The Treasury Inspector General for Tax Administration (TIGTA) has recommended the Internal Revenue Service (IRS) to reassess its examination procedures to effectively address the tax avoidance strategies employed by large multinational corporations in its final audit report published on 26 August 2024.
TIGTA was provided a list of 23 large multinational corporations that were alleged to have used a foreign trust structure that had no alleged business purpose or economic substance other than to avoid US taxation. TIGTA evaluated the processes, procedures, and enforcement tools the IRS has in place to address these structures and their associated transactions.
IRS faces challenges to address tax avoidance strategies of large multinational corporations
According to the TIGTA audit report, large multinational corporations can structure their operations and transactions for tax planning and sometimes tax avoidance purposes. An entire industry of lawyers, accountants, and wealth management professionals exist to help taxpayers, including large multinational corporations, reduce income subject to US taxation.
Much of this planning involves legitimate tax strategies; however, some strategies use the establishment of entities in a foreign no-tax or low-tax jurisdiction as a sole means to hide income producing assets or underreport income from US taxation.
In addition, large multinational corporations may use pricing methods when they conduct intercompany transactions that potentially result in evading or avoiding taxes.
Counsel support is necessary to address complexities in tax law
The TIGTA report explained that because large multinational corporations engage in very large and complex tax transactions, which often involve complex areas of tax law, the IRS must make legally sound and well-developed arguments to protect the interests of the Government.
As a result, IRS Counsel advice becomes a necessary consideration in the IRS’s overall enforcement approach. According to IRS management, Counsel evaluates the facts and circumstances of a case across a broad range of issues, including case law and precedent.
Whereas a revenue agent is evaluating the specific facts and issues of the assigned case. Counsel involvement becomes especially important when the outcome of litigation can set legal precedent for the IRS, which in turn can affect how the IRS litigates other similar cases.
Concerns regarding policies and practices that could appear to be favorable towards large multinational corporations
The TIGTA review found that policies might favor large multinationals, noting that these companies can directly contact IRS executives, potentially influencing examination efforts according to some revenue agents. The TIGTA determined that certain large multinational corporations may not be ideal candidates for the Compliance Assurance Process programme. Additionally, compliance personnel within the LB&I Division experience limited communication and interaction during the appeals process.
TIGTA recommended that the IRS review its examination procedures to determine whether changes are needed in support of effective tax administration for large complex taxpayers and that the IRS Independent Office of Appeals update its policies to require inviting compliance personnel and Counsel to taxpayer conferences involving large multinational corporations.
The IRS agreed to review its examination procedures but did not agree to require inviting compliance personnel and Counsel to taxpayer conferences involving large multinational corporations. However, we continue to believe that due to the complexities of large corporate tax administration, it is important to have the involvement of compliance personnel and Counsel in the appeals process.
