Successful IIR pilot program becomes permanent.

In its continuous effort to resolve issues earlier in the examination process, the IRS introduced the Industry Issue Resolution (IIR) program in 2000, for frequently disputed issues affecting many taxpayers. The IIR pilot program was established under Notice 2000-65. It proved to be a huge success, and the Service adopted the program permanently in 2002 (Notice 2002-20).

What is the Program About?

The IIR program was designed to provide guidance on common disputes. Its goal was to reduce the cost and burden of settling disputes for both taxpayers and the IRS, as well as to curtail the number of disputes that occur during post-filing examinations, thus cutting back on the time needed for audits.

The permanent IIR program is open to all business taxpayers, unlike the pilot program, which the Service restricted to only Large and Mid-Size Business (LMSB) Division taxpayers. The LMSB and Small Business/Self Employed (SBSE) divisions will share responsibility for operating the program.

In selecting the types of issues to include in the IIR program, the IRS solicits input from individuals, industry associations and other groups. In selecting program issues, the Service considers whether the issues are appropriate, the likelihood that it can provide timely guidance and the availability of necessary staff and resources.

An appropriate issue generally has two or more of the following characteristics:

* Uncertainty exists as to the correct tax treatment in a given situation.

* Uncertainty results in frequent, often repetitive, examinations of the same issue.

* Uncertainty results in a significant burden on the taxpayer.

* The issue is material and affects a significant number of taxpayers, either within an industry or across industry lines.

* A factual determination is a major component of the issue.

Inappropriate issues include:

* Issues unique to only one taxpayer or a small number of taxpayers.

* Issues under the jurisdiction of the Commissioner, Tax Exempt, and Government Entities Divisions (e.g., employee plans).

* Issues about transactions that lack a bona fide business purpose or for which taxpayers significantly reduce or specifically avoid paying Federal taxes.

* Issues involving transfer pricing or international tax treaties.

After reviewing the issues, the Service, the Office of Chief Counsel and Treasury select which ones they will include in the IIR program. Taxpayers do not have any input in this process.

Next, a team of appropriate professionals from the LMSB and the SBSE divisions, the Office of Chief Counsel, Appeals and Treasury reviews each issue and offers a resolution. When necessary, the team consults outside experts. An official traditionally responsible for settling disputes must approve the team's solution.

In reviewing an issue, the team may need additional information from the taxpayer (or group of taxpayers). It must request this information under the requirements of the Federal Advisory Committee Act. In addition, the team may also ask to inspect the taxpayer's books and records. This is voluntary; a review is not an examination and a taxpayer may still be subject to another review of its books and records during a later audit. However, during a team review, taxpayers are expected to disclose any information necessary to reach a resolution. This information may be subject to disclosure under the Freedom of Information Act. The taxpayer can provide information to the team, but it cannot participate in negotiations or in decisions.

Once the team reviews an issue and an official approves a recommendation, the IRS publishes guidance (most likely in the form of a revenue ruling or a revenue procedure), informing taxpayers of the proper treatment for reporting future returns (or in certain cases, prior-year returns).

What Are the Pros and Cons of the Program?

Like all programs, there are both good and bad points. The benefits of the IIR program include:

* Resolution of the same issue for a large number of taxpayers;

* Establishment of a consistent IRS position;

* Reduction in the cost and burden of disputing issues for both taxpayers and the Service;

* Elimination of tax-treatment uncertainty; and

* Elimination of financial-statement uncertainty.

The downside to the program is that:

* An industry settlement may be unfavorable to a particular company or group of companies.

* The IRS is less likely to consider an individual taxpayer's unique facts on a case-by-case basis after making an agreement with an industry. (For this reason, it is important for taxpayers or their representatives to provide input during a review process.)

* Taxpayers are not involved in the process, aside from providing documentation, and they do not have any decision-making authority.

Results of the Pilot Program

The pilot program was available solely to taxpayers in the LMSB division. Twenty-four taxpayers asked to take part in the pilot program and the IRS selected seven. Of these taxpayers, five issues were resolved as of April 25, 2002. The issues and related published guidance are as follows:

* Taxability of demonstrator automobiles provided to automobile salespersons (Rev. Proc. 2001-56);

* Clarification of bad debt charge-offs and conformity election for banks (Rev. Rul. 2001-59);

* Depreciation of golf course construction costs (Rev. Rul. 2001-60);

* Safe-harbor method of accounting for smallware costs for restaurant and tavern operators (Rev. Proc. 2002-12); and

* Treatment of impact fees and similar costs incurred during the development and construction of depreciable real estate (Rev. Rul. 2002-9).

The two remaining issues with guidance yet to be published are:

* Treatment of amounts paid by an employer to an employee for the rental of rigs and other equipment; and

* Determination of recoverable reserves for oil and gas for cost-depletion purposes.

Guidance on these two issues is expected this year.

Conclusion

In recent years, the IRS has made a concerted effort to give taxpayers various options for resolving issues prior to a post-filing examination. The IIR program is an example of this effort. Based on the pilot's success, the IIR program appears to be a beneficial dispute-resolution tool for both taxpayers and the Service. Taxpayers with recurring or industrywide issues should consider submitting them to the IRS for inclusion in the IIR program. The best way to do this is through an industry group. For further information on how to bring an issue to the IRS's attention and on the IIR program in general, contact Susan Blake, Senior Program Analyst, of the LMSB Pre-filing and Technical Services Office, at [phone].

FROM JIM DOUGHERTY, DIRECTOR, AND RONA FAUST, SENIOR MANAGER, TAX CONTROVERSY SERVICES, DELOITTE & TOUCHE LLP, WASHINGTON, DC

Editor:
Mark H. Ely, J.D., CPA
Partner
Washington National Tax
KPMG LLP
Washington, DC