In brief

The IRS is leveraging its Inflation Reduction Act (IRA) funding to target its compliance efforts on high-income and high-wealth individuals, complex partnerships, and large corporations. As part of these initiatives, the IRS recently announced that it is establishing a special group to focus on large or complex passthrough entities. The new passthrough group will include employees joining the IRS under its recently announced plan to hire more than 3,700 new employees to help with its expanded enforcement efforts.

The IRS also recently announced that it is requesting comments from taxpayers and advisors regarding improving and expanding tax certainty and issue resolution options for business taxpayers. In addition, the agency announced proposed changes to Form 6765, Credit for Increasing Research Activities, and is soliciting feedback on the changes, which include new Sections E and F that would be added to the form.  

These efforts are intended to help the IRS accomplish some of the objectives set forth in its Strategic Operating Plan by (1) helping taxpayers meet their reporting obligations and (2) using enhanced data and analytics to operate more efficiently and select the highest-risk cases for examination. 

Action item: Taxpayers potentially affected by the IRS’s expanded enforcement efforts should consider reviewing return filings to prepare audit-ready files in the event of possible IRS examinations. Taxpayers also should consider submitting comments regarding IRS efforts to improve and expand tax certainty and issue resolution options and proposed changes to the research credit form.

With respect to each of the IRS’s program intended to advance tax certainty and issue resolution, the agency is requesting specific comments on:

• The scope of the program, with specific examples of issues that would be appropriate for coverage under the program and issues that could be carved out of scope initially (e.g., limited to domestic issues) or generally (e.g., "comfort" requests);
• The parameters for defining the population of eligible taxpayers (e.g., publicly traded, audited financial statements, materiality, taxpayers operating under a robust tax control framework, etc.) or ineligible taxpayers (e.g., engaging in listed transactions or other abusive transactions, taking positions inconsistent with a Treasury regulation, etc.); 
• Timeframe for application to the program (e.g., cut-off date of no more than X months after return filing);
• Resolution options other than traditional examination; 
• Expectations with respect to taxpayers not accepted into the program (e.g., filing an amended return);
• Potential for initiating a program as a limited scope pilot; and 
• Recommended guardrails to ensure program's scope would be consistent with applicable law and does not undermine timely information reporting to the fullest extent feasible, as well as the timely and accurate filing of returns. 

In addition to the general request for comments, the IRS is requesting feedback on the programs and suggestions identified below.

Compliance Assurance Process (CAP)

Comments should address whether the IRS should consider modifications to the CAP eligibility requirements or other program features, including (1) whether eligibility requirements should be modified to include any taxpayer that prepares an annual financial statement that is audited by a third party or (2) whether there is value for partnership CAP in light of the agency’s plans for increased coverage of partnership structures.

Pre-Filing Agreements (PFA)

Comments should address opportunities to increase effectiveness of PFAs to promote tax certainty, including specific comments on (1) any barriers to using the current program, (2) program timelines, (3) resources needed to participate, (4) tax issues and/or tax entities that are especially well suited to PFAs, and (5) any other factors relevant to participation in the program.

Industry Issue Resolution (IIR)

Taxpayers and representatives should provide (1) observations from prior participation in the IIR program or prior use of IIR guidance and opportunities to enhance or grow the current program to increase taxpayer benefits and (2) input on addressing any program barriers and identifying tax issues that may be candidates for the program.  

Competent Authority assistance for US residency determinations

Comments should address instances where a treaty jurisdiction had not accepted Form 6166, Certification of U.S. Tax Residency, for a US treaty resident to claim benefits. Specifically, the agency is requesting taxpayers and representatives to include (1) the name of the country, (2) the stated reason the jurisdiction would not accept the Form 6166, (3) the country-specific requirements, and/or (4) whether certain clarifications on the residency status of a US treaty resident would be helpful. The IRS plans to use this information to help inform whether the US Competent Authority may be able to help in such instances.

The proposed changes include:

• A new Section E with five questions seeking miscellaneous information,
• A new Section F for reporting quantitative and qualitative information for each business component, required under Section 41, and
• Moving the "reduced credit" election question and the "controlled groups or businesses under common control" question from line 17 and line 34 to the top of Form 6765.

The IRS also is requesting feedback on whether Section F should be optional for certain taxpayers, including those:

• with qualified research expenditures less than a certain dollar amount at a controlled group level,
• with a research credit less than a certain dollar amount at a controlled group level, or
• that are qualified small businesses for payroll tax credit purposes.

An optional Section F would not affect the requirement to maintain books and records or to provide Section F information in similar format, if requested. It also would not apply to amended returns for the research credit.

All feedback on the proposed form changes, potential Section F options, and questions about these changes should be submitted to Lbi.rt.team@irs.gov with the subject line: "Feedback/Questions F6765". Feedback is requested by October 31, 2023. All feedback will be considered before finalizing any Form 6765 changes.