Announcement 93-144: early referral of issues to appeals and the role of appeals in the competent authority process.

On January 27, 1994, Tax Executives Institute filed the following comments with the Internal Revenue Service on Announcement 93-144, relating to the procedures for early referral of issues to Appeals and for requesting Appeals involvement in Competent Authority issues. The Institute's comments were prepared under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair is Robert D. Adams of Halliburton Company, and its International Tax Committee, whose chair is Lisa Norton of the Ingersoll-Rand Co. (On January 28, 1994, Mr. Adams testified at an IRS public hearing on Announcement 93-144.)

Tax Executives Institute is pleased to offer the following comments on Announcement 93-144, relating to the procedures for early referral of issues to Appeals and for requesting Appeals involvement in Competent Authority issues. The announcement was published in the December 6, 1993, issue of the Internal Revenue Bulletin (1993-39 I.R.B. 12). A public hearing on the procedures is scheduled for January 28, 1994.

I. Introduction

TEl commends the IRS for developing the Early Referral and Competent Authority procedures set forth in Announcement 93-144. As an organization dedicated to sound tax administration, TEI has long been concerned about the amount of time it takes to process a case through the IRS administrative process and through Competent Authority. The Institute has worked with the IRS on several projects (such as the Accelerated Issue Resolution procedure) that would expedite the process. The time it takes to shepherd a case through Examination and Appeals (and, if necessary, Competent Authority) is a major drain on the resources of the taxpayer and government alike.

The Early Referral procedure outlined in Announcement 93-144 would permit taxpayers to resolve cases more quickly by requesting a specific issue be referred to Appeals for early resolution. Early resolution of a particular issue could make both the taxpayer and the Examination personnel more amenable to resolving other issues involved in the case. In this regard, the inclusion of Industry Specialization issues within the ambit of the Early Referral proposal should prove especially salutary. We also commend the announcement's drafters for confirming that the Early Referral of an issue will not trigger the "hot interest" provisions of section 6621(c). Had the announcement been silent on the issue or reached the opposite conclusion, taxpayers would clearly have been reluctant to invoke the Early Referral procedure.

The Competent Authority procedure would permit taxpayers to request the involvement of Appeals in the competent authority process. This should improve taxpayers' access to Competent Authority in treaty countries, by producing positions more susceptible to agreement by a treaty country's Competent Authority and having the U.S. Competent Authority become involved before the foreign statute of limitations runs.

The Institute believes that, in appropriate cases, the new procedures will advance the IRS's goal of shortening the time required for resolving tax disputes. We applaud the IRS's efforts to enhance the efficiency and effectiveness of these processes.

II. Taxpayer Involvement

in the Process

TEI believes that flexibility should be the hallmark of the procedures. The announcement should clearly state that taxpayers have a choice whether to proceed through the IRS's normal channels or opt for the Early Referral/Competent Authority procedures. Although the announcement delineates the IRS's role in the Early Referral/Competent Authority processes, in some respects it fails to define clearly the taxpayer's role. We recognize that the announcement presages changes to the Internal Revenue Manual which generally governs internal procedures, but recommend that the taxpayer's role be explicitly discussed. We suggest that the Early Referral procedure confirm that once an issue is referred to Appeals, the normal Appeals procedures will apply, with the taxpayer being entitled to meet with the Appeals officer and submit pertinent supplemental material. In addition, with respect to the Competent Authority procedure, we recommend that the procedure specifically provide that the taxpayer has the right to meet with any Appeals personnel who may be involved in formulating the IRS's position paper. Indeed, the taxpayer should be invited to comment on the position paper before it is forwarded to the treaty partner's Competent Authority.

III. Early Referral Procedure

A. Limitations on Use of Procedure. The Early Referral procedure provides that the procedure will initially be limited to Coordinated Examination Program (CEP) cases and will be unavailable in respect of Joint Committee or docketed cases. The reason for instituting the procedure with respect to CEP taxpayers is just as valid for non-CEP taxpayers (especially those on the cusp of CEP-selection criteria): the resolution of cases in an expeditious manner. TEI believes that, if the new procedure successfully reduces the time for resolving disputes for CEP taxpayers, it should be expanded to include nonCEP taxpayers.

Moreover, the Institute questions the desirability of excluding Joint Committee cases from the procedure. As a practical matter, taxpayers and the IRS may not know that a case is destined for Joint Committee review until the entire examination--including Appeals--is completed. Moreover, excluding Joint Committee cases could well exclude many CEP taxpayers from this procedure. In addition, since the procedure is aimed at speeding up--not eliminating steps in--the process, we see no policy justification for limiting the early referral mechanism to non-Joint Committee cases; the agreement will still be subject to review by the Joint Committee.x We recommend that the procedure not categorically exclude Joint Committee cases from its scope.

B. Significant Issues. Announcement 93-144 provides that appropriate issues for Early Referral include those that are considered "significant" by the taxpayer and the IRS. The term "significant," however, is not defined.

TEI recognizes that, in drafting Announcement 93-144, the IRS sought to make the Early Referral procedure as flexible as possible. We believe that the use of the procedure should not turn on the dollar amount of the item at issue. For example, issues relating to the uniform capitalization rules often hold up the audit and their resolution could speed up the audit, regardless of the dollars involved. The procedure could also provide that absent some compelling reason, requests for Early Referral should generally be approved.

C. Steps for Approving or Denying the Request. Announcement 93144 provides that, in the steps for approving or denying the request for Early Referral, the CEP case manager sends the request to the District Director for approval. TEI suggests that the IRS clarify that the CEP case manager must forward it to the District Director or the designee (e.g., the Chief of Examination) within a specified time period after the taxpayer files the request.

D. Denial of Request. Announcement 93-144 provides that if a request for Early Referral is denied, the issue will be returned to the CEP case manager who will inform the taxpayer of the denial. The procedure states, "There is no formal appeal procedure for the denial of an Early Referral request." The taxpayer must be informed of the approval or denial of a request within 45 days.

TEI appreciates the IRS's desire not to laden down the procedure with unnecessary restrictions. To ensure that the Early Referral procedure is consistently applied by the district offices, however, we suggest that, if the IRS denies a request for Early Referral, the taxpayer be informed of whether Appeals, Examination, or both interposed an objection to the request, as well as the reasons for the objections. (The proposed form to request Early Referral could contain a space for an explanation of the denial.) This would permit taxpayers to determine what issues in the future may be ripe for the use of the Early Referral procedure.

The taxpayer should also be afforded the opportunity to meet with the appropriate IRS representatives on an informal basis to discuss the denial. Such a process will provide an opportunity for discussion between the government and the taxpayer and could lead to an earlier resolution of the case. For example, a taxpayer may be able to persuade the District Director to grant its request for Early Referral upon supplementing (or "perfecting") its request.

We also suggest that the procedure specify that the taxpayer must be advised of the approval or denial within 45 days of the date the request is submitted.

E. Transferring An Issue from Examination to Appeals. Announcement 93-144 sets forth the procedure for physically transferring the issue to Appeals. The announcement provides that the Early Referral file should be transmitted to Appeals and include copies of the Form 5701, the taxpayer's written response to the Form 5701, and Examination's response to the taxpayer's position.

To keep the taxpayer fully apprised of the IRS's position, the procedure should confirm that the taxpayer is entitled to receive a copy of Examination's response to the taxpayer's position, which will presumably resemble the revenue agent's rebuttal to a taxpayer's protest. Such an approach will ensure that all facts and legal positions relating to the Early Referral issue are fully developed and disclosed to both parties.

F. Requirement for Closing Agreement. Announcement 93-144 provides that if a settlement of the Early Referral issue is reached, the taxpayer and the IRS must execute a closing agreement. TEI believes that requiring a closing agreement may prove too restrictive and may dissuade taxpayers from taking advantage of the Early Referral procedure. We recommend that such agreements not be required in all cases and that other options (such as signing a Form 870-AD) be considered.

IV. Competent Authority

Procedure

Announcement 93-144 also provides a procedure designed to expedite the resolution of competent authority issues by encouraging taxpayers to request involvement of Appeals in the competent authority process, either before the case seemingly destined for Competent Authority leaves Examination or after a protest has been filed.(2) We applaud the IRS's effort to enhance the efficiency and effectiveness of the competent authority process by eliminating the requirement that, in most cases, taxpayers pursue their cases through Appeals before requesting competent authority assistance. That requirement has proven problematic for taxpayers. In some cases, taxpayers have been unsuccessful in keeping open periods of limitations in foreign jurisdictions while pursuing their case with Appeals. In other cases, the foreign Competent Authority has been unwilling to negotiate a settlement once a settlement (based possibly on the hazards of litigation) has been reached at Appeals.

TEI believes that affording taxpayers flexibility to request Competent Authority assistance before pursuing a case with Appeals will result in more efficient resolution of cases. At the same time, we are concerned that the proposal set forth in Announcement 93-144 may unduly restrict taxpayers' ability to participate in the development of the U.S. negotiating position, which could become the basis for a subsequent Appeals settlement in the event the Competent Authorities failed to agree. TEl believes that taxpayers should be afforded the opportunity to elect to either pursue a case with Competent Authority without having to proceed first through Appeals or to have Appeals involved in the competent authority process.

A. Development of an Issue. The new procedure contemplates the involvement of Appeals in the development of an issue that proceeds to Competent Authority without otherwise going through the Appeals process. The announcement states that the Appeals personnel will "consult" with the taxpayer before the issue is presented to the foreign Competent Authority. We recommend that normal procedures be applied and that the taxpayer be afforded the opportunity to present its case in depth before Appeals recommends a negotiating position.

TEI is concerned that where Competent Authority is brought into the case at the Examination stage, the proposal which allows Competent Authority to unilaterally request Appeals involvement may result in an unbalanced Appeals process by effectively limiting the taxpayer's involvement in the development of a case. We recommend that the IRS establish a procedure for developing a case at the competent authority level in an efficient and balanced manner. TEI would be pleased to work with the IRS in developing such a procedure.

B. Cases Where a Settlement Is Not Reached. Announcement 93-144 provides that if an agreement cannot be reached through competent authority negotiations, "the issue may be referred to Appeals." It is unclear what procedures would apply in such a case. We suggest that the competent authority position be the starting point for the development of the case at the Appeals level and the procedure provide (as the Early Referral procedure does) that the normal Appeals procedures will thereafter apply.

C. Combining Appeals and Competent Authority. TEI is concerned that the Appeals and Competent Authority processes discussed in the announcement may be collapsed into a single process in a case with an issue destined for Competent Author-. ity. A taxpayer should not be compelled to split off competent authority issues from the rest of its audit. If a taxpayer wishing to proceed through Appeals first is required to involve Competent Authority during the Appeals process, the resolution of the entire case at Appeals may be delayed. We suggest that the line between the two processes not be blurred; the choice should remain the taxpayer's.

V. Conclusion

Tax Executives Institute appreciates this opportunity to present our views on Announcement 93-144, relating to the procedure for early referral of issues to Appeals and the procedure for requesting Appeals involvement in Competent Authority issues. If you have any questions, please do not hesitate to call Robert D. Adams, chair of TEI's IRS Administrative Affairs Committee, at [phone] (with respect to the Early Referral Procedure); Lisa Norton, chair of TEI's International Tax Committee, at [phone] (with respect to the Competent Authority Procedure); or Timothy J. McCormally or Mary L. Fahey of the Institute's professional staff at [phone].

1 We confess some confusion concerning the limitation on the use of the procedure with respect to docketed cases. Once a case is docketed in the Tax Court, the IRS's examination function is halted, thereby rendering the use of the Early Referral procedure superfluous.

2 Announcement 93-144 provides that taxpayers can request the involvement of Appeals in the competent authority process, in accordance with the procedure set forth in Rev. Proc. 91-23. Rev. Proc. 91-23, however, does not currently contain such a procedure and, indeed, specifically requires taxpayers to exhaust their administrative remedies with Appeals before proceeding to Competent Authority. Thus, the announcement anticipates the revision of the revenue procedure. It might be helpful for the announcement to confirm the plans to revise Rev. Proc. 91-23. On December 14, 1993, TEI submitted comments to the Assistant Commissioner (International) on Rev. Proc. 91-23. For information purposes, we enclose a copy of those comments and request that they be associated with the hearing record on Announcement 93-144.