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Danilack Reflects on Time at LB&I
Interviewed by Amy S. Elliott —
[email protected]
Michael Danilack is a
principal in PricewaterhouseCoopers
Washington National
Tax Services practice.
He joined PwC in December 2014 and previously served as deputy
commissioner (international) in the IRS Large
Business and International Division and as
U.S. competent authority. Before 2010, he was a principal at Deloitte
Tax LLP and a partner at Burt, Staples & Maner
LLP. He served at the IRS in the 1990s as
associate chief counsel (international) and as an
assistant to the IRS commissioner.
As part of PwC’s global tax controversy network, Danilack’s work will involve transfer pricing, advance pricing agreements, mutual
agreements, and other cross-border tax controversies. Danilack received his LLM and his JD
from New York University School of Law.
Danilack recently spoke with Tax Analysts’
Amy S. Elliott to discuss his departure from
LB&I, the international enforcement priorities he
set while there, and his thoughts on how international examiners should be given more authority to control their cases.
Tax Analysts: Your departure from LB&I caused
some to question the future of international audits.
What were some of your key accomplishments
while you were at LB&I, and do you think they’ll be
Michael Danilack: I don’t think my departure
will have an impact on the way the IRS approaches
international audits. While I was there, we did a lot
of work in setting a course for the future, and much
of what we designed and implemented took hold
TAX NOTES, January 12, 2015
among the staff. My replacement is Doug
O’Donnell, who was at my right hand throughout
my tenure, and he is very well steeped in what we
were designing and implementing. I think he will
succeed in addressing the challenges that they face
going forward.
TA: Can you give some examples of what you
designed and implemented?
Danilack: There was a significant series of organizational changes, which started back in 2010 with
a reorganization of all of LB&I to bring together its
international resources. Some specific features of
what we did subsequently included the formation
of a transfer pricing function, the creation of a
brand-new executive position — the director for
transfer pricing, formerly held by Sam Maruca —
and the combination of the APA program with the
competent authority program to create the new
advance pricing and mutual agreement (APMA)
program. That combination wasn’t without some
rough spots, but I think in the end APMA was
tremendously successful. We brought Dick McAlonan in as the head of the program, and he did a
great job not only in overseeing the integration of
those two different groups but also in making sure
that the inventory was moving through the system
TA: Did you have metrics that told you whether
your efforts were resulting in an increase in revenue?
Danilack: The IRS really doesn’t work on
revenue-driven metrics. Instead, the way I think
about it, we brought in a lot of experts and marshaled our expertise to be more effective in determining which cases needed the most attention. The
results are really driven by the abilities and skill sets
of the people. Once we had those people in place,
the next thing we needed to work on was making
sure they had good ways to collaborate. We were
actively — and I believe they still are — looking to
break down artificial barriers that might exist between, say, the field program and the National
Office program. The proposition is that transfer
pricing — or any challenging compliance issue, for
that matter — needs to be worked on behalf of the
government using a single mind-set and the best
resources that you have.
We then took that model of running an integrated
program in the transfer pricing area and began to
replicate it. One of the areas where we were very
successful was in applying the integrated model to
(C) Tax Analysts 2015. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
One more initiative that I think proved to be a
tremendous benefit was forming an international
data management function, which has been led by
Bill Holmes. We decided that we needed a team
embedded in the international program that could
work closely with our international technical experts and ensure that the FATCA implementation
could be carried out fully informed by the technical
knowledge of the business unit. They’ve done an
excellent job. For example, through our [foreign
financial institution] registration portal, we had to
issue new identification numbers to financial institutions all over the world. The process was brand
new, and so we created and implemented the
concept of a global intermediary identification
number, now known as a GIIN. So far, I believe the
IRS has issued more than 130,000 GIINs.
TA: And the GIIN concept has been embraced by
other countries participating in what they’re calling
global FATCA?
Danilack: Yes. The technical term for what the
rest of the world has adopted is the common
reporting standard, or CRS. This approach was in
the works for quite a while. Once other governments began to understand FATCA, they came
together to agree that a FATCA-like process of
information reporting on financial flows would be
good for them. There was a tremendous effort to
make sure that the reporting requirements imposed
on financial institutions would satisfy the needs of
every country that had an interest. Agreement was
reached on those standards — a so-called schema —
so that financial institutions wouldn’t be hit with
multiple requirements from multiple governments.
TA: And that schema complements FATCA? It
won’t require more than what FATCA requires?
Danilack: I’d say it’s closely aligned with
FATCA. There are some nuances and small differences, but those types of small differences can be
managed easily if you have a single template and
then you build into the template those exceptions.
TA: Do the high compliance costs of FATCA on
financial institutions outweigh the benefits to governments?
Danilack: I don’t really have an opinion. I was on
the enforcement side of international, so it wasn’t
my job to make decisions on cost benefit analysis.
FATCA was a statutory mandate, and so we at the
IRS put our heads down and implemented it. The
costs on the financial community, the financial
industry, I’m well aware, are very high. Whether it’s
all worth it, so to speak, is yet to be seen. What I do
know is that the problem of offshore noncompliance, which FATCA’s intended to address, is a
serious problem. That came under a bright light in
the foreign bank matter, and we’ve seen it reflected
in the high level of participation in the IRS’s offshore voluntary compliance programs. Now, with
CRS, I think governments have done a nice job of
banding together to address a serious noncompliance issue.
TA: I understand you’re a proponent of what’s
come to be known as a cooperative compliance
audit strategy. How is that different from the IRS’s
traditional enforcement strategy, which is to encourage voluntary compliance and focus on highrisk, high-dollar issues?
Danilack: Cooperative compliance is that, but
it’s also more than that. Underlying it is the idea
that while the international tax law has many gray
areas, many challenging issues, and many things
that are not yet resolved, the vast majority of
taxpayers are trying to get it right. The approach is
that taxpayers and governments should work together to get to a place where taxpayers have
certainty, as opposed to taxpayers trying to figure it
out themselves and then having the government
come in later and debate whether they got it right.
TA: How does it compare with the compliance
assurance process?
Danilack: CAP is like a cooperative compliance
model in that it’s more real-time and it’s based on a
transparent interaction between the taxpayer and
the government. But cooperative compliance would
take the CAP program to a new level by incorporating into interactions with taxpayers a strategic
risk assessment based on a strong knowledge management platform. If an agent is speaking to a
taxpayer, the agent should be conveying as fully as
possible the government’s position on strategically
important issues — not only what he or she thinks
the right answer is. This means the agent must be
able to bring into the conversation the best thinking
the government has on an issue. So, personally, I
think that the knowledge management initiative
needs to come first before you can really truly get to
a cooperative compliance process here in the United
TAX NOTES, January 12, 2015
(C) Tax Analysts 2015. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
the foreign payments practice. This is a group of our
best experts in the withholding and [Foreign Account Tax Compliance Act] areas. Under the old
approach, you had agents who were scattered about
the country more or less disconnected from one
another, learning what they could through the
technical training that was provided, and then
doing their audits. The group lacked an overarching
strategy. But with the foreign payments practice, we
developed a single-minded approach to withholding. Based on these successes, I believe that model
needs to be replicated further to areas like foreign
tax credits, deferral planning, and inbound financing.
TAX NOTES, January 12, 2015
Danilack: I would not say that the IPNs were
brought in to replace the tiered issue process. The
IPNs, as I’ve described them, are essentially virtual
networks, which were put in place so that people
can collaborate and learn from one another. The
principal distinguishing factor between IPNs and
IPGs is that the IPGs have substantial technical staff
whose job it is to interact with field agents and
provide them with technical assistance on the casework. On the international side, in the IPNs, there is
no such group of technical experts providing guidance on specific fieldwork. The IPN really consists
of all the agents who participate in the networking
that’s going on. There are some staff assigned to the
IPNs, but they’re really just administering and
making decisions about the process. They are not
there to provide assistance to the field agents on
their cases. What we say is that the international
examiners are the experts.
TA: Taxpayers didn’t like issue tiering because
they thought it was directed by an inflexible ‘‘man
behind the curtain.’’ While there’s no such man
directing IPNs, the practice units contain redacted
information on the government’s risk threshold. In
a sense then, isn’t the international practice unit
telling the agent when to challenge an issue?
Danilack: Well, the whole practice unit is intended to guide the agent through his or her work
on an issue and to provide the resources they need
to do the work. The redacted material you mention
we regard as essentially law enforcement material.
The IRS does not talk about how it risk-assesses
returns because if it did, then the taxpayers would
know — well, if I just do this, and this, and this, I’ll
be OK. So those items that are redacted are of that
ilk. But keep in mind how the practice units were
designed. They weren’t designed because a group
of designated experts figured it all out and are
giving specific guidance to the units. They were
arrived at by a collective process where everybody
was involved in talking about the issue and trying
to figure out what the government’s position
should be as a general matter. What a taxpayer
wants to know is who is making the decision on my
case, and I can say it’s the international examiner
making the decision guided by units and the resources the units reference.
TA: So the agent has discretion not to follow the
risk tolerance in the practice unit?
Danilack: There’s no mandate on agents to follow anything. We’re trying to up their game by
teaching and making them sensitive to risk tolerances and guiding them. There’s no mandate in the
system that you must follow this to a T. The
advantage an agent has is they’re right there with
all the facts, they’re talking to the taxpayer, and
there are always considerations that need to be
(C) Tax Analysts 2015. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
TA: Is international’s knowledge management
initiative — the international practice networks or
IPNs and the related practice units — essentially
about updating workforce training materials?
Danilack: Not really. It’s not about updating. It
represents a radical change in the way we set out to
train. Most of the training that’s been delivered in
the past has been very rule-based training in particular code section areas. What we set out to do is
establish a more transactional-based training program, situational-based, scenario-based, where —
and you should see this reflected in the practice
units — they start off by saying here’s a situation
that you may see on audit. So what facts are
relevant? What questions should you ask the taxpayer? Then you get to what rules come into play.
But you also enhance the development of the audit
process by mapping it out based on the scenario,
rather than starting with rules and having the
agents try to figure out when the rules they learned
actually come into play. The latter approach makes
for more of a hunt-and-peck type of an audit as
opposed to an audit where, when the agent has the
full strategic picture of the transaction, they ask the
right questions, which is good for the agent and the
taxpayer. It’s a new way of learning, and the
feedback we were getting from agents was that the
practice units are great.
TA: To ensure that you have an agent presenting
the government’s position and not just what they
think about it, are you mandating that the agents
complete the relevant practice units?
Danilack: No, I don’t think there was a need for
mandate. Because the product was so good, agents
like the new approach. Prior to developing the
units, we connected people in broad subject matter
areas through the IPNs so that they could come
together and listen to discussions on what issues are
out there. The networks allowed agents to connect
to other agents — their colleagues around the
country. I think collaboration’s critically important,
so that’s why we went to work trying to build this
knowledge management platform and the networks, so that international agents have a way of
Everything the IRS does needs to be aligned with
a strategy. There needs to be an identification of
substantive areas that are important for an agent to
understand. That’s what the international matrix is.
It’s a way of saying here are the areas of importance
that people need to learn about and consider carefully in an examination.
TA: Can you clear up some of the confusion
about the difference between IPNs and issue practice groups [IPGs] on the domestic side and the
extent to which IPNs have anything to do with
issue tiering?
we developed more broadly. If you think about it,
it’s critical in an environment where you can’t hire
your way out of problems, and that’s the environment the IRS is in right now, unfortunately. The IRS
faces tremendous challenges with budget cuts.
That’s a very difficult state of affairs for the IRS,
particularly today where we’re moving into an
environment where the tax administrator needs to
be more sophisticated, more IT-enabled. There is a
certain sense that the IRS is going head-to-head
with foreign tax administrators in cases of potential
double taxation to protect the U.S. tax base from
encroachment by foreign governments. There is a
need to ensure that the positions the United States
takes are protective of the United States fisc, and
that’s what we were working hard at while I was
TA: You mentioned that the IRS can’t hire its way
out of problems. Can you talk about whether you
think the IRS’s current transfer pricing audits are
Danilack: The formation of the transfer pricing
operations and APMA and the marshaling of all the
transfer pricing resources brought a lot of very good
focus on the transfer pricing challenges the IRS
faces. I think that we made a lot of progress in
bringing about the mind-set that there are some
transfer pricing cases that are worth pursuing and
others that aren’t. In an environment of resource
constraint, the mind-set of ensuring that when you
have a particularly challenging transfer pricing
issue, the best people are brought to bear is especially important. This represents a movement forward in terms of a collaborative culture and
approach to doing the work of the agency so that it
can leverage its own expertise as it strives to do
more with less.
TA: You mentioned all the progress that you
were able to make with the APMA program. Some
are concerned that maybe those operations aren’t
going as well now that you’ve left.
Danilack: That program in particular is under
tremendous pressure because APAs are, and have
been for a long time, recognized as important work.
It’s difficult for the IRS to say we don’t have the
people, we have too much work, you can’t come in.
And competent authority work is not discretionary
work. The United States, in signing its treaties, takes
on the obligation to resolve double taxation for
taxpayers, and that resolution should be efficient
and effective, so it’s not something that can be
scaled to the resources that you have.
The demand on both APA and competent authority is rising rapidly, so I would say that program is
under stress. There was a period — a relatively
short period — when we felt we were getting it
TAX NOTES, January 12, 2015
(C) Tax Analysts 2015. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
taken into account because of the taxpayer’s particular facts and circumstances. You don’t want to
be prescriptive in a document intended to provide
general guidance. You want to defer to the expertise
the agent has in dealing with the taxpayer.
TA: Doesn’t that undermine your larger vision of
ensuring that you don’t have one agent doing one
thing and another doing something totally different?
Danilack: I don’t think so, because if you build a
system where all examiners have access to all
information and all experts, they have access to the
best thinking in the government. They can see it
right there in front of them, and because what
you’re providing to them is useful, I’m highly
confident they’ll use it. I’m not saying that they will
follow the general guidance closely in every case.
But that’s fine, because you have to allow for the
judgment of the person sitting there on the specific
case to come into play.
TA: Is there tiering of international issues?
Danilack: No, there’s no issue tiering. The way
issues are prioritized is that there’s a matrix laying
out the things that are important at a high level.
That framework and the content that it’s populated
with provides the strategy, if you will. There isn’t
some other document someplace that’s saying we
really need to do this and that. What we do will
follow from what’s taught, from what’s talked
about, from what agents and national technical
experts are talking about as important as they
network with one another. That will become what
may be considered a strategy.
TA: But to some extent your knowledge management is only as good as the people and knowledge
that it marshals. While you were at the IRS, you
persuaded many talented experts to join the agency
from the private sector. Are you concerned that the
IRS won’t be as successful at attracting that kind of
talent in the future?
Danilack: Bringing folks in from the private
sector to contribute to the work of the government
is always a very positive thing. The commissioner
has been speaking about the need for critical pay
positions. That does recognize that the IRS in a
certain sense is only as good as the knowledge it has
about its taxpayer base, and lots of times that
knowledge can be gained by bringing someone into
the government. But there’s an awful lot of wonderful knowledge and expertise in the government
already, and what I think we accomplished with the
IPNs was to allow that knowledge to be brought to
bear in the program.
Before I left, I began to have conversations with
some of the other operating divisions, and there
seemed to be a fair amount of interest in rolling out
the network and knowledge management concept
TAX NOTES, January 12, 2015
Danilack: Absolutely. We found that vis-à-vis the
countries with which we had a binding arbitration
clause that had been fully implemented, there was a
positive impact because the people working the
cases knew that it was in their best interest to try to
resolve the case as quickly as possible before they
had to roll the dice and let the position that they had
— the last best offer, if you will — be selected by an
independent arbitrator. So it did work — does work
— to keep pressure to work cases collaboratively
and quickly, and I think that was a positive aspect
of binding arbitration.
We did have some arbitration cases, and those
arbitrations went well procedurally. Now, I’m not
allowed to say how they came out. I know everyone’s asking. But there’s a requirement that the IRS
report out to Congress after they have completed a
certain number of arbitrations. All we know right
now is we haven’t reached that number.
TA: Why did you decide to leave LB&I when you
Danilack: Any decision to leave a job is a mix of
your own personal inclinations and how you’re
feeling about what’s going on where you are. I was
feeling very good about how things were going. But
there was always more to do, so it wasn’t the case
that I felt I was done. It wasn’t the case that I felt
that there were these tremendous barriers that
couldn’t be overcome and I had to leave because of
that. It was more the case that I felt I had set a
direction, and that it was time for me to leave and
let others refine and move ahead.
TA: Are there things that you’ll miss from your
time at LB&I?
Danilack: What I’ll miss and what I already miss
is the people, the camaraderie. We had a really nice
group, we got a lot done, and government employees are very dedicated. They’ve got a sense of
patriotism. They feel they’re doing the right thing
on behalf of the U.S. government, and that feeling
brings about camaraderie. That’s what I’ll miss
TA: What do you hope to achieve at PwC?
Danilack: In terms of what I will do here, it’s
likely that I’ll end up working in the areas where
I’ve got the most experience, and that would be at
that government interface. I have a keen interest in
what the IRS processes are like and how the IRS
interacts with taxpayers, so I imagine that I’ll be
involved on behalf of PwC clients in addressing IRS
matters, including working with foreign competent
authorities. I expect the role to evolve over time to
reflect the ways in which my experience adds value
to clients, for example, in cross-border planning or
finding ways to achieve certainty of tax results in
clients’ international operations.
(C) Tax Analysts 2015. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
under our belts, but that program tends to experience attrition fairly rapidly. The staff who are there
become valuable, and so they go off to private
sector jobs. That attrition started to kick in even
before I left, and even before I left we were not able
to hire, and that can affect the performance of the
program very quickly.
TA: So it’s a problem of hiring authority?
Danilack: The Service as a whole is under severe
hiring constraints and has been for a while. We
would have to, within LB&I, jockey for resources, if
you will, and try to make decisions as to where
something could be given up and where that hire
could be allocated to a more critical program. That’s
a difficult exercise because the work of the IRS is
critical across the board.
Doug O’Donnell mentioned recently that they’ve
made the decision to begin to train the agents who
are on the domestic side to do international work.
That initiative is the type of thing they’re going to
have to do. Now, it takes a while to take someone
who hasn’t had a tremendous amount of international exposure and train them to a point where
they could actually fill in on an APA project or a
competent authority matter. It will take time, but
that’s the type of approach they’re going to have to
take — retraining people to deploy them into the
programs that are nondiscretionary.
TA: Can you talk about your involvement in the
mutual agreement forum?
Danilack: I was very active, if not the principal
actor, in developing the concept of, and implementing, the mutual agreement forum — the MAP
forum — and I have a warm spot in my heart for
that effort. I’d like to see that MAP forum really take
what we developed before I left and move ahead
aggressively and work collaboratively on the many
issues MAP programs face around the world.
TA: Can outside stakeholders participate in the
MAP forum?
Danilack: What I was able to accomplish was the
design, the strategic plan, and a first meeting of
competent authorities. There weren’t outside stakeholders involved in the first meeting. However, we
were having discussions about involving outside
stakeholders in the effort, and I, for one, think it’s a
good idea. I think there probably should be a
vehicle by which the corporate community can
interact with the competent authorities on the MAP
forum and support one another as they try to get
those programs to a point where they can handle
the increasingly global challenge that we face.
TA: Speaking of the MAP forum, can you share
your views on binding arbitration? Given your
experience with arbitration while serving as the
U.S. competent authority, do you think it’s a good
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