Tax Executives Institute--IRS Large and Mid-Size Business Division liaison meeting: February 5, 2002.

On February 5, 2002, Tax Executives Institute held its annual liaison meeting with representatives of the Internal Revenue Service's Large and Mid-Size Business Division. The agenda for the meeting was published in the January-February 2002 issue of The Tax Executive. The minutes follow.

On behalf of the Large and Mid-Size Business (LMSB) Division of the Internal Revenue Service, Commissioner Larry R. Langdon welcomed TEI President Robert L. Ashby and the other members of the delegation from Tax Executives Institute to the liaison meeting. LMSB's and TEI's delegations to the liaison meeting are set forth below.

1. Opening Comments

   Mr. Langdon expressed appreciation to the Institute for its promotion of the LMSB "bonus" sessions that will be held at the Renaissance Hotel immediately following the conclusion of the Institute's Midyear Conference at the Grand Hyatt Washington. He also thanked the Institute for its letter to Commissioner Charles O. Rossotti, which commends the IRS for various taxpayer-relief notices issued in the aftermath of the September 11 terrorist attacks, for the changes in the research credit regulations, and for other matters. TEI thanked Mr. Langdon for the reply from the Commissioner expressing appreciation for TEI's efforts in promoting awareness among its members of the need to brief IRS field agents on company safety and evacuation procedures.

2. LMSB Updates

   1. Industry Issue Resolution (IIR) Program. TEI commended the IRS for developing new issue-management techniques that provide taxpayers and IRS personnel with more timely, focused guidance. TEI observed, however, that taxpayer- and industry-specific guidance is no substitute for generic guidance. TEI invited LMSB to provide an update on the Industry Issue Resolution (IIR) program, including whether additional issues (particularly in the international area) have been selected for resolution.

      Mr. Langdon said that, because of the success of the pilot IIR program, LMSB would recommend that IIR be made permanent. He said that an announcement to that effect may be released soon. Mr. Ng provided a summary of the IIR pilot program. Of seven items accepted for IIR, four matters have been resolved with formal guidance issued. In addition, supplemental guidance has been issued to the field on those items. Guidance on the other three issues selected for the pilot program is expected to be issued by the end of March. LMSB is enthusiastic that the process can be used to resolve contentious issues and is in the process of refining both the PFA and IIR programs. In order to evaluate the program and issue resolution process, the IRS is gathering feedback through a questionnaire posted on its website.

      TEI inquired whether the IRS will accept new issues for IIR. In order to ensure a level playing field for all taxpayers, Mr. Langdon said, the IRS will follow a procedure similar to that employed when the IIR pilot was announced. Specifically, taxpayers will be invited to submit proposed issues and IRS will decide which issues to accept; a public announcement will follow with all interested parties being accorded an opportunity to submit comments. The IRS will likely accept issues in the "gray areas" of the law where no formal guidance currently exists, but for which it will not be a "stretch" to reach a resolution of the issue.

      TEI inquired whether there is a mechanism to measure how many taxpayers have elected the resolution proffered in the IIR guidance. Mr. Ng said that the IRS is still developing measures of the compliance effects for all of the pre-filing issue resolution products. Anecdotal evidence suggests that pre-filing agreements (PFA) have a substantial effect on taxpayer compliance. He acknowledged that it is more difficult to measure the effect of IIR on compliance because the number of taxpayers affected by a particular issue is not easy to discern. Another unknown factor is the degree of uniformity or consistency of taxpayers' treatment of a tax issue before or after IIR guidance released. If an issue is not being raised as a proposed adjustment by the field, that is significant evidence that taxpayers are adopting the treatment prescribed by the IIR. Mr. Ng said that once the feedback on the pilot is complete, LMSB will draft a permanent IIR provision.

   2. Post-Filing Design Team. In November, TEI representatives met with the IRS Post-Filing Design Team to explore ways to improve the post-filing process. The first phase of the project was completed in December 2001. TEI's recommendations for improving the process include: (i) focusing on specific material issues (perhaps through better use of the Schedule M), rather than auditing the entire return; (ii) not revisiting issues that were audited with little or no change during the prior audit cycle; (iii) increasing the use of statistical sampling techniques; and (iv) increasing the use of electronic communication.

      Mr. Langdon said that the post-filing project is a key LMSB initiative to go beyond traditional compliance approaches. The Post-Filing Design Team is in phase II (Design and Blueprint) of its project and recently completed a focus group discussion in Santa Clara. During the next two to three months, the team will develop and refine its processes and will seek a means to test its procedures. TEI volunteered to serve as a resource for the IRS as it moves forward.

   3. Fast-Track Appeals Process. TEI noted that LMSB has issued Notice 2001-67, which LMSB Commissioner Larry Langdon has described as a "field-based" approach to resolve conflicts arising from audits. Under the procedure, taxpayers and IRS examiners work with an Appeals Officer to resolve their differences within 120 days. The procedure requires taxpayers to waive their ex parte protections. Once resolved, the resulting agreements could be applied to subsequent and prior periods. Some issues, TEI noted, have been resolved within a week.

      Mr. Black expressed his thanks to TEI for its receptivity to the Fast-Track appeals process. He said that 52 Case Leaders (GS-15) in Appeals have been trained in the process, and Appeals' direct involvement with the LMSB field team is critical. Five cases have been closed under the process within an average of 74 days. Fourteen more cases are under active consideration with an average of 40 days of elapsed time. The IRS is considering accepting 15 more cases; 11 cases have been declined. Cases are usually declined where the request is made after the field issued its 30-day letter. He said that all five LMSB industry groups have participated in the process. One question about Fast-Track Appeals that has been raised by the LMSB Industry Directors is whether Appeals has the resources to resolve the cases in a timely fashion. Mr. Black said that it does. Mr. Black invited TEI to provide feedback on the process.

      One member noted that her company used mediation recently to resolve an issue and that she was impressed with the Appeals Officer's mediation and technical skills. Mr. Black said that the Appeals Division frequently employs mediation to successfully reach agreements in the Small Business/Self Employed Division but does not anticipate high demand for formal mediation in LMSB Appeals.

      TEI inquired whether there is buy-in to the Fast-Track Appeals process at the field level. Mr. Black said that there is strong interest in Appeals, especially at the GS-15 level. The GS-14 Appeals Officers initially seemed less enthused, but became more open to the process after receiving their training. He encouraged TEI to bring any "pockets of resistance" at the field level to his attention. Mr. Brazzil said that the field agents are very enthusiastic about the process because of the opportunity to participate in the decision-making and settlement process. Ms. Burke explained that in order to make Fast-Track work, there has to be a balance between the incentives for taxpayers and the field. As a result, the procedure was very challenging to draft. In most cases, she said, key process issues were resolved in favor of taxpayers in order to provide a perception that the process is fair. TEI said that it will work to increase taxpayer awareness and interest.

   4. Pre-Filing Agreement (PFA) Program. TEI reiterated that it has supported the IRS's PFA initiative from the outset. In Rev. Proc. 2001-22, the IRS made the PFA initiative permanent and expanded it to international issues. In a report last summer, the Treasury Inspector General for Tax Administration (TIGTA) found that the pilot program offered taxpayers a successful process by which to resolve specific issues on tax returns not yet filed. TIGTA also found, however, that significant challenges remain before the pilot program can be converted into an effective operational program. TEI invited LMSB to provide a status report on the PFA program, including its relationship to the IIR program.

      Mr. Ng said that, despite press reports to the contrary, the PFA program is alive and well and is actively being used to resolve factual issues. He said that LMSB invited TIGTA to comment on the PFA initiative in order to ensure an independent evaluation of the process. Mr. Ng said that TIGTA's principal concerns were (i) whether taxpayer demand for the PFA process justified the resources devoted to the program and (ii) in responding to specific taxpayer requests for PFAs, whether IRS is limiting the resources available for examinations. LMSB's response to TIGTA's report acknowledges the resource constraints, but LMSB believes that substantial long-range benefits will be reaped by investing resources in the PFA process. By taking fact- and record-intensive issues off the table before returns are filed, LMSB believes it will be able to achieve a higher rate of compliance with fewer resources devoted to examining contentious issues, thereby freeing up resources for examination of other taxpayers.

      Mr. Ng said that there have been 29 applications for PFAs, of...