Details of IRS expanded policy of restraint not yet in IRM; range of applicability unclear.

• Author: Weber, Mindy Tyson
• Position: Internal Revenue Manual

Though the IRS in 2010 expanded its policy of restraint in requesting audit and tax accrual workpapers, it has not yet updated the Internal Revenue Manual (IRM) to reflect those changes. Furthermore, the range of applicability of the policy expansion remains unclear. The IRS expanded the policy of restraint to cover once-privileged documents where a waiver of the privilege occurred as a result of inspection of the documents by independent auditors and to allow for redaction of tax reconciliation workpapers that contain information from Schedule UTP, Uncertain Tax Position Statement.

IRM Section 4.10.20 contains the rules for IRS revenue agents with respect to obtaining audit workpapers, tax accrual workpapers, and tax reconciliation workpapers from taxpayers during an audit. While IRS auditors should request tax reconciliation workpapers as a routine matter in IRS audits, under the policy of restraint, unless unusual circumstances or listed transactions are involved, audit workpapers and tax accrual workpapers should not be requested (IRM [section]4.10.20.3, Service Policy for Requesting Workpapers).

The basic elements of this policy of restraint have been in effect for more than 30 years, although important changes related to listed transactions (permitting the request of tax accrual workpapers) were implemented in 2002. In Announcement 2010-76, the IRS expanded the policy "in connection with its decision to require certain corporations to file Schedule UTP." Because this expansion of the policy has not yet been written into the IRM, the announcement is the primary source for learning what new protections have been afforded taxpayers in light of the requirement to file Schedule UTP, on which uncertain positions taken on some tax returns must be described to the IRS.

The announcement states that:

If a document is otherwise privileged under the attorney-client privilege, the tax advice privilege in section 7525 of the Code, or the work product doctrine and the document was provided to an independent auditor as part of an audit of the taxpayer's financial statements, the Service will not assert during an examination that privilege has been waived by such disclosure. [Emphasis added.] However, if the taxpayer has taken any other actions that waive the privilege, or if unusual circumstances or listed transactions exist, the IRS may request the document and use enforcement efforts to obtain it. The announcement, however, also allows redaction of...