Special IRS Team Working To Identify Emerging “Abusive Transactions” – Tax Authorities

Earlier this year, the Internal Revenue Service (IRS) announced
the creation of a new Joint Strategic Emerging Issues Team (JSEIT).
The new initiative, announced at the New York University School of
Professional Studies Tax Controversy Forum in June, brings together
different agency divisions and organizations to identify and
address emerging tax compliance issues. Various divisions, such as
the Small Business/Self Employed (SB/SE), Large Business &
International (LB&I), Tax Exempt/Government Entities (TE/GE)
and Criminal Investigation divisions, will work together to bring
each division’s expertise and specialties into one place to
quickly address new issues that are brought to the IRS’s
attention.

The goal of JSEIT is to help taxpayers with compliance issues
and message them about which transactions work or do not work from
a compliance perspective. The purpose of JSEIT is to act as a
communication vehicle to identify areas that should be looked at in
more detail by the various IRS divisions. In this vein, JSEIT seeks
to provide messaging to taxpayers on emerging issues so that they
are informed early on as to how the IRS views a particular
transaction. JSEIT is not focused on transactions the IRS has
already deemed abusive (e.g., certain syndicated
conservations easements and micro-captive insurance transactions)
but seeks to identify developing issues and alert the public to
those issues.

JSEIT has not yet identified any specific emerging issues or
transactions that it is investigating. Rather, it receives input
from various sources, such as the public and IRS personnel, as to
emerging issues to keep an eye on. One example of input from the
public is a June 28, 2022, letter from a retired certified
public accountant discussing “multinational profit-shifting
structures” and Internal Revenue Code Section 482 and the
application of effectively connecting income taxation.

JSEIT also looks to social media and ideas that are posted on
the internet. This is consistent with the actions of LB&I
examination teams, which frequently look to US Securities and
Exchange Commission filings and LinkedIn profits and posts to gain
background information on corporate taxpayers and their
operations.

The IRS Office of Chief Counsel is also involved in JSEIT. Chief
Counsel attorneys sometimes hear about a new transaction from a tax
practitioner or an examination team and can bring that to JSEIT so
that it is aware of the new transaction. This allows Chief Counsel
attorneys to be involved early on and to provide guidance to
examination teams as to what transactions it believes are compliant
and which are not. For example, Chief Counsel attorneys can tell
revenue agents what to look for in an emerging issue and what
information to request from the taxpayer to gain a better
understanding of the transaction.

As we recently discussed, the IRS is set to receive
significant funding that will be deployed to improve taxpayer
service and enhance tax compliance. JSEIT may benefit from this
increased funding and be able to identify more issues on which to
focus and the most effective ways to promote taxpayer
compliance.

More information about JSEIT can be found in Bloomberg Tax’s Talking Tax podcast episode,
“IRS Aims to Stop Abusive Schemes From Gaining
Traction.” In the podcast, Benjamin Schwarz, senior
advisor to the SB/SE commissioner, and Holly Porter, associate
chief counsel for Passthroughs & Special Industries, discuss
the goals of JSEIT, the divisions involved and the issues JSEIT is
focusing on.

Practice Point: The IRS is continuing its
efforts to identify and potentially stop transactions that it
believes are abusive and not in compliance with tax law. JSEIT is
the IRS’s next step in said effort and seeks to draw upon the
collective expertise of the IRS across different divisions. It
remains to be seen whether JSEIT is any different from LB&I’s Compliance Campaigns, a program
that the IRS lauded as the next step in cross-department
examinations. We are hopeful that the IRS will follow through with
its promise of transparency and publish its findings on the issues
that it is following and how it views new transactions from a tax
compliance perspective.

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