The Tax Times: LB&I Agents Lose Autonomy To Centralized Office That Will Be Using Data to Identify Compliance Risks For Audit!

Tax practitioners will face new questions from examination teams as the IRS selects compliance risks based on data, in the Large Business and International Division's (LB&I) move from individual audits of multinationals to broader considerations involving risk assessment.

As opposed to the exam team coming out and identifying what areas will be looked at; the issues will be per-identified for the revenue agent. This change shifts the responsibility of selecting items to examine in an audit from the field agents to the revenue agents who are analyzing data in a centralized office. Exam teams will however, have the ability to raise other issues not identified from the data. LB&I Commissioner Douglas W. O'Donnell said that LB&I will be reorganizing its exam structure to save resources and create a more centralized approach.

A new organizational design will be put in place to facilitate transition to the new ways of doing business. The new LB&I will be organized around nine “practice areas.” Four of the practice areas will be organized geographically and appear to be structured similar to the current five industry directors with:

Directors of Field Operations (DFO) and
Territory Managers (TM) constituting the management structure within the practice area.

The other five practice areas (or “PAs”) are delineated along technical or subject matter lines:

Pass-through entities
Enterprise activities
Cross-border activities
Withholding and international individual compliance
Treaty and transfer pricing operations

Similarly, it is envisioned that all of the International Examiners will likely be housed within at least two of the international practice areas. It appears that at a strategic level, the subject matter practice areas will lead the development and coordination of the campaigns and treatments aimed at specific compliance risks. At a tactical level, the design calls for them to also work directly with examiners from the geographic practice areas that are assigned specific issues to work.

This highlights the need to equip LB&I to operate competently in the fast evolving global tax administration environment which was one of the prime drivers of the new concept of operations. In explaining the new “concepts of operation” and organizational alignment, there are four guiding principles on which he said LB&I’s future success is predicated:

Flexible, well-trained workforce—developing deeper specialized knowledge and dynamic tools
Selection of better work—based on data analytics and real-time examiner feedback
Tailored treatments—a more flexible stream of options to address current and emerging issues
Integrated feedback loop—continual collection and analysis of data that permits more precise focus on the right compliance risks

Both federal and state Tax Administration Agencies

must use their Limited Resources to achieve

Maximum Taxpayer Compliance.

Data Mining can help Tax Agencies

Achieve Compliance Goals and

Improve Operating Efficiency.

Managing an effective auditing organization involves many decisions.Each stage involves decisions that can increase or reduce the efficiency of the overall auditing program.

Texas and several other states, as well as tax agencies in the United Kingdom and Australia, rely on data mining to help find delinquent taxpayers and make effective resource allocation decisions. Data mining leverages specialized data warehousing systems that integrate internal and external data sources to enable a variety of applications, from trend analysis to non-compliance detection and revenue forecasting, that help agencies answer questions such as:

How should we split auditing resources among tax types?
Which taxpayers are higher audit priorities?
What is the expected yield from a particular audit type?
Which SIC codes are associated with higher rates of noncompliance?

Tax agencies have access to enormous amounts of taxpayer data. Most auditing agencies, in fact, draw information from these data sources to support auditing functions. Audit selectors, for example, search data sources for taxpayers with specific profiles. These profiles, developed by experts, may be based on a single attribute, such the taxpayer industry code (SIC), or on a complex combination of attributes (for example, taxpayers in a specific retail sector that have a specific sales-to-reported-tax ratio).

Data mining technologies do the same thing, but on a much bigger scale. Using data mining
techniques, tax agencies can analyze data from hundreds of thousands of taxpayers to identify common attributes and then create profiles that represent different types of activity. Agencies, for example, can create profiles of high-yield returns, so auditors can concentrate resources on new returns with similar attributes. Data mining enables organizations to leverage their data to understand, analyze, and predict non-compliant behavior.

Data mining is the exploration and analysis, by automatic or semiautomatic means, of large quantities of data in order to discover meaningful patterns and rules. Organizations use this information to detect existing fraud and noncompliance, and to prevent future occurrences.

This recently announced restructuring of the IRS' LB&I is aiming to bring about a “cultural change” in the department, said Sergio Arellano, director of International Business Compliance for LB&I.

“Really, the change for us that is critical is that we're going to have a cultural change,” Arellano said. “We're going to have to focus on becoming an organization that is comfortable pre-identifying issues.”

As part of the restructuring, LB&I will create a new position, assistant deputy commissioner for compliance integration and will likely be dropping its continuous audit program for large taxpayers, Arellano said during a Sept. 18 panel discussion at the American Bar Association Section of Taxation meeting in Chicago.

Individual audits aren't the answer, Arellano said. “We can't audit our way out of our issues. We have to find different methods and different approaches.”

LB&I is scheduled to implement the new structure in early calendar year 2016.

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