Update on new IRS resolution programs.

During 2000, the IRS introduced several new programs to accelerate issue resolution.

PFA Pilot Program

A Pre-Filing Agreement (PFA) pilot program was announced in February (Notice 2000-12). Under the pilot program, large businesses could request examination and resolution of specific issues for returns they expected to file between September and December 2000. The goal of the program is to enable taxpayers and the Service to resolve issues prior to filing that would otherwise be disputed in post-filing audits. A PFA is a closing agreement between a taxpayer and the IRS, covering one or more specific issues arising from transactions that the taxpayer conducted during a tax period ending before the agreement's date. The PFA program specifies how the transactions will be treated on returns filed after the agreement date. A PFA may also resolve related issues affecting other tax periods.

The PFA pilot program was open only to taxpayers in the Service's Large and Mid-Size Business Division (LMSB). The LMSB consists of businesses with assets of at least $5 million. In addition, to qualify for the pilot, a taxpayer must have had a coordinated examination team on site. For the pilot, the IRS considered entering into a PFA on any issue involving the application of settled legal principles, with certain specified exceptions.

Examples of issues suitable for resolution through a PFA include:

1. Valuation of assets (except in the context of transfer pricing) and the allocation' of the purchase or sale price of a business among the assets acquired or sold;

2. Identification and documentation of hedging transactions;

3. Issues relating to in-house research expenses under Sec. 41;

4. Allocation of costs among different categories of deductible and capitalizable items in which there is a published revenue ruling (e.g., repairs, advertising and Y2K costs);

5. Determination of which costs are investigatory costs incurred to determine whether to enter a new business and which business to enter, for purposes of qualifying as start-up costs under Sec. 195;

6. Determination of "market" for taxpayers using the lower-of-cost-or-market method of inventory valuation for inactive market situations; see Regs. Sec. 1.471-4(b);

7. Whether a taxpayer's financial statement preparation of its LIFO inventory is consistent with the LIFO conformity requirement under Regs. Sec. 1.472-2(e);

8. Whether a taxpayer's inventory contains "subnormal" goods (within the meaning of Regs. Sec. 1.471-2(c)) and the valuation placed thereon;

9. Whether a taxpayer is considered the tax owner of property produced under Regs. Sec. 1.263A-2(a)(1)(ii)(A);

10. Whether a manufacturing contract newly entered into by a taxpayer must be accounted for as a long-term contract under Sec. 460; and

11. The determination of appropriate asset classes for depreciable property placed in service during a tax period.

A PFA program will not be entered into for the following:

1. Issues that can be included in an advance pricing agreement under Rev. Proc. 96-53 (e.g., transfer pricing);

2. Issues that can be resolved by requesting a change in accounting method on Form 3115, Application for Change in Accounting Method;

3. Issues under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division (e.g., employee plans);

4. Issues on transactions that lack a bona fide business purpose or have as their principal purpose the reduction of Federal taxes;

5. The satisfaction, for purposes of Subtitle F (Procedure and Administration), of reasonable cause, due diligence, good faith, clear and convincing evidence or any similar standard; and

6. The applicability of any penalty or criminal sanction.

In addition, the Service will not entertain a request for a PFA in the following circumstances:

1. Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) partnership issues;

2. An issue that is (or will be) the subject of a pending or contemporaneous request for a letter ruling or a change in accounting method by the taxpayer;

3. A taxpayer's proposed resolution of the issue is contrary to a letter ruling, technical advice memorandum or closing agreement previously issued to (or about) the taxpayer;

4. A taxpayer's proposed resolution of an issue is contrary to a position adverse to the taxpayer that was proposed by the IRS in response to a letter ruling (or accounting method change) request that the taxpayer withdrew; or

5. The issue is the subject of litigation (or has been designated for litigation by the Office of Chief Counsel) between the Service and a taxpayer for a previous tax period.

The IRS's acceptance of a taxpayer's request to attempt to reach a PFA on a specified issue(s) does not suspend or waive the normal filing requirements for any tax returns affected by the proposed PFA. If a PFA is reached before filing of the return, the taxpayer will report the transaction(s) addressed in the PFA in accordance with its terms.

If a PFA is not executed prior to filling the return(s), the Service and the taxpayer may continue to attempt to resolve the issue and enter into a PFA under these procedures until July 31, 2001. If, as of July 31,2001, the IRS and a taxpayer have not entered into a PFA and the Service disagrees with the taxpayer's tax treatment of the transaction(s), they can continue to try to reach an agreement using accelerated issue resolution procedures under Rev. Proc. 94-67. This continuation of the issue resolution process does not require a new application. In addition to the AIR procedures, a taxpayer retains the right to pursue administrative appeal, either by requesting an early referral to Appeals or by protesting any proposed deficiency related to the issue.

The IRS received approximately 19 applications for the pilot program and accepted 12. As of Sept. 1,2000, of these 12, three closing agreements were executed and five agreements were in final review. At the conclusion of the pilot, the IRS will evaluate the program to determine if it will offer it on a permanent basis. The program will probably be adopted and possibly expanded to a broader base of taxpayers.

MAAP

To decrease its cycle time and inventory of Appeals cases, a new initiative called the Mutually Accelerated Appeals Process (MAAP) was introduced by the Service in June (IR2000-42). The goal of this program is to increase customer satisfaction by reducing the time to resolve coordinated examination program (CEP) cases in Appeals. CEP does examinations of the nation's largest corporations. Because CEP cases generally involve complex issues, it usually takes approximately 790 days to complete the Appeals process.

MAAP is available for cases involving $10 million or more in disputed tax. Under the MAAP initiative, both a taxpayer and Appeals must agree to a specific schedule to resolve all issues. In addition, they must agree to add resources and accelerate the pace to meet the specified schedule. At the beginning of the Appeals process, the taxpayer signs a statement agreeing to try to resolve the issues before an agreed-on date.

The IRS committed 50 Appeals officers to the MAAP initiative in 2000. Appeals will review the existing cases to determine how it might accelerate case resolution by adding team members, shifting workload among current team members or creating new teams. In addition, Appeals will review all new cases to determine whether MAAP would be appropriate to accelerate resolution of each individual case. The factors used to consider MAAP applicability include the taxpayer's cooperation level, age and status of the case, and whether IRS Specialists are required to resolve the case.

CCR

To resolve issues more quickly, a pilot program, called Comprehensive Case Resolution (CCR), was introduced by the Service in August (Notice 2000-43). The purpose of the CCR program is to accelerate the resolution of CEP cases with open issues involving multiple years. The pilot program was available to CEP taxpayers with at least one year open in Examinations and at least one year docketed in Counsel or in Appeals. The IRS hopes that the program will benefit both taxpayers and the Service, by reducing costs, burdens and delays through quicker case completion.

Generally, all issues that could be considered by the IRS Appeals function will be suitable for the CCR program. If an issue has already been agreed on between the taxpayer and Exam or Appeals, it generally will not be re-opened. Further, certain issues (such as TEFRA partnership issues under Sec. 6231 and issues designated for litigation by Chief Counsel) will be excluded from the program.

The selection criteria for the CCR pilot program include the following: (1) the taxpayer is already taking part in an LMSB CEP program and in an Appeals process; (2) the number of LMSB examination years is substantially complete; and (3) the Appeals issues will not be settled before the first issue resolution conference is held. In addition, for the pilot program, some of the factors the IRS is considering in the selection process are: (1) having a cross-section of taxpayers of various sizes, representing different industry lines, a geographical dispersion of cases and a variety of issues; (2) the availability of Service resources in LMSB, Appeals and Chief Counsel; (3) the likelihood of the case being resolved through this process; and (4) for a docketed year, the ability to comply with the Tax Court's procedures and deadlines. Applications for the pilot program were due to the IRS team manager or CCR coordinator, Cary Russ, by Sept. 29, 2000, and the Service was to select the participants by Oct. 31,2000.

After a case is accepted for the CCR pilot program, a team consisting of members from LMSB, Appeals and Counsel (if there is a docketed case) will be formed to resolve all open issues. Within 30 days of a taxpayer being accepted into the program, the CCR team will contact the taxpayer to schedule an initial planning meeting, at which the parties will establish an expedited time frame for resolving all open issues. The CCR process will follow the existing Appeals conference format and procedures. One difference is that the ex-parte communications prohibitions do not apply to the CCR process; all CCR team members may talk to other IRS employees about the case without the taxpayer's presence. If an agreement on the issues is reached, the Appeals closing process will be followed. If an agreement is not reached within one year of the initial CCR conference, Appeals will issue a statutory deficiency notice on the disagreed-on issues.

For taxpayers, the most significant benefit of this program is the avoidance of "hot interest." For tax years under audit, the CCR process occurs before the issuance of the 30-day letter and is intended to replace the Appeals process. Because hot interest does not begin to run on a proposed tax deficiency for the tax years under examination, this could mean substantial savings for taxpayers. The disadvantage is that taxpayers do not get an independent Appeals assessment of the case.

The resolution is a joint decision of Appeals and the other Service functions involved.

Summary

The overriding theme of the new initiatives introduced by the IRS during 2000 is quicker issue resolution. For some large taxpayers, the average number of open years currently is 13. The IRS wants to resolve issues earlier and close some of the open years for taxpayers. The benefits to taxpayers of these new programs include reduced costs, burdens and delays as a result of quicker resolution of issues and completion of cases.

FROM JIM DOUGHERTY, DIRECTOR, TAX CONTROVERSY, AND TRACEY FIELMAN, MANAGER, TAX CONTROVERSY, WASHINGTON NATIONAL TAX, DELOITTE & TOUCHE LLP, WASHINGTON, DC

Editor's note: Mr. Ely is former chair of the AICPA Tax Practice and Procedures Committee. Ms. Jacobs and Messrs. Dougherty, Marchbein and Burke are committee members.

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