LB&I Releases Good News/Bad News IDR Procedures

In recent years, Internal Revenue Service (IRS) management has been taking steps to make the federal income tax examination process more focused and efficient. The Large Business & International Division (LB&I) has shown a willingness to resolve a number of thorny issues on a global basis through the Industry Issue Resolution process with the insurance industry and others. This has greatly reduced the audit burden for both LB&I and large taxpayers, and particularly those in the insurance industry. However, not every issue is subject to global resolution, and the IRS is still conducting robust examinations. As part of the effort to make the examinations more efficient and less time consuming, LB&I management is tightening up the procedures for issuing and enforcing Information Document Requests (IDRs). This effort has involved at least two rounds of mandatory training over the last year for all the Revenue Agents and specialists who examine large taxpayers. It also has resulted in two written directives outlining the procedures. The two directives present what some may consider a good news/bad news scenario for large corporate taxpayers.

THE FIRST DIRECTIVE—REQUIRING EXAMINERS TO EMPLOY ISSUE-FOCUSED IDRS

The good news came on June 18, 2013, when LB&I management released LB&I Directive No. 04-0613-004, which has the potential to narrow the focus of IDRs and result in efficiencies and more collaboration between the IRS and taxpayers during the course of examinations. In the Directive, LB&I Management refers to mandatory IDR training that all LB&I revenue agents and specialists had recently completed at the time the Directive was released. The Directive reiterates three main points of the training and documents what is expected of the agents and specialists and of taxpayers going through the IDR process. The three main points of the training are that (1) agents and specialists must make their IDRs “issue-focused,” meaning they must clearly state in the IDR what issue led to the IDR, (2) they must discuss each IDR with the taxpayer ahead of time, and (3) the agents and specialists and taxpayers must agree to reasonable deadlines for responses to the IDRs. The Directive applies to all IDRs issued after June 30, 2013, and overrides any existing Memoranda of Understanding between the company’s tax department and the IRS examination team that are inconsistent with the required procedures.

THE FOLLOW-UP ENFORCEMENT DIRECTIVE—REQUIRING A RIGID, THREE-STEP ENFORCEMENT PROCEDURE

The potentially bad news came on Nov. 4, 2013, with the release of a follow-up Enforcement Directive (LB&I-04-1113- 009) from LB&I management that refers to a second round of training and reiterates and expands on the earlier directive’s IDR issuance requirements, but also introduces a rigid, three- step procedure for IDR enforcement. Regarding issuance, the Enforcement Directive has an attachment (Attachment 1) outlining 13 requirements IRS agents and specialists must follow that should be very helpful in making the IDR process more efficient. The 13 requirements more fully develop the three main points from the June directive discussed above. In general, the requirements are designed to (1) inform the taxpayer of the issue the examiners are exploring, (2) ensure that the IDRs are concise, numbered and limited to one issue each, (3) allow the taxpayer to see a draft and have the opportunity to discuss in advance both the content and timing of the response, and (4) allow the taxpayer to close the door on the response by requiring the examiners to commit on the face of the IDR to a date on which they will inform the taxpayer whether the response satisfies the request in the IDR.

The 13 requirements in Attachment 1 to the Enforcement Directive are all very helpful and should result in efficiencies. The potentially bad news for taxpayers is contained in an inflexible, three-step enforcement process described in Attachment 2 to the Directive that applies when a taxpayer does not comply with the deadline for an IDR established during the issuance process. The Enforcement Directive states that the three-step enforcement “process is mandatory and has no exceptions.” The mandatory enforcement process involves three “graduated” steps to deal with non-compliance. The three steps are (1) the issuance of a Delinquency Notice, followed by (2) the issuance of a Pre-Summons Letter, and, finally (3) the issuance of a Summons.