IRS launches new industry issue focus strategy.

• Author: Powers, Scott E.

To keep pace with changing business environments and cope with limited government resources, the IRS has implemented a new Industry Issue Focus (IIF) strategy to concentrate on high-risk tax issues. In recent years, the Service has begun to address issues associated with the dynamic nature of the global business environment in which some of its taxpayers operate. These taxpayers often retain sophisticated tax advisers who arrange very complex transactions in an effort to reduce their clients' overall U.S. tax. With this challenge comes the realization that the IRS must make certain that specific industry issues are properly addressed.

The IRS Large and Midsize Business Division (LMSB) has jurisdiction to examine business taxpayers with $10 million or more in assets. Fiscal-year 2006 statistics indicate that LMSB taxpayers paid approximately $206 billion in taxes and filed 175,862 returns, many of them thousands of pages long (see, e.g., "Industry Issue Focus (IIF) Fact Sheet--March 2007," available at www.irs. gov/businesses/article/0,,id=168490, 00.html (IIF Fact Sheet)). For example, the IRS announced that, on paper, General Electric's e-filed return would have been approximately 24,000 pages long, the nation's longest tax return; see IR-2006-84, available at www. irs.gov/newsroom/article/0,,id= 157845,00.html.

To examine these taxpayers and returns, the Service employs 5,132 revenue agents and LMSB specialists (this number does not include support personnel involved in these compliance efforts). The IRS believes that LMSB taxpayers deserve more attention, because government estimates for 2006 indicate that they account for $25 billion (7%) of the tax gap (the difference between estimates of taxes that should be paid and taxes actually collected).

LMSB Tax Compliance

As part of the new IIF strategy, the LMSB has implemented a system for prioritizing tax compliance issues. This system is designed to provide nationwide oversight on important designated issues to ensure consistency in issue resolution across industry lines; see "Industry Issue Focus," available at www.irs.gov/businesses/ article/0,,id=167377,00.html. The LMSB's implementation of this strategy, which identifies and manages specific issues, should materially alter the Service's approach to these issues during taxpayer examinations. In addition, the IRS recently published Internal Revenue Manual Section 4.51.5, Industry Focus and Control of LMSB Compliance Issues, which further...