Corporate Income Tax: Compiling and Maintaining Audit Files Strategies for Preparing an Effective Record for Federal and State Exams

Transcription

1 presents Corporate Income Tax: Compiling and Maintaining Audit Files Strategies for Preparing an Effective Record for Federal and State Exams A Live 110-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: Robert Willmore, Partner, Tax and Litigation Group, Crowell & Moring LLP, Washington, D.C. Pilar Mata, Sutherland Asbill & Brennan, Washington, D.C. George Hani, Member, Miller & Chevalier, Washington, D.C. Aaron Young, State and Local Tax Partner, Reed Smith, New York Tuesday, August 17, 2010 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions ed to registrations.

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4 Corporate Income Tax: Compiling and Maintaining Audit Files Aug. 17, 2010 Robert Willmore, Crowell & Moring LLP Pilar Mata, Sutherland Asbill & Brennan George Hani, Miller & Chevalier Aaron Young, Reed Smith

5 Today s Program Relevant Background Slides 6-15 (Robert Willmore and Pilar Mata) Audit File Policy At Time Of Transaction Slides (George Hani and Aaron Young) Identifying, i Segregating Privileged il Documents Slides (Robert Willmore and Pilar Mata) Handling Audit File Documents During An Audit Slides (George Hani and Aaron Young) 5

6 Relevant Background Robert Willmore, Crowell & Moring LLP Pilar Mata, Sutherland Asbill & Brennan

7 Federal Protections Against Disclosure Federal attorney-client privilege Federally authorized tax practitioner privilege Federal work product doctrine 7

8 Federal Attorney-Client Privilege (Cont.) Protects confidential communications between a client and the client s attorney made for the purpose of providing legal advice Provides absolute protection ti against tdisclosure Waived if communication is voluntarily disclosed to third parties unless purpose is to assist in provision of legal advice (Kovel doctrine) Advice is protected; factual materials are not. 8

9 Federally Authorized Tax Practitioner t Privilege Codified at IRC 7525 Applies to confidential communications between a federally authorized tax practitioner and a client Similar to attorney-client privilege in that it can be waived if communication is voluntarily disclosed Limitations Only applies to non-criminal tax matters before the IRS and DOJ Does not apply to any written communications in connection with the promotion of the participation in a tax shelter 9

10 Federal Work Product Doctrine Grounded in common law (Hickman v. Taylor) and Federal Rule of Civil Procedure 26(b) Protects materials prepared in anticipation of litigation or for trial Materials may be discovered if the other party shows a substantial need for the materials and cannot otherwise obtain their equivalent without undue hardship. hi Attorney s mental impressions, conclusions, opinions and legal theories generally are protected. Waived if disclosed to adversaries or their conduits 10

11 The Meaning Of Prepared In Anticipation Of Litigation Split among the U.S. Circuit Courts of Appeals Primary motivation purpose test (5th Cir.) Because of test (D.C., 2d, 3d, 4th, 6th, 7th, 8th, 9th Cir.) Textron s variation on the because of test (1st Cir.) 11

12 United States v. Deloitte LLP, No (D.C. Cir. 2010) DOJ subpoenaed Dow s external auditor, Deloitte, to produce three documents: Two documents prepared by Dow, which were shared with Deloitte subject to Deloitte s obligation to protect confidential info A memo prepared by Deloitte based on a meeting with Dow s attorneys during its review and audit of Dow s financial reserves D.C. Circuit affirmed the District Court decision that Dow did not waive work product protection ti by sharing the two documents with Deloitte. D.C. Circuit also affirmed the District Court ruling that the attorney s work product in the memo prepared by Deloitte was protected, t but remanded for a determination as to which parts of the memo were protected and which were not Sutherland Asbill & Brennan LLP 12

13 United States v. Textron, 577 F.3d 21 (1 st Cir. 2009) (pet. for cert. denied) IRS filed a petition to enforce an administrative summons for tax accrual workpapers. En banc majority held that workpapers were required and prepared in the ordinary course of business to make book entries and prepare financial statements. Focused on immediate motive (to fix amount of tax reserves); therefore, no work product protection Majority further rationalized that IRS access served the legitimate and important function of detecting abusive tax shelters. In Deloitte, D.C. Circuit suggested that the Textron en banc majority was not applying the because of test and instead was using a prepared for use in possible litigation test Sutherland Asbill & Brennan LLP 13

14 State Protections Against Disclosure State attorney-client privileges State-authorized authorized tax practitioner privileges Cal. Rev. & Tax. Code ; (mirror federal) State work product doctrines N.Y. State Civil Practice Law & Rules 3101 states that the work product of an attorney shall not be attainable and protects materials prepared in anticipation of litigation or for trial by or for another party, or by or for that party s representative. Cal. Code Civ. Proc states that [a] writing that reflects an attorney s impressions, conclusions, opinions, or legal research or theories is not discoverable under any circumstances and that [t]he work product of an attorney is not discoverable Sutherland Asbill & Brennan LLP 14

15 Commissioner v. Comcast, 901 N.E. 2d 1185 (Mass. 2009) State sought memo prepared by Comcast s accounting firm. Memo advised the company sinhouse in-house tax attorney of the pros and cons of various planning opportunities and the attendant litigation risks. Mass. Supreme Judicial Court applied the traditional because of test to evaluate whether the memo was protected under the state work product doctrine, which is substantially similar to the federal rule. Court held that memo was protected because Comcast had the prospect of litigation in mind when such advice was requested, even though the memo was used to help the taxpayer make an informed business decision based upon the anticipated tax consequences of the transaction Sutherland Asbill & Brennan LLP 15

16 Audit File Policy At Time Of Transaction George Hani, Miller & Chevalier George Hani, Miller & Chevalier Aaron Young, Reed Smith

17 Best Practices Start Audit Preparation Early Master the facts at time of transaction Organize documents Separate on issue-by-issue or state-by-state basis Set up system to track and identify documents Segregate protected documents Be mindful of company document retention policies Identify key participants Who would be a source for additional factual information? Who could be a potential witness? Set up tracking system 17

18 Best Practices Start Audit Preparation Early (Cont.) Master the legal analysis Know your issues Do you need an opinion and for what purpose? Who can/should prepare the opinion? Conduct your own audit risk assessment Will transaction require a reserve? Will transaction be novel or otherwise stand out? Does transaction involve a tiered Issue? 18

19 State Tax Audit Preparation And Implications Of Discovery Disclosure of sensitive state tax issues Opinion letters and tax litigation risk analysis documentation The more thorough the analysis, the more valuable to a state t tax auditor 19

20 State Tax Audit Preparation: Minimizing Risk Of Disclosure Establish procedures to increase likelihood that privilege applies Identify sensitive state tax issues Segregate and control documents Tax litigation analysis and tax computation analysis Fact documents and opinion documents Limit disclosure Use counsel to hire/communicate i with third parties Draft documents with proper format, phrases, etc. Apply procedures in conjunction with understanding of particular state Discovery tools Attorney-client and work product law Tax appeal process 20

21 State Tax Audit Preparation: Minimizing Risk Of Disclosure (Cont.) Legal analysis/opinion letter Privileged vs. standard FIN 48 documentation Two versions/summaries Voluntary disclosure Negotiated t with high-level h l state t officials i Complex Multiple legal theories Tax attributes Going-forward filing methodology 21

22 Identifying, Segregating Piil Privileged ddocuments Robert Willmore, Crowell & Moring LLP Pilar Mata, Sutherland Asbill & Brennan

23 Practical Considerations For Protecting Audit Files Define internal roles and responsibilities, and identify potential protections Planning: Attorney-client and tax practitioner privileges Compliance: Attorney-client and work product Controversy: Attorney-client, tax practitioner and work product Define roles and responsibilities for consultants Have your attorney retain consultants directly Consultant s role is to aid the lawyer in rendering legal advice. Lawyers should oversee communications and limit it confidential materials. Distinguish between consulting and testifying experts 2010 Sutherland Asbill & Brennan LLP 23

24 Practical Considerations For Protecting Audit Files (Cont.) Working with your independent auditor Create and communicate a work product protection plan for the auditor Segregate your tax accrual workpapers on an issue-by-issue and/or state-by-state basis Segregate and separately maintain summary schedules and legal or analytical memoranda Determine whether the type and amount of information requested by the auditor can be narrowed, and explore alternative sources of information Limit the documents generated by the auditor during the course of the audit 2010 Sutherland Asbill & Brennan LLP 24

25 Protecting Tax Accrual Workpapers Involve attorneys in the process of creating tax accrual workpapers Do not use your tax accrual workpapers as part of your tax preparation process Keep your tax accrual workpapers physically segregated from other documents, including deal or transactional documents as well as other tax-related documents Restrict access to and circulation of (including through s) of tax accrual workpapers With respect to uncertain or likely-to-be-disputed tax positions, use inside or outside tax counsel to perform any legal analysis and make any litigation risk judgments regarding those positions 25

26 Protecting Tax Accrual Workpapers (Cont.) If you believe the IRS will be requesting your tax accrual workpapers, have the files reviewed by an attorney to identify any privileged materials and ensure that they are properly protected.» Consider having a privilege log prepared» If you have not already done so, identify privileged materials by marking them appropriately, and place the privileged materials in separate files or folders.» Ensure that all files and folders with privileged materials are physically secure from access by third parties, including contractors and consultants» Identify all electronic copies of privileged materials, and take appropriate precautions to protect the security of such electronic copies by restricting access 26

27 Protecting Tax Accrual Workpapers (Cont.) Protect your tax accrual workpapers from disclosure to third parties and government agencies (e.g., SEC, OCC)» Do not disclose privileged materials to your auditor without first considering possible waiver implications» Consider whether the information can be disclosed to your auditor in a way that will protect the most sensitive information» If privileged materials must be disclosed, ensure that there are written confidentiality/nondisclosure agreements in place» If disclosing to a government agency that will not sign such an agreement, indicate in writing that the disclosure is for limited purposes only, that the agency is precluded from sharing the information, and that no privilege is being waived 27

28 Handling Audit File Documents During An Audit George Hani, Miller & Chevalier George Hani, Miller & Chevalier Aaron Young, Reed Smith

29 Document Management During Audit Continue to gather documents Go back to your original i sources one last time Adjust your search based on direction of IRS inquiries Continue to update/expand your log and index Control access to documents Keep a pristine set and create working files Consider more advanced organizational systems Scan documents into database 29

30 Document Management During Audit (Cont.) IDR management New set of documents IRS correspondence Create IDR log and share it with the IRS Track all other meaningful interactions with IRS Use file memos or confirmations Track which documents were provided to the IRS Bates-number each page List each document in cover letter or IDR response Generally, do not give IRS access to originals Exception: Overly broad request or voluminous response 30

31 State Tax Audit: Discovery Information document request Interrogatories Deposition Subpoena Duces tecum (documents) Ad testificandum (testimony) Summons Other state discovery tool 31

32 State Tax Audit: Protection From Discovery Privilege Attorney-client Accountant-client Work product doctrine Common interest Tax practitioner Other issues Overly broad Irrelevant Documents not available 32

33 State Tax Audit: State Privilege Law Issues Federal rules Federal Rules of Evidence, Rule 501 (general rule) Federal Rules of Civil Procedure, Rule 26(b)(3) State privilege laws may vary compared with federal law and other state laws State privileges may be more or less expansive compared with general federal guidance, with respect to: Waiver of privilege Burden to overcome privilege Scope of privilege 33

34 State Tax Audit: Appeal Procedure Issues State tax appeal procedure may affect litigation strategy Discovery options may vary depending on appeal level Settlement S t authority may vary depending di upon the appeal level Outcome of litigation may affect tax in other taxing jurisdictions 34

35 CIRCULAR 230 DISCLAIMER IRS Circular 230 Disclosure: To comply with certain U.S. Treasury regulations, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this communication, including attachments, was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed on such taxpayer by the Internal Revenue Service. In addition, if any such tax advice is used or referred to by other parties in promoting, marketing or recommending any partnership or other entity, investment plan or arrangement, then (i) the advice should be construed as written in connection with the promotion or marketing by others of the transaction(s) or matter(s) addressed in this communication and (ii) the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. To the extent that a state taxing authority has adopted rules similar to the relevant provisions of Circular 230, use of any state tax advice contained herein is similarly limited. 35