As IRS resources and enforcement actions increase, buoyed by a substantial increase in funding via the Inflation Reduction Act (IRA), taxpayers need to rethink their risk tolerance and audit preparedness. The IRS has been vocal about targeting taxpayers who could lead to the most significant audit recoveries, stating:
THE IRS HAD OPEN EXAMINATIONS OF 76 OF THE LARGEST PARTNERSHIPS IN THE U.S. THAT REPRESENT A CROSS SECTION OF INDUSTRIES INCLUDING HEDGE FUNDS, REAL ESTATE INVESTMENT PARTNERSHIPS, PUBLICLY TRADED PARTNERSHIPS, LARGE LAW FIRMS, AND OTHER INDUSTRIES
The IRA not only greatly expanded funding for the IRS but has also introduced new and complex tax provisions, including the corporate alternative minimum tax and the stock buyback excise tax.
The expansion in IRS and other taxing authorities’ audit activity is widespread, with heightened focus on many issues, including:
• Large partnerships and discrepancies between closing and
opening balance sheets
• High net worth individuals
• Base erosion and other transfer pricing activity
• Corporate stock repurchases and similar transactions.
In addition to the IRS, state and local tax agencies as well as non-U.S. governmental agencies have been strengthening tax audit capabilities and/or becoming more aggressive.
Taxpayers recognizing the rising threat of tax controversy both within and outside the U.S. are increasingly looking to tax insurance to mitigate risk and achieve economic certainty.
We encourage clients to consider tax insurance, a solution that reduces or eliminates the economic burden of historical and potential future tax exposures.
Many taxpayers who have previously considered tax insurance to address risks identified during due diligence or to protect the validity of renewable energy tax credits are now exploring tax insurance for a broader array of risks in advance of and as a response to the initiation of a challenge by a taxing authority. There is growing use of tax insurance to:
• Address uncertainty in transfer pricing.
• Mitigate tax and/or valuation risk on spinoffs,
reorganizations, and other restructuring transactions.
• Address risks that fall within the many “no rule” areas of
the IRS private letter ruling system.
Lockton’s Tax Insurance Practice is uniquely positioned to help clients evaluate whether and how to utilize tax insurance to address the growing number and size of tax risks. We have more than doubled in size over the past 12 months, and our team is composed of tax professionals with significant tax underwriting and broking experience as well as decades of legal and advisory experience across a broad array of tax issues and jurisdictions, including sophisticated renewable energy tax credit and real estate expertise.