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PFA program - an increasingly useful tool for taxpayers.

One of the strategic priorities of the IRS'S Large and Mid-Size Business Division (LMSB) is issue management, which it defines as developing a strategy to resolve disputes with taxpayers sooner or to eliminate controversy earlier in the process. The Pre-Filing Agreement (PFA) Program was developed to assist LMSB in this purpose. It allows LMSB taxpayers to request an examination of specific return issues, which could be subject to post-filing disputes, to determine the proper tax treatment prior to filing the return. PFAs are finalized with a closing agreement under Sec. 7121. This provides the taxpayer with certainty as to return positions specified in the agreement.

This item discusses the evolution of the PFA program and highlights some of its goals and key revisions announced in Rev. Proc. 2005-12.


Through the use of the PFA program, the IRS's goal is to reduce the taxpayer's and the IRS's costs and burdens, by providing certainty on issues earlier than the traditional post-filing examination process. Because the examination is performed prior to return filing, the taxpayer and ItS have timelier access to both the relevant tax records and personnel.

The Service, on an annual basis, releases a report on the program that discusses the types of issues resolved, taxpayer satisfaction and time saved. Exhibit 1 above is an IRS chart showing the time saved in pursuing a PFA, as opposed to resolving an issue during the post-filing examination process.

Although the program has been expanded and has proven to be efficient, it is underused, having received only 42 applications during calendar-year 2003. Exhibit 2 above compares the number of applications received per year since the program's inception.

Pilot Program Evolution

In February 2000, the Service announced the pilot PFA program in Notice 2000-12. At that time, the program was available only for Coordinated Issue Cases with an examination team on site at the time a PFA request was made. Of the 19 applications received during the pilot program, seven dosing agreements were executed, in an average of 166.1 days. This was significantly shorter than the time needed to examine an issue during the post-filing audit process, which could take a number of years. Since its inception, the PFA program has evolved; it has become an increasingly useful tool for taxpayers.

Rev. Proc. 2001-22 made the pilot permanent and expanded the program by making PFAs available to all taxpayers under the jurisdiction of the LMSB, including those not currently under audit. It increased the number of international issues eligible for the program. In addition, it added a user fee, ranging from $1,000 for taxpayers with assets from $5 million to $50 million; $5,000 for taxpayers with assets from $50 million to $250 million; and $10,000 for taxpayers with assets of $250 million or more.

As additional issues were accepted into the program, the IRS noted an increase in resolution time--from 166.1 days to 299.4 days for calendar-year 2003. However, despite this increase in time from the pilot, the program is still significantly faster than the traditional process.

Program Revisions

In December 2004, Rev. Proc. 2005-12 expanded the PFA program by (1) allowing taxpayers to resolve issues for multiple future tax years and (2) broadening the eligible, acceptable international issues.

Under guidelines outlined in Rev. Proc. 2001-22, eligible tax years had been limited to the current tax year or any prior tax year for which a return was not yet due and not yet filed. The IRS acknowledged that this limit prevented taxpayers and the Service from resolving (1) issues for future tax years or (2) methods that would affect future tax years. Thus, it expanded the program to enable taxpayers to request a PFA for the current tax year, any prior tax year for which an original return is not yet due and filed, and up to four future tax years.

Scope: In general, the Service will consider entering into a PFA (1) on any issue that requires either a factual determination or an application of well-established legal principles; (2) regarding a method used by a taxpayer to determine the appropriate amount of an item of income, allowance, deduction or credit; (3) for an issue under an IRS operating division other than LMSB, but only with the other division's concurrence.

The revised guidelines expand the issues eligible for the program, by stating that any domestic or international issue that requires either a factual determination or application of well-established legal principles and is not excluded by the revenue procedure, is likely suitable for the PFA program. The nonexclusive list of eligible domestic issues and the exclusive list of eligible international issues provided in Rev. Proc 2001-22 have been removed.

Rev. Proc. 2005-12 also provides clear guidance that a PFA cannot be obtained for a transaction that has not yet occurred, but rather only for completed transactions and events. According to the IRS, there had been some confusion on this issue.

In the new revenue procedure, the IRS encourages taxpayers pursuing a PFA on international issues to seek competent authority consideration under the mutual agreement procedures of any applicable U.S. income tax convention. A PFA may also be requested for an international issue that has been previously submitted for competent authority assistance.

Under previous guidance, the acceptance of a taxpayer's PFA request was at the discretion of the LMSB Industry Director with subject-matter jurisdiction over the taxpayer. The Industry Director had final decision-making authority as to whether a taxpayer's request was suitable for the PFA program. Now, prior to making any decisions to proceed with a taxpayer's request, the Industry Director must first coordinate and consult with the Associate Chief Counsel having subject-matter jurisdiction over issues proposed for the PFA program. As part of that coordination effort, the Associate Chief Counsel may decide whether the issue would be better suited for the letter ruling process. In general, an issue concerning the interpretation of rules of law that are not well settled is more appropriately handled by that process.


Rev. Proc. 2005-12 describes the application, review and acceptance process for the PFA program. The program has been highly successful, consistently receiving high ratings from taxpayers. It has been an effective tool for reducing costs and providing certainty on examined issues earlier than resolution sought during the traditional post-filing examination process.
Exhibit 1: Comparison of pre- and post-PFA time savings

Cumulative hours Taxpayer LMSB
(executed PFAs) (hours) (hours)

Actual hours 19,655 14,881
expended--PFA process

Estimated hours 37,755 21,298
required to be

Time savings-actual 18,100 6,417
PFA process vs.
post-filing process

Percentage 47.9% 30.1
PFA process vs.
post-filing process

Source: Anns. 2004-59 and 2004-30

Exhibit 2: PFA applications received during calendar years 2000-2003

Application status Years

 2000 2001 2002 2003

Received 19 26 44 42

Accepted 12 18 25 29

Rejected 7 8 14 5

Withdrawn before
acceptance/rejection 0 0 1 1

Withdrawn 1 2 4 1
after acceptance

Pending acceptance 0 0 4 7
at December 31

PFAs executed 7 5 12 18

Source: Anns. 2004-59, 2003-43 and 2002-54

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Title Annotation:pre-filing agreement
Author:Sylvia, Sharlene M.
Publication:The Tax Adviser
Date:Apr 1, 2005
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