IRS Waging New Audit Campaigns Against Business Taxpayers

The Internal Revenue Service is drawing up plans to wage issue focused “campaigns” against taxpayers.  The move represents a big shift in the agency’s approach to business audits and one that corporations need to prepare for.

Historically, many of the nation’s largest corporate taxpayers have been subject to so-called continuous audits of their returns.  In practice, this has meant that IRS agents were perpetually stationed in taxpayers’ corporate offices.  Indeed, the audit of these sometimes 10,000 page tax returns took an army of IRS agents’ full-time attention for months or even years!  Over the last several years, however, Congress has stripped away funding from the IRS.  The net result has been a substantial reduction in the number of tax audits over the last several years.

In reaction to having fewer resources to accomplish the same job, the IRS has revamped its methodology and approach.  That’s where the campaigns come in.

Late last year, the IRS group that audits the country’s largest taxpayers, the Large Business and International (LB&I) division, announced that it would restructure itself to deal with shrinking resources and a shifting tax environment.  One feature of the restructuring is the end of the continuous audit program.  Instead, LB&I has chosen to direct all of its resources to focused, coordinated examinations on specific issues that it believes are abusive and could bring in big dollars – the IRS’s new “campaign” methodology.  Although this program is in its infancy, taxpayers are beginning to see the contours of the IRS’s latest strategy.

The IRS has leveraged its knowledge throughout its system, identified the most serious tax issues, and allocated its resources to those issues.  The emphasis is away from specific taxpayers and on to specific tax issues.  So far, the IRS has announced three “campaigns” focused on inbound distributions (for example, moving untaxed, foreign earnings into the U.S.), basket options (a technique used to convert short-term taxable gains into favorable lower tax rate long term gains), and captive insurance (one of the issues on the IRS’s “Dirty Dozen” list).  This, however, is just the beginning.