September 27, 2019

M&A Tax: Treasury Report Says IRS Lacks M&A Compliance Strategy

The IRS is taking heat in a recent report ssued by the Treasury’s inspector general for tax administration (TIGTA) over its lack of a strategy to assess compliance issues associated with mergers and acquisitions.  Here’s an excerpt:

The IRS does not have an overall strategy to address potential tax noncompliance of merger and acquisition transactions.IRS Examination managers TIGTA spoke with asserted that issues related to mergers and acquisitions generally receive the same attention as any other issue. IRS data indicate that adjustments were proposed in 400 (8 percent) of the 4,965 instances in which mergers and acquisitions were potentially an issue in closed cases from Fiscal Years 2015 through 2018.

When LB&I Division examiners were able to propose an adjustment to merger and acquisition issues, the proposed adjustments were significant: an average of approximately $15.2 million per issue. The IRS collects information on mergers and acquisitions from taxpayers engaging in those transactions but does not use it to identify potential noncompliance.

Taxpayers that engage in a tax-free reorganization must notify the IRS with their next tax return by including a statement. 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 report also noted that the IRS proposed audit adjustments for underreported taxes on deals of approximately $296 million in 2018 – compared to approximately $1.05 billion in 2015. The report said that the percentage of deals with proposed adjustments also declined from 9.1% to 5.3% over the same period.

The IRS disputes the report’s conclusion that it lacks a strategy to address noncompliance in M&A transactions, but the report is getting some media attention, so don’t be surprised if the IRS takes a harder look when it audits your deals than it has in recent years.

John Jenkins