For a large majority of business taxpayers and their in-house tax professionals worldwide, the Large Business & International Division (LB&I) of the Internal Revenue Service represents the principal point of regular interface with the U.S. taxing agency. Thus, any changes, whether large or small, in scope, focus, or operation will usually attract some measure of attention. In the present case, however, because the changes to LB&I represent a wholesale restructuring of its operations, the scrutiny from every corner of the business taxpayer and advisory communities has been intense. This article puts the current reorganization in a broader context, highlights specific structural and operational issues, and proposes practical solutions to the identified issues.
On September 17, the IRS announced a major reorganization of LB&I. The reorganization is significant not only in its details but also in how relatively quickly it comes on the heels of the last reorganization in 2010, in which the former Large and Mid-Size Business Division (LMSB) was restructured and renamed LB&I with a renewed focus on international issues.
When LMSB "stood up" on June 4, 2000, its goals were laudatory. Its vision was "to be a world-class organization, responsive to the needs of customers in a global environment, while also applying innovative approaches to customer service and compliance." (1) The LMSB structure was aligned by industry (five groups with industry directors) instead of geography. The revised structure included 80 territory managers who were to "ensure that the appropriate resources are available to resolve issues referred by team managers," who in turn were to manage the front-line examination process. (2) This new "customer focus" was designed to "reduce examination costs and burdens" through new alternative dispute resolution (ADR) techniques, prefiling guidance, issue resolution, and new technology. (3)
The goals of the most recent reorganization, however, appear to be very different and reflect a very practical response to the environment in which the IRS currently finds itself (see box, IRS Woes: Changes Since 2000). In 2000, approximately 210,000 LMSB filers made annual cash payments of approximately $721 billion. (4) Nearly ten percent of these taxpayers were examined each year, and LMSB had a staff of approximately 7,200. (5) In 2010 LB&I administered the tax law for corporations, partnerships, and individuals with assets greater than $10 million with a staff of only about 6,000. Today, as in 2010, the IRS finds itself struggling to keep up with the rapid pace of globalization and its impact on the 296,000 taxpayers now within the jurisdiction of LB&I. Since 2010, however, the IRS' budget has declined significantly and, accordingly, so have its resources. At the same time that the IRS has been asked to take on additional responsibilities, between fiscal years 2010 and 2015, the IRS' budget has been reduced by more than $1.2 billion (ten percent; eighteen percent when adjusted for inflation). (6) The IRS has significantly fewer employees, including fewer enforcement staff, and the number of audits and the amount collected from audits have shown a marked decline.
Commissioner John Koskinen's all too familiar refrain of "doing less with less" has begun to inform almost every decision the agency makes. One such decision: How to most efficiently allocate dwindling IRS examination resources and effectively enforce the tax laws.
Everything Old Is New Again
From a structural perspective, the most significant changes are the return to a single deputy commissioner rather than two (one domestic and one international) (7) and the replacement of "industries" with nine practice areas.
The practice areas are each led by a director who reports to the deputy commissioner. The four regional practice areas are Western, Central, Eastern, and Northeastern, and the five subject matter practice areas are Pass-through Entities, Enterprise Activities, Cross-border Activities, Withholding and International Individual Compliance, and Treaty and Transfer Pricing Operations. Still unclear is how all of these practice areas will work together. Commissioner Douglas O'Donnell has indicated that more than one practice area may be involved in the audit of a taxpayer, but he has also indicated that the majority of LB&I's now only 4,500 employees--sixty to seventy percent--will likely be assigned to one of the four regional compliance areas. (8) These details are still being sorted out.
The "Campaign" Approach
Beyond the organizational chess game, the potentially revolutionary change is how the IRS proposes to identify issues (and presumably taxpayers) to be audited. For a number of years, LB&I has been talking about moving toward a more "issue-focused" approach for conducting examinations, advocating limited scope examinations for all taxpayers, and more recently instituting a requirement that information document requests (IDR) be issue-focused. More recently, there has been talk of phasing out the continuous audit program for most taxpayers and eliminating the CIC/IC distinction.
The proposed reorganization takes this approach to the next level, proposing that LB&I will identify potential areas of noncompliance and design "campaigns" to address them. Campaigns may involve a combination of "treatment streams," including examinations, outreach, or guidance. LB&I acknowledges that it doesn't really know what those campaigns may look like in the context of large business taxpayers, but it cites the Offshore Voluntary Disclosure Program (OVDP) as an example of a campaign. Perhaps most significantly, agents will no longer be assigned returns and then be responsible for finding issues to audit. Rather, risk will be centrally assessed, and agents will be directed what to examine when they are assigned a return. As O'Donnell has acknowledged, this approach presents "complicated, cultural" challenges (9) in an agency where agents have enjoyed relative autonomy for years.
A More "Agile" IRS?
A PowerPoint presentation announcing the rollout indicates that LB&I needs to "continuously evolve in order to keep pace with the way the world does business and with our taxpayers" and reflect "one LB&I," instead of international versus domestic, field versus headquarters, and strategy versus execution. The materials also indicate LB&I will engage in "effective tax administration by updating examination processes that have not been refreshed for many years."
The materials set out a "core set of guiding principles" that establish "the foundation for where LB&I wants to be in the future." These are: (1) a flexible, well-trained workforce; (2) the selection of better work; (3) tailored treatments; and (4) an integrated feedback loop. The principles of enhanced training of agents and increased collaboration within the organization are laudable. However, as discussed below, these principles have little chance of translating into workable, sensible practices without the input of the taxpayer community. In that spirit, we proffer the following...