IRS announces a "breakthrough" plan.
The Breakthrough team evaluated the cycle time on Industry Cases (ICs) and Coordinated Industry Cases (CICs). ICs involve taxpayers with more than $10 million in assets. The CIC program examines the approximately 1,200 largest taxpayers in the country. "Cycle time" is defined as the period from filing the return until closure of the examination process (including Appeals). The current average cycle time for IC and CIC is 37 months and 60 months, respectively; the IRS's goal is to reduce it to 18 months. The new IRS commissioner has strongly emphasized achieving audit currency and reducing cycle time to move the IRS forward.
Under Breakthrough, agents were required to perform a full risk analysis on all of their ICs (except those under the limited issue focused examination (LIFE) program) by Nov. 14, 2003. Based on this review, they developed strategies to resolve ICs more expeditiously, by limiting the examination's scope to only those issues with a high risk of noncompliance; these cases are expected to close by April 30, 2004. If this deadline cannot be met, the agent must obtain the territory manager's approval. There are some exceptions to the established closure deadlines, including: abusive tax shelters; fraud; competent authority; prefiling agreements in process; cases under the Tax Equity and Fiscal Responsibility Act of 1982; LIFE cases; fast track/early referral; cases with material issues (determined using the LIFE definition of materiality); pending counsel advice; high-priority work (e.g., coordinated issues); and cases in which the taxpayers are uncooperative and noncompliant.
Status 10 cases are also affected by Breakthrough. "Status 10" cases are cases that have been assigned to agents, but for which no work has been performed. Under Breakthrough, Status 10 cases with a filing date before Sept. 1,2002, should have been surveyed and closed out of the group by Nov. 30, 2003, unless they met one of the following exceptions.
The first exception occurs when the group docs not have more current cases in their inventory to work. When this occurs, they may choose to examine an aged case, rather than surveying it. However, rather than working old cases, they should consider requesting priority work (e.g., Joint Committee cases, tax shelters, etc.) from remote locations. Another exception is if the Status 10 case is associated (e.g., related returns or multiple-year examinations) with an open case currently being worked.
Similar to the ICs, a full risk analysis was performed on all CIC examinations by Nov. 14, 2003. Aggressive closure deadlines were established for the following cases:
* Those with an estimated closure date (ECD) in fiscal-year (FY) 2004 (i.e., FY ending Sept. 30, 2004) must achieve their FY2004 ECD.
* Those with an ECD in FY2005 must close by March 31,2005.
* Those with an ECD in FY2006 must close by June 30, 2005.
The exceptions that apply to ICs also apply to CIC deadlines. Agents should discuss with taxpayers the revised timelines and examination scope.
Before March 31, 2004, the team manager should have reviewed cases from intervening years to determine whether they should be audited. "Intervening years" are defined as all open years between the current open cycle and calendar year 2002 returns. All intervening years selected for audit must be closed by June 30, 2005. Agents must examine the return and select only those issues that can be examined and closed timely; they should use various initiatives (e.g., LIFE, fast track, etc.) to ensure that they meet the established closing date and prepare a timeline to ensure that the issues selected for examination can be closed by the deadline. There are several exceptions: material issues, tax shelters, fraud and cases hi which the taxpayer is noncompliant. Any other deviations from the deadline require the team manager's approval.
Lastly, if 2002 is a one-year cycle, it must be closed prior to June 30, 2005. If the 2002 cycle is expanded to include the 2003 return after it is filed, the examination plan should be completed by March 31, 2005, with an expected examination closure date of March 31, 2006.
Phases II and III
Breakthrough's phase II, which began in October 2003, includes refining the examination process and enforcing the established milestones. Phase III includes proposing new legislation and making changes to the Internal Revenue Manual and regulations, as well as other changes; it was scheduled to begin around April 2004.
Effect on Taxpayers
Breakthrough establishes aggressive deadlines to complete examinations. To meet the milestones, agents will need to narrow the scope of their examinations and use various initiatives. The shorter timeframes for examinations and the need to achieve established deadlines may place a heavier burden on taxpayers. The response times for information document requests and notices of proposed adjustments will be compressed. To alleviate some of the pressure, taxpayers should be involved in the audit planning process. They need to alert the examination team if there will be times during the year when they will not be able to devote substantial resources to the audit (e.g., tax return preparation season).
While Breakthrough may present an additional burden, it also presents a tremendous opportunity for taxpayers. It will allow for limited-scope examinations and permit taxpayers to become more current in their examinations which, in turn, should lead to greater financial statement certainty as to the tax reserve. Taxpayers need to evaluate their cases and work with their examination team so that both parties can benefit.
For Breakthrough to be successful, the IRS will need to reinvent the audit process and obtain buy-in on the new procedures from all levels of personnel. Once it has implemented Breakthrough, its next challenge will be maintaining and sustaining the new audit process in the future.
FROM JIM DOUGHERTY, DIRECTOR, AND RONA HUMMEL, MANAGER, TAX CONTROVERSY, DELOITTE & TOUCHE LLP, WASHINGTON, DC
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|Publication:||The Tax Adviser|
|Date:||Apr 1, 2004|
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