IRS issues second IDD on domestic production deduction.

• Author: Benko, Beth
• Position: Industry director directive

The IRS has issued a follow-up directive to the industry director directive (IDD) issued on December 6, 2006 (LMSB-04-1206-018), on the Sec. 199 domestic production deduction (DPD) (LMSB-04-0707-049).The DPD is a designated Tier I issue and as such must be identified, developed, and resolved in a consistent manner across all IRS Large and Mid-Size Business cases involving similarly situated taxpayers. The IRS believes that the DPD collectively represents significant tax dollars, and early indications suggest that taxpayers have inconsistently applied the rules promulgated under Sec. 199.The intent of the follow-up IDD is to describe controls being placed on the review of larger deduction amounts.

The previous IDD set forth five minimum checks required in every case, which can help an IRS exam team determine whether to include the issue in the audit plan. Not all cases will lead to mandatory audit of the DPD. In the IDD, the Service states that cases meeting certain established criteria will be subject to mandatory audit. Those criteria, however, have been redacted from the document.

When the DPD is audited, the IRS continues to concentrate on determining the most effective way to audit and the specific areas on which the audit team should focus. To aid in the development and resolution of DPD cases, the following requirements will be put in place for returns with the DPD: 1. The team manager assigned to the case will contact the DPD technical advisers to share and discuss the audit plan.

2. Contact will be maintained with the DPD technical advisers throughout the audit process to discuss issues and involve them as needed.

3. Form 5701...