LB&I Ends Tiered Issues
Effective Aug. 17, 2012, the IRS will no longer use the tiered management process to set examination priorities and address important issues in the Large Business & International (LB&I) Division. Instead, it will examine the former Tier I, II, and III issues and assess risk in the same manner as any other issue in an examination (LB&I-4-0812-010). As part of this process, the IRS withdrew all industry director directives (IDDs) on tiered issues.
In place of the tiered issue process, LB&I is developing a knowledge management system consisting of issue practice groups (IPGs) and international practice networks (IPNs), which will provide IRS examination teams with technical advice. Relevant guidance from the former IDDs will be retained on the IPG and IPN websites. Other guidance will be updated.
Issue tiering, a practice established in 2006, involved separating examination issues into one of three tiers (for a more complete explanation, see “IRS Tiered Issues,” Corporate Taxation Insider, Jan. 28, 2010).
In place of the tiered issue process, the new IPGs and IPNs (currently being piloted by the IRS) are designed to foster knowledge sharing across LB&I and the Office of Chief Counsel. For more, see “New LB&I Knowledge Management Strategies: IPGs and IPNs,” by Robert D. Adams, The Tax Adviser, Oct. 2012, page 668.
Chief Counsel Advises on Identity Theft Returns
In Program Manager Technical Advice (PMTA) 2012-13, the IRS Office of Chief Counsel explained in a memorandum to Small Business/Self-Employed Division attorneys what the IRS can do when a return is filed by an identity thief to generate a fraudulent refund and the IRS has issued a statutory notice of deficiency based on that fraudulent return.
The PMTA explained that a return filed by an identity thief is not a valid return because it is not filed by the true taxpayer or with the true taxpayer’s consent and it lacks a valid signature. The Office of Chief Counsel has taken this position in prior guidance.
Once the IRS issues a statutory notice of deficiency based on the identity thief’s return, the IRS can adjust the victim’s account before the period to petition the Tax Court under Sec. 6213(a) (generally 90 days) expires, including abating any assessments that were based on the bad return, the PMTA stated. The only exception would be if a necessary adjustment required an additional assessment on the victim’s account, but even in that case, the taxpayer could waive the restriction on assessment under Sec. 6213(a) so that the IRS could adjust the account immediately.
The PMTA also stated that if the taxpayer establishes that he or she did not submit the bad return, then the issuance of a notice of deficiency was an administrative error and the IRS should rescind the notice if the taxpayer consents, especially because that will preserve the IRS’s ability to later issue a notice if a deficiency is discovered on the victim’s actual return.
Benistar Plan Taxpayers Lose Appeal
The Second Circuit upheld the Tax Court’s holding in Curcio (Nos. 10-3578, 10-3585, 10-5004, and 10-5072 (2d Cir. 8/9/12), aff’g T.C. Memo. 2010-115) that contributions to a purported welfare-benefit plan known as the Benistar 419 Plan were not deductible.
The four consolidated cases involved business owners who enrolled in Benistar, which offered in its promotional literature “virtually unlimited deductions for the employer.” Other employees of the businesses were not enrolled. The businesses paid amounts into a trust that Benistar used to purchase life insurance policies on the owners, who could select the type of insurance and the premium payment term to fully pay for the death benefits. Businesses also could withdraw from or terminate their participation, upon which the plan would distribute the underlying policy to the insured.
The Tax Court held, as it has in similar cases (see previous Tax Matters coverage, “Tax Court Again Takes Dim View of Benistar Plan,” Jan. 2011, page 56) that the contributions to the plan were not ordinary and necessary expenses as required by Sec. 162(a) but were used by the taxpayers to “funnel pretax business profits into cash-laden insurance policies over which they retained effective control.”
The Second Circuit agreed, noting that Sec. 419(a), which governs deductibility for welfare-benefit plan contributions, requires that they be deductible under another Code provision, and that Rev. Rul. 69-478 states that the proper provision for deductibility of contributions to an employee trust for life insurance is Sec. 162(a) and related regulations.
The appeals court also affirmed accuracy-related penalties on the resulting underpayments.