Steven Miller, Former IRS Acting Commissioner and alliantgroup National Director of Tax
On May 9th, 2014, the Houston Chapter of the Tax Executives Institute held a panel discussion on the new IRS IDR enforcement process. I had the pleasure of participating on the panel and offered my insights into the IRS’ approach to the new IDR process, as well discussing alliantgroup’s experience with the process to date. I thought I would outline some of what transpired on the panel.
By way of background, on June 18th, 2013 the IRS issued a directive outlining new principles for LB&I IDRs. (LB&I-04-0613-004). The new directive was issued to speed the exam process and to create a bit more transparency and give and take in the IDR process. The process outlined in the directive (and its successors described below) represent what the IRS considers best practices. For example, under the new process, agents are required to issue draft IDRs, allowing taxpayers to review the draft and negotiate scope and deadline. As importantly, the agent is supposed to tell you how long he or she will have to review your response to the IDR. Strict timelines are set out for the IDR process.
During my time at the Service, the IRS was pursuing a redesign of the exam process for large exams. The IDR directive was the first product of this work. I mentioned at the meeting that practitioners should view these changes in conjunction with changes in Appeals under the Appeals Judicial Approach and Culture project (“AJAC’). Under AJAC, Appeals will no longer engage in fact finding, placing more importance on the exam IDR process.
In November 2013, the IRS supplemented the June directive and issued another directive outlining a number of changes to the timeline for possible summons enforcement. This timeline was (and remains) somewhat inflexible and rather tight. If the taxpayer does not provide a complete IDR response by the IDR response date, the Service will issue a Delinquency Notice after discussion with the taxpayer. And the Delinquency Notice must generally include a response date that is no later than 10 business days from the date of the Delinquency Notice.
If the taxpayer does not provide a complete response to an IDR by the Delinquency Notice response date, the Territory Manager must discuss a pre-summons letter with the taxpayer (higher up the chain of command), and the examiner must issue a Pre-Summons letter signed no later than 10 business days after the due date of the Delinquency Notice. The Pre-Summons letter response date should generally be 10 business days from the date of the Pre-Summons letter.
If the taxpayer does not provide a complete response to an IDR by the response date in the Pre-Summons letter, the examiner must discuss the lack of response and coordinate the issuance of a Summons with Counsel. If the IRS issues a Summons and there is no response, a summons enforcement suit will be filed by filing a petition in the U.S. District Court where the taxpayer resides.
I should note that the IDR process was improved in February and then came into force. The key improvement is the ability of an agent to grant an extension of time without going too far up the chain. IRS examiners or specialists may grant taxpayers who fail to timely provide a complete IDR response an extension of up to 15 business days prior to initiating IDR enforcement procedures, according to a February 28, 2014 directive. More recently, the IRS has informally suggested that extension may be granted beyond 15 business days.
alliantgroup’s tax controversy group (40 or so strong) has been involved in many IDRs since the new process began. During the panel, I outlined what we have seen to date.
First, in our experience, many of the “new” procedures are practices we have always employed. We always stress discussions with the agent and the use of drafts. And we always are willing to appropriately elevate any issue we cannot resolve at the agent or specialist level.
Second, we have seen some expansion in discussions of IDRs prior to even the issuance of a draft. This has allowed both parties some additional time before the strict timeline kicks in. We have seen variance in this geographically, but generally it is a good trend. Note that none of our many clients have yet received a delinquency notice. In only one circumstance did we encounter a problem in which we perceived the new process to be used as a potential hammer. However, even that situation was ultimately resolved to everyone’s satisfaction.
Third, given the timelines, we always document all discussions with the IRS, sending correspondence to the agent reflecting our understanding and, if necessary, copying the agent’s manager, thus memorializing the conversation.
Fourth, while the process is working for our clients so far, we are concerned that there may be instances when we cannot, through no fault of the taxpayer, meet the tight production dates even with extension. There are certainly situations, such as obtaining foreign or third party documents, where the 15 day extension will simply not be enough and taxpayers may have to elevate the situation to individuals higher in LB&I. The process is a bit unclear on how all that will work.
During the panel I also recommended that a taxpayer provide as much information as possible/practicable by any due date, and as indicated above, always document interactions. If things do go south, these acts will place the taxpayer in the best possible position to defend or prevent summons enforcement. I will note that in my experience, convincing the Department of Justice to enforce a summons is by no means automatic and there are a series of steps that can be taken to great effect. Similarly, the Powell factors the courts will use should be considered during the exam itself and not just later as the taxpayer heads to court.
My summary at the panel was simply this. We have had a good start with the IRS utilizing their new IDR procedure. It is still very early but I am cautiously optimistic that this could in fact lead to more dialog and more rapid examinations. Lastly, there are concrete steps you can take to protect yourself even if you believe a summons action may be forthcoming.