“Likely Suitable Issues” for IRS Pre-Filing Agreements (PFAs)

For large businesses and international taxpayers, the IRS’ Pre-Filing Agreement (PFA) program provides a way to “seek an agreement on issues likely to be disputed in post-filing audits.” Eligible taxpayers can use the PFA to address tax concerns related to specific transactions, or they can use the PFA to seek a broader resolution of potential compliance concerns before they file. In both scenarios, working closely with an experienced Texas tax attorney is essential for making informed and strategic decisions.

One of the first decisions taxpayers need to make when considering a PFA request is whether the issue (or issues) they are seeking to resolve are likely to fall within the scope of the PFA program. To this end, taxpayers (and their counsel) can review the IRS’s list of “likely suitable issues.” This list is not exhaustive, and submitting a request related to a “likely suitable issue” does not guarantee acceptance. But, even with this being the case, this is a good first step toward making an informed and strategic decision about how best to proceed.

“Likely Suitable Issues” Under the PFA Program

The IRS has identified 10 “likely suitable issues” for submission under the PFA program. These issues are as follows:

Limitations on Repurchase Premiums on Convertible Debt

Eligible large businesses can submit requests under the PFA program related to the applicability of the limitations in Section 249 of the Internal Revenue Code (IRC) related to the repurchase premium on convertible debt.

Research Credits

The IRS accepts qualifying requests under the PFA program related to, “[w]hether the taxpayer’s activities or expenses qualify for the IRC 41 credit for increasing research activities or IRC 174  amortization of specified research and experimental expenditures (SRE).”

Worthless Securities Deductions

The IRS also accepts qualifying requests under the PFA program related to “whether a security became worthless during the eligible taxable year and the amount of the loss, for purposes of section 165(g). . . . [and] whether the security is a security in a domestic affiliate pursuant to IRC 165(g)(3).”

Discount Rates and the Costs of Required Capital (Insurance Companies)

Insurance companies can submit requests under the IRS’s PFA program related to determining the discount rate and costs of required capital for their valuation. Similar to other PFA requests, these requests require the submission of various specific forms of documentation along with the company’s PFA application.

Long-Term Contracts

Construction and manufacturing companies can submit PFA requests related to “whether a construction or manufacturing contract is required to be accounted for as a long-term contract under IRC 460.” Section 460 of the IRC addresses the income tax treatment of revenue derived from certain types of long-term contracts.

International: Qualified Business Units

The remaining “likely suitable issues” all pertain to international taxpayers. In this case, the IRS accepts qualifying requests under the PFA program related to whether an international unit of a company’s trade or business constitutes a “qualified business unit” within the meaning of Section 989(a) of the IRC. Qualified business units are subject to special rules regarding recognition of gain and loss.

International: U.S. Trade or Business

Large businesses located primarily overseas can submit PFA requests to determine whether they qualify as being “engaged in a trade or business within the United States.” This, too, has significant implications for calculating businesses’ U.S. federal tax liability.

International: Effectively Connected Income

The IRS accepts qualifying PFA requests from international businesses seeking to proactively determine, “[t]he amount of gross income that is effectively connected with the conduct by the taxpayer of a trade or business within the United States.” Income that is effectively connected to a company’s trade or business within the United States (or “effectively connected income”) is subject to taxation under the IRC.

International: Deductions Against Effectively Connected Income

Submitting a PFA request is also an option for large international businesses seeking pre-filing resolutions regarding, “the extent to which . . . deductions are connected with income that is effectively connected with the taxpayer’s conduct of a trade or business within the United States.”

International: Permanent Establishment

Finally, the IRS accepts qualifying requests under the PFA program related to, “[w]hether the taxpayer has a permanent establishment in the United States for purposes of a bilateral income tax convention to which the United States is a party and, if so, what profits are attributable to that permanent establishment.”

Choosing Between the PFA Program and Its Alternatives

While submitting a PFA request is one way that large businesses and international taxpayers can seek to proactively resolve complex (and potentially high-risk) tax issues with the IRS, this is by no means the only option available. The IRS has established a variety of other pre-filing and post-filing options as well. These options include (but are not limited to):

Pre-Filing

• Advance pricing agreement (APA)
• Compliance assurance process (CAP)
• Determination letter
• Industry issue resolution program (IIR)
• Private letter ruling (PLR)

Post-Filing

• Accelerated competent authority procedure (ACAP)
• Accelerated issue resolution (AIR)
• Determination letters
• Fast-track settlement (FTS)
• Mutual agreement procedure (MAP)
• Early referral to IRS Appeals
• Rapid IRS appeals
• Traditional IRS appeals
• Post-appeal mediation

When facing the potential for substantial federal tax liability (and the potential for invasive IRS scrutiny), it is critical to give due consideration to each of the options that are on the table. With this in mind, if you are thinking about (or have questions about) submitting a request under the IRS’s Pre-Filing Agreement program, it will be worth consulting with an experienced attorney who can help you decide whether this is the most desirable approach under the circumstances at hand.

Request a Confidential Initial Consultation with Texas Tax Attorney Lawrence Brown

If you would like more information about the IRS’ Pre-Filing Agreement (PFA) program or any of the other pre-filing or post-filing resolution options listed above, we invite you to get in touch. To request a confidential initial consultation with Texas tax attorney Lawrence Brown, call Brown Tax, P.C. at 888-870-0025 or tell us how we can reach you online today.