3.2.3 Be aware that some financial transactions are reportable transactions
Corporate treasury departments often enter into complex derivatives transactions with no tax motive in mind. However, because of the ability of derivatives to be used for both timing and character plays in the tax law, under Notice 2002-35 and Notice 2006-16, a broad swath of derivatives may be regarded as substantially similar to a listed transaction so as to subject to mandatory disclosure on Form 8886 (Reportable Transaction Disclosure Statement). For that reason, it is important for the tax department to be ware of transactions being contemplated by their finance colleagues, even if there is no tax benefit intended.
4. Handling a Financial Transactions Audit
Auditors audit financial transactions under two principal mandates: following a directive to examine a tax-motivated products or transaction, or under more general guidelines to ensure that the rules are being adhered to, particularly anti-abuse rules.
4.1 Tax-motivated transactions
Tax-motivated transactions will originate with the tax department or those departments will be heavily involved. Aside from ensuring that high-level options are sought and GAAP requirements are fulfilled, the tax department must also ensure that all evidentiary materials are well preserved and in order. All cases turn on specific facts, and these must be asserted and proven. Many controversies are settled based on favorable factual findings.
4.2 Compliance with the law
Certain financial product problems are ubiquitous, such as the straddle rules. Straddles are offsetting positions in actively traded property, for example, a company that has an account in a foreign currency and a forward contract to sell that foreign currency. The draconian tax rules governing straddles provide that any realized losses on one position in the straddle must be deferred to the extent there are gains in unrealized positions in that straddle. There are complicated rules for successor positions to offsetting positions. The IRS does no always audit for straddles, but when they do, it is very difficult to fight an adjustment. The rules are extremely anti-taxpayer and of broad application. However, IRS agents are not always familiar with the scope of the rules and exceptions, or with the latest guidance, and so it is important to review the issues and the taxpayer’s specific facts carefully. Expertise by the taxpayer and its advisors can often defeat an initially problematic adjustment.
5. Utilizing the Various Branches of the Government to Obtain Outcomes Favorable to the Taxpayer
Taxpayers can advocates for their tax positions most effectively proactively, before the problem arises. This requires that the tax department engage in planning, be vigilant about documentation and understand the company’s finance activity.
Other arrows in the company tax department’s quiver (which are mostly underutilized) involved the various branches of government. A deep understanding of the relationship between the Office of Tax Policy at the US Department of the Treasury (Treasury), IRS Chief Counsel, IRS field agents, the various Congressional committees, and the Justice Department is exceedingly important, both in preventative work and in dealing with controversy as it raises. The discussion below will address the roles of the Office of Tax Policy, IRS Chief Counsel, and the various Congressional committees. Investing in relationships with the technical staff in these agencies is certainly worthwhile for all taxpayers. Certainly knowledgeable, and often ready to help with questions, requests, and suggestions, the right staff at Treasury and Chief Counsel are invaluable (and free!) resources for taxpayers facing or anticipating conflict with IRS agents.