Deloitte - Americas Regional Tax Controversy Interview (i)

Interview with Jason Dimopoulos, Deloitte Tax LLP

Interview with Jason Dimopoulos, Deloitte Tax LLP

What is the most significant change to your region/jurisdiction’s tax legislation or regulations in the past 12 months?

From a US federal controversy perspective, I believe the most significant change has been the passage of the Inflation Reduction Act (IRA). The IRA allocated over half of the US$79 billion in funding that the Internal Revenue Service (“IRS”) will receive over the next decade to IRS enforcement. While the effect of that funding will not be immediate, I do expect that the funding will, over time, provide significant assistance to the IRS.

What has been the most significant impact of that change?

Taxpayers haven’t yet seen the major effect of that change. It will likely take time for the IRS to apply the increased funding in an effective manner by identifying talented professionals in the market and, then, train them to become effective revenue agents. I do expect, however, to see a more effective approach, both in identifying suitable returns for audit and in conducting those audits. The IRA contains a number of clean energy credit provisions and there will likely be developments with respect to which claimed credits will come under audit as well.

How do you anticipate that change impacting your work and the market moving forwards?

I expect the IRA to increase the IRS’ audit inventory, thereby increasing the number of audits that federal tax controversy practitioners may be asked to defend. That change will, again, likely take time to manifest itself. I’d note that US$25 million of the amount allocated to the IRS is designated for IRS operations support, which should benefit the IRS’ ability to conduct audits in something closer to “real time”. The IRS should experience increased technological capabilities and the ability to better assist taxpayers over the phone, as well.

How has this changed the way you offer tax advice?

The IRA has not affected the way I offer tax advice from a substantive standpoint. From an emphasis standpoint, however, I continue to encourage taxpayers to contemplate best practices with respect to audit readiness and “audit file” preparation in light of the expected greater IRS enforcement. Performing “mock audits” and assisting taxpayers in preparing for IRS audits are even more important in this evolving environment.

What potential other legislative/regulatory changes are on the horizon that you think will have a big impact on your region/jurisdiction?

A potential agreement on Base Erosion and Profit Shifting (“BEPS”) 2.0 may significantly affect US multinational taxpayers. The potential implementation of Pillar One (involving reallocation of certain amounts of taxpayers’ taxable income to market jurisdictions) and Pillar Two (involving a new global minimum tax) will likely have a meaningful effect on the controversy landscape for these taxpayers.

What are the potential outcomes that might occur if those changes are implemented?

The agreement on a multilateral framework for applying BEPS 2.0 will increase the burden on many clients’ tax departments to manage multilateral tax controversies. Increased communication and coordination among various tax authorities—particularly with respect to Advance Pricing Agreement (APA) and Mutual Agreement Process (MAP) issues—may exacerbate that burden on taxpayers.

Are there any regulatory/legislative changes you believe should be implemented in your region/jurisdiction?

I believe that the component of the IRA in which Congress allocated meaningful additional funding to the IRS provided much-needed assistance to the IRS. While a better-funded IRS may mean more audits down the road, the portion of the funding related to operations support, business systems modernization, and taxpayer services should allow the IRS to, for example, process tax returns and refunds more efficiently. The additional funding should, further, assist the IRS in fielding practitioners’ and taxpayers’ questions via telephone.

How do you believe those changes would help improve the tax landscape in your market?

While the increased funding in IRA may lead to increased audit activity in the future, I believe that taxpayers’ overall experience with the IRS may improve as a result of that part of the legislation.

How are issues surrounding the taxation of the digital economy affecting your work?

Legislation including, for example, the Infrastructure Investment and Jobs Act passed in late 2021 has laid the foundation for an enhanced information reporting regime with respect to digital assets. While the IRS has already become increasingly focused on auditing cryptocurrency-related issues, the benefits of enhanced information reporting to the IRS will likely increase both the quantity and efficiency of IRS audits in this space.