Tax Executives Institute--Internal Revenue Service Large and Mid-Size Business Division liaison meeting: February 24, 2003.

On February 24, 2003, Tax Executives Institute met with Larry L. Langdon, Commissioner of the IRS's Large and Mid-Size Business Division, and other representatives of LMSB. TEI President J.A. (Drew) Glennie led the Institute's delegation to the meeting. The agenda for the meeting is reprinted below. Minutes of the meeting will be published in a future issue of the magazine.

1. Introduction

2. Audit Processes

   1. Pre-Filing Initiatives

      * LMSB has shown a commendable openness to new and different ways of doing business. More than a year ago, the Division announced several "pre-filing" initiatives, emphasizing the need to resolve issues before a return is filed. This increased attention on "front-end" activities--by the use of pre-filing agreements and industry issue resolution techniques--could potentially reduce contentious audits and prolonged litigation.

      * During the liaison meeting, we invite an update on the use of these procedures, including whether LMSB intends to initiate new IIR projects.

   2. LIFE Initiative

      * TEI is pleased with LMSB's recent announcement of its limited issue focused examination, or "LIFE," initiative. LIFE is an innovative process to focus government and taxpayer resources on the most significant issues on a taxpayer's return by using a risk-based methodology. The new initiative requires the execution of a formal memorandum of understanding between the taxpayer and IRS that will govern key aspects of the examination, including the imposition of a dollar threshold on a case-by-case basis below which both the taxpayer and IRS agree not to raise issues or make claims.

      * As the IRS has acknowledged, the new approach represents a major culture shift for LMSB. Critical to its success is the involvement--and training--of IRS field personnel. Without a commitment from the examination team and their supervisors, the new procedure could well be viewed as the latest "flavor of the week," i.e., a mere reworking of other initiatives without an underlying change in philosophy. We understand that LMSB has begun training its agents in the new process. During the liaison meeting, we request an update on the training of agents in the use of the new procedure.

      * Although TEI remains hopeful that the LIFE process will succeed in institutionalizing "best practices" for IRS examinations and providing consistency in the treatment of taxpayers, some members have expressed concern about its implementation. The process will succeed, however, only if both taxpayer and the IRS honor the commitments--concerning deadlines, materiality standards, and staffing--set forth in the memorandum of understanding. Providing performance measures based on the use of the process may help resolve this issue.

      * A linchpin of the LIFE procedure is the establishment of materiality thresholds that can vary from taxpayer to taxpayer. TEI agrees that a "one-size-fits-all" standard may not be appropriate, but some members have voiced concern that a case-by-case standard may threaten consistency among similarly situated taxpayers. The procedure contemplates that a taxpayer disagreeing with an examiner's assessment of materiality may take the issue up the IRS chain of command, but many taxpayers remain reticent about using that approach for fear of antagonizing the audit team. During the liaison meeting, we invite discussion of how to minimize these concerns.

      * LIFE has been described as not a right but a privilege, meaning that participation is not automatic; rather, the decision to use LIFE rests with the IRS examination team and the team manager. Are there taxpayers that, despite a history of cooperation, will not be considered for the LIFE procedure because of size, corporate structure, or involvement in particular types of transactions? The process should be made available to all taxpayers with a track record of cooperation and fair dealing with the IRS. TEI believes that audit teams should be required to discuss the procedure with taxpayers and held accountable for why the process is not used.

   3. Record Retention Limitation Agreements

      * For several years, TEI and the IRS have discussed the significant burdens imposed on corporate taxpayers relating to the requirement that extensive records be maintained in respect of taxable years subject to audit. Although taxpayers have a responsibility to maintain records to support the positions taken on their tax returns, there is a need to minimize the burden that currently exists (especially for those taxpayers that have many years open for IRS examinations).

      * Record retention burdens can best be reduced by increasing the currency of audits; if taxable years are closed in a more timely manner, fewer records will need to be retained.

      * Taxpayers and the IRS should make better use of records retention limitation agreements. TEI has long supported the use of agreements that recognize the challenge of constantly changing technology (including limitations on the ability to convert data created on legacy systems) and we continue to believe the rules can be productively revised and streamlined. For example, given the prevalence of ERP systems, guidance should be...