The Internal Revenue Service will be implementing a new program using data analytics to select which large corporate taxpayers to audit. The program will identify which corporate tax returns show the highest compliance risk based on criteria such as gross assets and gross receipts. Large corporations should be proactive and perform internal audit risk assessments in order to address any potential red flags.
The Large Business and International Division (LB&I) of the Internal Revenue Service (IRS) recently announced that it will roll out a new program, the Large Corporate Compliance (LCC) program, to replace the Coordinated Industry Case (CIC) program in selecting the largest and most complex corporate taxpayers. The primary objective of the LCC program will be to “efficiently focus its resources on noncompliance” by using data analytics to identify which large corporate taxpayers to audit, beginning with the 2017 tax year. The elimination of the CIC program was first hinted at in 2015 when the IRS moved toward more “risk-based” audits.
Some of the key features of the LCC program’s use of data analytics will be in identifying case-pointing criteria such as gross assets and gross receipts. This automated pointing, LB&I explains, allows for a more “objective determination” of which taxpayers properly belong in the category of the largest and most complex corporate taxpayers. LB&I will then use data analytics to identify which tax returns are susceptible to the highest compliance risk, regardless of whether the taxpayer has recently been under audit or the geographical proximity between the IRS exam team and the taxpayer’s location. For calendar year taxpayers, 2017 returns could include, among other new provisions, the Internal Revenue Code Section 965 transition tax, and the LCC program rollout may help LB&I identify which taxpayers initially to select for audit of the 2017 Tax Cuts and Jobs Act (TCJA) provisions.
It is no secret that the IRS has been contending with budget shortfalls for many years, resulting in fewer overall audits. Nor is it a secret that the IRS has already been using data analytics to achieve what it calls “more efficient mission delivery.” The IRS’s Strategic Plan for 2018–2022 emphasized the importance of using data analytics in conjunction with qualitative information to “select high-priority work.” This includes investing in analytics and visualization software and tools as well as training for proper utilization. Moving away from the CIC program may also enable LB&I to use remote audits to manage its declining resources.
The use of data analytics to identify large corporate taxpayers for auditing is consistent with LB&I’s campaign approach over the last several years, as it has slowly rolled out new campaigns periodically. Both the LCC program and the focus on campaigns allow LB&I to do more with less, but continue to raise questions about how much a taxpayer’s facts still matter or if everything is coming up “ratios.”
There are several features of the CIC program that will continue to be in effect under the LCC program, at least until further notice from the IRS. Pending CIC cases will be completed and closed as CICs. Existing Internal Revenue Manual (IRM) provisions addressing CIC procedures will remain in effect for new LCC cases until such provisions are replaced by IRM 4.50.3 within the next two years.
Taxpayers will still be allowed to make affirmative disclosures during the first 15 days of the audit to avoid certain Section 6662 penalties under Revenue Procedure 94-69. However, the IRS cautioned that Revenue Procedure 94-69 is currently under review. If this aspect of the LCC program is abandoned, taxpayers may risk an increase in penalties and face even more pressure on return reporting positions—while at the same time digesting all of the new TCJA guidance that continues to be released.
CIC taxpayers were also able to submit informal refund claims at the beginning of an audit and have those claims considered during the audit. This is another beneficial aspect of the CIC program that, if removed, will require a taxpayer not under audit to submit a formal claim and wait for the IRS to audit the claim, or file a refund suit six months after submitting the formal claim.
What does the LCC program rollout mean for corporations and businesses that have not been under continuous audit or audited in recent years? Now is a good time to perform an audit risk assessment. Taxpayers can proactively prepare for potential audits or even make corrections by filing amended tax returns. And, as the IRS updates the old CIC procedures as part of the migration to the LCC program, taxpayers that have been part of the CIC program for decades may eventually learn that they are no longer under continuous audit, as the IRS instead uses data analytics to ensure its limited resources are spent on tax returns with the highest compliance risk. The IRS and other global revenue authorities have been using data analytics for years, so taxpayers should be analyzing their own data proactively to identify any potential red flags or issues.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
 LB&I-04-0419-004 (May 21, 2019), Interim Guidance on Implementation of the Large Corporate Compliance (LCC) Program. The attachment to the Interim Guidance provides a list of IRM sections affected by the implementation of the LCC program.