Strategies for dealing with the new IRS IDR process.

• Author: Garofalo, William
• Position: Information document request

The IRS Large Business and International Division (LB&I) has issued new guidance that substantially revises the Information Document Request (IDR) process. (1) This guidance comes in the form of a November 4, 2013, Directive to examiners with two attachments (hereafter the Directive). This Directive builds on prior guidance concerning the issuance of IDRs, while adding new guidance on the enforcement process if a taxpayer does not timely respond to an IDR. This article will break down the key parts of the LB&I Directive and how they may change the way the IRS conducts large case examinations. The article will then suggest taxpayer strategies for dealing with the new IDR process.

The Directive was immediately effective for changes in the IDR issuance process. The changes in the IDR enforcement process were made effective as of January, 2014. On February 7, 2014, the IRS issued an email (2) delaying the enforcement process until March 3, 2014. According to the email, the short delay is to allow "clarification that is necessary to ensure that the procedures governing IDR issuance and enforcement are easily and clearly understood." Despite this short delay and the pending "clarification," I expect that most of the changes to the IDR process are already in place; taxpayers need to understand these procedures and prepare for the dramatic changes that they bring.

Clearly, LB&I is dissatisfied with the old IDR process. (3) In particular, LB&I believes that the IRS does not obtain sufficient and timely information to resolve issues, and LB&I agents lack the tools to properly deal with this lack of information and delays. Expanding on prior guidance, the Directive provides for a more focused and "transparent" IDR process that involves greater interaction between taxpayers and the IRS. This process is described in summary fashion in Attachment 1 to the Directive. This more interactive process presumably will generate better information. And to fix the timeliness issue, the Directive requires a firm timetable for responses to IDRs. The Directive also provides in Attachment 2 for a mandatory enforcement process for any delinquent IDR responses.

In my view, LB&I intended for the Directive to substantially change the way agents conduct large case examinations. Both agents and taxpayers have to adapt to this new process; I believe that there will be some bumps in the road until we all get used to the new way of business.

The Mandatory Enforcement Process

The mandatory enforcement process for delinquent IDRs is the part of the Directive that has attracted the most attention. This new enforcement process is a reversal of the prior enforcement regime, which gave agents and their managers autonomy to decide how and whether to press taxpayers for delinquent information. Under the new process, agents have mandatory steps that they must complete if information is delinquent, with rigid deadlines. Apparently the perception of senior LB&I management is that agents were either un willing to press taxpayers for timely information or lacked the tools to do so. The new mandatory steps are the cure for those problems.

The Directive's new enforcement process is certainly an audacious step by LB&I senior management. It is notice to taxpayers that the old way of doing business is over. While the enforcement process outlined in the Directive may be subject to "clarification" or even some softening shortly, the new process is sure to be a major change from prior procedures.

The key to the new IDR enforcement process is the IDR delivery date. Once this date is determined (more on that later), it is fixed in stone. Extensions of the IDR due date are not permitted. The enforcement process itself "is mandatory and has no exceptions." (4)

The Delinquency and Pre-Summons Letters

If a taxpayer fails to deliver all of the information requested in the IDR by the delivery date, the agent must discuss the failure with the taxpayer and then deliver a standard delinquency letter to the taxpayer within 10 days. The delinquency letter will give the taxpayer up to 15 days to correct the delinquency. These time frames are maximums; agents can provide fewer days or issue the letters faster. Presumably they will do so in some cases, especially if their deadline for complying with the Directive falls on a weekend or holiday. The Directive requires a delinquency letter if the taxpayer fails to timely deliver any of the requested information. If the taxpayer fails to meet the deadline stated in the delinquency letter, the next step is that the agent will give the taxpayer a standardized pre-summons letter. This letter is to be delivered "as quickly as possible," but in no account in more than 14 days. The pre-summons letter will normally require compliance with the IDR within 10 days. The 10 day period can only be extended by a DFO (5) or higher level IRS manager.

The pre-summons letter must be signed by the IRS Territory manager and addressed to an equivalent person in the taxpayer's tax department. The letters must be discussed with IRS Counsel. The territory manager must discuss the failure to produce with the taxpayer. The DFO must be informed of any pre-summons letter prior to issuance. So the Directive requires involvement by senior IRS management and keeping IRS Counsel informed.

Based on the above timelines, once a taxpayer fails to deliver any information requested by an IDR, the taxpayer will reach the pre-summons letter deadline in a maximum of 49 days (10+15+14+10). This assumes that no senior manager provides any deadline extension. I would expect taxpayers to normally hit the pre-summons deadline within 40-45 days, given the "as quickly as possible" language for issuing pre-summons letters and the need to move up deadlines to avoid them falling on a weekend or holiday.

Since IDR due dates cannot be extended (and the deadlines for complying with the IRS delinquency and other warning letters can only be extended by senior management) the IDR due date now acquires far more importance than under prior IDR practice. The quick run-up to the summons process further increases the significance of the due date. Taxpayers will want to ensure that they can meet any IDR deadlines when those deadlines are set, so they avoid being enmeshed in this enforcement process.

The Summons Process

If the taxpayer fails to meet the pre-summons letter deadline, the agent "will complete the next phase of the enforcement process, the Summons." This language of the Directive requires the issuance of a summons if the taxpayer has failed to provide any information requested by the IDR by the pre-summons letter...