Wednesday, May 30, 2012

Fast Track Settlement - A Process for Prompt Resolution of Large Business and International Tax Issues

IRS has recently released Publication 4539, which provides taxpayers with an overview of the Fast Track Settlement (FTS) process. The pub includes information on who can use FTS, advantages to its use, and how a taxpayer can start the FTS process.
Corporate taxpayers under examination by IRS's Large Business and International Division (LB&I) can get an expedited resolution of their case while it is still within LB&I's jurisdiction by participating in IRS's FTS program. The FTS program, which is jointly administered by LB&I and IRS's Office of Appeals, gives LB&I personnel and taxpayers an opportunity to mediate their disputes with an Appeals Official acting as a neutral party.
According to IRS, use of FTS provides taxpayers with a way to resolve audit issues during the examination process in 120 days or less. FTS is a key part of IRS's initiative to reduce the amount of time that the examination and resolution processes take.

According to IRS Commissioner Douglas Shulman, 83% of cases accepted into FTS resulted in a resolution.

FTS is generally available for all cases within LB&I's Compliance jurisdiction and certain cases outside of LB&I's jurisdiction. According to IRS, it works best with a limited number of unagreed issues. FTS can also be used in conjunction with LB&I's Compliance Assurance Process (CAP), which allows participating large corporations to work collaboratively with an IRS team to identify and resolve potential tax issues before the tax return is filed each year.

FTS can be used to settle most factual and legal issues, listed transactions, appeals and compliance coordinated issues, and issues requiring hazards of litigation settlement (i.e., where IRS considers its odds of winning a case and factors this into its decision of whether to settle or go to trial).

However, FTS isn't available in situations involving issues that are designated for litigation (i.e., where IRS essentially wants to litigate an issue, generally to establish judicial precedent, and thus won't consider settling it absent a taxpayer's complete concession), issues for which the taxpayer has submitted a request for Competent Authority assistance, "whipsaw" issues, and issues that have been excluded from the FTS process by a Chief Counsel Notice or equivalent publication.

According to Pub 4539, the advantages of using FTS include:
  • Quick resolution (i.e., within 120 days) of audit issues;
  • One-page application;
  • Consideration of the hazards of litigation (which can be considered by appeals officers and IRS counsel, but not IRS examining agents);
  • Preventing the accrual of "hot" interest (i.e., the additional 2% interest imposed on large corporate underpayments under Code Sec. 6621(c));
  • Withdrawal from the process at any time; and
  • Retention of all traditional appeal rights (see below).
When it appears that there might be unagreed issues raised during a taxpayer's exam, the taxpayer and LB&I team manager should have an early discussion regarding the possible use of FTS. Before the Form 5701 (Notice of Proposed Adjustment) is issued, the taxpayer and LB&I team should first agree on all of the facts and circumstances, and exhaust LB&I resolution authority on the issues.
After a Form 5701 is issued, and IRS receives a written response from the taxpayer, either of the parties may suggest participation in the FTS program. If the other party agrees, they contact the LB&I FTS Coordinator or the Appeals FTS Program Manager to determine if FTS is appropriate.

Both parties must complete and execute an application for FTS. The Form 5701 and taxpayer's written response should both be included in the FTS application package to help the FTS Program manager understand the dispute and determine whether the issue is sufficiently developed to be resolved via FTS. If the issue isn't ready, the LB&I FTS Coordinator and Appeals FTS Program Manager will advise the parties on what additional development might improve the odds of acceptance into FTS, or suggest other Alternative Dispute Resolution processes.

Both the taxpayer and those that have the authority to represent the taxpayer must be present during FTS. A Form 2848, Power of Attorney and Declaration of Representative, can be used.

If the parties decide that a resolution cannot be reached, the case will be closed promptly. The taxpayer retains all traditional appeal rights if the case or issue isn't settled. The administrative file will be returned to LB&I without Appeals' notes, but any written documents disclosed by the taxpayer during the FTS process will become available to be used by LB&I in its determination.
After the taxpayer, LB&I, and the Appeals Official sign the FTS Session Report acknowledging a basis of settlement, the Appeals Official will draft the appropriate settlement document to reflect the parties' agreed treatment of the issue.

An alternative to FTS is the Early Referral to Appeals. According to Pub 4539, this option is best utilized relatively early in the examination process when there are one or more developed, unagreed issues, and there are other undeveloped examination issues. Here, the developed, unagreed issues are referred to Appeals, while the other issues continue to be developed in LB&I.

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