IRS Audit Process, Procedures & Programs

1. IRS Audit Process, Procedures & Programs December 6, 2012

2. Panel Speakers Joe DePew, Sutherland, Asbill & Brennan, LLP Margaret Labno, Zurich American Insurance Co. John Risacher, Ernst & Young, LLP Moderator Dawn Cummings-Fritz, Zurich American Insurance Co.

3. Agenda • IRS Initiatives and the Hot Topics • LB&I Restructuring • Issue Management Initiatives • Quality Examination Process (QEP) • Compliance Assurance Process (CAP) • Alternative Dispute Resolution (ADR) • Putting It All Together

4. Large Business & InternationalDivision Realignment • Effective, October 1, 2012, LB&I will realign its industry groups with contiguous geographical boundaries • The Field Specialists (Engineers, Financial Products Specialists, Computer Audit Specialists) will be realigned into one of the industry groups • Employment tax specialists will become part of the Small Business/Self-Employed Division • IRS seeking to gain greater operating efficiencies • May result in new executives and managers on your audits with minimal change to audit teams

5. MD DC LB&I Domestic Realignment Map Communications, Technology, Media Retailers, Food, Transportation & Healthcare Financial Services AK ME NY VT WA ND MN MT NH Manhattan WI MA OR SD MI ID CT RI IA WY PA IN OH IL NE NV WV KY UT DE NJ MO CO VA KS TN CA NC AR AZ SC NM Natural Resources Construction Heavy Manufacturing & Pharmaceuticals OK HI GA AL MS LA TX FL

7. Formation of new Issue Practice Groups (IPG) and International Practice Networks (IPN) • On August 17, 2012 the IRS announced the termination of the tiered issue process and has adopted Issue Practice Groups (IPG) for domestic issues and International Practice Network (IPN) for international issues • All prior Industry Director Directives (IDDs) relevant to the tier issue process are withdrawn and should not be followed by examiners • IPGs will be lead by an IPG Coordinator with one or more full-time subject matter experts (SME), a larger number of part-time SMEs who spend less than 25% of their time as Collateral SMEs, and an IPG analyst • IPNs will be centrally managed by dedicated full time international issue coordinators • All LB&I compliance personnel will have access to the IPGs and IPNs and can participate on periodic calls to discuss issues or consult with subject matter experts

8. Formation of new Issue Practice Groups (IPG) • Current domestic IPGs include: • Changes in Accounting Methods • RICs, REITs and REMICs • Life Insurance • Non-Life Insurance • Deductible and Capital Expenses • Corporate Issues • Financial Institutions • Inventory • Pass-throughs • Credits

9. Formation of new International Practice Network (IPN) Income Shifting Inbound Financing Repatriation/Withholding • International Practice Network will focus on international issues and will replace the tiered issue process • The International Practice Network will report to Mike Danilack, Deputy Commissioner LB&I (International) International Business Compliance (IBC) Inbound Income Shifting Deferral Planning FTC Management Repatriation International Business Compliance (IBC) Outbound Jurisdiction to Tax US Activities US Investments International Individual Compliance (IIC) Inbound Jurisdiction to Tax Offshore Arrangements Foreign Tax Credits Pass-thru Entities Foreign Corporations International Individual Compliance (IIC) Outbound Tax Treaties Information Gathering Corporate Organizations/Transactions Foreign Currency

11. Quality examination process • Formerly, joint audit planning process — effort between TEI and IRS to develop a joint, issue-driven, audit planning process that engages all members of the audit team, including specialists, in conjunction with the taxpayer during all phases of examination • LB&I refocusing efforts to stress compliance with quality examination process (QEP) principles and guidelines at the field level • Applicable to audit teams and taxpayers • Provides an organized, consistent framework for administering exams • Three distinct phases of exam: (1) planning, (2) execution and(3) resolution • Encourages ongoing dialogue from both sides for effective, efficient exam process • Establishes accountability in executing audit plan • Exam teams responsible for fully and completely developing issues during exam • Exam teams encouraged to use appropriate issue resolution strategies (i.e., fast track)

12. Understand the business operation • Review significant business transactions • Conduct risk assessment to evaluate tax compliance and tax reserve impacts • Identify compliance issues for resolution • Provide compliance guidance IRS interacts directlywith taxpayer to: CAP – the process Tax Year Ends Tax Year Begins Filing Date Post-filing CAP Year No Change Letter Full Acceptance Yes Determine Return Acceptance Post-filing review Issue(s) Resolved? Partial Acceptance No • 1 or more unresolved issue(s), or • New undisclosed issue(s) Issue Focused Exam Termination Continuous Issue Resolution Process IRS works with Taxpayer, Specialists, Technical Advisors, Appeals, and Counsel to identify and resolve issues CAP Version 1.2

13. CAP application and acceptance process Timeline for 2013 tax year 10/31/2012 12/31/2012 01/31/2013 03/31/2013 Taxpayer and IRS complete joint training CAP applications due IRS notifies taxpayer of acceptance CAP MOU is signed • The CAP MOU is effective for the first CAP year and will continue until: • the transition years are closed and the CAP year is closed; • the taxpayer is terminated from CAP; or • the taxpayer voluntarily withdraws from CAP • The taxpayer must submit an application every year.

14. CAP Phases

15. Factors for success for both taxpayers and the IRS: • Leadership and Accountability • Transparency • Clear expectations • Sense of urgency • Objectivity • Resolution Mindset • Resources • Trust

16. IRS Audit Procedures Regarding Schedule UTP • Centralized review team • CAP taxpayers • IRS CAP team members mandatory training • Comparison of issues disclosed in CAP to issues disclosed in Schedule UTP • Non-CAP taxpayers • IRS Exam team members mandatory training • UTP is not a “mandatory” examination issue • Taxpayers should only be requested to provide documents and information relating to the tax treatment of the position and should not be requested to provide: • Explanation of rationale for determination that issue was uncertain • Copies of workpapers used to prepare Schedule UTP • Tax accrual workpapers • Top three issues disclosed in 2010: transfer pricing, R&D tax credit and Section 162 business deductions

17. ADR options • Pre-return filing • Compliance assurance process • Pre-filing agreement • Industry issue resolution • Private letter ruling • APA Before the return is filed • ADR • May provide value through: • Lower admin costs • Speedier resolution • More favorable settlements • Audit process (post-filing) • Limited issue focused exam • Accelerated issue resolution • Early referral appeals • Fast track settlement • DO 4-24 • DO 4-25 • Simultaneous appeals/competent authority Under exam Appeals • Post-appeals process • Mediation • Arbitration

18. Early referral appeals (Rev. Proc. 99-28) • Optional method by which the taxpayer may request the early referral of one or more unresolved issues from the Examination or Collection Division to the Office of Appeals • Designed to resolve cases more expeditiously through the field and Appeals working together

19. Fast track settlement (FTS) (Rev. Proc. 2003-40) • FTS uses mediation techniques to help IRS and the taxpayer settle an issue in a 120-day timeframe. • Gives LB&I personnel and LB&I taxpayers an opportunity to mediate their disputes with an appeals official acting as a neutral party • If any issues remain unresolved at the conclusion of the FTS process, the taxpayer retains all applicable appeal rights. • Once an agreement is reached through FTS and the session report is signed, the settlement cannot be modified.

20. Pre-filing agreement (PFA) (Rev. Proc. 2009-14) • Enables taxpayers and the IRS to resolve, before the filing of a return, the treatment of an issue otherwise likely to be disputed in post-filing examinations • If successful, results in a closing agreement • An agreed-upon methodology may be used for up to four subsequent years • Provides full resolution of issue earlier than traditional return filing and examination • Benefits taxpayer and IRS by improving the quality of tax compliance while reducing its costs, burdens and delays • Affords heightened certainty for financial statement

21. Managing your audit • Know your exam team and the decision makers • Understand how and when to engage LB&I leadership and counsel • Knowledge of tools, processes, and procedures are key to achieving objectives • Proactively manage your relationship • Develop strategy to achieve your objectives • Execute strategy well • Continuous learning are adaptability are essential • Change is inevitable

22. Current state and desired state: Where are you on the scale? • Survival mode: Get through this cycle • Make my current audit more efficient and focused • Obtain multiyear strategy to get current and obtain appropriate certainty as early as possible • Prepare to qualify for CAP in 2013/2104 • Move quickly to CAP Maintenance • Keep from being audited by managing uncertainties proactively

23. Questions ?