October 17, 2014
William R. Davis
The new information document request (IDR) procedures released in the past two years are part of an exam redesign in the Large Business and International Division, former acting IRS Commissioner Steven T. Miller said on October 16.
Fred Murray of Grant Thornton LLP said at the American Law Institute Continuing Legal Education Handling a Tax Controversy Conference in Washington that the IDR change is significant and leads to many questions, such as how the IRS will handle each IDR being limited to one issue. He also said, and Miller agreed, that part of the new examination process in LB&I will focus on IDRs and coming up with the issues that will be part of the IDRs.
Murray speculated that LB&I would announce the new examination process within the next couple months.
LB&I recently released three related directives — two in 2013 (LB&I-04-0613-004, LB&I-04-1113-0009) and one in 2014 (LB&I-04-0214-004) — that create new enforcement procedures mandating that agents communicate with taxpayers before issuing an IDR and keep to a streamlined timeline throughout the enforcement process. (Prior coverage.)
When asked by Brian C. McManus of Latham & Watkins LLP whether the IRS established the new IDR procedures as a reaction to a view that corporate taxpayers were taking too long to respond to IDRs or that the IRS thought it needed ground rules about how taxpayers and IRS agents would interact regarding IDRs, Miller said that communication and transparency are the main goals, but moving the case along is important as well.
“In the Service, we used to see long delays by reason of the agent or reason of the client in getting information back and forth,” and the new IDR procedures are designed to address that problem, said Miller, who is now national director of tax at alliantgroup.
Summons Enforcement Not So Scary?
Miller urged practitioners to view receiving a summons as an opportunity to communicate and negotiate with the IRS.
Because the Service must get a district court to enforce a summons, which can take anywhere from six to 12 months and involves a different set of rules, taxpayers have flexibility to negotiate the terms of responses and to get the issues resolved, Miller said.
For a district court to grant summons enforcement, the IRS agent seeking summons enforcement must first persuade her superiors, then the superiors must persuade chief counsel, who then needs to persuade the Department of Justice to take the enforcement action, Miller explained.
“Here, when you receive a summons, you are able to stare down the Service; you are able to negotiate with the Service,” Miller said.
Miller added that in his experience it is more often the case that summonses don’t get enforced. “I’ll just point that out; it is not an easy thing for the IRS to get the Department of Justice to take a summons enforcement case,” he said.
After receiving a summons enforcement, practitioners should gather documents up, have a discussion with the IRS, and get the issue resolved “because ultimately if you end up in summons enforcement, you are almost certainly going to lose, subject to some narrow exceptions,” Miller said.
Does Failure to Follow IDR Procedures Fail Powell?
The new IDR procedures raise questions regarding their intersection with the Powell standards for summons enforcement, Miller said.
“LB&I has built this magnificent cathedral of dates, times, and procedures; what if they screw up? Does that give me the ability to say that they didn’t follow their own steps under the fourth leg of Powell?” Miller asked. “I’m guessing the answer is no.”
In United States v. Powell, 379 U.S. 48 (1964), the Supreme Court established a four-element test that the government must satisfy to enforce a summons. The fourth element requires the government to show that the administrative steps required by the Internal Revenue Code for issuance and service have been followed.
This September, in United States v. Artex Risk Solutions Inc., No. 1:14-cv-04081 , the U.S. District Court for the Northern District of Illinois held that the IRS did not fail to follow its administrative steps because the IDR directive is not applicable to summons enforcement and the directive states: “This Directive is not an official pronouncement of law and cannot be used, cited, or relied upon as such.” The court also said that because the IRS issued the IDR before the procedure’s effective date, it does not govern.
Miller said the Artex case is one of the reasons he believes failing to follow IDR procedures is not a cause to fail the fourth prong of Powell. He said, however, that he expects more taxpayers to make that argument.
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