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IRS Remains Focused on Domestic Production Deduction

Dec.10.2018

Although the 2017 Tax Cut and Jobs Act eliminated the Domestic Production Activities Deduction (DPAD), the IRS remains focused on auditing DPAD claims. On November 21, 2018, the IRS issued a new directive to Large Business & International (LB&I) Division employees regarding the procedures for when a taxpayer files a claim for a DPAD. This directive relates to the IRS’s recent inclusion of the DPAD as one of its Compliance Campaigns.

LB&I’s DPAD Campaign

In 2016, LB&I began moving towards issue-based examinations. LB&I said that issue-based examinations would allow it to focus its limited audit resources on issues with high compliance risk. In 2017, LB&I announced the initial 13 “Compliance Campaigns”—that is, the list of issues it would focus on auditing. LB&I has since added campaigns, and there are now 45 total campaigns. For prior client alerts on IRS Compliance Campaign announcements, please see here (February 3, 2017) and here (November 8, 2017).

LB&I added DPAD to its Compliance Campaigns in September 2018. LB&I said it added DPAD to “ensure taxpayer compliance with the requirements of IRC Section 199 through a claim risk review assessment and issue-based examinations of claims with the greatest compliance risk.”

LB&I’s DPAD Directive

As part of the new DPAD campaign, the LB&I developed a risk assessment process for all amended returns and claims for refund that claim a DPAD.

Per LB&I’s new directive, any LB&I examiner who receives a claim for refund must follow the risk assessment process. This is also true for any refund claim filed with the Ogden service center. The LB&I directive instructs examiners to consider materiality when conducting their risk review assessment.

In certain situations, the LB&I directive requires examiners to contact the specialists in the IRS Corporate Income and Losses Practice Network, who will assist in assessing the risk. The examiner must go to the specialists if the examiner receives an informal claim for refund, the examiner receives an amended return not filed with the Ogden campus center, or the case is a Joint Committee case.

Finally, the directive also instructs examiners to consider whether Section 6676 penalties are appropriate. The IRS may impose Section 6676 penalties when there is no reasonable cause for a refund claim. 

Bottom Line

Although it has been repealed, the IRS has identified DPAD as an issue with high compliance risk, and taxpayers claiming the DPAD, especially those claiming refunds, should expect scrutiny from LB&I exam.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Dwight N. Mersereau
Partner – Washington, D.C.
Phone: +1 202.624.2856
Email: dmersereau@crowell.com
Teresa Abney
Counsel – Washington, D.C.
Phone: +1 202.624.2667
Email: tabney@crowell.com