact that passthrough entities made up significantly more than half the LB&I constituent population, a disproportionate emphasis has been placed on large corporations. The large taxpayer examination activity typically took place within what commonly is described as the large case program—most recently defined as the Coordinated Industry Case (CIC) program. The returns of CIC taxpayers are centrally scored and selected for examination and then assigned to a local team of IRS personnel who determine the specific issues to be examined. Local examination teams have broad discretion to choose the issues that they will examine. Because of the historical priority assigned to CIC taxpayers, LB&I has very limited visibility into the extensive non-CIC portion of its constituency—sometimes called the "middle market."

A focus on issue rather than enterprise

At its heart, the campaign approach seeks to shift LB&I from focusing on relatively few large corporations to focusing on more precisely identified compliance risks throughout the entire LB&I population. Under LB&I's plan, a campaign will start with a centrally identified "risk-issue" that will be addressed by one or more "treatments." According to the IRS, these treatments will include a range of actions. On one end of a spectrum, the IRS may choose to publish formal guidance clarifying a specific aspect of the law. On the other end of that range, the IRS will employ focused and coordinated audit techniques on issues it believes to represent more egregious noncompliance. In between those extremes, the IRS will use outreach campaigns, internal training, and the publication of related Issue Practice Units (IPUs), soft notices, and the Industry Issue Resolution (IIR) program as treatments that it can customize to fit the identified risk.

Despite its commitment to the new campaign approach, the IRS will not abandon its CIC program. Some large taxpayers will continue to experience comprehensive enterprisewide examinations. For taxpayers that are selected for a campaign-based treatment, the interaction with the IRS should normally be limited to the specific campaign issue, although there is a process by which an examiner can secure a manager's approval to expand the scope of the examination. If its new approach is successful, LB&I envisions its campaign-based work expanding as a percentage of its overall workload. At a macro level, pursuing compliance risk via the campaign approach will likely result in LB&I's interacting with a significantly higher percentage of its taxpayer constituency. Inevitably, campaigns will reach some taxpayers that LB&I has rarely, if ever, examined.

The first 13 campaigns

The IRS kicked off its new approach with 13 initial campaigns that involve the following issues:

  • The Sec. 48C energy credit;
  • Offshore Voluntary Disclosure Program declines/withdrawals;
  • The domestic production activities deduction, multichannel video program distributors, and television broadcasters;
  • Micro-captive insurance;
  • Related-party transactions;
  • Deferred variable annuity reserves and life insurance reserves IIR;
  • Basket transactions;
  • Land developers: Completed-contract method;
  • TEFRA linkage plan strategy;
  • S corporation losses claimed in excess of basis;
  • Repatriation;
  • Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, nonfilers; and
  • Inbound distributors.

In the buildup to the announcement of the campaigns, many anticipated that the first wave of campaigns would represent the top compliance risks of the day. A quick review of the list above, however, reveals that the first 13 actually cover a wide spectrum of "risk." On one hand, it's no surprise that basket options, micro-captive insurance, or repatriation issues would make the list of potential significant tax risks. On the other hand, it is less clear that issues such as a TEFRA linkage strategy, Form 1120-F nonfilers, and deferred variable annuity and life insurance reserves (an issue already under consideration as part of an IIR project) would be counted among the top compliance risks.

When pressed about the varying degrees of risk among the first campaigns, the IRS explained that it never intended for the first campaigns to encompass only the most pressing issues. Instead, its goal was for the first installment to provide a good overall test of the campaign concept by covering a broad range of taxpayers and issues that will engage a significant portion of the LB&I workforce and involve the application of the full suite of treatments.

Startup questions

As taxpayers and their advisers encounter the first set of campaigns, a number of questions have surfaced. Some of these questions have been discussed during webcasts, but currently very little written IRS guidance is available. Among the questions that have been raised are:

  • Will taxpayers be subject to more than one campaign? If so, will individual tax years be routinely kept open for the full length of the assessment period so that separate teams of IRS experts can pursue multiple campaigns?
  • Given that both subject-matter experts and local agents will be involved in campaign-based examinations, who will have overall responsibility for both the administrative features of the campaign—statute control, consents, and case closure—and substantive results—decisions to propose, modify, or withdraw adjustments?
  • How will a taxpayer go about escalating an issue within the IRS—will it be required to pursue it up both a geography-based "line" as well as a subject-matter-based one?
  • What access will taxpayers and their advisers have to IRS subject-matter personnel who exercise some influence in a case?
  • Will campaign issues be automatically included within the scope of those examinations conducted under the CIC and Compliance Assurance Process procedures?
  • How will the soft notice process work? For example, will taxpayers that take corrective action as result of a soft notice have an opportunity to mitigate potential penalties? And when might a soft notice morph into an examination of books and records within the meaning of Sec. 7605(b)?
  • Will the fact that an issue is centrally designated for campaign treatment limit the viability of either fast-track settlement or traditional appeals?

As LB&I reaches its stride in this new campaign era, other issues will certainly emerge. In the near term, taxpayers and advisers will be wise to determine as early as possible whether an IRS contact is related to a campaign. A soft notice or a notice of examination that is triggered by a campaign ought to prompt early engagement between client and adviser. In many traditional audits the precise issues to be examined come into focus only after the agent has done preliminary scoping, often including the issuance and review of information document requests (IDRs). When a taxpayer receives a campaign-generated soft notice or notice of examination, it should be expected that the agent is further up the preparation curve than he or she might otherwise be at the same stage of a normal audit. The campaign issue is apt to come to the agent with specific descriptions and guidance—sometime formally encapsulated in a published IPU. Template IDRs may have been developed for the agent's use, and there will typically be a consulting network of behind-the-scenes issue specialists.

As in any encounter with the IRS, it is generally in a taxpayer's best interest to understand the IRS focus as early as possible. The IRS has said that it will not routinely disclose that a contact is campaign-based, but it has said that its personnel will furnish that information if a taxpayer asks for it. The earlier a taxpayer and its adviser understand why the IRS has selected a return position for scrutiny, the greater likelihood that they can present the taxpayer's facts and circumstances in a context that addresses the perceived "risk."

Reportedly, another set of campaigns is undergoing final internal review. So far there is no information about the subject matter of any new campaigns; however, a second wave will almost certainly expand the taxpayers and issues subject to the campaign protocols. At this stage in its maturation, it appears that the campaign approach may well constitute the type of change that Koskinen envisioned when he challenged LB&I to design a more effective future state.



Mike Dolan is national director of IRS Policies and Dispute Resolution, Washington National Tax of KPMG LLP. He is also a member of the AICPA IRS Advocacy & Relations Committee. For more information about this column, contact


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