IRS environmental survey.

On November 1, 2006, TEI's International President, David L. Bernard, wrote to Deborah Nolan, Commisoner of the IRS's Large and Mid-Size Business Division, about the LMSB current "environment."

On behalf of Tax Executives Institute, I am pleased to provide additional information regarding the current "environment" in which LMSB personnel and taxpayers interact. You will recall that TEI agreed to undertake a limited survey of our members in an attempt to quantify the anecdotal information we had received about a perceived deterioration in the tone and professionalism of the relationship between LMSB examination personnel and taxpayers.

Following our discussion in mid-August, TEI polled its Board of Directors and IRS Administrative Affairs Committee, a population of approximately 120 members; each was asked to respond to the following:

* Whether there had been an increased issuance of Forms 5701 at later stages of the exam or surprise NOPAs. If so, to what do you attribute this behavior?

* Whether there had been an increase in referral of issues to Appeals. If so, to what do you attribute this behavior?

* Whether they had received unreasonable/unfocused IDR's or "kitchen sink" IDRs.

* Whether there had been an overall change in tone of the examination.

Approximately 40 responses were received, which are summarized in the attached document. All responses have been redacted to preserve member confidentiality.

The responses reflect a fair divergence of opinion. That differences exist suggest opportunities for improvement. They also suggest that taxpayers are experiencing--or could well experience--disparate treatment, audit experiences, and/or outcomes, because of the differing attitudes and perspectives of the LMSB personnel with whom they interact. To be sure, many respondents described a generally positive experience in dealing with the IRS and noted the professionalism and spirit of cooperation on the part of the exam team. Regrettably, others found themselves at the other end of the spectrum and detailed particularly troublesome behavior by the agents and specialists.

TEI stands ready to assist LMSB in assessing the issues identified by our survey respondents and evaluating appropriate LMSB responses. We are confident that, by working together, we can establish and maintain the proper balance between enforcement and customer service.

TEI appreciates the opportunity to share this information with you. Please feel free to contact Timothy J. McCormally, TEI's Executive Director, or Eli J. Dicker, TEI Chief Tax Counsel, both on 202.636.5601 if you need additional information.

Respondent 1

The IRS team has worked with us on the timing and scope of the audit and has approached each meeting in a professional and business-like manner. So far I am very pleased with the relationship.

Respondent 2

We just completed an exam, and it was reasonably painless. We suggested LIFE during the opening conference, and the agent and her supervisor ultimately came back recommending it. The only issue came up when they gave us the IDR to produce the officers' personal returns. We declined, and the agent ended up contacting the officers herself. They could have avoided the problem if the agent had requested them from the service center early on.

The whole thing took about 9 months from initial contact to closure, and we are current. Part of it is the Service is so short of people in [specific location] so they lack the resources to waste time.

Respondent 3

Increased issuance of Form 5701s at later stages of the exam or surprise NOPAs. If so, to what do you attribute this behavior?

It has generally been our experience that Forms 5701 have been issued towards the end of the audit. This was attributable in part to the size/scope of the audit and inefficient management of the audit by Exam. However, in recent cycles, we've seen more adherence to the Audit Plan with Forms 5701 issued earlier in the cycle. We've received very few "surprise NOPAs" over the past several cycles. Increased referral of issues to Appeals. If so, to what do you attribute this behavior?

Exam hasn't referred any of our issues to Appeals. Consistent with prior experience, we have "agreed" and "unagreed" issues upon the completion of the audit. The number of unagreed issues that have gone to Appeals in recent cycles is comparable to prior cycles. Receipt of unreasonable/unfocused IDR's or "kitchen sink" IDR's.

Exam has done a better job of adhering to the Audit Plan and (1) issuing focused IDRs, (2) discussing proposed IDRs with us in advance to make sure they're properly focused/scoped, and (3) reissuing IDRs if we find them to be unreasonable/unfocused. The boilerplate/mandatory IDRs authored by IRS National Office personnel are much more likely to be unreasonable/unfocused or "kitchen sink" IDRs than the IDRs authored by local Exam. Overall tone of the exam

The tone is reasonable for what it is--effectively an adversarial relationship. Each side treats the other side with professional courtesy and respect. Respondent 4

Although our Exam team may be somewhat emboldened as a result of the Commissioner's emphasis on compliance, they have continued to conduct themselves professionally. We have not experienced any unusual aggressiveness or other inappropriate conduct.

Respondent 5

We were at the end of our audit, everything going smoothly, the [IRS exam personnel] Advisor comes out to take a look at our [other audit], and offers to help with the other audit. He ends up revisiting a topic that I had been told the week before was closed and there was no issue. He determined the team did not do a good job in analyzing the topic, and ended up bringing other specialists in. At one point my boss and I had a conference call with around 6 IRS people, including Counsel, and the tone on the call with the aggressiveness of Counsel and accusatory attitude, along with a threatening nature, led to a shouting match on the phone where the IRS personnel were talking over each other. This has led to a threat of summons, where our Territory Manager wanted to know why our Team Manager was not going through with it. That was after the meeting we had scheduled with the IRS to interview executives here at the company. It has been difficult with all of the specialists the team is talking to, and the audit was supposed to be done in [time period]. So much for timeliness.

Respondent 6

We recently concluded an IRS audit that included the years 1998 thru 2003. Our case manager and audit team were great to work with. They did everything professionally and we both got along very well. The team was thorough, brought up many good issues, and compromised when it was deemed necessary.

We would give this audit team and its case manager very high marks. To put things in perspective, the agent we had for the previous audit of years 1996 and 1997 was decidedly at the other end of the spectrum. So much so that our written critique of the agent solicited a visit from a special agent to our offices. We are not afraid to lambaste a rogue agent, but at the same time we will praise a good team.

Respondent 7

We just completed an exam and found everyone from the IRS to be reasonable in their requests and response time allowed. This created a better atmosphere and one in which we were both working to complete the audit. Several status meetings were held during the audit which prevented surprises and kept both sides on schedule.

We did not see them as more aggressive. Yes, there were 'kitchen sink' IDRs, but they were willing to accept data that were most appropriate and in line with the applicable topics/subjects/issues.

Respondent 8

We are presently under examination for the taxation year ended [xx/xx]. For months, my Tax Manager and I here have been commenting on the behavior of our IRS agents. Specifically, the primary agent has exhibited more systematic aggressiveness with regard to certain issues. We presently have only a few unresolved issues one domestic and two international. The international issues involve [issue]. The international agent initially provided us with a schedule indicating that she was arriving at an adjustment for [amount]. The international agent proposed a revised allocation using revenues to arrive at an additional adjustment. She provided no technical support for the proposed methodology that she used.

Overall, my impression is that the IRS agents have an amount that they want to collect related to this examination. It is quite different from anything I have experienced in the past. Additionally, the IRS agents assigned to our exam have not provided technical support, tax law for their positions. On the one domestic issue that we have, the IRS agent could not initially describe to me the tax technical issue just that it did not seem right.

Respondent 9

Responding on behalf of [company name] the answer to questions 1 through 3 is no. The overall tone of the exam has been professional and respectful. We have not experienced any of the problems alluded to [in your questions].

Respondent 10

Examples of the more aggressive IRS in the most recently concluded [current year] audit of the Taxpayer. Please note that the Taxpayer did not experience these audit techniques prior to the [current year] audit. Nor has the Taxpayer ever paid an accuracy related penalty or been determined to participate in any tax shelter prior to this audit cycle.

Heightened threats to impose accuracy-related penalties under IRC [section] 6662.

In one case, an IDR was issued requesting the following documents to evidence reasonable cause, good faith, and due diligence in regards to the formation of a transaction the Service was defining as a tax shelter. Document Is used in the broadest possible sense and means any written, printed, typed, photo static, photographed, recorded, or otherwise reproduced communications or representations, whether comprised of letters, words, numbers, pictures, sounds or...