TIGTA: IRS Has No Tax Compliance Strategy for M&A Transactions

Chris Gaetano
Published Date:
Sep 12, 2019

The Treasury Inspector General for Tax Administration (TIGTA) endeavored to see whether the IRS had an effective strategy for dealing with tax compliance in mergers and acquisitions (M&A) transactions, only to find that the service doesn't have one at all. Interviews with IRS management revealed that issues related to such transactions generally receive the same level of attention as any other. 

TIGTA found that the IRS does collect information on M&A from taxpayers engaging in these transactions, but this data is not used to identify potential noncompliance. Instead, the IRS relies on the taxpayers themselves to notify the IRS through an attached statement informing them of their tax-free reorganization. When TIGTA asked the IRS to provide the number of these statements filed for tax years 2015 through 2017, the IRS explained that while these statements are part of the taxpayer’s return, it was unable to provide the information. 

The Large Business and International Division (LB&I) is primarily responsible for overseeing M&A transaction compliance, and it mainly operates on a "campaign" approach to auditing specific issues. TIGTA said that, of the 53 campaigns the division has launched, just two were related to M&A transactions. One possible reason for this, according to TIGTA, is that these transactions are generally very complex, and not all of them represent the same compliance risk. Further, many revenue agents aren't exactly experts in M&A transactions, and so they need to consult subject matter experts on the more complex area, but consulting them on every issue may not be realistic, given available resources. 

However, even when the IRS does examine an M&A transaction for potential issues, little often comes of it: TIGTA noted that, between 2015 and 2018, the IRS devoted 27,874 staff days to issues that, ultimately, did not lead to an adjustment. 

"M&A transactions remain an area of potential compliance risk with the potential for large adjustments,but a significant number of staff days are often spent concentrating on no or low-risk M&A issues instead of M&A issues with audit potential," said the TIGTA report. 

TIGTA recommended that the IRS develop a strategy for assessing compliance risk and promoting tax compliance in the M&A area, as well as determine if returns with high-risk M&A transactions can be identified before they reach the field. The IRS management disagreed with the recommendation, saying that they already have a strategy and that, furthermore, the noncompliance rate for M&A transactions is low. TIGTA, in response, disagreed. 

"While IRS management stated that their various approaches constitute a strategy, we found these approaches to M&A transactions to be limited, separate,and distinct from one another and support the need for a consolidated approach," said the TIGTA report. 

Click here to see more of the latest news from the NYSSCPA.