A More Collaborative Tax Controversy Approach? Strategies for Exam and Appeals.

• Author: Solomon, Eric

Tax executives are familiar with the scenario: Internal Revenue Service examiners are in the building and are beginning to issue information document requests (IDRs) on routine and sensitive issues. One typical taxpayer response is to go on the defensive. This approach includes not voluntarily identifying issues and transactions; responding to IDRs as narrowly as possible; not offering to make factual or legal presentations to Exam; and not responding to notices of proposed adjustment (NOPAs) or responding as narrowly as possible. In other words, the typical taxpayer approach is to conserve resources used at Exam because "Appeals will offer a better deal."

A Better Approach?

Depending on the circumstances, a better approach might be a more proactive model. This approach involves disclosing certain issues at the beginning of the audit; making factual and legal presentations on those issues; responding to IDRs more fully; and offering interviews with business people (if appropriate). Some advantages of a proactive strategy can include establishing a better rapport with the Exam team; narrowing the number and scope of IDRs; shaping Exam's view of issues through presentations that explain the issues effectively; and speeding up the audit and resolving more issues.

The proactive model has some compelling analogues. Consider first the Pre-Filing Agreement (PFA) program. The IRS refers to the PFA process as "cooperative issue resolution." The IRS states that in the PFA process "the taxpayer and the IRS will agree on a proposed timeframe, identification of relevant records, access to records or testimony, and the scope and depth of examination" The IRS envisions a "one-team concept" that provides for an efficient and timely review of readily available records, reduces post-filing examination cycle time, and reduces costs to and the burden on all parties. Consider also the Compliance Assurance Process (CAP). Under CAP, "the IRS and the taxpayer work together to achieve tax compliance by resolving issues." Thus, CAP "is based on the transparent and cooperative interaction between the taxpayer and the IRS." The goal of CAP is to resolve "tax issues through open, cooperative and transparent interactions between the IRS and taxpayers."

The IRS Approach

In 2016, the IRS' Large Business & International (LB&I) Division issued IRS Publication 5125 and announced a desire to bring some version of the proactive model into the examination process. For the Exam team, compliance with the publication is largely mandatory. The publication's introduction, however, acknowledges that it is not universally mandated, stating that "portions of this publication may be more applicable to some cases than others." Yet, in most cases, Exam is required to act in accordance with the publication. Specifically, Exam is to "work transparently in a collaborative manner with the taxpayer." Also, Exam is directed to "ensure that each party's position is fully understood" Furthermore, Publication 5125 requires that, after examining each issue, Exam must provide the taxpayer with an IDR that sets forth Exam's understanding of "all relevant facts."

Publication 5125 requires that in all cases Exam must comply with the IDR procedures that LB&I published in its 2014 Directive on Information Document Requests Enforcement Process (DIDREP). That directive sets forth procedures that seek taxpayer input into the...