IMPACT ON TAXPAYERS
Corporate mergers and acquisitions can be large dollar, complex transactions that potentially have large tax implications. Some of those transactions can be tax-free depending on the structure. It is important that the IRS ensure that these complex transactions are in compliance with the tax law and that the appropriate amount of tax is paid.
WHY TIGTA DID THE AUDIT
The Institute for Mergers, Acquisitions, and Alliances reports that there were 14,540 mergers and acquisitions in the United States in Calendar Year 2018, with a value of almost $1.9 trillion. There have been approximately 120,000 domestic corporate mergers and acquisitions in the last 10 calendar years, totaling $15.3 trillion. The Internal Revenue Code permits tax-free treatment for transactions that meet certain technical requirements, and taxpayers sometimes make the form of the transaction appear to satisfy those requirements while the substance does not. The Large Business and International Division (LB&I) has been transitioning to issue-based audits and has adopted a “campaign” approach to auditing specific issues. TIGTA performed this review to determine whether the IRS had an effective strategy with respect to the compliance risks presented by mergers and acquisitions.
WHAT TIGTA FOUND
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.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the Commissioner, LB&I Division: 1) establish a strategy for assessing compliance risk and promoting tax compliance in the mergers and acquisitions area, including determining if returns with high-risk merger and acquisition transactions can be identified before they reach the field; and 2) determine whether the merger and acquisition tax forms, and information provided on them, could be used as a compliance tool within a larger strategy to assess risk and ensure that corporate merger and acquisition transactions are compliant with the tax code.
The IRS disagreed with the first recommendation and agreed with the second. The IRS stated that it already has a strategy consistent with the goals of the recommendation. TIGTA believes the IRS’s described approaches to merger and acquisition transactions have been limited, separate, and distinct from one another and support the need for a consolidated strategic approach.
Highlights of Reference Number: 2019-30-050 to the Commissioner of Internal Revenue.