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By Paul DeNard, Anthony Russo, Tien Do and Elizabeth Sweigart
The new information document request (IDR) process is aimed at supporting a systematic, issue-focused approach to examinations. A year into the new IDR creation approach -- and six months into the new enforcement process -- the results in practice have been mixed for both taxpayers and the IRS...
Over the course of the last few years, senior leadership at the Internal Revenue Service (IRS) has publicly articulated a desire to move toward a model of "cooperative compliance" in interactions between IRS personnel and taxpayers. Consistent with this goal, several recent initiatives, including the new information document request (IDR) process, aim to improve efficiency and transparency across the organization as a means of promoting better dealings with taxpayers.Starting in early 2013, the Large Business & International (LB&I) Division of the IRS rolled out a comprehensive training to its examiners and specialists detailing the changes to the process by which it collects information from taxpayers during an examination and by which it enforces taxpayer compliance with those requests. Broken into two parts, the first section of the mandatory training covered the new requirements for IDR issuance while the second addressed the revised enforcement procedures.
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In Context. The new IDR drafting and enforcement process follows the implementation of the quality examination process (QEP), which was introduced to the field in 2010. Although QEP required a dialog between the IRS examiners and taxpayers with respect to IDRs, practitioners found that its application in the field was uneven.In 2012, LB&I conducted a series of nationwide peer reviews that identified the IDR process as a problem area in examinations. Specifically, IDRs were not routinely discussed with taxpayers — either before or after they were issued — and, in the case of a delinquency on the part of the taxpayer, enforcement procedures were applied inconsistently or, in some instances, not at all. Specifically, the review revealed that the IRS follow-up on partial or non-responses to IDRs ranged from 15 days to over six months in certain instances.
IDR Issuance Process. On June 18, 2013, the Acting Commissioner, LB&I issued directive LB&I-04-0613-004 announcing the mandate that all IDRs issued after June 30, 2013, must comply with the new IDR issuance process. The new process is comprised of 12 key requirements that broadly can be grouped into three categories:Pre-issuance Discussion. Before the IDR is drafted, the IRS examiner must have a discussion with the taxpayer to (1) discuss the issue related to the IDR, and (2) explain how the information requested is related to the issue under consideration and why it is necessary. The examiner should then (3) use this communication to determine what information ultimately will be requested in the IDR.
IDR Enforcement Process. To address the ramifications of a taxpayer failing to meet the agreed-upon IDR response deadline, the Commissioner, LB&I released directive LB&I-04-1113-009 on November 4, 2013. This directive set out the new mandatory three-step IDR Enforcement Process: (1) a Delinquency Notice; (2) a Pre-Summons Letter; and (3) a Summons.
Delinquency Notice. In the event a taxpayer fails to comply, the examiner — in concert with the IRS Team Manager — moves to the first phase of the enforcement process, the Delinquency Notice (Letter 5077). Prior to issuing the notice, the examiner is to discuss the matter with the taxpayer to ensure that the taxpayer understands the next steps in the enforcement process if the information requested in the IDR is not provided by the response date established in the Delinquency Notice.,,
Pre-Summons Letter. If a taxpayer does not provide a complete response to an IDR by the Delinquency Notice response date, the next step is the Pre-Summons Letter (Letter 5078). Unlike the prior phase of the enforcement process, the examiner does not discuss the Pre-Summons Letter with the taxpayer prior to its preparation. Rather, the examiner prepares the letter following a discussion with the IRS Team Manager, Specialist Manager, the respective Territory Managers, and Counsel...
Refer Back to the Requirements. Continuous, open, and transparent communication is a critical success factor for the new IDR process. Often, gaps appear between the required steps in the process and the outcome in practice when communication between the examiner and the taxpayer breaks down.Of special import is the initial discussion between the examiner and taxpayer covering how the information being requested is related to the issue under consideration and why that information is needed. Although it may seem expedient to gloss over this dialogue, corporate tax personnel are cautioned to avoid doing so and instead insist on a robust conversation to clarify the issue and communicate exactly what information can be provided to address it. The format in which the data is available also matters as some information may not be in a state that lends itself to efficient analysis; not every system simply exports the sought after data into a readily analyzable spreadsheet.
The Road Ahead. The new IDR process offers opportunities for taxpayers to benefit from increased transparency and avenues for two-way communication with the IRS during an examination. However, to derive maximum value from the new system, corporate tax personnel must not only educate themselves on the new IDR issuance and enforcement procedures, but also fully engage with the exam team...
* Paul DeNard, Anthony Russo, Tien Do and Elizabeth Sweigart are with PricewaterhouseCoopers LLP. Paul, a Managing Director, joined PwC after a 35-year career with the IRS in a wide range of field and executive level positions. Most recently, he was the Deputy Commissioner (Domestic), LB&I for the IRS. He can be reached at paul.denard@us.pwc.com. Tony, a Managing Director, is a member of the NY Metro Tax Controversy and Dispute Resolution Team. Prior to joining PwC, Tony served with the IRS for 36 years in a variety of positions including as International Territory Manager, Large and Mid-Size Business Division for both the Retail Food & Pharmaceutical and Heavy Manufacturing industries. He can be reached at anthony.russo@us.pwc.com. Tien, a Director, has been with PwC for over 18 years. Prior to joining the NY Metro Tax Controversy and Dispute Resolution Team, she was a part of the NY Metro Asset Management practice. She can be reached at tien.t.do@us.pwc.com. Liz, a Director, has nearly 15 years of transfer pricing, tax controversy, and project management experience. She can be reached at elizabeth.a.sweigart@us.pwc.com. Learn more about PwC at http://www.pwc.com.Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.
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