PFA program - an increasingly useful tool for taxpayers.

• Author: Dougherty, James A.
• Position: Pre-filing agreement

One of the strategic priorities of the IRS'S Large and Mid-Size Business Division (LMSB) is issue management, which it defines as developing a strategy to resolve disputes with taxpayers sooner or to eliminate controversy earlier in the process. The Pre-Filing Agreement (PFA) Program was developed to assist LMSB in this purpose. It allows LMSB taxpayers to request an examination of specific return issues, which could be subject to post-filing disputes, to determine the proper tax treatment prior to filing the return. PFAs are finalized with a closing agreement under Sec. 7121. This provides the taxpayer with certainty as to return positions specified in the agreement.

This item discusses the evolution of the PFA program and highlights some of its goals and key revisions announced in Rev. Proc. 2005-12.

Overview

Through the use of the PFA program, the IRS's goal is to reduce the taxpayer's and the IRS's costs and burdens, by providing certainty on issues earlier than the traditional post-filing examination process. Because the examination is performed prior to return filing, the taxpayer and ItS have timelier access to both the relevant tax records and personnel.

The Service, on an annual basis, releases a report on the program that discusses the types of issues resolved, taxpayer satisfaction and time saved. Exhibit 1 above is an IRS chart showing the time saved in pursuing a PFA, as opposed to resolving an issue during the post-filing examination process.

Although the program has been expanded and has proven to be efficient, it is underused, having received only 42 applications during calendar-year 2003. Exhibit 2 above compares the number of applications received per year since the program's inception.

Pilot Program Evolution

In February 2000, the Service announced the pilot PFA program in Notice 2000-12. At that time, the program was available only for Coordinated Issue Cases with an examination team on site at the time a PFA request was made. Of the 19 applications received during the pilot program, seven dosing agreements were executed, in an average of 166.1 days. This was significantly shorter than the time needed to examine an issue during the post-filing audit process, which could take a number of years. Since its inception, the PFA program has evolved; it has become an increasingly useful tool for taxpayers.

Rev. Proc. 2001-22 made the pilot permanent and expanded the program by making PFAs available to all taxpayers under the...