Update on new IRS resolution programs.

• Author: Ely, Mark H.
• Position: Tax issue resolution

During 2000, the IRS introduced several new programs to accelerate issue resolution.

PFA Pilot Program

A Pre-Filing Agreement (PFA) pilot program was announced in February (Notice 2000-12). Under the pilot program, large businesses could request examination and resolution of specific issues for returns they expected to file between September and December 2000. The goal of the program is to enable taxpayers and the Service to resolve issues prior to filing that would otherwise be disputed in post-filing audits. A PFA is a closing agreement between a taxpayer and the IRS, covering one or more specific issues arising from transactions that the taxpayer conducted during a tax period ending before the agreement's date. The PFA program specifies how the transactions will be treated on returns filed after the agreement date. A PFA may also resolve related issues affecting other tax periods.

The PFA pilot program was open only to taxpayers in the Service's Large and Mid-Size Business Division (LMSB). The LMSB consists of businesses with assets of at least $5 million. In addition, to qualify for the pilot, a taxpayer must have had a coordinated examination team on site. For the pilot, the IRS considered entering into a PFA on any issue involving the application of settled legal principles, with certain specified exceptions.

Examples of issues suitable for resolution through a PFA include:

1. Valuation of assets (except in the context of transfer pricing) and the allocation' of the purchase or sale price of a business among the assets acquired or sold;

2. Identification and documentation of hedging transactions;

3. Issues relating to in-house research expenses under Sec. 41;

4. Allocation of costs among different categories of deductible and capitalizable items in which there is a published revenue ruling (e.g., repairs, advertising and Y2K costs);

5. Determination of which costs are investigatory costs incurred to determine whether to enter a new business and which business to enter, for purposes of qualifying as start-up costs under Sec. 195;

6. Determination of "market" for taxpayers using the lower-of-cost-or-market method of inventory valuation for inactive market situations; see Regs. Sec. 1.471-4(b);

7. Whether a taxpayer's financial statement preparation of its LIFO inventory is consistent with the LIFO conformity requirement under Regs. Sec. 1.472-2(e);

8. Whether a taxpayer's inventory contains "subnormal" goods (within the meaning of Regs. Sec. 1.471-2(c)) and the valuation placed thereon;

9. Whether a taxpayer is considered the tax owner of property produced under Regs. Sec. 1.263A-2(a)(1)(ii)(A);

10. Whether a manufacturing contract newly entered into by a...