TEI comments on Phase II currency initiative: May 7, 2004.
This letter responds to a request for Tax Executives Institute's comments on LMSB's Phase II initiative to improve currency and cycle time. TEI appreciates the opportunity to comment on this initiative involving changes related to the use of information document requests (IDRs), Forms 5701 (Notice of Proposed Adjustments), revenue agent reports (RARs), and 30-day letters. While TEI has long and consistently supported the goal of currency, we have significant reservations about some of LMSB's proposals. These concerns are set forth below.
This initiative is the second in three phases of LMSB's productivity improvement effort. In respect of the IDR process, the Phase II team has proposed a process whereby the taxpayer's behavior would determine the applicable IDR process. The general IDR process governs the situations in which the taxpayer provides information to the IRS in a timely manner. The procedure, however, also provides rules for dealing with two sets of taxpayers whose behavior does not satisfy the general rule: (1) the delayed-response taxpayer, where compliance is achieved through additional meetings or requests; and (2) the non-responsive taxpayer, which involves the potential use of summonses to achieve compliance.
The proposal would also eliminate the use of the traditional RAR by combining it with the issuance of the 30-day letter and limit extensions of time for filing a protest.
TEI agrees that both taxpayers and the IRS have a common goal of completing the audit in a fair, timely, and efficient manner. Several innovative procedures--such as the Limited Issue Focused Examination (LIFE), Joint Audit Planning Process, and Fast Track Mediation and Settlement-were developed with taxpayer input to improve the examination process and promote currency. These procedures all have in common a focus on the collaborative effort between the taxpayer and the IRS audit team and the desire to push resolution of issues down to the lowest possible level.
TEI agrees that the backlog of cases must be addressed before significant efficiencies can be achieved. Although the Institute commends LMSB for working to make the audit process more consistent and uniform, we regret that the Phase II proposal has the potential for adversely affecting the relationship between cooperative taxpayers and their audit team. The mandatory, non-collaborative processes developed by the Phase II team represent a step backward, not only by dictating a "one-size-fits-all" solution to IDR response time, but by moving the decision-making authority higher up the chain of command. In our view, more flexibility must be built into the process to acknowledge specific taxpayer circumstances and to ensure that taxpayers are not mistakenly characterized as delinquent or non-responsive.
There is an adage in the management field that "you get what you measure." If you measure IDR response time, that will be exalted above all else. Submitting written responses to IDRs, therefore, will likely take precedence over informally providing helpful information on a taxpayer's business practices, complicated transactions, or technical tax issues. Additional meetings will not resolve issues relating to the lack of resources and may well eat into time available to respond to the IDRs. Rather than imposing a rigid response time for IDRs, the IRS should work collaboratively with the taxpayer to set a reasonable completion date for the examination. Thus, the IRS team and taxpayer would determine what procedures--such as Fast Track, LIFE, or targeted response times to IDRs--work best for them.
TEI is very much concerned about the ripple effect of the Phase II proposal. If taxpayers have inadequate time to review Forms 5701, for example, they may be more inclined to reject the proposed adjustments and move the issues to Appeals. Moreover, curtailing the time to prepare a high-quality response to the 30-day letter may result in more skeletal protests, making Appeals' review of the un-agreed issues more time-consuming. With more pressure on Appeals, issues that should have been resolved within the IRS may well be transferred to the courts. (The worse-case scenario, which should not be dismissed out of hand, is that some taxpayers will likely reject the Phase II proposal and insist that the IRS information-gathering proceed exclusively through the issuance of summonses. Such a course of action would surely not advance the cause of audit currency.)
By keeping an eye on the end result, the IRS can advance its currency goal without rupturing its relationship with taxpayers. In other words, maintaining an open, honest, and two-way relationship between the taxpayer and the audit team--not isolating one item in the process to define cooperation--is the most effective way of getting and staying current.
The IDR Process
a. The 20-Day IDR Response Time. The Phase II initiative would create a 20-calendar-day time frame for responding to IDRs unless an earlier time frame is negotiated during the joint audit plan or opening conference. Any deviation from the mandatory time frame would have to be approved by the Territory Manager. The intent of the proposal is to standardize the mandatory time frame and establish a default process to allow for additional time on an issue- or case-specific basis. Thus, the process seemingly acknowledges that not every IDR is capable of being answered within a 20-day period. TEI suggests that this exception be spelled out more clearly in the proposal. (1)
TEI agrees that flexibility in diverging from the prescribed time frames must be built into the IDR process. The nature of an IDR will often dictate its response time. For example, IDRs related to domestic issues may be easier to answer than those related to international operations, where information must be obtained from overseas. IDRs from specialists may take longer to answer because of the complexity of the issues. Acquisition-related data are particularly difficult to obtain. An effective and realistic procedure should respect these differences.
Rather than focusing on the response time for individual IDRs, the goal should be to review the average response time. If a time limit is rigidly enforced, the result may be hastily drafted responses that may require more follow-up. Moreover, an unrealistic response time may result in the issuance of summonses. Such a result would only extend the audit (or Appeals process), benefitting no one. Reliance on the average response time would also be more consistent with the criteria for determining whether to grant an extension of time in which to file a protest (on page 12 of the proposal).
b. Detailed Analysis by Audit Team. In order for the process to work effectively, there must be accountability on both sides of the IDR process. Thus, TEI is pleased that the new procedure would require the IRS audit team to determine whether the taxpayer's response is adequate within 5 days and to perform a detailed analysis within 15 days. TEI recommends that a process for informing the taxpayer of the result of the review or for issuing a Form 5701 within a stated time frame should be included in the process. We also recommend that, consistent with our suggestion in respect of IDR response time, the procedure provide that the review is based on an average response time. Finally, we suggest that adherence to these deadlines be built into the agents' performance measurements.
c. Quality and Quantity of the IDRs. The truncated response time places a premium on well written, focused IDRs. If the IRS's currency goal is to be met, IDRs must be discussed with taxpayers before they are issued and vague or overbroad IDRs must be refined or eliminated. Such an approach would limit the number of inadequate responses and eliminate the need for follow-up questions. A procedure for reviewing the IDR before it is issued should be built into the process, i.e., a "pre-IDR" process.
If the date on the IDR is to become critical, the date listed must reflect the date the taxpayer receives it. Some members report receiving IDRs from agents that are dated two or three weeks previously. Such delays in delivery skew the averages and paint an unfair picture of a taxpayer's responsiveness.
Questions should also be limited to one per IDR. International examiners, financial products specialists, and other specialists are particularly prone to writing extremely complicated IDRs; multi-part questions should be avoided.
Finally, the IRS audit team should take into account what else may be on the taxpayer's plate when the IDR is issued. Thus, IDRs issued during year-end closings or the tax compliance season should be avoided or at least staged in consultation with the taxpayer. In addition, a 20-day response time is unrealistic when the IRS issues numerous IDRs at the same time, e.g., at the opening of the cycle. One member noted that at the beginning of her last audit cycle, 70 IDRs were issued on the same day. Again, working with the taxpayer to address the timing and quantity of the IDRs is the best approach to achieving currency.
d. Role of the Team Manager. The new procedure would require that deviations from the 20-day time frame be approved by the Territory Manager. TEI suggests that this approval should rest with the Team Manager, who is in the best position to determine the compliance history of the taxpayer, the taxpayer's responsiveness, and the complexity of the issues to be reviewed? The Territory Manager should be involved only when the taxpayer and Team Manager cannot reach an agreement.
In TEI's view, the Team Manager should continue to manage the audit. Thus, the Team Manager's involvement in the IDR process should be specifically addressed in the procedure.
e. Unanticipated Absences. The new procedure would provide an accommodation for unanticipated absences by the examination team, but not the taxpayer's staff. A similar accommodation should be provided in respect of unexpected absences by the taxpayer's staff, who are also subject to medical or family emergencies or other unforeseen circumstances such as employee turnover. Holidays should also be accommodated. Not including a reciprocal provision reinforces the impression that the process is one-sided.
f. The Use of Summonses. Perhaps the most troubling aspect of the new procedure is its emphasis on the use of summonses to achieve currency. The new procedure would seemingly require the issuance of a summons to "delinquent-response taxpayers" no later than 70 days after the IDR is issued if incomplete information is submitted. An effective audit process depends upon cooperation and the mere threat of a summons has the potential of adversely affecting the team's relationship with the taxpayer. This is particularly disturbing if a complicated, multi-question IDR has been issued and the taxpayer's responses represent substantial compliance. The threat of a summons will only serve to make the relationship more adversarial. Safeguards must be built into the procedure to ensure that the summons process is not used inappropriately.
The 5701/RAR/30-Day Letter Process
a. Combining the RAR and 30-Day Letter. The new procedure would eliminate the Revenue Agent Report (RAR) by combining it with the 30-day letter. Although the chart on page 11 is not clear, apparently there is now a 30-day period between the issuance of the RAR and the issuance of the 30-day letter. If taxpayers and the IRS audit team review drafts of the Forms 5701 as they are developed, TEI agrees that this 30-day period could be eliminated. Not waiting until the end of the audit to issue the majority of Forms 5701 is critical to this initiative.
b. Response Time. The new procedure would require all Forms 5701 to be answered within 30 days. The time for filing a protest would also be limited to 30 days; thus, the procedure would eliminate the automatic 60-day extension of time in which to respond to the 30-day letter. Extensions would not be granted unless a federal national disaster has been declared or the taxpayer's overall response time for IDRs is 20 days or fewer and the taxpayer's responses to the Forms 5701 are deemed adequate.
Requiring responses to Forms 5701 within 30 days fails to take into account issues that may arise during the audit, such as those prompted by new legislation, the issuance of regulations, or court decisions. The management of the Forms 5701 will--and should--vary by company and issue.
Significant delays on the audit process are not normally owing to how long it takes a taxpayer drafts a protest, but rather the length of the examination itself. TEI is concerned that the shortened time period for filling a protest may reduce the quality of the protest and place more pressure on the Appeals process. It takes time to perfect an appeal, especially if multiple Forms 5701 are issued near the end of the audit. For example, one member recently received an RAR that exceeded 1,600 pages without even a table of contents or a summary of the proposed adjustments. In these circumstances, taxpayers may well resort to a form of "notice pleading" to meet the deadline. The filing of skeletal protests will not help to achieve currency and may well diminish it.
TEI also suggests that the process include a 30-day deadline for the IRS to transfer the case to Appeals after the protest is filed.
c. Tax Computation. The new procedure anticipates that only one preliminary tax computation would be made and issued with the last Form 5701 for unagreed cases. Most large taxpayers have complicated issues that must be addressed in the tax computation, such as carryovers, the alternative minimum tax, or section 382 limitations. Taxpayers need time to respond to the last Form 5701 before the tax computation is performed.
Moreover, some issues may arise--such as the calculation of net operating losses--only after the tax calculation is completed. While only one calculation may be possible in some cases, careful analysis of the tax liability often requires additional computations. The proposal needs to address these issues.
It is unclear how this proposal would affect the tax computation for agreed or partially agreed cases. Perfecting the tax computation in these circumstances is necessary and may well take more than 30 days, particularly if complex computations involving items such as foreign tax credits must be performed. Neither the chart on page 13 nor the flow chart on page 14 addresses this issue.
TEI appreciates the opportunity to comment on Phase II of LMSB's Productivity Improvement Initiative. We would be pleased to work with you to improve the proposal.
If you have any questions, please do not hesitate to call Paul O'Connor, chair of TEI's IRS Administrative Affairs Committee, at 978.715.1232, or Mary L. Fahey of the Institute's professional staff at 202.638.5601.
(1) For example, page 6 of the proposal refers to "a default process to allow additional time on issue or case specific basis" and a "firm 20 day initial IDR response time." Yet, this exception is not included in the flow charts beginning on page 8.
(2) It is unclear whether the new process requires the approval of the Territory Manager to obtain an extension of time to respond to a particular IDR or only to provide for an initial response time of more than 20 days in the audit plan. This issue should be clarified in the final procedure by specifying that the Team Manager may approve extensions of time to respond to a particular IDR.
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|Title Annotation:||Tax Executives Institute|
|Date:||May 1, 2004|
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