Industry issue resolution.
On February 28, 2001, Tax Executives Institute submitted the following comments to the Internal Revenue Service on Notice 2000-65, relating to establishing a pilot program for "industry issue resolution." The comments took the form of a letter from TEI President Betty M. Wilson to Larry R. Langdon, Commissioner of the IRS's Large and Mid-Size Business Division, and were prepared under the aegis of the Institute's IRS Administrative Affairs Committee whose chair is Robert J. McDonough, Jr. of Axcelis Technologies, Inc. Numerous members of the committee contributed to the project.
Tax Executives Institute is the preeminent association of business tax executives in North America. TEI has 5,300 individual members who represent more than 2,800 of the leading corporations in the United States, Canada, and Europe. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws; and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and, because it provides certainty, that taxpayers can comply with in a cost-efficient manner.
Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by Notice 2000-65, relating to the Industry Issue Resolution pilot program.
The IIR pilot program has the laudatory objective of providing guidance on frequently disputed tax issues affecting a significant number of LMSB taxpayers, which in time will reduce taxpayer burdens and conserve government resources. TEI commends the IRS for developing new techniques to provide taxpayers and IRS personnel with more timely, focused guidance. The IIR program promises to produce more certainty on technical industry issues and thereby reduce post- filing disputes. In addition, taxpayers may benefit from having issues raised in a broader IIR context rather than being limited to the narrow facts of an isolated technical advice memorandum or court case. Finally, IIR may minimize inconsistent treatment of similarly situated taxpayers.
To operate most efficiently, several issues relating to IIR should be addressed. First, and perhaps most important, is to specify and fine tune how issues will be identified for the IIR program and which taxpayers -- or groups of taxpayers -- will be involved in the process. In addition, the effect of the program on ongoing examinations and on the currency of audits must be assessed. Finally, the form and effect of the resulting industry-based guidance must be explicated.
Identifying Issues and Affected Taxpayers
Notice 2000-65 invites taxpayers and industry associations to suggest issues and possible options for resolution. Although TEI agrees that it is logical to focus on a group of taxpayers (or industry) that may be particularly interested in an issue, care must be taken to ensure that the resolution of the issue is evenhanded. Thus, we commend LMSB's efforts to ensure that no single taxpayer, group of taxpayers, or other industry "representatives" are accorded exclusive access to the IIR process. For example, Rev. Proc. 2000-38 (which relates to the proper tax treatment of mutual fund distributor commissions -- so-called 12b-1 expenses) has been cited as the result of an IIR-type process, whereby the LMSB Financial Services and Healthcare industry group engaged in constructive dialogue with affected taxpayers and then developed a procedure (which sets forth three permissible methods of accounting that a taxpayer could elect) to help resolve a long-contentious issue. Many taxpayers may well take advantage of one of the three proposed methods to resolve current audits and forestall future disputes. One challenge that remains, however, is to revise and formalize the process used by FSH to ensure that no group of affected taxpayers is excluded from the IIR process.
TEI understands that the IRS intends to publish a list of issues accepted for the pilot. The sooner this is done, the better. The timely publication of active IIR projects will help flesh out the IIR initiative and thereby assuage taxpayer concerns about its scope and consequences. It should facilitate the identification of the universe of potentially affected taxpayers who may wish to participate and thereby forestall criticisms that a specific segment of the industry is not being consulted. Taxpayer comments should be specifically solicited about possible alternatives for resolving the issue, as well as ranking potential IIR projects in order of importance to the industry.
Although TEI agrees that taxpayers and taxpayer groups bear responsibility for engaging the IRS on industry issues, additional steps can and should be taken to demonstrate LMSB's openness to broad-based taxpayer input. Where an industry issue is long-lived and pervasive, there will be little doubt about the correctness of placing it on the IIR list. In other cases, however, the IRS may benefit from expeditiously "vetting" the suggestions received either from IRS personnel or from external sources. Indeed, given the limited resources of the IRS (and Treasury Department) -- as well as LMSB's overarching objective of selecting top-quality and important issues for IIR -- TEI recommends that LMSB routinely summarize, publicize, and seek comments on the priority to be given to particular topics, whether proposed by taxpayers or taxpayer groups or by LMSB personnel. The list should be as comprehensive and detailed as possible.
We understand that topics submitted by taxpayers or industry groups will in most cases be released eventually under the Freedom of Information Act. By establishing a process by which suggestions are publicly released on a timely basis, LMSB can validate whether its assessment of the issues' relative importance squares with those of taxpayers. For example, assume that industry groups submit a dozen topics to be addressed by IIR and that LMSB personnel recommend another six. The IRS could release a listing of all 18 topics and ask that interested parties weigh in on the priority to be assigned to the topics. If the time frame for taxpayer input is circumscribed, the IIR process can move forward expeditiously while guarding against LMSB's devoting significant resources to topics of limited value.
TEI also believes that the ongoing success of IIR depends on the process being as transparent as possible. Thus, we encourage LMSB to shine as much light as possible on the process, for example, by elaborating on the criteria used in selecting issues as well as why certain suggestions were not acted upon. In addition, LMSB should publish periodic reports on the overall initiative, which should discuss both favorable outcomes (such as the issuance of notices or revenue procedures) and any "lessons" learned. These actions will build taxpayer confidence in the integrity and efficacy of the IIR process.
Effect on Currency
One of LMSB's key goals is to resolve issues on a more current basis, and IIR holds significant promise for advancing this goal. IIR will do this not only by establishing a procedure to govern the resolution of issues on a pre-filing basis, but also by setting ground rules for resolving ongoing audits.
TEI agrees that LMSB and the affected taxpayers should remain open to resolving IIR issues retrospectively. Thus, like the IRS's advance pricing agreement program, IIR can have both backward-looking and forward-looking positive effects. We remain concerned, however, about how the IIR process itself may impede the IRS's currency goals, for example, by placing audits (or issues) in abeyance while an industry solution is sought. Although field agents and taxpayers should be aware of the scope of and potential benefits flowing from ongoing IIR projects, there should be no "hold" on resolving individual cases while an IIR project is being worked.
Need for Elective Procedure
Notice 2000-65 provides that the form of IIR guidance may vary depending upon the issue. The most likely form of guidance, however, will be a revenue procedure that permits taxpayers to adopt a recommended treatment of the issue on future returns.
Although taxpayers always have the option of challenging the treatment prescribed in a revenue procedure or ruling, the willingness of taxpayers or taxpayer groups to participate in the IIR process may be affected by how "exclusive" the IIR-prescribed solution is deemed to be. Indeed, many TEI members have voiced concern about the prescriptive nature of IIR. Attributable in part to the "newness" of IIR, this concern should dissipate as taxpayers gain experience with the new procedure. One key, however, is to assure taxpayers that the goal of IIR is not to "force" a settlement but to "work" one. Thus, TEI recommends that the IIR procedure specify that the designated treatment or safe harbor will ordinarily be elective with taxpayers. In the absence of such assurance, the IIR's optional resolution may be viewed as the only resolution, and this result could discourage taxpayers from participating in the process.
Moreover, the final IIR procedure should emphasize that one-size-fits-all solutions may not work and an individual taxpayer's facts may require a different solution. Even within industries, there are diverse fact patterns and divergent views, and any attempt to impose a single "industry resolution" could pit one segment of the industry against another. For example, more than a decade ago taxpayers worked with the IRS to develop a revenue ruling (Rev. Rul. 89-23) and procedure (Rev. Proc. 89-16) on the treatment of package design costs. The ruling called for taxpayers to accept a 60-month life for qualifying expenses. To some taxpayers, the certainty that came with the 60-month life outweighed the detriment of not immediately expensing what had (heretofore) been currently deductible. Other taxpayers disagreed, and at least one successfully challenged the ruling in court.
IIR holds the promise of bringing similar certainty to taxpayers, but IIR guidance should not, out of the box, be cast as the only solution. In other words, IRS audit teams should not lose their ability to resolve individual cases. If agents perceive that an IIR-developed revenue procedure is the IRS's "last word" on an issue, the process could have the perverse effect of discouraging issue resolution at the audit level and sending more cases to Appeals. Such a result would be detrimental to tax administration and undermine LMSB's stated goals to promote currency and reduce taxpayer burden.
Critical Importance of Communication
Open communication will be critical to the success of IIR. The ability of the IRS to rapidly disseminate information about the issues on which it seeks input (either for purposes of setting priorities or for purposes of developing industry-based guidance) will not only affect the ability of taxpayers to provide such input in a timely manner but also communicate volumes about LMSB's commitment to customer-based solutions to industry issues. TEI is committed to assisting LMSB in giving IIR a fair test and, at the conclusion of the pilot, making appropriate changes to the IIR procedure. Thus, TEI is willing to publicize the list of IIR projects and to encourage interested members to respond positively to LMSB's request for assistance. Moreover, in appropriate cases, the Institute will likely take advantage of the opportunity afforded by IIR to address specific issues that LMSB includes in the IIR initiative.
Tax Executives Institute appreciates this opportunity to present our views on Notice 2000-65, relating to the Industry Issue Resolution pilot program. If you have any questions, please do not hesitate to call Robert J. McDonough, Jr., chair of TEI's IRS Administrative Affairs Committee, at 978.787.4117, or Mary L. Fahey of the Institute's professional staff at 202.638.5601.
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|Title Annotation:||IRS tax guidance program|
|Date:||Mar 1, 2001|
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