IRS environmental survey.

On November 1, 2006, TEI's International President, David L. Bernard, wrote to Deborah Nolan, Commisoner of the IRS's Large and Mid-Size Business Division, about the LMSB current "environment."

On behalf of Tax Executives Institute, I am pleased to provide additional information regarding the current "environment" in which LMSB personnel and taxpayers interact. You will recall that TEI agreed to undertake a limited survey of our members in an attempt to quantify the anecdotal information we had received about a perceived deterioration in the tone and professionalism of the relationship between LMSB examination personnel and taxpayers.

Following our discussion in mid-August, TEI polled its Board of Directors and IRS Administrative Affairs Committee, a population of approximately 120 members; each was asked to respond to the following:

* Whether there had been an increased issuance of Forms 5701 at later stages of the exam or surprise NOPAs. If so, to what do you attribute this behavior?

* Whether there had been an increase in referral of issues to Appeals. If so, to what do you attribute this behavior?

* Whether they had received unreasonable/unfocused IDR's or "kitchen sink" IDRs.

* Whether there had been an overall change in tone of the examination.

Approximately 40 responses were received, which are summarized in the attached document. All responses have been redacted to preserve member confidentiality.

The responses reflect a fair divergence of opinion. That differences exist suggest opportunities for improvement. They also suggest that taxpayers are experiencing--or could well experience--disparate treatment, audit experiences, and/or outcomes, because of the differing attitudes and perspectives of the LMSB personnel with whom they interact. To be sure, many respondents described a generally positive experience in dealing with the IRS and noted the professionalism and spirit of cooperation on the part of the exam team. Regrettably, others found themselves at the other end of the spectrum and detailed particularly troublesome behavior by the agents and specialists.

TEI stands ready to assist LMSB in assessing the issues identified by our survey respondents and evaluating appropriate LMSB responses. We are confident that, by working together, we can establish and maintain the proper balance between enforcement and customer service.

TEI appreciates the opportunity to share this information with you. Please feel free to contact Timothy J. McCormally, TEI's Executive Director, or Eli J. Dicker, TEI Chief Tax Counsel, both on 202.636.5601 if you need additional information.

Respondent 1

The IRS team has worked with us on the timing and scope of the audit and has approached each meeting in a professional and business-like manner. So far I am very pleased with the relationship.

Respondent 2

We just completed an exam, and it was reasonably painless. We suggested LIFE during the opening conference, and the agent and her supervisor ultimately came back recommending it. The only issue came up when they gave us the IDR to produce the officers' personal returns. We declined, and the agent ended up contacting the officers herself. They could have avoided the problem if the agent had requested them from the service center early on.

The whole thing took about 9 months from initial contact to closure, and we are current. Part of it is the Service is so short of people in [specific location] so they lack the resources to waste time.

Respondent 3

Increased issuance of Form 5701s at later stages of the exam or surprise NOPAs. If so, to what do you attribute this behavior?

   It has generally been our experience that
   Forms 5701 have been issued towards the
   end of the audit. This was attributable in
   part to the size/scope of the audit and
   inefficient management of the audit by
   Exam. However, in recent cycles, we've
   seen more adherence to the Audit Plan
   with Forms 5701 issued earlier in the
   cycle. We've received very few "surprise
   NOPAs" over the past several cycles.

Increased referral of issues to Appeals. If so, to what do you attribute this behavior?

   Exam hasn't referred any of our issues to
   Appeals. Consistent with prior experience,
   we have "agreed" and "unagreed"
   issues upon the completion of the audit.
   The number of unagreed issues that have
   gone to Appeals in recent cycles is comparable
   to prior cycles.

Receipt of unreasonable/unfocused IDR's or "kitchen sink" IDR's.

   Exam has done a better job of adhering
   to the Audit Plan and (1) issuing focused
   IDRs, (2) discussing proposed IDRs with
   us in advance to make sure they're properly
   focused/scoped, and (3) reissuing
   IDRs if we find them to be unreasonable/unfocused.
   The boilerplate/mandatory
   IDRs authored by IRS National
   Office personnel are much more likely to
   be unreasonable/unfocused or "kitchen
   sink" IDRs than the IDRs authored by local
   Exam.

Overall tone of the exam

   The tone is reasonable for what it is--effectively
   an adversarial relationship.
   Each side treats the other side with professional
   courtesy and respect.

Respondent 4

Although our Exam team may be somewhat emboldened as a result of the Commissioner's emphasis on compliance, they have continued to conduct themselves professionally. We have not experienced any unusual aggressiveness or other inappropriate conduct.

Respondent 5

We were at the end of our audit, everything going smoothly, the [IRS exam personnel] Advisor comes out to take a look at our [other audit], and offers to help with the other audit. He ends up revisiting a topic that I had been told the week before was closed and there was no issue. He determined the team did not do a good job in analyzing the topic, and ended up bringing other specialists in. At one point my boss and I had a conference call with around 6 IRS people, including Counsel, and the tone on the call with the aggressiveness of Counsel and accusatory attitude, along with a threatening nature, led to a shouting match on the phone where the IRS personnel were talking over each other. This has led to a threat of summons, where our Territory Manager wanted to know why our Team Manager was not going through with it. That was after the meeting we had scheduled with the IRS to interview executives here at the company. It has been difficult with all of the specialists the team is talking to, and the audit was supposed to be done in [time period]. So much for timeliness.

Respondent 6

We recently concluded an IRS audit that included the years 1998 thru 2003. Our case manager and audit team were great to work with. They did everything professionally and we both got along very well. The team was thorough, brought up many good issues, and compromised when it was deemed necessary.

We would give this audit team and its case manager very high marks. To put things in perspective, the agent we had for the previous audit of years 1996 and 1997 was decidedly at the other end of the spectrum. So much so that our written critique of the agent solicited a visit from a special agent to our offices. We are not afraid to lambaste a rogue agent, but at the same time we will praise a good team.

Respondent 7

We just completed an exam and found everyone from the IRS to be reasonable in their requests and response time allowed. This created a better atmosphere and one in which we were both working to complete the audit. Several status meetings were held during the audit which prevented surprises and kept both sides on schedule.

We did not see them as more aggressive. Yes, there were 'kitchen sink' IDRs, but they were willing to accept data that were most appropriate and in line with the applicable topics/subjects/issues.

Respondent 8

We are presently under examination for the taxation year ended [xx/xx]. For months, my Tax Manager and I here have been commenting on the behavior of our IRS agents. Specifically, the primary agent has exhibited more systematic aggressiveness with regard to certain issues. We presently have only a few unresolved issues one domestic and two international. The international issues involve [issue]. The international agent initially provided us with a schedule indicating that she was arriving at an adjustment for [amount]. The international agent proposed a revised allocation using revenues to arrive at an additional adjustment. She provided no technical support for the proposed methodology that she used.

Overall, my impression is that the IRS agents have an amount that they want to collect related to this examination. It is quite different from anything I have experienced in the past. Additionally, the IRS agents assigned to our exam have not provided technical support, tax law for their positions. On the one domestic issue that we have, the IRS agent could not initially describe to me the tax technical issue just that it did not seem right.

Respondent 9

Responding on behalf of [company name] the answer to questions 1 through 3 is no. The overall tone of the exam has been professional and respectful. We have not experienced any of the problems alluded to [in your questions].

Respondent 10

Examples of the more aggressive IRS in the most recently concluded [current year] audit of the Taxpayer. Please note that the Taxpayer did not experience these audit techniques prior to the [current year] audit. Nor has the Taxpayer ever paid an accuracy related penalty or been determined to participate in any tax shelter prior to this audit cycle.

Heightened threats to impose accuracy-related penalties under IRC [section] 6662.

   In one case, an IDR was issued requesting
   the following documents to evidence reasonable
   cause, good faith, and due diligence
   in regards to the formation of a transaction
   the Service was defining as a tax shelter.

      Document Is used in the broadest possible
   sense and means any written, printed,
   typed, photo static, photographed,
   recorded, or otherwise reproduced communications
   or representations, whether
   comprised of letters, words, numbers,
   pictures, sounds or symbols, or any combination
   thereof.

      It includes, but is not limited to, originals
   and copies of agreements, memoranda,
   notes, studies, reports, summaries,
   schedules, workpapers, analyses, projections,
   surveys, appraisals, listings, letters
   and other correspondence, charts, books,
   graphs, printed matter, audio or video
   tapes, outlines of oral presentations,
   notes of telephone or other conversations,
   diaries and appointment calendars, telegrams,
   cablegrams, facsimiles or other
   written notes or communications, and all
   financial records, checks, drafts, instruments,
   checkbook stubs and records, and
   any other writing or document.

      This definition includes electronic mail
   and data, and all documents stored on
   computer. It includes copies or duplicates
   or documents contemporaneously
   or subsequently created which have any
   non-conforming notes or other markings.
   It also includes data compilations
   from which information can be obtained
   (translated, if necessary, by you through
   detection devices into usable form), and
   all preliminary versions, drafts, or revisions
   of any document, and other writings
   or documents of whatever description or
   kind, whether produced or authored by
   you, or anyone else, including non-identical
   copies of any of the foregoing.

      Instead of responding to this overly onerous
   and burdensome request, the Taxpayer
   offered additional factual information allowing
   the Service to reach the conclusion
   that the transaction was not a tax shelter
   and had been properly recorded on the
   taxpayer's return.

      The Service again attempted to apply
   IRC [section] 6662 relative to [entity] for which the
   Taxpayer was a [member]. A Letter Ruling
   opining to the credit eligibility of the [entity]
   had been received and accepted by the
   Service. At issue was the [tax issue]. The
   request for documents to evidence reasonable
   cause, good faith, and due diligence
   in regards to the position taken on the return
   was requested. Again, the Taxpayer
   offered additional factual information to
   support their position. Although the Service
   did not agree, the information caused
   the Service to withdraw the request for the
   [section] 6662 documentation.

Heightened threat to use subpoenas to obtain privileged documents (e.g. tax opinions); In this case, privilege was claimed and the Service later determined the transaction to be properly recorded in the Taxpayer's return.

* The Service failed to follow IRS Announcement [number] when the field examiner proposed an adjustment without considering the appropriateness of the determination through its required coordination with the Issue Specialist and the National Office. No such coordination with either was completed.

* Attack value of IP donation through use of boutique legal firm whose approach is to attack the actual validity of the patents donated. The Taxpayer was given permission to interview the legal firm in order to ascertain the information upon which their results were based. The interview was cancelled by the IRS District Counsel after taxpayer's request to record the interview. Request to interview without recording was granted provided questions provided to Legal firm in advance. Upon review of questions, interview was again denied--thereby denying the Taxpayer the ability to respond to the results reached by the Legal firm. The Legal Firm report provides a determination of the "value" of the donated patents for which the firm would have lacked expertise and information to opine on.

* Due to the aggressive and accusatory method of interviewing used by the Service and IRS District Counsel in discussing the donated IP technology with the Taxpayer's scientists, the scientists felt they would want legal representation during future IP interviews to protect them from assertions of wrong doing by IRS personnel. (IRS District Counsel).

Respondent 11

I do not have any of these concerns or issues with my IRS team. They have been very professional, [and the] tone and respect have always been appropriate.

Respondent 12

We recently resolved an LMSB audit that encompassed several years. During the audit the Service exhibited a high degree of professionalism and mutual respect, even when disagreements occurred during the audit. The Service's tone for the most part was fairly even keel and not overly aggressive, although near the end there was a big rush on their part to complete the audit once National Office provided them with guidance on our sole outstanding issue. In sum I would say that our experience with our most recent examination was a positive one.

Respondent 13

There is a growing concern that interpretation and administration of National Office programs are undercutting the efficiency of our examination. A principal example of this is the rigid application of P-4-5 which precludes involvement of agents on the examination of a taxpayer beyond a 5 year period. The Service is seeking to apply this policy statement to essentially remove all of the experienced agents from our upcoming cycle--at the same time pressuring for more currency. This is being done notwithstanding the fact that deviations can be obtained for key agents and, in any event, that a 'grace period' of up to 25 days is available for agents to have some continuing oversight (this is apparently being rigidly interpreted as little as 1 hour at the taxpayer = 1 day).

We had a very successful audit of the prior cycle (22 months total) and were anticipating doing so again. However a wholesale exchange of agents will undoubtedly entail the issuance of numerous superfluous IDRs as we are forced to 'educate' the new agents to the uniqueness of large scale examinations and particular nuances of our industry.

Although I have taken this issue up with area IRS management, to the extent this strict application is a detriment to ourselves and other large LMSB taxpayers, this concern should elevated.

Respondent 14

I am afraid corporate taxpayers' rights are being intentionally disregarded by the IRS and it continues to get worse. Based on what I have observed [my IRS agent]:

* lies, gets caught and it is acknowledged by both his boss and the territory manager, and agent still does not get transferred. Also, there are agents/specialists who are known and acknowledged by all large case taxpayers AND IRS agents as well, to be outside acceptable professional behavior and the Service continues to assign them to cases. In fact, in several instances, these same agents are even promoted.

* uses the threat of a summons as though it is the norm,

* argues it is in the best interest of the taxpayer to do a one year audit despite objections from the taxpayer,

* refuses to do a joint audit plan jointly but insists that the taxpayer sign it as though it was a joint effort,

* requests information but then ignores it when it is favorable to the taxpayer,

* accuses the taxpayer of having a substantially similar transaction, threatens to go after accrual workpapers, but then admits that he hasn't read the IRS notice on point and can't even describe the taxpayer's transaction at issue.

* insists on holding you to an audit timeline despite the IRS reneging on a "limited scope" audit that was agreed to at the opening conference.

* states that it would be in the best interests of both sides to have issues just go to Appeals rather than trying to resolve in Exam because it will improve audit currency,

* attempts four times to assess penalty despite significant overpayment situation.

Respondent 15

Increased issuance of Form 5701s at later stages of the exam or surprise NOPAs. If so, to what do you attribute this behavior?

Not Applicable

Increased referral of issues to Appeals; If so, to what do you attribute this behavior?

Not applicable

Receipt of unreasonable/unfocused IDR's or "kitchen sink" IDR's.

   I found the IDRs to be generally reasonable.
   I definitely did not feel that the agent was
   "fishing" or issuing IDR's unduly broad.

Overall tone of the exam

   I felt I had a good relationship with the
   agent. She was in fact cooperative and
   even helpful. I had a question on efiling
   and she put me in touch with the local
   guru. We had an accounting method
   change favorable to the government that
   we wanted her to open up another year,
   which was refused. We then requested a
   consent letter that was readily issued.

Respondent 16

Increased issuance of Form 5701s at later stages of the exam or surprise NOPAs. If so, to what do you attribute this behavior?

No

Increased referral of issues to Appeals; If so, to what do you attribute this behavior?

No

Receipt of unreasonable/unfocused IDRs or "kitchen sink" IDRs.

No

Overall tone of the exam

   We have had a very good tone for the last
   several cycles.

Respondent 17

Our most recent exam was 100% more professional than the previous exams. The field agents and supervisor were very accommodating, kept to the timetable, did not make any issues personal, and treated the staff professionally. This may have been the result of our previous agent who was the exact opposite. He made personal attacks, was very unprofessional, mean spirited, etc.

Respondent 18

The IRS just concluded its examination of the [xx-xy] tax years, and has commenced an examination of the [yy-yz] years. The coordinator is the same for both cycles, but the manager changed for the later cycle. All of the IRS team members for the last cycle, and the ones that I have met for this cycle, have comported themselves with professionalism. The coordinator is quite good and issues IDRs which probe issues thoroughly, but I would not consider the IRS actions to be excessively aggressive, especially when compared with audits I have participated in for earlier tax years (aa and ab). I think that some of the IDR response time targets are overly aggressive for a large multinational group, but team members have generally been accommodating as long as they are provided with enough information to remain busy. All in all, I consider the IRS team to have acted practically and reasonably. The coordinator has assisted in expediting refunds, although he views this as a benefit to the government in avoiding the interest cost. Managers and higher level individuals within the Service seem more inclined to be more aggressive, but we have not recently experienced any who are excessively so. In the two most recent cycles, all have been professional, mutually respectful and otherwise reasonable to deal with; some have even been helpful in resolving non-audit tax issues.

Respondent 19

Increased issuance of Forms 5701 at later stages of the examination (surprise NOPAs) ... if so, to what do you attribute this behavior?

   Yes, we have experienced this in our
   latest audit. We are not a large case taxpayer,
   but currently have 3 years under
   audit. The agent has been working on
   the case for the last 12 months and until
   a few weeks ago, did not find anything
   of substance. Then, during his last week
   on site (about 2 months ago), he brought
   up a large dollar international issue. This
   issue was raised after he stated to us that
   the international agent assigned to our
   case had signed off as not having any
   issues. He issued a couple of follow-up
   IDRs on this issue and then left. We responded
   to his IDRs (they were pretty
   basic) timely, but still have not received
   a Form 5701 on this issue. We even have
   had a closing meeting with him and his
   supervisor and still have not seen a Form
   5701. Not sure where (or who raised) this
   issue, but it appeared to us that he was
   trying to get something out of the audit
   and move on.

Referral of more issues to Appeals ... if so, to what do you attribute this behavior?

   Before our closing meeting, the agent basically
   raised his hands and said that we
   were better off going to Appeals than trying
   to settle with him or his manager. The
   agent's argument on this issue was pretty
   basic and did not appear to be well developed.
   He basically stated that an item
   we deducted was nondeductible under
   [IRC Section]. That was it, no case law, no
   regulations, no citations, etc., just nondeductible
   under [IRC Section]. It appeared
   to us that the agent did not want to deal
   with us anymore and just wanted to push
   the case onto Appeals.

Unreasonable/unfocused IDRs, "kitchen sink," IDRs?

   His IDRs were pretty focused with the
   exception of the last few on this international
   issue. He indicated that they were
   coming from the international agent assigned
   to our case, but they were asking
   for a lot of general information.

Overall tone of the examination

   As noted above, the agent was pretty
   easy to work with until the last couple
   of weeks of the audit. It was interesting
   to us that the agent was even assigned
   to our case as his career had been built
   around auditing insurance companies
   and had never audited a manufacturer.
   The tone has definitely changed in the
   last few months to where we thought we
   would have a few minor adjust to now
   having a major fight on our hands.

Respondent 20

We have been audited for the periods between [years] by auditors out of [post of duty; our audit is still open regarding transfer pricing and two issues on appeal. The auditors I have dealt with have been very professional respectful, and pleasant to deal with even though we have substantial disagreements.

Respondent 21

We are generally audited for every cycle [however, our last two years were surveyed by the local examination team] so we've had a significant amount of interaction with the IRS over the years. Our experience has been very favorable. While we often don't agree on the issues, we have been able to resolve matters at the exam level without going to Appeals on the last two cycles. The specific agent is very professional. He is thorough and issues a great deal of IDRs, however, all seem to be reasonable (none that I would categorize as fishing expeditions). Generally, prior to the issuance of IDRs, the Agent discusses this with us to make sure we understand the request and also to receive input from us on how to word the IDR to obtain the needed information efficiently.

The Team Manager has also been very professional and has never surprised us with anything. When there is a change or introduction of something new, we are alerted in advance.

To specifically answer your survey:

* No unusual behavior. No surprise IDRs and generally timing of such fits within the expected fieldwork part of the exam.

* No issues to Appeals for last two cycles--all resolved with Exam Team. (our company had a long history of having numerous issues at Appeals)

* IDRs seem reasonable.

* Tone is very professional and overall the present relationship between the IRS and our Company is much improved from previous years.

With the exception of one newly hired field agent, we have experienced excellent service and respect from the IRS examiners assigned to our case over the past several years.

Respondent 22

There has not been a notable change in the behavior of our audit team, IRS Counsel or Appeals. They have been courteous and professional. No particular change in aggressiveness.

Respondent 23

We aren't getting any more 5701s than we thought, although our audit is not complete. We are, however, getting a lot more picky IDRs for additional details on the deductions that we are taking that are permanent in nature. Sometimes you feel that you have to prove a "negative" (which obviously can't be done) in order to substantiate the deduction. You think that you've given them everything that you have and they still question your integrity. I'm seriously considering that on any major transactions that we initiate in the future we give them "any and all" documents that we have upfront and let them figure the issue out. They seem to want to be spoon-fed.

We think that we are going to Appeals for the first time in 20 years. The issues are fairly big for us (a former Appeals officer said they were pretty small in relation to other appeal issues) and the IRS team wants every piece of documentation, regardless of whether it is meaningful to the issue or not. They are either scared to death that they will be disciplined for not being thorough or they don't know what they need. I think that they don't want to make a decision since they are out of their comfort zone on permanent type issues. We had one agent that couldn't sleep at night because of an international transaction that was reflected on a 5701 but had no US tax impact.

Yes. We get these [IDRs] and we respond and we get another IDR basically looking for the same information in a different format. It is sometimes difficult trying to reconcile a management report, to a general ledger account and back to a spread sheet analysis to prove that a deduction has not been claimed twice for book purposes. We have SOX requirements and great internal controls but the attitude of "prove it to me" is getting a little ridiculous.

The tone is a little colder than it was in the past. Also, dealing with their economists is a nightmare.

The Commissioner must think that every taxpayer is stealing from the Treasury.

Respondent 24

We have not seen any more aggressiveness in the exams. In fact we have a whole new audit team for our current cycle and so far all conversations have been pleasant and there is no indication we will have any management problems with the exam. I would say we've had the same experiences in the past several exams as well--mutual respect and certainly not adversarial relationships.

Respondent 25

Prior to a year ago, we experienced a more aggressive behavior on our exam. Over the last year, however, we have experienced less aggressiveness and an overall better tone on our audit. The IDRs have also been more reasonable and focused over the last year.

Respondent 26

We have recently completed an audit of our fiscal years xx and xx. Overall, the audit was conducted professionally and with mutual respect.

Specifically, there was no increase in the issuance of 5701s or NOPAs towards the end of the audit. Proposed adjustments were discussed beforehand and attempts were made by both parties to resolve and agree to issues before they were written up.

Issues were not referred to Appeals, although the threat of referral was used as a tool to "enable" a settlement.

IDRs were focused.

Overall, as stated above, the exam was performed in a professional manner.

Respondent 27

I wouldn't say "more aggressive," but our agent did ask me, the corporate tax director, to obtain and provide to him copies of our executives' tax returns. I told him no, that Debbie Nolan said I didn't have to. I referred him to the August 23, 2004 IRS memorandum that states that he should, "requisition the returns of corporate executives using the ERCS/AIMS system during the planning stage of the exam," to which he replied, "Darn, I was hoping you didn't know about that!"

Respondent 28

Forms 5701 are late and have very little substance. New issues are raised months after the case was supposed to be closed. The IRS is afraid they will miss something. Exam team does not want to settle things because it will look bad. Let Appeals take the fall. Overall, the tone of my exam can be characterized this way: we know you are crooks, the Commissioner finally agrees, and given enough time we will uncover all your misdeeds. Even if we don't we will make life miserable for you.

Respondent 29

In our most recent federal examination, it took the agent about 6 months to close the case and issue the RAR, and finally, we refused to extend the statute to get him to issue it. In our case, this was a resource issue, but maybe it's affecting other IRS teams differently.

Respondent 30

In our most recent examination, the IRS over promised and under delivered; specifically,

LMSB failed to execute an agreed closed agreement without material language changes. As we could not agree to the proposed wording change, the entire issue was deleted from the closing agreement ...

LMSB reserved the right to audit the consistency aspect of [tax issue]; this reservation was not contained in our audit plan, risk analysis and no prior IDRs had been issued in this regard.

LMSB provided insufficient resources and processes to support our audit.

Respondent 31

We have received 5701s very late in the exam cycle for issues that were audited early in the exam where no further contact was made and no adjustments were expected. We attribute this behavior to the increased time pressures brought on by the currency initiatives.

Issues were referred to Appeals that were not fully developed. The Exam team refused to spend any additional time on the issues because time was up due to the currency initiatives. Actually, the RAR had already been postponed twice due to the IRS. Appeals threatened to send the entire case back. In the end, exam agreed to continue to work the issues that were not ready for Appeals, while Appeals prepared to work the rest of the case. The final outcome is yet to be determined.

We continue to receive broad and unfocused requests. When we meet with the exam team to try to focus on a specific issue, they are generally unwilling to narrow these requests, especially with respect to requests from our financial products specialist. Although the IRS touts that they are interested in doing whatever is necessary to streamline the audit for the sake of currency, they are not willing to take the necessary steps to reel in rogue specialists.

We are very transparent with our exam team. While we practice open communication with them, it continues to be one-sided. Their response to our concern is to state that they will answer any questions we ask. Obviously, we don't always know when or what to ask.

Other Comments/Additional Issues:

At the IRS' request, we provide detailed presentations addressing the issues that we think the IRS will be interested in (without much direction from them, even after we ask them to provide direction), such as dispositions of subsidiaries and hedging transactions, without making any apparent headway. The IRS still issues IDRs asking very basic questions and requesting voluminous documentation.

Our exam team completely disregarded our request to participate in the planning of our current audit cycle. The audit plan was completed and signed off without any input from us. They did not even provide a copy of the plan until 5 months after it was signed off by the Territory Manager at a point where the exam was 75% complete.

The Exam team is not at all interested in providing any customer care service. Anytime we request assistance regarding IRS notices, procedural issues, etc., the exam team responds by telling us to call the toll free number on the top of a notice or to contact the Taxpayer Advocate.

Respondent 32

The IRS and LMSB have become considerably more aggressive in recent years. [A number of examples follow.]

IRS is raising issues and threatening penalties in order to pound taxpayers into submission on the underlying real issues. Legitimate issues should be discussed on their own merits, not under the cloud of a penalty threat or worse.

Penalties are seemingly automatic these days. I know of one case where penalties were asserted on depreciation, of all things. Chief Counsel Notice 2004-036 and similar pronouncements have been turned on their head into the assertion of automatic penalties.

The IRS should not raise issues unless IRS is confident that IRS is "more likely than not" going to prevail if litigated. They should be held to the same standard as taxpayers. In effect, the IRM says so. Issues are not supposed to be raised for purposes of negotiation on other issues.

LMSB should follow the regulations and not "make new law." It's not uncommon for agents to ignore regulations.

In current audit cycles, the IRS should follow the resolution of issues resolved or settled in prior cycles. It's not uncommon for agents to refuse to follow past agreements on recurring issues, even in cases where a closing agreement refers to the issue.

LMSB agents should not refuse to go to Fast Track even if they think that they are 100% correct in their views. They should be open minded.

Agents should not be allowed to ask for technical advice or use the National Office to get written advice merely as a means of undermining the independence of Appeals. It is not uncommon for LMSB to use this tactic, delaying cases for years.

Respondent 33

In our last exam which covered the years [xx-xy], the field agent was incredibly inexperienced and seemed to have little knowledge of accounting in general. While the initial IDRs were cookbook and annoying, she was courteous and professional at all times. The international team was much more experienced and also cordial and professional. The CAS auditor was very cooperative and worked with us as a team to get the data he needed in their format. No complaints at all.

No issues with their demeanor. The audit just took far too long due to the inexperience of the auditor. I got the feeling she was promoted during the hiring freeze of several years ago.

Respondent 34

I would say we have an excellent relationship with our examiners. We disagree on many issues but the agents always conduct themselves professionally. The "near exceptions" would be specialists (international and financial products) but the Case Manager and Coordinator correct the specialists' behavior after we complain.

I lived in [State] a few years ago (mid-90s) and thought the [post of duty IRS had a very good relationship with their taxpayers. (Much, much better than we did in [post of duty]. But changes in the taxpaying community after 2000 or so and the LMSB reorganizations of the last couple of years may have changed the dynamics in [post of duty]. In addition, [external IRS consultant [is very difficult to deal with on [specific tax issue], which are very important in [post of duty].

Respondent 35

We were audited for an NOL carryback claim for the [xx] year. The agent had no experience with the [taxpayer's] industry (his experience was with another industry). He did not understand the scope and size of a large case audit (i.e., he would issue initial IDRs instead of a statistical sample).

While he was courteous, I found him to be lazy. Once we gave him documents he requested, he did not want to spend the time to read through the documents. He also wanted us to prepare his Joint Committee submissions. Finally, he was a "no show" for appointments he would schedule with me.

Respondent 36

The big issue with LMSB is statute extensions. Many times Exam finishes all its work except for one or two issues. They are still issuing IDRs on those issues. All other issues might be agreed. Then they realize there is 6 months or less on the statute. They ask for an extension. The taxpayer, being the good citizen it is, says sure. But since all the other issues are agreed, the taxpayer suggests that the extension be limited to the issues still under investigation. LMSB says absolutely not. While we aren't looking at any more issues, who knows, something might come up. Of course the alternative is the star notice and all that goes with that. This all wreaks havoc on your financial statements because every issue stays open. I see no reason why LMSB needs unlimited time and unlimited issues. If they want a longer statute of limitations, they should go to Congress, not obtain it by intimidation.

Respondent 37

We have issues regarding statutes of limitation. These statute extension requests provide us with the only possible leverage we have to get the IRS motivated when we need closure on the audits. The IRS requests these extensions 6 months in advance, and likes to extend for over 6 months because of their requirement to have extensions covering the subsequent 6 months. That leaves any open issues on the table because of their procedures.

Respondent 38

In response to your request regarding examples of current LMSB audits and their temper, taste, tone and professionalism, the taxpayer submits the following:

* [Taxpayer] is a [multi-billion] [industry segment] company

* IRS commenced fieldwork [month x, year 1]

* IRS completed fieldwork [month y, year 3]

* 4564s (IDR's) issued--over 200 (average response time under 20 days)

* 5701s issued--50

* 5701s unagreed--over 50%--13--

* 5701s settled at the field level--1 (under advice from the financial products specialist)

The audit was initiated due to Joint Committee review of NOL carrybacks from [years xx and xy], under the 5-year carryback rule initiated post September 11th 2001.

The taxpayer is a [industry segment] and the audit team had no prior experience in this area. The agents relied heavily on the [specific] Industry Specialist when auditing [specific] issues. The Industry Specialist visited only once during the audit and never asked questions directly of the taxpayer. The taxpayer asked to meet with the Industry Specialist during a later visit that was planned with the audit team. The audit team told the taxpayer that the specialist did not have time to meet. All communication with the specialist was filtered through the agents. This "middle-man" approach to asking and answering industry specific questions created a lot of confusion and miscommunication. The agents felt frustrated due to their lack of understanding of the issues and not being able to fully explain the specialist's point of view. This created quite a few 4564s that were not discussed with the taxpayer prior to issuance and were vague in nature. When the taxpayer pushed back to get a narrower focus, the IRS called a meeting with management representatives from both parties and complained about the taxpayer attitude and lack of cooperation. When the taxpayer asked (on several occasions) to meet separately with the case manager, the requests were denied; the case manager would only meet if the agents were present. This led to a breakdown of communication between the taxpayer and the audit team and although the IRS and the taxpayer held monthly status meetings, very little was accomplished.

Statute extensions (two were signed) became increasingly problematic, with the taxpayer asking for time commitments from the audit team and the IRS threatening statutory notices. The IRS verbally committed to audit closing dates several times during the audit and each time they were not met. At the end of fieldwork the taxpayer requested that the IRS grant a 30-day extension on the 30-day letter that was to be issued "shortly." The case manager flatly refused to consider any extension, but after additional communication and formal written requests, the case manager verbally conceded that a 30 day extension would be granted. Given the time of the audit, the number of unagreed issues and the dollar volume in dispute the taxpayer found the case manager's original position to be unreasonable.

The taxpayer's written and verbal positions presented in defense of 5701s were met in nearly all cases with denial. For example, one of the proposed adjustments related to a [specific] deduction. The taxpayer was able to show that their position was on solid ground and that other companies are successfully filing 3115s to adopt the taxpayer's method. The agents refused to rescind the adjustment. Any attempt by the taxpayer to "negotiate, trade, or bargain" 5701s at the field level has been rebuffed.

The taxpayer/audit team relationship has been contentious. Both sides can reference instances where the other side has been uncooperative. The overall tone of this audit has been stressful at best. The audit team has been frustrated with their own lack of understanding of the issues and taxpayers' explanations of industry practice and special code sections that apply to its operations do not seem logical to them. They have relied solely on the Industry Specialist. The audit team has shown reluctance to think independently and has great difficulty admitting errors. Math errors were pointed out on one of the 5701 (issued on date) and to this date, the team has not amended the 5701 to correct the errors and when it was first pointed out to them they denied the errors were there. The bottom line is that as the communication continued to fail, the audit became increasingly hostile.

The taxpayer has found one of the agents to have very strong personal opinions regarding the audit, other auditors and the taxpayer. The agent has criticized the IRS specialist assigned to the case currently and IRS specialist assigned to previous audits. The agent has also criticized the taxpayers' representatives. The agent has openly referred to this audit as the "audit from Hell" and has accused a taxpayer representative of being a "liar" in front of the case manager, the territory manager and the taxpayers' manager.

What the taxpayer has found incredulous is the following:

* Lack of any standard of materiality

* Lack of direction or input from the case manager (it seems the agent ran the audit)

* Lack of involvement or direction from the Territory Manager (except in cases were the relationship between the tax payer and the audit team was seriously fractured ... in these instances, the TM chastised the taxpayer)

* Lack of the audit team's desire to resolve issues at the field level

* The audit team dealing with the taxpayer from a position of authority and power instead of trying to work with the taxpayer.

Based on the information provided above it is quite obvious that this audit is a difficult one from the taxpayer's perspective. This "new" IRS approach is detrimental to the audit process, it is time consuming and expensive for the taxpayer.

Respondent 39

Substantively, are you finding the LMSB Division more aggressive in the following ways:

Increased issuance of Form 5701s at later stages of the exam or surprise NOPAs. If so, to what do you attribute this behavior?

   We received a few 5701s late in the audit,
   but it was because the exam team
   was behind in clearing out issues. Exam
   was not intending to play games or surprise
   us.

Increased referral of issues to Appeals. If so, to what do you attribute this behavior?

   This has not been a problem in our two
   most recent audits.

Receipt of unreasonable/unfocused IDRs or "kitchen sink" IDRs.

   These seem to be an inevitable part of any
   exam. The most recent exam team was
   willing to discuss these IDRs and narrow
   the scope or withdraw them.

Overall tone of the exam

   Overall tone has been more positive during
   the last two exams.

Respondent 40

Overall, my impression is that the IRS agents have an amount that they want to collect related to this examination. It is quite different from anything I have experienced in the past. Additionally, the IRS agents assigned to our exam have not provided technical support, tax law for their positions. On the one domestic issue that we have, the IRS agent could not initially describe to me the tax technical issue just that it did not seem right.

Standards of Conduct

Since the Mission, Principle, and Purposes of TEI can be achieved only by the observance on the part of its members of the highest standards of professional conduct, the Board of Directors adopted the following:

Tax Executives Institute, Inc., recognizes the following as the standards of conduct for each member in administering tax affairs for which he or she is responsible:

* The member accepts taxes as the cost of civilization and accepts the laws imposing taxes as the mechanism for distributing that cost among businesses and individuals. The member will comply with those laws, whether or not agreeing with them.

* The member recognizes an obligation to minimize company tax liability, within the bounds of the law and to the extent consistent with policies or objectives of the company, having due regard for the interests of society in sound tax policy, and will advise and support action to obtain that objective, to the best of the member's ability.

* The member recognizes an obligation to make an affirmative contribution to the sound administration of tax laws, and to the adoption of sound tax legislation, by cooperation and consultation with the persons charged with those functions, having due regard for the interests of society, as well as the interest of the company and its employees.

* The member accepts each Government representative as a person devoted to fulfilling the obligation to collect revenue honorably in accordance with law. The member will deal with the representatives on that basis, and will take occasion with others to uphold this view of Government representatives. In case of any deviation of a representative from that standard, the member will present the pertinent facts to the authorities authorized to take action with respect to the deviation.

* The member will present the facts required in tax returns and all the facts pertinent to the resolution of questions at issue with representatives of the government imposing the tax.

* The member will employ assistants and outside representatives upon the basis of their technical competence, always having due regard for the highest standards of professional ethics.

* The member will at all times recognize a duty of professionalism and will not use TEI membership to solicit business or sell products to other members.