IRS releases 1997 Examination Program Letter.

The Assistant Commissioner (Examination), IRS, has release the Examination Program Letter for fiscal year 1997 (the tax year ending Sept. 30, 1997). The "letter" is a outline of the Services priorities, areas of emphasis and underlying examination philosophy for the upcoming year.

The IRS's main goal (as set forth in the letter) is to attempt to improve productivity while decreasing examination cycle times. This goal is intended to be accomplished through (1) increasing examination yield (expressed as dollars assessed per staff year); (2) decreasing audit cycle times (the length of examinations); and (3) reducing the corporate no-change rate (the number of examinations in which no adjustments are recommended).

Continuing a long-standing trend, increased attention will be paid to cases that fall into the "large business" examination program in 1997. These are taxpayers with assets over $10 million that do not fit within the Coordinated Examination Program (CEP). These taxpayers will increasingly, be subjected to the audit techniques currently used exclusively in CEP cases; this means an increased use of audit specialists (computer, employment, excise and employee plans). On a long-term basis, the Service plans to use "CEP techniques" in the audit of large partnership and S corporation returns as well.

The IRS is continuing to emphasize the use of alternative dispute resolution (ADR) techniques to resolve issues at the lowest level. Accordingly, the Service is currently exploring the possibility of extending the use of settlement techniques, such as accelerated issue resolution and early referral, to non-CEP taxpayers.

If a non-CEP taxpayer is subjected to a "CEP-type examination," practitioners should urge the IRS to extend the "privileges" afforded CEP taxpayers to the non-CEP taxpayer. Some of these privileges might include an opening conference, periodic updates and briefings with the case manager, and the use of ADR techniques that, officially, are available only to CEP taxpayers.

Partnership Returns

There will be increased audit coverage of partnership returns. Despite staff constraints, this goal win be accomplished through (1) limiting the scope of examinations (looking at a narrower range of issues on a larger universe of returns); (2) encouraging "pickups," i.e., the examination of partnership returns associated with large corporate and CEP examinations; (3) focusing on real estate partnerships, and (4) completing a major project on the use of the low-income housing credit (which is claimed by may partnerships).

Excise Taxes 

The Service has begun a three-year program to increase audit coverage of excise taxes. In 1997, the emphasis will be on motor fuel excise taxes. In 1998 and 1999, additional resources will be devoted to all classes of excise taxes. Excise taxes will receive additional attention as training planned for 1997 is completed, with future emphasis on motor fuel and petroleum by-products, telecommunications and manufacturing excise taxes.

Employment Taxes

The recent court decisions in the area of tip reporting (Morrison Restaurants, Inc., appeal filed Apr. 25, 1996, and Bubble Room Inc., appeal filed Dec. 10, 1996) have the Service reevaluating its approach in using employer-only FICA tax assessments. (See Tax Clinic, "IRS to Stop Employer-Only Assessments for Underreporting of Tips," TTA, Mar. 1997, p. 152.) Examination agents will continue to focus on worker classification issues overall; however, the IRS has temporarily ceased making employer-only FICA assessments on tip income. Worker classification examinations will be pursued primarily among mid-size firms in which the Service believes it can: -- reclassify entire classes of workers; -- find cash payment schemes set up to avoid employment taxes, -- identify a failure to file Forms 1099 and W-2; and -- pursue issues such as fringe benefits and deferred compensation.

Without employer-only FICA assessments, the IRS will have difficult attacking tip reporting issues. As a result, the benefits of entering into various tip reporting agreements win likely be diminished. On a separate issue, the second year of the two-year test of the Worker Classification Settlement Program (CSP) ends in March 1988, unless extended. Taxpayers under examination who wish to consider a CSP-type settlement should be aware of this time frame.

Compliance Research

In addition to the above areas of emphasis, the Service has launched several "Compliance Research Projects" as a part of the new National Office (NORA) and District Office (DORA) Research and Analysis efforts. The Examination Division will participate in a number of projects designed to measure compliance and test corrective actions in six specific areas.

* Automotive market segment: The objective is to improve the accuracy of reporting within the automotive market segments (new and used automobile dealers and service stations). This market segment has been used as a prototype for the IRS compliance research effort. The Service will test several compliance, information and education programs in this area.

* Tipped restaurant employee strategy: The IRS has a multi-year strategy to improve reporting of tips by employees. The strategy has three objectives: reduce nonfiling of Forms 8027, Employer's Annual Information Return of Tip Income and Allocated Tips; increase the percentage of tips reported by employers and employees; and increase tax collections from tip income. (This strategy may be adversely affected by the Morrison and Bubble Room decisions.)

* Individual nonfilers: Examinations will work approximately 10,000 high-income nonfiler cases. The strategy focus on high-income repeat nonfilers previously brought into the system under the Services nonfiler program; in will focus on profiling nonfilers and emphasize the use of Criminal Investigation referrals.

* Tax return preparers' strategy: The DORA sites will study the characteristics of individual tax returns produced by paid preparers, in an attempt to identify trends and differences in returns by preparers.

* EDAS: The electronic disclosure authorization system (EDAS) will automate and expedite the verification of return information provided to prospective lenders by taxpayers applying for mortgages and business loans. As part of this strategy, Revenue Agents will examine a sample of returns to determine the tax change potential. In the start-up of this program, the IRS found more income claimed to support loan applications than the amounts reported on many of the returns actually filed. The Small Business Administration and the Service piloted this program, which now includes commercial lenders.

* Multiple use of SSNs: This strategy is directed at eliminating the high number of duplicate-use Social Security numbers (SSNs) currently encountered on filed returns. Initially, the IRS will focus on returns on which an SSN is used for the primary or secondary taxpayer on one return and for an individual claimed as a dependent on a second return.