LB&I audits, old lessons, new approach: transparency, collaboration, fair and efficient resolution, no argument with goals, but the devil is in the implementation details.

• Author: Kafka, Gerald
• Position: IRS Large Business and International Division

Those who ignore history are doomed to repeat it. That adage is true in all walks of life, but it is particularly appropriate as the IRS prepares to implement its most recent initiative for examinations by the Large Business & International division (LB&I), as described in the draft release of Publication 5125.

The stated objectives in the draft are laudable: transparency, collaborative factual development, and fair and efficient resolution. These same concepts have been trumpeted in the past with equivalent opening fanfare. However, they have been supplanted over time with different measures of the same components.

This commentary is intended not to dissect the new formulation but to provide some historical perspective and to attempt to identify the major, practical factors that will determine whether the current version succeeds or will be replaced by yet another approach.

LB&I Examinations as Described in Publication 5125

Publication 5125 (July 2014) sets forth LB&I's approach for planning, executing, and resolving examinations. Common to the three stages are the generic objectives to "work transparently in a collaborative manner with the taxpayer," "apply the law to the facts in a fair and impartial manner," and resolve issues "at the lowest possible level."

Taxpayers are also expected to be transparent and cooperative. Within this context, future examinations will be issue-centric, rather than case-based, and will be premised on an early risk analysis of the issues to be addressed. Three major criteria are being introduced to accomplish this:

* Each issue identified for examination will have a separate issue team, which will have responsibility for setting timetables, developing facts, and resolving proposed adjustments.

* The taxpayer will be required to provide a written concurrence of the issue team's statement of facts or to otherwise identify additional relevant facts and/or document any disputed facts.

* The taxpayer will be permitted to file an informal refund claim only within 30 days of the opening conference. Thereafter, he will be required to file a formal Form 1120X with a fully documented statement of supporting facts that allows "the exam team to make a tax determination of the claims without requiring the use of IDRs (Informal Dispute Resolutions)." These changes are interlinked with the prior

LB&I IDR directive (Feb. 28, 2014; IRS Control No. LB&I-04-0214-004), which provides strict timetables for response dates to IDRs, after which a pre-summons and summons issuance timetable automatically is triggered, and with the Appeals Judicial Approach and Culture (AJAC) project (July 2, 2014; IRS Control No. AP-08-0714-004), which returns Appeals to a quasi-judicial review function that will decline jurisdiction over a case to LB&I if a taxpayer introduces new information or raises a new issue at Appeals.

These changes were preceded during the last few years by the reorganization of LB&I, the demise of the Tiered Issue program, and the introduction of issue practice groups (for domestic issues) and international practice networks (for international issues). These all were launched with the same three generic objectives stated above, but greater emphasis was placed on centralized management of issue analysis and resolution, with a cadre of technicians removed from the facts typically given final authority over issue management and resolution.

The proposed examination program evidences a modified shift back to field management of issues, but in the form of multiple issue teams, each with responsibility for its single issue, albeit subject to coordination with a technical advisor. The former programs reflected a lack of confidence in field agents (and precipitated many internal complaints and a lowering of their work morale), but, because of budget limitations (traceable in part to some notable training programs with entertainment themes), there has been little training to convert agents to the new approach.

The success of the new audit approach will likely be dependent on three variables: the agents who comprise the issue teams, the coordination of the issue teams where multiple issues are being examined, and mutual transparency and collaboration. The metamorphosis from a single audit team based on site, aided by technical advisors and with a single case manager, to multiple issue teams, each with an issue manager, technical specialists, and field agents who are geographically dispersed, is a...