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Definition of a successful large-case program.

Definition of a Successful Large-Case Program

Mike Bernard (TEI's President), Linda Burke, and I thank you for inviting Tax Executives Institute to Denver on February 28 to discuss the issue of "Defining a Successful CEP" with you and members of your CEP task force. Linda and I were impressed by the progress the task force had made in identifying the various components of a successful large-case program and appreciated your willingness to share your ideas with us and, equally important, to weigh our views on the various proposals the task force is considering.

There can be no question that better communication between the various participants in the Coordinated Examination Program will facilitate the move toward mutually beneficial changes in the program. By including TEI (and other prime customers of the CEP program) in discussions at the front end, you have taken a significant step in ensuring such communication and, as you indicated Commissioner Goldberg put it, "giving taxpayers a say in how the tax laws are administered." In short, notwithstanding any concerns we might have about the specific steps that are being contemplated, we are very pleased with the process your task force has adopted.


As Linda said at the outset of the meeting, the task force's proposed mission statement that - [a]

successful coordinated examination

program conducts

cost effective, quality examinations

with the least burden on

both the government and the

taxpayer, thereby promoting

the highest degree of voluntary

compliance - is

something no reasonable person would disagree with. The key question is, how can the Internal Revenue Service best accomplish that mission? In this regard, we appreciate that the outline of "the measures of a successful CEP" which you distributed represents a "work in progress" and, consequently, that the specific items identified during our Denver meeting (together with possible remedial steps) may well be significantly modified before the task force's work is completed. Nevertheless, we did want to take this opportunity to reiterate TEI's concerns about some of the issues we discussed during our meeting. [Discussion of various materials relating to TEI's position on the Coordinated Examination Program omitted.]


TEI wholeheartedly agrees with the task force that a competent, well-trained, experienced staff is of the utmost importance in implementing a successful CEP. We further agree that the IRS needs to establish a clear strategy for training and to take steps to see that it is fully implemented. The Institute pledges its support in arguing that it is the equivalent of robbing Peter to pay Paul when training dollars are diverted to other programs.

Currency: Resolving Issues

at the Lowest Level

TEI believes that currency should be a major measure of the success of a CEP examination. More to the point, whereas taxpayers and the IRS may disagree over other measurement tools (e.g., return on investment), both will ordinarily agree that currency is a laudable goal. Again, the question is, how do we get there from here?

TEI has long believed that, along with ongoing communication between the parties, a key to currency is investing case managers with clear authority to resolve (or settle) issues and holding them accountable for the proper exercise of that authority. Thus, we believe the goal of currency is intimately related to the goal of resolving issues (cases) at the lowest level. You will recall that, during our meeting, there was a spirited discussion of what case managers can, should, and in fact do resolve. We found it interesting that the two case managers on your task force (Roy Little and Mike Rucker) generally shared the views expressed by the taxpayer representatives that case managers should be empowered to resolve most issues and held accountable for not doing so.

I would be remiss if I did not mention TEI's continuing concern about the role of Chief Counsel in the Examination process. Obviously, we agreed that in appropriate cases Counsel attorneys, as well as other outside experts, can expedite the resolution of issues. We are aware of many cases, however, where the result has been delay, not resolution. We attribute this to the litigation (rather than technical issue) orientation of most District Counsel personnel (and the National Office attorneys from whom they most frequently seek advice - those in the Tax Litigation Division). We understand that the National Office is considering possible changes in the organization of the Office of Chief Counsel to afford field personnel with effective access to attorneys with technical expertise (rather than simple a litigation orientation) and are hopeful that any forthcoming changes will adequately address our concerns.[1]

Return on Investment

Although time did not permit a detailed discussion of the return-on-investment (ROI) issue during our Denver meeting, Linda Burke made a critical observation that bears repeating: ROI should not be the predominant measurement factor and, to the extent it is taken into account, the measurement point should not be the date the Revenue Agent's Report is issued, but rather the end of the administrative (or perhaps even the litigating) process. Stated simply, the IRS needs to guard against the taxpayer perception that ROI, perhaps because it is easier to gauge than other measures of "success," means simply that revenue, not quality, will drive the CEP process.

Possible Revocation of

Rev. Proc. 85-26

You will recall that one of the issues that concerned us the most during our meeting was the suggestion that Rev. Proc. 85-26 be revoked. TEI was very active in the development of the revenue procedure and believes the proponents of its elimination misapprehend its purpose and its use. As you know, most large-case taxpayers begin their audits by turning over required adjustments (ranging from the correction of discovered computational or clerical errors to changes attributable to intervening legal or legislative developments) to the case manager. The Institute pressed for the development of a reasonable procedure whereby CEP taxpayers could apprise he IRS of such items and avail themselves of the "qualified amended return" provisions of the section 6661 (now, section 6662) regulations without having to prepare and file a formal amended return.

Rev. Proc. 85-26 was intended to recognize (indeed, encourage) the voluntary correction of errors; it does this by insulating taxpayers from the substantial understatement penalty where the IRS is made aware of the errors (or other items possibly giving rise to adjustments) before the audit gets significantly underway. Although TEI has not surveyed its members on this issue specifically, the Institute generally believes that the revenue procedure has worked well: it has vindicated the policy underlying the statute's adequate disclosure requirement without imposing any unnecessary burden on taxpayers to prepare and the IRS to process amended returns.

During our meeting, two arguments were advanced to support the possible revocation of the revenue procedure. First, it was suggested that the emphasis that Rev. Proc. 85-26 places on the commencement of the audit (since any disclosure must be made essentially within 10 days of the date the taxpayer is notified of the impending commencement of an audit of the relevant tax year) interferes with the IRS's ability to prepare for the audit, for example, by restricting the ability of a Computer Audit Specialist (CAS) to review the taxpayer's computer records. The experiences of our members convince us that Rev. Proc. 85-26 need not be a barrier to the effective planning of the audit by a CAS or others. Moreover, to the extent a problem does exist, we believe it can be addressed by modifying the revenue procedure, perhaps by revising what is deemed to constitute the commencement of an examination. (We note that section 4.02 of Rev. Proc. 86-19 provides that tests to establish the readability and completeness of machine-sensible records do not constitute "an examination of the books and records" within the meaning of section 7605(b).) In any event, we do not believe this issue dictates the complete abandonment of the revenue procedure and the reasonable approach it embodies.

The second suggested reason for eliminating Rev. Proc. 85-26 is more troublesome. Specifically, it was suggested that taxpayers purposefully do not disclose items on their tax returns but rather, for some reason, hold those items in reserve. TEI is unaware of even anecdotal evidence supporting this position. We are further unaware of why a CEP taxpayer would consider such a "strategy." If a taxpayer knows it is going to be audited (as CEP taxpayers are), what possible advantage could be gained by not disclosing an item on the tax return only to disclose it at the beginning of the audit?

It was suggested that, since not all CEP taxpayers are audited every year, the IRS might find a taxpayer's disclosures helpful in determining whether or not to audit a taxpayer.[2] This issue, however, seems to us to be distinct from the question whether taxpayers refrain from disclosing known items when they file their returns. We do not believe they do. Rather, the disclosures made pursuant to Rev. Proc. 85-26 pertain to errors or items discovered (or legal developments occurring) after the return was filed. The elimination of the revenue procedure, therefore, could well lead to fewer, rather than more, disclosures.

In summary, we believe any effort to revoke or materially restrict the availability of Rev. Proc. 85-26 in an effort to "improve compliance" would be misguided and, possibly, counterproductive. Linda and I were pleased that members of the task force understood our concerns, and we hope that the proposal does not go forward. Should the task force decide to formally recommend the revocation of Rev. Proc. 85-26, the Institute would appreciate the opportunity to file a formal submission elaborating on the foregoing comments.[3]

Other Issues

Finally, we believe that there were a number of other ideas discussed during the Denver meeting that merit further exploration, including:

* Involving taxpayers in the

planning process on a case-by-case

basis. This would include

not only providing the taxpayer

with a copy of the complete audit

plan, but including the taxpayer

in the development of the

plan - i.e., having the taxpayer

"buy into" the audit plan. In

many cases, the taxpayer already

plays a significant role in

the development of the audit

plan (e.g., agreeing on the frontend

to a targeted completion

date and undertaking to provide

sufficient staff to meet that target

while the case manager does

the same); the goal is to replicate

that experience nationwide.

* Having taxpayers and the IRS

work "contemporaneously" on

preparing files relating to transactions

that will be audited in

subsequent years (e.g., if a taxpayer

in 1990 acquires a company,

having the case manager and

tax director discuss in 1991 the

types of records that should be

maintained, and how they might

be organized, to expedite the audit

of the acquisition when the

1991 return is audited in, say,

1994). This type of situation

would seem to be encompassed

in Marv Burton's "real time"

examination references.

* Having the case manager serve

as a single-purpose, "one-stop-shopping"

liaison between the

IRS and the case manager (e.g.,

if the taxpayer is having difficulty

straightening out a payroll

tax, offset, or other problem

involving one or more Service

Centers or Districts, the

case manager would intervene

to help resolve the matter).


Once again, TEI appreciates the opportunity to meet with you and the members of your CEP task force and hope that you found our Denver meeting helpful in moving toward your goal of defining a successful CEP program. If you should have any questions about this letter, please do not hesitate to call me at (202) 638-5601.

(1) A collateral concern is the effect of Counsel's involvement on the basic integrity and efficacy of the Appeals process. We continue to believe that Appeals will be successful in settling cases only if the independence of Appeals Officers is not compromised. Although it may not be fruitful to revisit the basic question whether Appeals should be part of the Office of Chief Counsel, we do believe the independence of Appeals needs to be vigilantly guarded and, hence, question institutionalizing Counsel's role in any pre- or post-Appeals conferencing.

(2) In this regard, it should be remembered that the statute does not technically require disclosure; rather, the fact of disclosure immunizes the taxpayer from the assertion of a penalty.

(3) Another proposal that greatly troubles the Institute relates to increasing the tax interest rate depending on how long a year remains open. (For example, the interest rate on deficiencies or refunds would be 11 percent if the tax were settled within three years, 12 percent if settled within the fourth year, 13 percent if settled within the fifth year, and so on.) Stated simply, the proposal would put a premium on delay by the party (government or taxpayer) that would be receiving the interest payment and penalize the other party, without regard to whether all or any part of the delay in closing the year is attributable to that party. As we pointed out during the meeting (and your task force seemed to appreciate), it is often not within the taxpayer's power to control when a case will be closed; in such a situation, a penalty (in the form of an ever-increasing interest charge) should not be imposed.

PHOTO : 1991 Midyear Conference: Ralph Weiland, chair of the IRS Administrative Affairs Committee, takes notes as Bill Tress of the IRS reviews developments in the Coordinated Examination Program.
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Author:McCormally, Timothy J.
Publication:Tax Executive
Date:Mar 1, 1991
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