Tax Break

Officials outline IRS and Justice Department tax focus

June 20, 2012

Notes from the Tax Underground: What do tax officials and tax lawyers worry about?

At New York University’s Tax Controversy Forum in New York last Friday, Michael Danilack, deputy commissioner (international) of the Internal Revenue Service, told hundreds of tax lawyers that being more strategic was essential to the agency.

Danilack, who oversees the recently revamped Large Business & International division, flashed up a PowerPoint slide entitled, “Key Drivers of the New International Function.” The division was remade in October 2010 to concentrate on the international aspects of taxation for large U.S. multinationals.

The IRS, subsequent slides said, was now “focusing on cases/issues where taxpayers engage in aggressive planning.” Other slides said the agency was “moving into areas not receiving sufficient attention” and “willing to let go of less important issues to move to matters of strategic importance.”

Cue transfer pricing, which dominated the rest of Danilack’s talk. The IRS has watched with unease as a growing number of multinational corporations book increasingly large profits overseas, often in tax-haven countries. Danilack said the agency was staffing up a newly designed “field-focused Transfer Pricing Initiative.”

What that means is that big companies can expect, in theory at least, to find less red tape between the IRS field officers who audit companies and the resident technical experts back at the national office in Washington, D.C. Another benefit touted on a Danilack slide: a streamlined Advanced Pricing Agreement process that will “eventually reduce time needed to complete an APA.”

Meanwhile, over at the Justice Department, a recently confirmed Kathryn Keneally, now the country’s top tax prosecutor, described a Justice tradition that borders on a ritual. Each time a new Assistant Attorney General for the Tax Division is installed, he or she receives in her desk drawer a letter written by the previous official in the job. Keneally said that on April 6, her first day, she opened her top drawer to find the expected missive from Nathan Hochman. “This is the best job you’ll ever have,” the letter began. Keneally said that “to walk in and find Nathan’s letter…was really remarkable.”

It’s not clear when Hochman actually wrote the letter. He left Justice in April 2009 for private practice at Bingham McCutchen, and the DOJ post was unfilled until Keneally was confirmed to the position by the U.S. Senate last March. No word on whether Hochman’s missive had begun to fade in Keneally’s drawer.

Keneally spoke at length about her plan to tackle identity theft. That theme was echoed in a presentation on a separate panel by Faris Fink, commissioner of the IRS’s Small Business/Self-Employed Division. The Justice Department, Fink said, “is concerned about moving forward with that particular issue.” He added that “it is unbelievable how epidemic that problem is.”

Fink added that flow-through entities “are going to be a growing area as far as coverage goes.” He added that use of the entities “is the direction many folks are moving in,” and that the service was “going to beef up our training” in the area.

Flow-through entities, such as partnerships, limited liability companies and S corporations, do not bear taxes but instead pass on tax bills to their investors and partners. The IRS has become increasingly concerned that such entities, particularly when layered together, can be used to evade taxes.

Fink acknowledged problems with the IRS’s three recent offshore voluntary disclosure programs, which have drawn some 33,000 taxpayers with hidden offshore accounts and netted $4.4 billion. With the first program, rolled out in 2009, “we didn’t get off the ground very well,” Fink said, adding that the IRS had been slow to process the information it received. Some 70 percent of all disclosures flowed through his division, with the other 30 percent handled by Danilack’s division, he said.

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