While much of the U.S. payroll is under deficit reduction pressure, personnel in the nation's tax-collection operation increased by 19% from 2006 through 2010, with half of that hiring coming in 2010 alone. The increase apparently has paid off; IRS enforcement revenue increased by 18% last fiscal year alone, to $57.6 billion, according to the office of the Treasury Inspector General for Tax Administration, or Tigta.
"Increased staffing has led to increased revenues for the service," Sharon Katz-Pearlman, national principal-in-charge of KPMG's Tax Controversy Services Network, said in this week. "The new type of agent they are bringing in has a substantial amount of outside experience."
These new agents are spending much of their time on middle-market companies. According to Tigta, while fiscal 2010 saw an overall 5% increase in corporate examinations, companies with assets of $10 million or greater have undergone 7% more examinations. For companies worth at least $250 million, that figure is 9%.
"Middle market companies that are historically not subject to examination are coming under examination," said Katz-Pearlman. "More agents are out there working on cases that are not large cases."
The IRS is going after bigger game among individuals, too, she noted. One agent told her that a high-wealth group formed by the service almost two years ago currently is "focusing on returns that are two-to-three inches thick; in other words, taxpayers with a lot of investments."
In learning about such high-income taxpayers, the IRS is eager to explore the webs of assets available to them, she said, using link analysis tools to unravel the "tentacles" that spread out from entities such as trusts and multi-tiered partnerships.
There is also continuing effort to review more returns of flow-through entities, according to Katz-Pearlman. "In time of flat budgets, the IRS cannot increase activity across the board, but must address areas where there is growth and potential risk," she said.
"The theme of all this is 'the IRS is coming, the IRS is coming'," said Brian Trauman, national principal-in-charge of KPMG's Transfer Pricing Dispute Resolution Services. " But we've been saying that for a while."
As part of its , the agency five months ago appointed Sam Maruca, a partner at the law firm of Covington & Burling, to head its Large Business and International Division's transfer pricing operation. Maruca augmented his staff with some 30 junior and senior economists at the end of September, and has opened additional field offices in Chicago, Dallas and New York, said Trauman.
These freshly minted IRS agents not only will boost collections, but, as a result of a reorganization, also will see transfer pricing disputes through from investigation to resolution. "Going forward, you have the same individuals working the case and negotiating the outcome," said Trauman. "We should see things begin to speed up."
Another way the IRS is trying to improve its act is through increasing reliance on its Compliance Assurance Process, started in 2005 with 17 hand-picked pilot participants and had ramped up to 140 taxpayers by the start of this year, according to Michael P. Dolan, director of practice, procedure and administration at KPMG's Washington National Tax Group.
Under CAP, a company is required to fully disclose information concerning completed transactions and its proposed treatment of all material issues. The IRS is then supposed to conduct "near-real time" audits of each disclosed tax position, with the parties attempting to reach and record "Individual Resolution Agreements" on each issue. If the return is submitted in a way that complies with these agreements, the IRS accepts the return as filed.
Effective March 31, the agency rolled out this program beyond the pilot stage, allowing all companies to sign up on a voluntary basis. Participants move from pre-CAP, which involves the resolution of all previously outstanding tax issues, through CAP, and eventually proceed to a less invasive "CAPmaintenance" program. Graduating to maintenance should generally come after "at least one or two good years of CAP," Dolan said.
"The first chapter's not yet been written on CAP," Dolan said. He added that, while the program is "important to taxpayers who are more or less concerned about predictability," it's important to keep in mind that companies should assess whether their corporate cultures are ready for the contemporaneous disclosure requirements involved.
"The business is entering into it, not the tax department, so the question is whether business and tax can partner in a way that one or the other is not left out to dry," he said. "It's not all hearts and flowers."