This panel will discuss the latest developments with the IRS including Large Business & International (LB&I) organizational changes and how they affect you.

1. 22nd Annual Health Sciences
Tax Conference
The changing IRS controversy landscape:
what’s on the horizon
December 5, 2012

2. Disclaimer
► Any US tax advice contained herein was not intended or written to be
used, and cannot be used, for the purpose of avoiding penalties that may
be imposed under the Internal Revenue Code or applicable state or local
tax law provisions.
Page 2 The changing IRS controversy landscape: what’s on the horizon

3. Disclaimer
Ernst & Young refers to the global organization of member firms of Ernst & Young
Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-
serving member firm of Ernst & Young Global Limited operating in the US. For more
information about our organization, please visit www.ey.com.
This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this
document may be reproduced, transmitted or otherwise distributed in any form or by
any means, electronic or mechanical, including by photocopying, facsimile
transmission, recording, rekeying, or using any information storage and retrieval
system, without written permission from Ernst & Young LLP. Any reproduction,
transmission or distribution of this form or any of the material herein is prohibited and
is in violation of US and international law. Ernst & Young LLP expressly disclaims any
liability in connection with use of this presentation or its contents by any third party.
Views expressed in this presentation are not necessarily those of Ernst & Young LLP.
Page 3 The changing IRS controversy landscape: what’s on the horizon

4. Presenters
► Ed Curvin ► Ned Connelly
HCA Healthcare Ernst & Young LLP
Nashville, TN Stamford, CT
+1 203 674 3006
► Marlin Shaw ned.connelly@ey.com
Health Management Associates, Inc.
Naples, FL ► Mark Mesler
Ernst & Young LLP
Atlanta, GA
+1 404 817 5236
mark.mesler@ey.com
► Frank Ng
Ernst & Young LLP
Washington, DC
+1 202 327 7887
frank.ng@ey.com
Page 4 The changing IRS controversy landscape: what’s on the horizon

5. Agenda
► Large Business and International (LB&I) organizational
changes and how they affect you
► The current experience of the health care industry with the
compliance assurance process (CAP)
► Effective use of other issue-resolution tools in the health
care industry
► Key focus areas of the examination process
► The evolution from the tier initiative to Issue
Practice Groups (IPGs)
Page 5 The changing IRS controversy landscape: what’s on the horizon

6. LB&I organizational changes and how they
affect you

7. Source: IRS – LB&I
Page 7 The changing IRS controversy landscape: what’s on the horizon

8. LB&I industries by state — current
WA
MT ME
ND
VT
AK OR MN
ID WI NH
SD NY
MI
WY MA
CA PA RI
IA CT
NE
NV OH
IL IN Manhattan
UT
WV
CO DE
HI MO
KS KY VA NJ
NC MD
TN
AZ NM OK AR SC
GA
CTM MS AL
TX LA
F
FL
HMT
NRC RFPH/HMT F/HMT
RFPH NR/HMT CTM/RFPH
Page 8 The changing IRS controversy landscape: what’s on the horizon

9. LB&I domestic realignment
Communications, Retailers, food, transportation Financial services
technology and media and health care
AK
ME
NY VT
WA
ND MN
MT
Manhattan NH
WI MA
OR SD
MI
ID RI
IA
WY
PA
IN
IL OH
NE
NV
KY WV
UT MO DE NJ
CO VA
KS
CA
NC DC
AR MD
AZ
SC
NM
OK Heavy manufacturing
and pharmaceuticals
GA
MS AL
HI
TX LA
FL
Natural resources and
construction
Page 9 The changing IRS controversy landscape: what’s on the horizon

10. LB&I domestic realignment (cont.)
Deputy Commissioner (Domestic)
Paul DeNard
Global high wealth Natural resources and
Donna Hansberry construction
Kathy Robbins
Retailers, food, transportation Financial services
and health care Rosemary Sereti
James Roosey
Communications, technology Heavy manufacturing and
and media pharmaceuticals
Cheryl Claybough Laura Prendergast
Page 10 The changing IRS controversy landscape: what’s on the horizon

11. The current experience of the health care
industry with the CAP

12. CAP permanency: IR-2011-32
New CAP phases
• The Internal Revenue Service (IRS) and the taxpayer develop a plan to
Pre-CAP eliminate open years within a set time frame.
• They work in a cooperative and transparent post-file environment.
phase • The ultimate goal is to meet the selection criteria and progress to the
CAP phase.
• The taxpayer and the audit team work in a real-time environment to isolate and
resolve issues prior to filing; which is the same as the current CAP process.
• The taxpayer works with the audit team by identifying transactions and issues
CAP phase and providing timely information to resolve those issues.
• Resolution of all material issues with the IRS ensures, prior to filing of the
return, that the IRS will accept the return if filed consistent with agreed tax
treatment.
Compliance • The IRS will adjust the level of review work and time applied.
• The adjusted level of review is based on the taxpayer’s unique experience in
maintenance CAP and its history of compliance and risk.
• There is periodic disclosure of material transactions and issues.
phase
Page 12 The changing IRS controversy landscape: what’s on the horizon

13. Items to consider
► Matters to consider in determining whether CAP is the
right fit for you:
► Past IRS audit history
► Current examination focus
► Disclosing upcoming events with significant tax return impact
► IRS relationships — past and present
► Time to complete intervening years
► Best year to enter CAP
Page 13 The changing IRS controversy landscape: what’s on the horizon

14. Some thoughts from a CAP taxpayer …
► Increased burden in the first year
► The need for constant communication
► When and what to tell your CAP team
► IRS internal politics
► Access to quicker responses and assistance
► Schedule UTP management
► Lack of consistency in the CAP among taxpayers
► Ability to “pre-work” issues
► Awareness of your additional leverage
Page 14 The changing IRS controversy landscape: what’s on the horizon

15. Effective use of other issue-resolution tools
in the health care industry

16. Alternative dispute resolution (ADR) options
Pre-return filing
Before the ► Compliance assurance process
return ► Pre-filing agreement
► Industry issue resolution
is filed ► Private letter ruling
► Advance pricing agreements
ADR Audit process (post-filing)
Provides value through: ► Limited-issue focused exam
► Lower admin costs ► Accelerated issue resolution
► Speedier resolution
Under exam
► Early referral appeals
► More favorable ► Fast-track settlement
settlements
► Competent authority process
Appeals process
Appeals ► Rapid appeal process
► Mediation
► Arbitration
Page 16 The changing IRS controversy landscape: what’s on the horizon

17. Key focus areas of the examination process

18. Key focus areas of the examination process
► Proposed major changes to the Information Document
Request (IDR) process
► Schedule UTP in examinations
► The rules of engagement
► Changes in organization structure and staffing of exams
Page 18 The changing IRS controversy landscape: what’s on the horizon

19. IDR process — changing procedures
► To improve audit cycle time, the LB&I Division reviewed
the IDR process.
► LB&I is developing new IDR management training.
► It is anticipated that LB&I will set a specific response due
date and expectation.
► Failure to comply will result in a pre-summons letter and
summons action.
► It is anticipated that the LB&I Division will issue directions
to all field examiners.
► This will have a potential negative impact on the
audit process.
Page 19 The changing IRS controversy landscape: what’s on the horizon

20. Schedule UTP update
► In 2010, 1,900 filers, averaging 3.1 disclosures
► Top three issues: transfer pricing, research credit,
Sec 162 deductions
► 3% of filers notified of filing deficiencies, most with
concise statement
► No penalty or current consideration for requesting penalty
► For 2012, first year for Part II filing, disclosing prior-year
uncertain tax positions
► IRS continuing to monitor Schedule UTP filings to risk-
assess tax returns and to identify potential issues
Page 20 The changing IRS controversy landscape: what’s on the horizon

21. IRS use of schedule UTP for
enforcement programs
► LB&I examiners use 2010 filings to conduct
risk assessment
► Centralized unit analyzed 2010 filings to identify trends
► Examiners not permitted to request information on:
► Rationale for determining that the issue was uncertain
► Copies of workpapers used to prepare Schedule UTP
► Information about the hazards of litigation
► Any tax accrual workpapers or documents privileged under
modified policy of restraint
► With managerial approval, the issues reflected on the
2010 Schedule UTP can be opened for examination in a
prior tax year based on a risk assessment
Page 21 The changing IRS controversy landscape: what’s on the horizon

22. Schedule UTP — lessons learned
► Consider UTP disclosure in tax planning
► Review unit-of-account implications
► Assess materiality when recording unrecognized tax benefits
► Consider reserves recorded for tax positions on all forms
and schedules
► Develop process to track expectation to litigate positions
► Develop process to track prior-year positions
► Prepare for questions from corporate leadership, boards and the IRS
related to UTP disclosures
► Develop process to track reserves recorded before the year in which
a position is reported on the return
Page 22 The changing IRS controversy landscape: what’s on the horizon

23. Schedule UTP — going forward
► Keep abreast of IRS policies and changes related to filing
requirements and use of information
► Consider tools available to achieve certainty and minimize
risk related to UTP disclosure
► Understand multi-year implications of UTP disclosure and
take appropriate actions
► Be watchful of similar requirements on the part of the
states or foreign jurisdictions
Page 23 The changing IRS controversy landscape: what’s on the horizon

24. The rules of engagement
► Apply to case interactions of LB&I executives
► Purposes:
► Clarify roles, responsibilities and lines of authority
► Facilitate the right answer for a case or issue
► Promote consistent treatment
► Reinforce integrity and ethical decision-making
► Protocol for elevating a case within an industry
Page 24 The changing IRS controversy landscape: what’s on the horizon

25. The rules of engagement (cont.)
► The protocol for elevating a case across industries is:
► Case-related contacts should be made at the team level.
► Strategic issues or requests for assistance should be brought directly to
the specific industry director.
► The taxpayer should rely on any IRS contact to determine the appropriate
industry and level of contact if unclear.
► Taxpayers can elevate unresolved issues to the next level of interaction.
► Taxpayers may elevate unresolved industry-related issues through the
Line Authority Executive to the Issue Owner Executive.
► Taxpayers may directly request industry-aligned involvement and any
disputes will be resolved through industry protocol.
► Field agents and teams are expected to recognize that elevation is part of
the audit process.
Page 25 The changing IRS controversy landscape: what’s on the horizon

26. The evolution from the tier initiative to IPGs

27. Formation of new IPGs
► IPGs will focus on domestic issues and will replace the Tiered Issue Process.
► IPGs will be composed of an IPG coordinator, one or more full-time subject matter
experts (SMEs), a larger number of part-time SMEs who spend less than 25% of their
time working on the IPG (collateral SMEs) and an IPG analyst. The SMEs can be field
agents, technical specialists or managers. In addition, each IPG includes
representatives from LB&I Counsel and National Office Counsel with jurisdiction over
the issue.
► LB&I managers and examiners will have access to the IPGs and can participate on
periodic calls to discuss issues or consult with SMEs.
► The IPG will assist in identifying, developing and resolving issues; assist in
implementing new legislation; participate in educating internal and external customers;
and develop and maintain expertise in subject matters.
► Examiners will have authority to seek assistance from specialists but will have control
of the issue on their case.
► The process is intended to reduce the headquarter control and decentralize decision-
making to the field.
► The issue manager will report to the Director, Pre-filing and Technical Guidance and
will handle systemic issues and coordinate with Counsel.
Page 27 The changing IRS controversy landscape: what’s on the horizon

28. Formation of new IPGs (cont.)
► Specific tax issues are not publicly disclosed
► Current domestic IPGs include:
► Changes in accounting methods
► RICs, REITs and REMICs
► Life insurance
► Non-life insurance
► Deductible and capital expenses
► Corporate issues
► Financial institutions
► Inventory
► Pass-throughs
► Credits
Page 28 The changing IRS controversy landscape: what’s on the horizon

29. Formation of new International Practice
Network (IPN)
Income Inbound Repatriation/ ► The IPN will focus on
shifting financing withholding international issues and
International business compliance inbound will replace the Tiered
Issue Process.
Income Deferral FTC Repatriation ► The IPN will report to
shifting planning management
Mike Danilack, Deputy
International business compliance outbound Commissioner
(International), LB&I.
Jurisdiction US activities US investments
to tax
International individual compliance inbound
Jurisdiction Offshore Foreign tax Pass-thru Foreign
to tax arrangements credits entities corporations
International individual compliance outbound
Corporate
organizations/transactions
Page 29 The changing IRS controversy landscape: what’s on the horizon

30. Questions or comments?
Page 30 The changing IRS controversy landscape: what’s on the horizon