INSURANCE TAX CONFERENCE: PRACTICE & PROCEDURE

1. INSURANCE TAX CONFERENCE:PRACTICE & PROCEDURE Kevin M. Brown, PricewaterhouseCoopers, Panelist R. Lee Christie, Sidley Austin LLP, Panelist Jeffrey Jablonski, RLI Insurance Company, Panelist Dawn Cummings-Fritz, Zurich North America, Moderator

2. ITC: Perspectives on IRS Practice & Procedure • Company • Consultant • Counsel ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ ٭ • LMSB – IRS Field Exams • IRS Appeals Process • Litigation

3. ITC: Practice & Procedure IRS Field Exams Quality Examination Process

4. ITC: Quality Exam Process (QEP) Overview • Background • QEP – What is it? How is it applied in the audit process? • Collaborative Audit Process -- “Rules of the Road”; • Establish Audit Scope and Issue Priority including Risk Analysis and Materiality; • Establish Exam Plan Timelines; • Jointly agree on Information Document Request (IDR) process; • Exam plan – jointly develop, review, and sign off; and • Identify Issue Resolution Process 4 4

5. ITC: Quality Exam Process (QEP)Background • Been a decade since the implementation of the Joint Audit Planning Process which was jointly developed with Tax Executives Institute. • Agents found the process useful but needed streamlining, more flexibility, and more opportunities for taxpayer involvement. • Taxpayers and their advisors observed inconsistent use of the process; some very involved and others not at all. • The new Quality Examination Process replaces the Joint Audit Planning Process. • While Joint Audit Planning was a set of suggested best practices the new QEP contains “requirements” for the Service and encourages taxpayer participation which cannot be mandated. 5

6. ITC: Quality Exam Process (QEP) • Joint Audit Planning Process ended for examinations started after May 30, 2010. QEP in-place for examinations started on June1, 2010. • The QEP is incorporated in the IRM. • QEP focuses on three elements; • Planning • Examination • Resolution • For revenue agents the “shoulds” of Joint Audit Planning are now “wills” – QEP is required. The QEP process brochure must be shared with taxpayer at beginning of audit. 6 6

7. ITC: QEP – Collaborative Audit Process“Rules of the Road” • Educate both parties; • Reach agreements regarding procedures to obtain related party returns, claims, affirmative issues, third party contacts; • Obtain basic data needed to prepare exam plan; • Clarify use/role of specialists, Counsel, and Technical Advisors; • Discussion of potential issues/risk analysis; • Discussion of the Information Document Request (IDR) process; • Develop and agree on schedule for periodic meetings; • Issue Resolution Process including early submission of Technical Advice Requests, Industry Issue Resolution program, etc.; and • Statute Extensions understandings. 7 7

8. ITC: QEP – Audit Scope and Issue Priority The exam team and taxpayer discuss: • Limited scope audits include LIFE exams, follow-up on issues raised in preceding cycle, repeat examinations where unabsorbed claimed credits (e.g. foreign tax credits) are so large as to preclude a productive full scope audit; • Prior audit results; • Claims and affirmative issues; • Mandatory issues – including Tiered issues, Coordinated issues, compliance checks; and • Permanent or timing issues; accounting or non-accounting issues. 8 8

9. ITC: QEP – Audit Scope and Issue Priority Materiality: • Total dollars: • Dollars to income; • Dollar value of deductions to total deductions: • Tax benefit to total tax; • Credit to tax; • Compare to gross receipts and/or gross assets; • Materiality was used for financial statements and tax return; and • Absence of an item. 9 9

10. ITC: QEP – The Exam Plan: Audit Scope and Issue Priority Risk Analysis: Ongoing -- but must be conducted during initial plan, when 50% time applied, or significant event occurs. • Level of compliance; • Adjustment potential/expected result of examination; • Future Impact; • Industry trends, practices, issues; • Financial state of entity; • Compliance; • Prior experience; • Cost benefit – resources/time; • Taxpayer systems and internal controls; and • Appeals and litigation considerations. 10 10

11. ITC: QEP – Audit Scope and Issue Prioritization • All of the factors used to determine scope and issue prioritization should be shared and discussed with taxpayer during planning discussions/meetings and in the exam plan; • The Exam Team will explain to the taxpayer why the issue was selected; • Taxpayers should also discuss the audit team’s proposed examination techniques to determine that the most effective and efficient methods are employed; and • The Exam Team solicits the taxpayer’s input on best approaches for examining the issue/transaction. 11 11

12. ITC: QEP – The Exam Plan: Establishing Timelines Teams will establish mutually agreeable timelines including: • Start and completion dates; • Risk Analysis review, completed, and shared; • Last date for IDRs to be issued; • Last date for claims to be filed; • Last date for Form 5701(s) to be issued; • RAR target date; and • Specialist work timeline. 12 12

13. ITC: QEP – Information Document Request (IDR) Process • Establish contact points for both parties for IDRs to go to/from. • Before issuing an IDR the team will discuss and agree on the records necessary to address the examiner’s issues/concerns, what sources for obtaining information are available, alternative records, and the purpose/intent of request. • Should be specific, clear, and concise. • Will specify timeframes for taxpayer to respond after discussion. • Will specify timeframes for IRS to notify taxpayer that response is complete or what else is needed. • Will agree on process to elevate concerns or address delays quickly. NOTE: The IDR management process should be documented and become a part of the Exam Plan. 13 13

14. ITC: QEP – The Exam Plan • Part 1: Taxpayer Information Section includes overall plan of examination and the taxpayer is asked to sign off; • Part II: Service Management Information Section (Examination Program) is the team manager’s instructions to the audit team members; and • Part III: Examination Procedures Section contains each team member’s assignment and the procedures to be used to accomplish that assignment. Includes planned start and completion dates, estimate of time by issues, description of exam technique/sampling, prioritization of issues. • ALL parts of the plan should be shared with the taxpayer (unless Law Enforcement Criteria or Official Use Only). • Representatives for the IRS and the taxpayer sign the examination plan acknowledging understanding and commitment. 14 14

15. ITC: QEP – Establish Issue Resolution Process • Generally, before issuing a Form 5701 - Notice of Proposed Adjustment (NOPA), the taxpayer and exam team will discuss the issue associated with the proposed adjustment. NOPAs should not be a surprise. The taxpayer will, at a minimum, confirm the facts of the issue in question and clarify their position; • Taxpayers should provide additional facts and/or supporting evidence to validate facts presented during issue discussion; and • The exam team may engage specialists, technical advisors, Counsel, and other experts in issue discussions. 15 15

16. ITC: IRS Field Exams IRS Exam Insights

17. ITC: IRS Exam Insights • Coordinated Issues • Property-casualty • Margins and Other Unsubstantiated Additions to Insurance Company Reserves for Unpaid Losses and Claims – 11-18-2009 • BCBS – Health • Margins and Other Unsubstantiated Additions to Insurance Company Reserves for Unpaid Losses and Claims – 11-18-2009 • Conversion of Nonprofit Organizations – 06-04-08 • Abandonment Losses for Intangible Assets – 05-27-2005 • Life • Conversion of Nonprofit Organizations – 06-04-08 • Abandonment Losses for Intangible Assets – 05-27-2005 • Loss Utilization in a Life-Nonlife Consolidated Return Separate v. Single Entity Approach – 8-09-2000 • IRC Section 807 Basis Adjustment – Change in Basis v. Correction of Error – 01-06-1997 17

18. ITC: IRS Exam Insights (cont’d.) • Separate Account Dividend Received Deduction (“DRD”) • Industry Director Directive issued May 20, 2010 • §166 deductions claimed on certain security impairments • Tier 1 issue: Fact or Rumor? • Other C-Corp and General exam “hot buttons” 18

19. ITC: IRS Field Exams LMSB To LBI

21. ITC: IRS Field Exams Rules of engagement Past Present Future

22. ITC: IRS Field Exams Dispute Resolution Tools

23. ITC: IRS Field Exams • Dispute Resolution in Advance • Early Referral (Rev. Proc. 99-28) • Comprehensive Case Resolution (Notice 2001-13) • Fast Track Settlement (Rev. Proc. 2003-40) • Fast Track Mediation (Rev. Proc. 2003-41)

24. ITC: IRS Field Exams • Dispute Resolution in Advance • Advance Pricing Agreements (Rev. Proc. 2006-9) • Pre-Filing Agreement (Rev. Proc. 2009-14) • Industry Issue Resolution (Rev. Proc. 2003-36) • PLR (Rev. Proc. 2010-1)

25. ITC: IRS Field Exams Early Referral (Rev. Proc. 99-28) • Early referral of fully developed unagreed issue to Appeals while Exam continues work on other issues. • No special settlement authority. • No issues designated for litigation.

26. ITC: IRS Field Exams Comprehensive Case Resolution (Notice 2001-13) • Appears to still be in “pilot status”, per www.irs.gov as of Oct, 2010. • Large business taxpayers may request resolution of all years they have open under examination by Exam, in Appeals, and in docketed status before the Tax Court, through an IRS team process. Purpose to resolve all open issues on all open years currently or previously under examination. • Consent to ex parte contacts. • No 30-day letter on unagreed Exam issues (delaying large corporate underpayment rate).

27. ITC: IRS Field Exams Fast Track Settlement “FTS” (Rev. Proc. 2003-40) • Fast Track Appeals personnel mediate between Exam and taxpayer. • Eligibility: The parties should initiate FTS only after the Service issues Form 5701 (Notice of Proposed Adjustment) and the taxpayer provides a written response, but before the date on which the Service issues the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Office of Appeals (30-day letter). • No special settlement authority (coordinated issues remain so). • Not always available (e.g., issues designated for litigation or under consideration for same).

28. ITC: IRS Field Exams Fast Track Mediation (Rev. Proc. 2003-41) • Occurs before the 30-day letter is issued. • Appeals Officer mediates factual dispute between Revenue Agents and the taxpayer. • Taxpayer retains traditional rights to Appeals Division if a settlement is not reached.

29. ITC: IRS Field Exams Accelerated Issue Resolution (Rev. Proc. 94-67) • An “AIR” agreement is a closing agreement between a Coordinated Examination Program (CEP) taxpayer and the IRS. • Extends the resolution of a disputed issue forward in time to cover years not yet under audit.

30. IRS Appeals Process ITC: Practice & Procedure

31. ITC: IRS Appeals Process – Taxpayer’s Rights • Publication 556 • Most important: the right to appeal • No ex parte communications • Appeals officer is prohibited from ex parte communication with other IRS employees. • Different appeals employees interpret this differently • Confidentiality • Taxpayer enjoys same confidentiality protections with respect to discussion with federally authorized practitioners as with own counsel. • Representation

32. ITC: IRS Appeals Process – Taxpayer’s Rights (cont’d.) • Government cannot ask you to give up your right to sue the government. • Litigation or Administrative Costs • Only for “prevailing party”, below a certain size, measured by net worth and number of employees. • Right to Appeal to Tax Court, Court of Federal Claims, or District Court. • Appeals officers must concede issue if trial of that issue has only nuisance value. IRM 8.6, Conference and Settlement Practice

33. ITC: IRS Appeals Process – Taxpayer’s Rights (cont’d.) No new issues during Appeals, unless grounds for action are “substantial” and amount of tax is “material” Appeals officers are instructed not to raise a new issue “casually, indiscriminately or haphazardly” and never to do so, under any circumstances, for bargaining purposes.

34. ITC: IRS Appeals Process – Dispute Resolution Tools Simultaneous Appeals (Rev. Proc. 2006-54) • A taxpayer may simultaneously pursue assistance from a Competent Authority and IRS Appeals in issues that arise under tax treaties.

35. ITC: IRS Appeals Process – Dispute Resolution Tools(cont’d.) Appeals Mediation (Rev. Proc. 2009-44) • Certain cases under consideration by Appeals can be resolved through mediation. Rev. Proc. 2009-44 greatly expands the cases eligible. • All Issues—Factual AND Legal • Default: Appeals Mediator is another IRS Appeals employee. No additional expense to taxpayer • Taxpayer may elect to use co-mediator not employed by IRS at own expense.

36. ITC: IRS Appeals Process – Dispute Resolution Tools(cont’d.) Appeals Arbitration (Rev. Proc. 2006-44) • The arbitration procedure may be used to resolve issues while a case is in Appeals, after settlement discussions are unsuccessful and, generally, when all other issues are resolved but for the specific factual issue(s) for which arbitration is being requested. Rev. Proc. 2006-44.

37. ITC: Practice & Procedure Litigation

38. ITC: Litigation Forum Options • Tax Court - need not pay deficiency - appealable to regional circuits - no direct oral testimony by experts • US District Court - full payment rule - appealable to regional circuits - jury trial available • Court of Federal Claims - full payment rule - appealable to Federal Circuit

39. ITC: Litigation Why (or why not) Litigate? • Cost • Getting ahead of another taxpayer(s) with bad facts • Industry Issues - Trade Association coordination - Funding groups and free riders • Sometimes the only path toward an acceptable settlement • If your issue is designated for litigation by IRS, you may have no choice.

40. ITC: IRS Practice & Procedure Any Questions ?

41. ITC: IRS Practice & Procedure Thank You!