Comments on managing the claims process: May 22, 2003.

On May 22, 2003, TEI sent the following letter to W. Kurt Meier, Senior Industry Adviser for the LMSB Retailers, Food, Pharmaceuticals and Healthcare Industry Group on a proposed procedure for managing the claims-for-refund process. The Institute's comments were prepared under the aegis of its IRS Administrative Affairs Committee, whose chair is David L. Bernard of the Kimberly-Clark Corporation. Kelly Nall of Electronic Data Systems Corporation contributed materially to the preparation of the comments. An attachment of responses from TEI members is also included.

On behalf of Tax Executives Institute, I am pleased to respond to your request for comments on LMSB's proposal for managing IRS resources when a claim is filed during the examination process.

The proposed process would apply only to taxpayers in the IRS's coordinated industry case (CIC) program and only in respect of "significant claims," i.e., adjustments to taxable income in excess of $2 million or in tax of $700,000. The proposal requires claims to be filed within 90 days of the opening conference, regardless of the amount of time allotted to the audit cycle. For taxpayers using the IRS's limited issue focused examination, or LIFE, process, claims would be subject to the time and materiality thresholds agreed upon in the memorandum of understanding. Although taxpayers have a statutory right to file claims anytime within the applicable statute of limitations, the procedure would require that claims filed after the 90-day deadline would be worked as part of a separate claims cycle with its own estimated completion date, unless the Team Manager determines to work the claim as part of the normal audit cycle.

TEI commends LMSB for seeking a uniform solution in respect of the management of claims. We recognize that late-filed claims may strain the IRS's resources and frustrate taxpayers when they lead to IRS requests for more time to conduct the audit. We suggest, however, that more flexibility should be built into the procedure.

TEI finds the 90-day time frame troubling, particularly in respect of examinations that often take 24-36 months to conduct. The audit is an interactive process and the vast majority of most taxpayers make every effort to file their claims as soon as possible. Many claims filed during the examination process are unknown to taxpayers at the start of the audit. For example, claims are often the result of information discovered when a taxpayer is either responding to an information document request or preparing a subsequent return. In addition, claims may arise as the result of an IRS announcement or a court decision that occurs after the examination begins. A separate regime for such claims potentially burdens the process and penalizes taxpayers who have a good working relationship with their examination teams. A flexible, more targeted rule must be built into the process for such items.

TEI strongly recommends that the time for filing claims be an item discussed and agreed upon during the development of the audit plan. One alternative would be to provide that the cut-off date is the half-way point of the audit. Such an approach should permit the examining team to work the issue in the normal course of the audit without unduly straining IRS resources. The Team Coordinator should have the discretion to deviate from this policy without the approval of the Director of Field Operations.

The LIFE process initiated last year by LMSB was a step in the right direction toward resolving audits in a timely and efficient manner. It should not be undermined by a procedure that places undue restrictions on IRS agents and taxpayers to jointly resolve issues relating to claims made during the conduct of an audit.

For your information, we are attaching additional comments from individual TEI members concerning the proposal.

Conclusion

TEI appreciates the opportunity to comment on the proposal for managing the claims process. If you have any questions, please do not hesitate to call David L. Bernard, chair of TEI's IRS Administrative Affairs Committee, at 920.721.2230, or Mary L. Fahey of the Institute's professional staff at 202.638.5601.