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TEI-IRS Mid-States Region liaison meeting.

On January 23, 1997, representatives of TEI's Region VII and Region VIII, plus TEI Executive Michael J. Murphy, held the Institute's annual liaison meeting with officials from the Internal Revenue Service's Mid-States Region. The minutes of the meeting, which were prepared by David L. Bernard (TEI's Vice President-Region VII), are reprinted below.

Welcoming Remarks

On behalf of the Internal Revenue Service, Regional Commissioner Gary Booth welcomed TEI to Dallas. He said that TEI liaison meetings afforded the region a good opportunity for both TEI and the IRS to take stock of their relationship and to discuss many issues of common concern. He then commented briefly on the impending resignation of Margaret M. Richardson as Commissioner at the end of filing season. He noted that Treasury Secretary Rubin has suggested that the Commissioner's replacement may be an individual with broad business management skills as opposed to being a tax lawyer or accountant (as traditionally been the case.)

Mr. Booth also discussed the following: (1) tax simplification; (2) the IRS's Tele-File service, pursuant to which 26 million individuals are eligible to file returns by phone (he encouraged major corporations to support this initiative); (3) the National Commission on Restructuring the IRS, which is studying the practices and procedures of the IRS (Mr. Booth said the IRS hopes to achieve funding stability as a result of the Commission's report, which is due this summer): (4) the effect of budget constraints on the IRS, including a hiring freeze, restricted travel, outsourcing, early retirements, "buyouts," and outplacement services (the IRS is making contingency plans for a reduction in force, which -- if it occurs -- will be the first in agency's history).

With respect to the recent realignment of the Appeals organization, Mr. Booth reported that Thomas Kuntz, Regional Director of Appeals, will report to National Director of Appeals who will report to Deputy Commissioner. (Previously, Mr. Kuntz reported to the Regional Commissioner.) Mr. Booth explained that the realignment was effected to formally separate of Appeals from the Compliance function and, hence, to underscore Appeals' independence.

Mr. Booth concluded his opening remarks by thanking TEI for the excellent support and cooperation the chapters, regions, and national organization had given to the Mid-States Region.

On behalf of TEI, Michael Murphy thanked Mr. Booth and the other IRS officials for meeting with the Institute. He emphasized the importance of regional liaison meetings to TEI's mission of improving tax administration (a goal TEI shares with the IRS) and serving its members by raising issues of common concern and keeping them informed important developments.

Mr. Murphy next reported that the Institute's President, James R. Murray of PacifiCorp, has testified recently before the National Commission on Restructuring the IRS. He said that the testimony expressed not only the Institute's views on the causes of tax law complexity (and its recommendations for improvement), but also supportive comments on the IRS's Coordinated Examination Program. Mr. Murphy added that the Institute had decried the unprecedented "IRS bashing" that had occurred in recent years. He concluded by noting that TEI had supported the centralization of Appeals and recognized that enhancing communication between the IRS and taxpayers is "a two-way street."

Dale F. Hart, the region's Chief Compliance Officer, reported on the status of the IRS's realignment and consolidation. He stated that transition had gone well and is nearly complete at all levels. He also comments on the effect of recent resource cutbacks, observing that the reductions had been difficult to absorb, but said the IRS remains committed to devoting sufficient resources to the CEP program. Indeed, engineers and economists are being hired, he said.

Mr. Hart said that the IRS wants to encourage joint planning of examinations. He said that bringing taxpayers into the planning process will enable the IRS to complete audits on a more timely basis and thereby enhance currency. Finally, he reported on several management initiatives to resolve issues, including Accelerated Issue Resolution (AIR), pre-filing determinations, early referrals to Appeals, advanced pricing agreements, and expansion of Examination settlement authority. He said that TEI and the IRS share a common goal: resolution of issues at the earliest possible stage.

Thomas T. Kuntz, Regional Director of Appeals, also discussed the recent decision to centralize Appeals. He stated that the change is expected to have "little impact" managerially on the region. Appeals will continue to interact with the regional Compliance personnel, seeking improvements. He made reference to "Case Quality of Process Review" reports, which set forth ways in which Appeals can do its job better and faster, and he observed that the use of "work plans" had enabled Appeals to save more that 100 days per case; indeed, having formal work plans with dates agreed to by the taxpayer saves more than 200 days per case.

Mr. Kuntz also discussed various alternative dispute resolution procedures. He reported that the use of the early referrals to Appeals procedure had not grown as much as the IRS would like. He said the early referral program was a good one that should be utilized more. As for mediation, we said there had been five cases assigned by Team Chiefs, and that three were closed last year. He reported that the IRS will extend its mediation test one additional year.

With regard to the processing of cases, Mr. Kuntz said that last year, there was an average of 193 days from a request to an Appeals conference. This year, the period is down to 145 days.

Finally, he briefly discussed several issues, including joint meetings between Appeals and Examination personnel, the sustention rate in Appeals, process reviews, the role of Team Chiefs, and the importance of taxpayer involvement in the audit planning process.

Questions and Answers

In advance of the meeting, TEI submitted several questions to the IRS. The Institute's questions (in somewhat edited form) and a summary of the IRS's responses are set forth below.

Question 1: The Oklahoma Large Case Group has now been given the responsibility for Arkansas, in addition to Oklahoma. However, the Large Case Group's Team Chief no longer resides in Oklahoma. The Team Chief now works out of the Dallas or Houston office. Why doesn't Oklahoma have a Team Chief and what effect will it have on the efficiency of handling cases so assigned?

Answer: The Team Chief who previously resided in Oklahoma recently retired. At the time of his retirement, the low inventory of large cases in Oklahoma did not justify positioning a Team Chief in Oklahoma City. Oklahoma and Arkansas have only 24 large cases out of a total of 405 in the Mid-States Region. In the Mid-States Region, there are currently 14 Team Chiefs, including 3 in Houston, 3 in Dallas, 5 in Chicago, 1 in Omaha, 1 in St. Paul, and 1 in St. Louis. The number of Team Chiefs in the Mid-States Region will likely drop to 13 because of a reduction in the number of CEP cases in the Mid-States Region. All Team Chiefs have travel budgets and, accordingly, visiting outlying districts should not be a problem. The location of Team Chiefs is part of an ongoing effort to maximize efficient usage of the chiefs. In Chicago, the former Chief of Appeals has accepted a position back "on the line" as a Team Chief. It was noted in a related matter that the same discussion holds true for litigation and the assignment of Counsel to the various offices.

Question 2: In a time of IRS budget cuts, there seems to be renewed emphasis by agents in the CEP program to focus on large proposed adjustments not on issues that can be sustained at Appeals or in court. CEP taxpayers have been assured by management at the District level that the performance of agents is not based on dollars generated per audit hours incurred. How does the region balance the budget pressures with obtaining quality sustainable audit issues? How is the region monitoring this situation?

Answer: There has not been a change in focus in the large case program. The IRS budget cuts have not really hit the CEP program. Agents are not measured by audit dollars generated. Each District Director is required to certify that agents are not being measured based on dollars generated. If taxpayers feel there is pressure for their agent to generate targeted dollars, they should request a meeting wit the branch chief. "Yield" is a factor in evaluating higher levels within the IRS, but is primarily used for purposes of allocating resources. However, agents in the field are measured in terms of ten auditing standards of the CEP program. (Editor's Note: Anyone wishing a copy of the auditing standards should send a written request to TEI Headquarters, Attention: DeAnn Mueller.)

Question 3: Recent internal IRS guidelines clarify the procedures by which the IRS National Office provides written advice to the IRS field personnel to assist in the resolution of non-docketed cases (See Chief of Counsel Directives Manual -- Notice -- (30)-000-273). With regard to Field Service Advice ("FSA"), the procedure says, "Taxpayer participation in the Field Service Advice process is within the discretion of the Field Office with jurisdiction over the case in which the advice is requested. The Field Office may inform the taxpayer that Field Service Advice has been requested, and may offer the taxpayer an opportunity to comment, either orally or in writing, about the facts or law relevant to the issue that is the subject of the request."

(1) What is the region's position with regard to the taxpayer's participation in the FSA process?

(2) Will the Regional Office recommend that the Districts within the region allow field personnel to inform the taxpayer that FSA has been requested and offer the taxpayer an opportunity to comment, either orally or in writing as suggested in the above guidelines?

Answer: There is no initiative to encourage districts to bring taxpayers into this process. Rather, it is left totally up to the discretion of the District Director's staff. The Regional Office will not recommend that the districts allow (or not allow) field personnel to inform the taxpayer that Field Service Advice has been requested. If the taxpayer is aware that FSA is being requested, the taxpayer may request a presubmission conference with the National Office to determine whether the issue should be handled through Field Service Advice (as opposed to a Technical Advice memorandum).

Question 4: What is the IRS's policy on Freedom of Information Act requests from taxpayers in large case audits? What should taxpayers do if the IRS examination team reacts adversely to a Freedom of Information Act request?

Answer: The IRS follows a first-in, first-out procedure with respect to Freedom of Information Act (FOIA) requests; there is no special treatment given to CEP taxpayers in the FOIA process. Prior to submitting a formal FOIA request, taxpayers should informally attempt to obtain the desired documents through their Case Manager. If the IRS examination team reacts adversely to a FOIA request, the taxpayer should elevate its concerns within the district. If the taxpayer continues to face problems, it should call Earl Blanche, Regional Compliance Director in Dallas.

Question 5: What is the current policy on Global Interest Netting?

Answer: The IRS study on Global Interest Netting is complete and a report was scheduled to be issued by January 30th. The IRS believes it would be improper to discuss this issue prior to the release of the formal report. (Editor's Note: The IRS's netting report had not been issued as of March 25, 1997.)

Question 6: Locally the IRS indicated that the Mid-States Region has decided to emphasize or include a comprehensive benefit plan audit as part of the CEP audits. It was also reported that the region is the only region with this emphasis. Is this true? What is behind this decision? How is this equitable administration of the tax law across all taxpayers if it is only a regional IRS focus? One of the local employee benefit plan auditors said he did not understand this decision since most of the issues appear in cases involving smaller / medium sized taxpayers, not at the large case taxpayers.

Answer: The IRS National Office is concerned that there may be discrimination issues within cafeteria plans across the country. The Mid-States Region was chosen, as a testing ground, to determine if in fact there are problems. This review will take place throughout the Mid-States Region in selected CEP audits through this year, and the Mid-States Region will report back to National with their conclusions. This is just a data-gathering exercise in the Mid-States Region. In particular, the Service is looking at discrimination at the executive levels within companies, as well as the adequacy of communications to employees. The Service is also looking for the appropriate filing of Forms 5500 for the plans being reviewed. Currently, the Service is trying to set up Compliance Agreements with taxpayers to get errors corrected. The Service is not out at this point merely to set up tax deficiencies.

Question 7: As part of the CEP planning process, is it possible for the IRS to be more informative as to the number of hours to be spent on areas / issues? We are being encouraged to take an active part in the "planning process," to resolve issues by using the advance resolution mechanism, to allow computer usage / access, etc., yet we don't see any decrease in time spent by the IRS on the audit. The taxpayers' efforts to save time and create efficiencies have not translated into less time spent overall on the audit.

Answer: CEP taxpayers need to be involved in the audit planning process, and not just receive a copy of the completed audit plan. The IRS has a new training module on the audit planning process, which covers involvement of taxpayers. IRS representatives stressed the need for a taxpayer to be active and to push for involvement in the planning process. Progress is being made in some areas such as Houston and Dallas, but it is acknowledged that there is uneven taxpayer involvement in the audit planning process. Actual experience is that there is meaningful taxpayer involvement in less than 50 percent of the situations reviewed. This is a priority within the Mid-States Region.

Question 8: Are there any plans to expand the CEP program in this region to cover more taxpayers?

Answer: The IRS does not go out seeking new CEP audits, but it does have a large business examination program that employs some CEP techniques in cases of smaller taxpayers. CEP cases are selected based on the following: gross assets, gross receipts, operating entities, multiple industry status, team members, specialists, support work by revenue agents, and total examination staff days. There are presently 405 CEP cases in the Mid-States Region.

Question 9: What role does the large case manager have today? Specifically, what duties do they perform? Will these duties change significantly in the next two / three years?

Answer: The large case manager has overall responsibility for the case and the utilization of resources, including issues, experts, and counsel. There are no plans to change the duties of the large case manager in the future. Taxpayers should go to the branch chief if case managers are refusing to discuss specific issues.

Question 10: What guidance is the Regional Office giving to the field regarding the development of audit plans, the level of specificity of those plans, and the sharing of those plans with the taxpayer?

Answer: As indicated in Question 7, it is important to be aware that greater emphasis is being put on the development of an Appeals work plan, with the Team Chief being encouraged to share that plan with the taxpayer. Also, taxpayers are reminded that part 3 of the audit plan sometimes is not complete until 60 to 90 days after the audit commences. This is the part of the audit plan that identifies specific issues that will be reviewed and should be shared with taxpayers.

Question 11: What is the status of travel dollars for specialists?

Answer: The top priority in the matter of travel is case travel. There are no moratorium and no restrictions on travel dollars for specialists. Travel for training and other purposes will be suspended first if there is a threatened effect on the Service's primary mission. If you are having a problem in this regard, please talk to the case manager.

Question 12: What are the implications to taxpayers of the recent reorganization of appeals, where direct line authority has been moved from Regional Commissioners to the National Office of Appeals?

Answer: It is too early to tell what the implications will be to taxpayers. Appeals has always had independence and this recent reorganization merely reinforces that status by giving the taxpayer a clear vision of this role.

Question 13: Has the consolidation of Appeals in the Mid-States Region been a positive factor with respect to scheduling conferences, with taxpayers (i.e., is there faster turnaround time)? If not, what is the future outlook and when can we begin to expect efficiencies to emerge?

Answer: The consolidation of Appeals in the Mid-states Region has contributed to reducing the elapsed time between the date of filing of a protest and the scheduling of the first conference. However, some offices are not staffed correctly and it will take time to match staffing and caseloads.

Question 14: What is the role of the Counsel vis-a-vis Appeals in the Mid-State Region?

Answer: Counsel is to provide assistance when requested by Appeals, whether that be formal or informal. Appeals does not have to abide by Counsel's advice, but must obtain IRS National approval if they decide to go directly against the advice of Counsel. In the event of a docketed case, if counsel finds that factual development is necessary, it may start discovery. In this case, counsel has authority to keep the case without releasing it for review at Appeals. Counsel's position has consistently been that it has no desire to try a case if there is no substantial chance that it will win.

Question 15: A period of time has gone by since the IRS reorganization which reduced the number of regions and realigned or changed many districts. What parts of that reorganization have been successful? How is the taxpayer better served by the new alignment? What would you do differently?

Answer: CEP taxpayers are better served in one respect because we now have at least one specialist assigned to a district in most of the 33 districts.

Question 16: What is the IRS doing with the R&D credit claims? There has been an indication that there is a bias toward disallowance of claims which have been filed with the help of CPA firms (paid on a contingency basis). With respect to the refund claims that are being field for the R&D credit, under what circumstances does the IRS believe internally developed software should qualify for the credit?

Answer: The IRS does have an initiative to look at R&D refund claims that relate to software development expenses. However, there is not a focus on specific CPA firms or on claims generated with the assistance of specific CPA firms. It was noted that there are seven tests that must be met for software to be eligible for the R&D credit. The IRS is skeptical regarding the qualification for credit of software modification expenses.

Question 17: Is it possible to come to an agreement with the region on a capitalization/expanding policy for fixed assets?

Answer: No. This can be discussed in the development of the audit plan, but there is no written policy. The Mid-States Region believes that the capitalization vs. expense issue must be evaluated case by case. The Service does not endorse the "Cleveland capitalization" policy. This Cleveland policy was intended for a specific industry and cannot be applied across the board.

Question 18: We understand that recent taxpayer experience with the IRS concerning record retention agreements varies considerably between various regions of the United States. What is your policy with regard to record retention agreements? Also, on a related topic, have you had any recent experience with digital imaging records being utilized for audit documents?

Answer: The IRS now leaves the decision to the taxpayers as to what should be retained. It is up to the taxpayer to initiate discussions in this area. It was noted that in detail-intensive areas such as earnings and profits and tax credits, the taxpayer and the Service should consider reaching agreement on numbers at certain points in time, so that documents prior to that point need not be retained. The IRS noted that it is now auditing to a PC environment rather than, a mainframe environment, and this obviously impacts record retention policies.

Question 19: Taxpayers are relying on the current "check the box" regulations yet certain government representatives are saying that more legislation is necessary in that area. Are there any comments on this?

Answer: Final regulations are out. The IRS has no further comment. The regulations represent the Service's policy. A member of the staff of the Ways and Means Committee questioned the Service's authority to issue these regulations without specific legislation. IRS Counsel believes that they do have authority to issue these regulations.

Question 20: Is there any knowledge of the "tightening up" of the continuity of interest rules within the reorganization area?

Answer: Proposed regulations were issued in this area on January 15th which liberalized the continuity of interest rules within the reorganization area.

Question 21: In view of budget cutbacks and staff reductions, what is the current status of the IRS computer modernization project mandated by Congress, and what effect will this have on the Mid-States Region?

Answer: The IRS now has a Chief Information Officer and he has only been on board for six months. We must take a "wait and see" approach to determine what the impact of budget cuts will be on the computer modernization project. The Tax Systems Modernization (TSM) budget is being reduced each year, but TSM principally relates to return processing. The CEP program is working to upgrade the revenue agents with Pentium computers and more RAM memory, etc.

Closing Comments

There was a discussion of the potential impact of budget cuts. The bottom line is that there is a reduction-in-force plan should it be needed, since the impact of attrition by itself would not be nearly great enough. There is a report due to Congress on March 2, 1997. In the event that such a plan is to be put into force, the employees must be given a 60-day notice.
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Title Annotation:January 23, 1997 meeting
Publication:Tax Executive
Date:Mar 1, 1997
Previous Article:Tax Executives Institute-Joint Committee on Taxation liaison meeting: minutes.
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