Will There Be Greater IRS Scrutiny of Corporate Merger & Acquisition Transactions By STEVEN TOSCHER and TENZING TUNDEN
The Treasury Inspector General of Tax Administration (TIGTA) issued a report on September 5, 2019, which questioned the IRS Large Business and International Division’s (LB&I) strategy for examining corporate merger and acquisition (M&A) transactions. In the report, the TIGTA stated that the IRS’s approach to M&A transactions has been limited, separate, and distinct from one another… and greater coordination and integration is needed. The report indicated that the IRS needs an overall strategy to address potential tax noncompliance of M&A transactions. The TIGTA report also suggested a more robust use of the substantial data the IRS collects on M&A transactions.
IRS data indicates that adjustments were proposed in 400 (8 percent) of the 4,965 instances in which M&A transactions were potentially an issue in closed cases from fiscal years 2015-2018. The average adjustment during this time period was $15.2 million per issue.
The objective of the TIGTA audit was to determine if the IRS had established and implemented an effective strategy to ensure that corporations meet their tax obligations related to taxable US Corporate M&A. Examiners of the TIGTA relied on information from LB&I Division’s Issue Management System (IMS). The IMS is used by leadership, management, and staff to accurately quantify work performed related to cases.
The TIGTA found that the IRS needs a unified strategy for examining corporate M&A transactions. IRS examination managers the TIGTA spoke with confirmed this by asserting that these issues receive the same attention as any other tax issue. The managers responded that there is difficulty in identifying and examining productive M&A issues due to the complexity of M&A transactions. Each transaction is unique and may not represent the same compliance risk.
Recommendations by the TIGTA and LB&I Response
The following recommendations were proposed by the TIGTA.
1.The IRS should establish an overall strategy for assessing compliance risk and promoting tax compliance in the M&A area. The IRS should determine if returns with high-risk M&A transactions can be identified before they reach the field.
The deputy commissioner of LB&I disagreed with this recommendation primarily because the IRS has already conducted such a study in 2017. This determination of a strategy has already been completed and is being implemented. The IRS stated that it already has a strategy consistent with the goals of the recommendation. However, the TIGTA believes that this strategy should be consolidated and more strategic rather than divided and isolated.
2.The IRS should determine whether M&A forms and information provided on them could be used as a compliance tool within a larger strategy to assess risk and ensure that Corporate M&A transactions are compliant with the tax code.
The IRS agreed with this recommendation and may use information from tax return forms associated with M&A in enforcement. These forms include Form 8806, Form 1099-CAP, Form 8023 for §338 transactions, and Form 8883 to report asset allocations. Adoption of this recommendation could have a significant impact on how M&A transactions will be audited in the future. This is another example of IRS beginning to use and leverage its access to “big data.”
IRS Audit Activity in M&A Transactions Going Forward
The IRS collects information regarding corporate M&A activity but does not use it to identify potential noncompliance. However, that will change if the TIGTA’s second recommendation is adopted. If so, computers will analyze the IRS data collected to assist auditors to identify issues that need further scrutiny. This can lead to additional proposed adjustments in M&A transactions of all types and not just limited to closely held corporations. Our prediction is that use of big data and artificial intelligence will substantially increase IRS scrutiny of M&A activity. While large public corporate M&A transactions may be more likely to comply with federal tax laws, the IRS may be more aggressive in M&A transactions involving closely held corporations or mid-sized private corporations. Reliance on obtaining a private letter ruling or conforming certain aspects of a merger to revenue rulings may be more important now in light of the anticipated increase in IRS audit activity,
STEVEN TOSCHER – For more information please contact Steven Toscher – firstname.lastname@example.org. Mr. Toscher is a principal at Hochman Salkin Toscher Perez, P.C., specializing in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at tax litigator.com.
Tenzing Tunden recently graduated from the Graduate Tax Program at NYU School of Law and the J.D. Program at UC Davis School of Law. During law school, Mr. Tunden served as an intern at the Franchise Tax Board Legal Division and at the Tax Division of the U.S. Attorney’s Office (N.D. Cal).