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Comments on coordinated examination program: evaluation of agent performance and the IRS's ethics initiative, December 20, 1989.

Comments on Coordinated Examination Program: Evaluation for Agent Performance and the IRS's Ethics Initiative

December 20, 1989

Earlier this year representatives of Tax Executives Institute met with Larry M. Phillips, you, and other members of the Internal Revenue Service's Quality Improvement Project on the Coordinated Examination Program to discuss the IRS's review of the CEP program as well as its efforts to refine an ethics initiative for the IRS.

In October, Mr. Phillips participated in the Institute's 1989 Annual Conference, which was held in Toronto, and shared his views as the chair of CEP-QIP team; at that time, members of the Institute's IRS Administrative Affairs Committee reacted to Mr. Phillips's presentation and summarized TEI's concerns and recommendations with respect to two aspects of the IRS's CEP program: evaluation of agent and case manager performance, and the application of the IRS's ethics initiative to large case agents.

As we have already advised Mr. Phillips, his presentation to the Institute's Annual Conference was very well received. TEI members were generally heartened by his comments and the direction in which the QIP team is heading. The purpose of this letter is to follow-up on Mr. Phillips's request that the Institute provide its views on measuring performance and the IRS's ethics initiative. In light of Mr. Phillips's subsequent retirement, we have been advised to submit our comments to you, with copies to Commissioner Goldberg, Assistant Commissioner (Examination) Blattner, and Mr. Phillips.

Overview: A Commitment

to Quality

The development of a meaningful program of measuring performance by members of the CEP examination team is essential to the long-term success of a quality improvement program. In this regard, Tax Executives Institute affirms its general belief that a clear line does not exist between the criteria for evaluating agent performance and ethics. An evaluation procedure that serves to identify, develop, and support the retention of IRS employees who demonstrate superior technical skills and the desired level of professionalism should also single out those employees with integrity, a strong values system, and high ethics.

In other words, good agents or case managers -- or Appeals Officers for that matter (1) -- will not only have the requisite technical skills but will, almost by definition, be professional and ethical in their conduct. Thus, an understandably symbiotic relationship exists between the two concerns. Measuring "good" or "bad" performance, however, is not something that is easily accomplished. Consequently, in addition to soliciting the views of professional associations such as TEI, we recommend that the IRS consider, to the extent it has not done so already, retaining the services of professional management consultants to assist it in refining its evaluation program.

As TEI's previous submissions on the CEP program make clear, the Coordinated Examination Program operates to the mutual benefit of the IRS and taxpayers. We applaud the IRS's initiative in seeking to improve the program, for though the CEP program is operating well, there is truth in the quality axiom, "if it's not broken, it may soon be." Improving techniques and procedures for evaluating agents and case managers should be an integral part of the IRS's CEP quality initiative.

Following the Institute's meeting with the CEP-QIP team this summer, we solicited comments from our various chapters about agent performance and the IRS's ethics initiative. I am pleased to report that our request generated a considerable number of thoughtful responses from all regions of the country. Although taxpayer perceptions of the CEP program in general and the measurement of agent performance and ethics in particular are understandably colored by taxpayers experiences (good or bad) with specific IRS personnel, we believe certain generalizations may properly be drawn. Thus, even if particular conclusions are based on anecdotal evidence and are of limited applicability to the CEP program as a whole, we trust they will be of benefit to the IRS.

Taxpayer or Other Evaluation

A threshold question in evaluating agent or case manager performance is who should be the evaluators. As a primary "customer" of the IRS in general and CEP personnel in particular, TEI believes it is important for the IRS to take into account the views and experiences of the taxpayer in evaluating agents and case managers. Obviously, a corporate taxpayer's perspective needs to be weighed in evaluating the significance of its comments. The possibility of bias, however, should not preclude the IRS from seeking the "customer's" opinion. (2) Rather, the taxpayer's views--together with any ameliorating factors--should be considered by the IRS personnel who are designated reviewers of agent and case manager performance.

Evaluations may be facilitated by the development and use of a checklist or survey approach. In particular, TEI believes that a complete evaluation would encompass the following aspects of agent or case manager performance:

* Preparedness for initial conference

* Technical competence

* Quality of issues raised

* Timeliness of raising issues

* Adherence to audit plan

* Proficiency in use of computers

* Work ethic

* Materiality of adjustments

* Interpersonal and decision-making skills and management attributes

Consistent with private sector-evaluation programs, evaluations of CEP team members should be completed in writing and should become part of the permanent personnel file of each agent. These evaluations, moveover, should include a "forecast of potential" for the agent as well as an estimated timetable for promotion. We also believe that agents and case managers should have an opportunity to review and comment upon their evaluations.

Evaluations should be part of a well-constructed "rewards system." Agents and case managers whose evaluations are good should be monetarily rewarded, whereas those whose evaluations are not good should receive constructive criticism together with appropriate corrective training.

Number of Agreed Cases or

Issues Upheld at Higher Levels

TEI submits that the amount of proposed assessments at the examination level should not be used as a measurement of agent or case manager performance. Rather, the number of issues agreed to by the taxpayer or sustained by the Appeals Division (and, ultimately, the courts) should be taken into account. In this regard, responding TEI members expressed frustration that there is seemingly little or no incentive for agents or case managers to work toward an agreed case. If the percentage of sustained or agreed issues contribute favorably to an agent's or case manager's evaluation, audits will more likley be completed with more care and timeliness.

TEI believes that if a large number of issues are carried to the Appeals Division, the agent's and case manager's performance should be critically examined. Thus, routinely "kicking issues upstairs" to the Appeals Division, without properly developing the facts and law, should affect the agent's and case manager's evaluation. Unsustainable issues, with the exception of those settled on a hazards-of-litigation basis, should reflect negatively on their performance. (3)

Finally, we note that an item in the December 20, 1989, issue of The Wall Street Journal affirms Commissioner Goldberg's willingness to grant settlement authority to agents. TEI wholeheartedly supports such a move, which of course would have to be factored into the CEP evaluation program.

Materiality of Issues

The materiality of the issues raised should be a critical criterion in evaluating an agent's or case manager's performance. Although development of an operative definition of materiality may prove to be problematic, TEI believes the evaluation procedure should measure how well the agent distinguishes between material and immaterial issues and how well he or she handles the material issues.

A common perception among CEP taxpayers is that agents and case managers sometimes raise numerous issues of dubious significance as "window dressing" -- without regard to their materiality. Audits would be more effective, and likely yield more revenue, if agents were evaluated on the basis of the materiality of the adjustments sustained (or agreed to).

Similarly, we believe the evaluation process should address those situations where the examiner raises issues that, while entailing costly and time-consuming documentation efforts, ultimately (or even potentially) involve very little revenue. Regretably, such situations are not rare. For example, numerous taxpayers have experience with agents who insist that all foreign tax receipts be produced in accordance with section 905(c), or with agents who require extensive documentation in respect of between-year adjustments (which, even if the adjustments sustained, will result only in an item of income or deduction being shifted from one year to another).

Stated simply, even if a particular approach or position is legally sustainable, it may impose inordinate costs on the taxpayer that, when viewed from either a policy or revenue perspective, should reflect negatively on the agent's (or case manager's) conduct of the audit. (4) Conversely, where the agent or case manager displays creativity or initiative in establishing quality audit approaches that save both the government and the taxpayer time and effort, his or her evaluation should be positively affected.

Inter-Personal Skills

Good inter-personal skills are essential if an agent or case manager is to be effective. A case manager's or agent's ability to get along with taxpayer personnel as well as other members of the examination team is critical to an effective audit.

Effective inter-personal skills can be measured. Subject to the previously discussed limitations, agreed cases at the Examination level could serve as an indication of good interpersonal skills. In contrast, documented personality conflicts could be a negative measure of inter-personal skills.

Audit Plan

The Audit Plan -- how well it is put together, as well as how it is fulfilled -- should be a major factor in evaluating case manager performance. Additions to a taxpayer's permanent audit file should be reviewed by the case manager assigned to the audit before the opening conference; in addition, as part of the IRS's quality enhancement program, consideration should be given to having the file reviewed by an agent or manager not associated with the case.

TEI respondents expressed the view that the maintenance of a taxpayer's permanent file is very important in determining the efficiency of the audit, especially with respect to continuing and repeat issues. In particular, we suggest that a checklist be develkoped on which the case manager would signify whether he or she has (among others things) --

* reviewed previous Revenue Agent's Reports (RARs)

* reviewed the permanent file

* presented audit issues at an even pace during the audits

* determined whether previous Appeals settlements based on Forms 870-AD have been adhered to assuming no change in the governing law (and, if not, why not)

* recorded discussions with taxpayers concerning the pace of the audit

* planned the timing and efficient use of specialists

* met with the taxpayer's representatives to discuss and review the audit plan

Completion of the audit on time, and in accordance with the plan, should be a positive factor in a case manager's evaluation.

Evaluation of Workpapers

Public accounting firms routinely review the quality and completeness of their employees' workpapers and, as part of a peer review system, an accounting firm's workpapers and procedures are periodically reviewed by another firm.

TEI respondents suggest that CEP examination workpapers could similarly benefit from such a quality review (which we understand is currently not a feature of CEP audits). Good workpapers should be a "road map" of the examination and should document the issues raised and their disposition, as well as matters considered but not raised, and why they were not raised. The workpapers should also clearly and logically set forth the research and reasoning underlying information document requests.

Technical Competence

Agents and case managers should be periodically reviewed to determine their knowledge of the substance and procedures of the areas they audit. Moreover, the evaluation should address whether the agent effectively and clearly communicates to the taxpayer the legal basis for the IRS's position. Such a review would be a good tool for assuring technical competence and identifying the need for continuing education.

Ethics Initiative and


Large case examiners generally display high standards of ethics. Thus, in focusing on the need for ethical behavior, care must be taken to avoid negatively affecting taxpayer relations.

An employee's work ethic -- whether the employees work for the IRS as an agent or a case manager or for a company in its tax department -- in the final analysis becomes a significant "moral" issue. For example, consistent lack of punctuality and full-time effort on an agent's part could unduly prolong an audit and, thus, adversely affect the government's and taxpayer's ability to use time effectively and efficiently.

Obviously, the IRS's ethics initiative raised sensitive issues of "line drawing." In this regard, we recall that an IRS representative at our June meeting suggested that an agent who raises "clearly spurious" issues might be faulted on ethical grounds. Although we conceptually agreed with the statement, we recognize the difficulty inherent in placing such agent behavior on an ethics continuum. Thus, in undertaking to enhance the overall ethical climate of the IRS, caution must be exercised to avoid impugning the professionalism of any segment of its personnel.

Confidentiality of Taxpayer


TEI's survey of its chapters highlighted a legitimate concern about improper disclosures of taxpayer information during the audit process. For example, examiners assigned to one case may reveal (perhaps totally inadvertently) information concerning another taxpayer, or agents may discuss the audit with on-site representatives from other government agencies. Agents and case managers should be cautioned to avoid such improper disclosures and meaningful administrative action should be taken if such disclosures occur.

Potential conflicts may also arise when an agent or case manager leaves the government and obtains employment in industry. Although former employees remain subject to sanctions for disclosing taxpayer information, we suggest that consideration be given to stressing the confidential nature of the information obtained during government employment. In this regard, a departing agent or case manager might be asked to sign a statement affirming the confidentiality of taxpayer information. (5)

Documentation of IRS

Ethics Policy

TEI suggests that the IRS's "benchmarking" against common corporate procedures on business conduct and ethics could enable the IRS to focus ethical documentation and, therefore, enhance ethical performance of IRS employees. In addition, we believe that the IRS's value, mission, and policy statements should be developed as separate documents and that consideration be given to having each agent or case manager (or other employee) annually attest to his or her understanding of, and adherence to, the IRS's policies. These signed documents could then be placed in an agent's permanent file.

TEI believes that the careful evaluation of agents and case managers against criteria, such as those suggested above, would enhance the ethical behavior by providing the proper checks and balances that would apply to the IRS employees personally.


Evaluating agent and case manager performance is only the first step in an effective management program. For the benefit of the individual agent or case manager as well as the IRS's ongoing benefit, a meaningful training program should be developed (and maintained) that addresses any deficiencies that are documented through the evaluation process.

Standard training should encompass not only technical (substantive tax law) subjects, but also focus on interpersonal skills and communication skills (both oral and written). Training in these latter areas is critical in establishing agents and case managers as professionals in their own eyes and in the eyes of the taxpayers. Additionally, agents should receive training on how a taxpayer's organization and operating procedures will affect the IRS's audit techniques and program, e.g., how the taxpayer's being centralized or decentralized will affect the information-gathering process.


Tax Executives Institute is pleased to respond to the Internal Revenue Service's request for comments on the evaluation and ethical training of all members of the CEP examination team. In closing, we reiterate our support for the Coordinated Examination Program and commend the IRS for its quality initiative.

If you should have any questions about our comments, or if you wish for us to elaborate on our views, please do not hesitate to call me at (201) 894-2641 or the Institute's professional staff (Timothy J. McCormally or Mary L. Fahey), at (202) 638-5601.

(1) Although the Appeals Division is beyond the scope of this submission, the Institute believes that the evaluation and ethical issues that were identified by TEI respondents for the most part have applicability with respect to Appeals Office personnel as well as Examination-level personnel.

(2) Thus, although adverse comments by a single taxpayer should not by themselves lead to a negative evaluation (and, indeed, may need to be discounted), they should almost always be noted; when viewed in the context of comments by other taxpayers (or, for that matter, other IRS personnel), they may serve to identify a performance problem on which the IRS should focus.

(3) Obviously, an agent's performance should not be downgraded when the position he or she takes, regardless of whether it is ultimately sustained, is dictated by the National Office. Obviously, too, an agent's evaluation should take into account whether he or she is excessively accommodating in settling issues.

(4) By focusing on the materiality of the issues raised, the evaluation process would encourage examiners to balance the IRS's legal right to demand precise documentation (even in respect of minor issues) against the practical need for, as well as the taxpayer burdens attendant to, providing such documentation. We suggest, moreover, that the striking of such a balance would serve to diminish the instances of perceived "taxpayer procrastination" and generally improve taxpayer-IRS relations.

(5) TEI believes that the obverse situation -- where an individual leaves a job in industry and taken a position with the IRS -- should also be addressed. Specifically, the IRS should neither solicit nor accept confidential information about a taxpayer from an employee who previously worked for that taxpayer.
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Author:Burk, William M.
Publication:Tax Executive
Date:Jan 1, 1990
Previous Article:Comments on Rev. Proc. 89-11: disclosure of return positions.
Next Article:Comments on IRS comfort rulings policy, January 20, 1990.

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