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Tax Executive Institute-Internal Revenue Service liaison meeting: minutes November 19, 1996.

Minutes November 19, 1996

On November 19, 1996, Tax Executives Institute held its annual liaison meeting with the Commissioner of Internal Revenue and other senior officials of the Internal Revenue Service's National Office. The agenda for the meeting is reprinted in the November-December 1996 issue of The Tax Executive. The minutes of the meeting, which have been approved by both the Institute's delegation to the meeting and the IRS, are reprinted below.

Opening Comments

On behalf of the Internal Revenue Service, Commissioner Margaret M. Richardson welcomed TEI President James R. Murray and the other members of the delegation from Tax Executives Institute to the liaison meeting. The IRS's and TEI's delegations to the liaison meeting are set forth in the box on the following page.

The Commissioner thanked the Institute for scheduling the meeting and said she looked forward to a productive exchange of ideas and views. She also expressed the tax agency's appreciation for the support that TEI had provided, especially during the past year. The Commissioner said that the previous year had been a challenging and exciting one for the IRS, stating that despite the external distractions, the IRS had experienced a productive year. She said that the IRS was continuing to deal with the consequences of its recent reorganization and had faced a good deal of analysis over how it can be more productive. She added that the budget picture would not change materially and, accordingly, the IRS would continue to seek out ways to be more efficient. As always, she added, Congress and the IRS needed to take a hard look at the agency's priorities. She said that it was critical that a proper balance be struck between taxpayer service, compliance and training. If the IRS is to do its job, she said, it is critical that it have well-trained, well-equipped personnel.

The Commissioner explained that the entire government had come under pressure to contract government services and that the IRS had not been immune to that pressure. She said that the IRS's pilot project on contracting out collection services had been extended by Congress, adding that it was really too soon to draw any conclusions from the pilot. (She said the details of the second pilot had not yet been put together, noting that the pilot would be administered by the Department of the Treasury.) She elaborated that the IRS was also evaluating the outsourcing of processing services.

Turning to the budget picture for fiscal year 1998 and beyond, the Commissioner predicted that the IRS's budget would not be much better than it had been. The Commissioner said that the IRS needed to address how best to operate in an environment of shrinking budgets. She emphasized that the IRS wanted to be viewed as part of the solution, not part of the problem. She acknowledged with regret that the IRS budget is viewed as a "spending program," and made specific reference to recent IRS compliance initiatives. The Commissioner continued that the IRS had served more taxpayers during the past year -- by telephone, by the Internet, by person-to-person contact. She then invoked the maxim that "it takes money to make money."

The Commissioner briefed the Institute on the IRS's specific productivity increases, including the success of its TeleFile program whereby three million taxpayers filed by telephone. She said that the IRS wanted to build upon its success and would expand the TeleFile program to all Form 1040 E-Z filers. As for the IRS's experience with the Internet, the Commissioner said that the IRS's home page had been very well received. She noted that comments on proposed regulations could be filed via the Internet and that this new avenue of citizen-to-government contact had spawned numerous comments from "untraditional" sources.

As for the National Commission on Restructuring the Internal Revenue Service, the Commissioner acknowledged TEI's testimony before the group and expressed the IRS's appreciation for the Institute's balanced comments. (The Commissioner serves as an ex officio member of the Commission and was present when the Institute testified before the group on November 8.) She said that the National Commission had many areas of focus and that it was too early to know precisely "where it's going."

Following the Commissioner's opening remarks, Mr. Murray responded that TEI was very pleased to be holding the liaison meeting. He thanked the Commissioner and the other IRS officials who were present for the time they had taken in preparing for the meeting. He said that TEI fully understood the myriad challenges that the IRS was facing, adding that many of the challenges ("doing more with less") were identical to those faced by the business community. Mr. Murray said that the Institute empathized with the IRS's situation. He then commented that TEI was astonished by the frequency and tone of political statements about "pulling the IRS out by the roots." He characterized such comments as inappropriate and said they easily could do more harm than good. He then reiterated the Institute's support for the IRS's modernization efforts and for its training initiatives.

Mr. Murray reported that TEI had reconsidered its own organizational structure in light of the IRS's reorganization, and had realigned its chapters and regions in a way that should facilitate liaison activities between the Institute's local chapters (and regions) and the IRS's streamlined field structure. TEI's new organizational structure will go into effect in August of 1997, he said.

Mr. Murray referred to his testimony before the National Commission on Restructuring the IRS, generally complimenting the IRS National Office for its Coordinated Examination Program (CEP) initiatives. He said that the IRS had done many positive things in recent years, but added that taxpayers were frustrated about the uneven implementation of initiatives in the field. He said another major issue that the Institute wanted to address during the liaison meeting was growing taxpayer concern about the IRS's approach to capitalization issues.

Referring to the Commissioner's comments on the IRS's "budget woes," Charles W. Shewbridge inquired whether the budget situation augured cutbacks in any programs affecting corporate taxpayers. The Commissioner responded that there were no corporate programs specifically designated for reduction, but noted that the IRS's training initiatives would be affected.

Deputy Commissioner Michael P. Dolan reported that, although the budget freeze had adversely affected the IRS's plans to replace engineers and other specialists reduced by attrition, the budget reductions generally would not affect the CEP program. He added that certain support areas would be affected by budget limitations, including training, travel, and the hiring of expert witnesses. The Deputy Commissioner said that Vincent Canciello, National Director of Appeals, was addressing some staffing issues in Appeals, moving personnel from one location or assignment to another in order to redress overstaffing and understaffing issues.

Michael J. Murphy, TEI's Executive Director, asked whether the limitations on travel would prompt the IRS to undertake more support audits, which might well raise communications concerns. Thomas W. Wilson, Jr., National Director of Corporate Examination, said the CEP program has not experienced any dramatic decreases in its travel budget and did not foresee any correlative increase in the number of support audits. He added, however, that the IRS was working to improve internal communications within CEP teams, and he explained that the IRS had installed a Windows NT system that could facilitate better linkages between team members in a secure environment. These linkages could ultimately permit a decrease in travel.

The Commissioner reported to TEI that the IRS was attempting to maximize the benefits flowing from its training program by taking fuller advantage of video-conferencing opportunities and leveraging the abilities of its high-quality instructors. She confirmed Mr. Dolan's statement that CEP taxpayers may be affected to the extent attrition reduces the number of available specialists.

Chief Counsel Stuart M. Brown echoed the Commissioner's and Mr. Dolan's words of welcome. He said that the IRS annually held liaison meetings with a number of stakeholders and he complimented the Institute on its preparation for the meeting; more preparation produces a better meeting, he added. The Chief Counsel said that TEI's written agenda for the meeting was the best it had received, adding that the Institute's efforts helped the IRS tremendously. Mr. Dolan added that TEI's agenda was characterized by an "unmatched literary style." Mr. Brown then said that TEI had historically done a good job of preparing meeting minutes and disseminating them to its membership, and urged the Institute to continue doing so. Mr. Murphy said the Institute believed the wide circulation of the minutes benefitted not only the Institute's membership but also the organization's local liaison activities.

Report of the Taxpayer Advocate

At the Commissioner's request, Lee Monks discussed the effects of recent legislation on his position as the IRS's Taxpayer Advocate. (Previously, Mr. Monks's title was "Taxpayer Ombudsman.") Specifically, Mr. Monks reviewed the changes effected by the Taxpayer Bill of Rights 2 (T2), including changes in the rules relating to Taxpayer Assistance Orders (TAOs) and the enhanced linkage between the Taxpayer Advocate and the Problem Resolution Officers (PROs) in the field. Mr. Monks also explained the requirement that the Taxpayer Advocate prepare annual reports to Congress on (i) the office's plans for the year in respect of taxpayer rights and burdens, and (ii) the significant challenges that taxpayers face in dealing with the IRS, coupled with the Taxpayer Advocate's recommendations for addressing those challenges. Mr. Monks said that one outgrowth of T2 would be better and continual communications between his office and the IRS field functions. He said he hoped his office's dialogue with stakeholder groups such as TEI would also increase.

Mr. Murray thanked Mr. Monks for his report. He noted that the primary contact that CEP taxpayers had with PROs and the Taxpayer Advocate related to the processing of accounts. He said that, although there had been some progress in the area, corporate taxpayers were often frustrated by the inability to reconcile accounts. Mr. Monks acknowledged that the primary interaction between CEP taxpayers and PROs related to account problems and expressed the hope that the advent of EFTPS (Electronic Federal Tax Payment System) would ameliorate many of the problems.

Robert L. Ashby, chair of the Institute's IRS Administrative Affairs Committee, asked whether, as a general matter, CEP taxpayers should deal in the first instance with the PRO or, rather, should work through the Case Manager in resolving account problems. The ensuing discussion confirmed that generally CEP taxpayers should use their Case Manager (or Team Coordinator) as the point of contact.

The Commissioner thanked Mr. Monks for his summary, and added that T2 contained a number of other provisions that, while not directly affecting large case taxpayers, would affect the IRS's interaction with the taxpayer community. She made specific reference to the enactment of intermediate sanction provisions relating to exempt organizations.

Implementation of CEP Initiatives

At the Commissioner's request, Mr. Wilson turned to the agenda topic relating to the effective and even implementation of CEP initiatives in the field. He began by reaffirming the IRS's appreciation to TEI for its involvement in, and support for, various initiatives relating to the Coordinated Examination Program. He said that TEI's participation had been quite constructive and helpful.

Mr. Wilson reported that the IRS had effected numerous changes in the Internal Revenue Manual to ensure that field personnel were aware of, and encouraged to embrace, various initiatives to involve taxpayers in the audit planning process and to facilitate the resolution of issues at the lowest possible level. He added that the IRS was continuing to publish CEP Extra!, a quarterly newsletter intended to disseminate information to the field, and that it endeavored to make information available to field agents on-line to provide them with instant access to what the IRS called its "best practices." Mr. Wilson continued that the reduction of IRS districts to 33 as part of the reorganization had made it easier to communicate with the field and to ensure that national initiatives are effectively implemented.

Mr. Wilson continued that in September the IRS had held a meeting of all CEP branch chiefs, at which a variety of different initiatives were discussed; he said that the branch chiefs had shared their own best practices and explored how best to advance the IRS's objectives of reducing taxpayer burden, increasing compliance, and achieving productivity increases. He added that among the issues discussed was the perception that the IRS was not being consistent in sharing the audit plan with CEP taxpayers or otherwise implementing National Office initiatives. Mr. Wilson assured TEI that the virtually unanimous view was that the audit plan not only should be shared with large case taxpayers but that it was, in fact, currently being shared. Mr. Wilson said that the IRS was training its field personnel to apply risk analysis principles, and that he believed field agents generally see the benefit in involving taxpayers in the Information Document Request (IDR) process and otherwise sharing information with them. He said that he thought TEI members would continue to see improvements in the management of CEP cases because the field generally sees value in the National Office initiatives.

Roger D. Wheeler thanked Mr. Wilson for his comments. He said that TEI members continue to report inconsistencies across and even within districts (as well as from audit cycle to audit cycle) and explained that the inconsistencies in the level of taxpayer involvement in the audit planning process frustrated taxpayers. Mr. Wilson responded that the expectation is that the audit team will share the audit plan (and other information) with the taxpayer and that the team should have a justifiable reason for not sharing the plan. He elaborated that there are taxpayers that have not been cooperative or forthcoming with the IRS (who "play games") and that if the audit team were not getting cooperation from the taxpayer, a decision might be made, for example, not to share the audit plan. In other words, "cooperation is a two-way street." He added that field personnel were being urged, in appropriate cases, to take more aggressive enforcement action in respect of uncooperative taxpayers (for example, by issuing summonses).

In response to a question from Mr. Murray, Mr. Wilson added that National Office (and Regional) CEP officials were taking a higher profile in respect of CEP taxpayers, often meeting with them to discuss initiatives that seemed to be going well. Mr. Murphy asked whether the National Office representatives had met (or were planning to meet) with so-called uncooperative taxpayers. He suggested that such meetings could underscore the connection between the taxpayer's actions and the IRS's decision not to share the audit plan. Mr. Wilson clarified that he was referring not only to the decision not to share the audit plan, but also to the decision to involve the taxpayer in the overall planning process. Ideally, the team and the CEP taxpayer should move beyond "just passing paper" (the audit plan) to discussing cooperatively and openly how particular issues can most efficiently be examined.

John M. Dalrymple, acting Chief Compliance Officer, observed that there is a consistency problem with taxpayers, too. He elaborated that not all taxpayers respond the same way to IDRs or to Forms 5701 (Notices of Proposed Adjustments). He said that in assessing how to interact with a particular taxpayer on the current cycle, the IRS must take into account the taxpayer's history. For example, if something happened in the prior cycle to suggest that sharing the audit plan had negative consequences for the IRS, then perhaps the audit plan should not be shared on the current cycle. In other words, the goal of consistent treatment should not prevent the IRS from adapting to the circumstances of a particular situation. To not adapt, Mr. Dalrymple said, would be naive. He added that one thing that might affect the team's willingness to share is whether the taxpayer regularly filed claims for refund near the end of the examination; such a practice can be disruptive to the team's time table.

Mr. Murray recommended that where the case manager deems a taxpayer to be "uncooperative," the case manager should meet with the taxpayer to explain why. This would help address the taxpayer's perception of (unjustified) inconsistent treatment. Mr. Wilson agreed. He then reported that the National Office would complete its review and release the University of Michigan's taxpayer burden survey within the next 90 days. Mr. Murray inquired whether the report would stratify problems by geographic area (for example, whether there are more problems in the Western Region than in Midstates). Mr. Wilson said that the report may identify geographic differences.

Mr. Wheeler returned to Mr. Murray's suggestion that the Case Manager meet directly with the CEP taxpayers that are deemed to be uncooperative. He said that both sides should attempt to deal with problems in a forthright manner, eschewing a "cat and mouse game." In appropriate cases, therefore, the Case Manager should say "I am not providing you with the audit plan because you have not been cooperative in that you did x and y and z...." Mr. Dalrymple agreed that candor was critical, and he acknowledged that the IRS had not always done a good job of communicating why it was (or was not) doing things. He opined that the IRS had been sending too subtle a message.

Susan M. Murray inquired about the attributes and actions of uncooperative taxpayers. What characterizes them, she asked. What can TEI do to help remedy the situation? Mr. Wilson responded that some taxpayers apparently believe that it is not to their advantage to be cooperative. For example, they may believe that stalling, or temporizing, benefits their position and, accordingly, may choose not to provide certain information until a case is referred to appeals. Hence, one sign of an uncooperative taxpayer is whether a taxpayer responds to a Form 5701 or rather withholds information from the audit team, providing it only to Appeals.

Paul Cherecwich, Jr. said that, for the CEP initiatives to be effective, both sides must feel that it is in their best interest to cooperate. He said that the team and the taxpayer must strive to identify win-win situations. One key benefit for taxpayers (from "buying into" the various initiatives) would seem to be a shorter examination, but the taxpayer must be assured that, if it assists in shortening one aspect of the audit, the "saved" time will not be spent elsewhere. Mr. Cherecwich said that agents should be more focused in how they approach the audit and how they frame information requests. He commented favorably on Assistant Commissioner Thomas Smith's recent memorandum concerning IDRs for management letters. He said that the memorandum, which said that generalized, open-ended requests were inappropriate, reassured taxpayers that the audit team should not engage in "fishing expeditions. "

Mr. Wilson thanked Mr. Cherecwich for his comments. He said that one message that had been communicated to the branch chiefs at their recent meeting was that there were common benefits to ending audits early. He said audit teams were being told that "it's okay to quit," and reported that, in five of seven reviewed cases in which the accelerated issue resolution (AIR) procedure was used, the current cycle was shorter than its predecessor. Mr. Ashby asked whether there was a correlation between currency and the taxpayer's status as cooperative or uncooperative. Mr. Wilson said yes and that he believed that the current peer review study would confirm the correlation.

Mr. Ashby asked whether the National Office had plans to follow up on its meeting with large case branch chiefs with meetings involving case managers, and he asked whether the effective implementation of CEP initiatives would be built into the case managers' objectives. Mr. Wilson responded that the IRS had plans to teach the education modules to both case managers and team coordinators and that it was endeavoring to secure funding for the training.

Mr. Murray expressed the Institute's concern that the National Office's lauding of increased production (as measured by proposed adjustments or "dollars recommended") -- for example, in the CEP Extra! newsletter -- without an appropriate focus on other measures could lead agents to write up questionable issues. Mr. Wilson said that the IRS recognized the need to have a balanced set of measures. Accordingly, among the factors that are looked to are agreed dollars per staff year, currency, and total adjusted revenues (including claims). In addition, Mr. Wilson continued, the measurement of individual performance is separate from the IRS's program evaluation. Mr. Murphy acknowledged the IRS's separation of program evaluation productivity and individual productivity, but reiterated that taxpayers perceive that agents are evaluated on a "dollars recommended" basis. Mr. Dolan said that the IRS's measures are designed to prevent undue influence being placed on any single factor; the agency has adopted a systematic approach to ensure a balanced appraisal of field personnel. He acknowledged, however, that the IRS may have to refine its measures In this regard, Mr. Wilson invited TEI's suggestions on how best to measure agent performance.

Appeals Initiatives

Mr. Canciello noted that the Institute's agenda has posed several questions concerning recent initiatives by the IRS's Appeals organization to accelerate the resolution of issues. He reported the following:

* Early Referral to Appeals: Since the inception of the program, there have been 23 cases in which the IRS's procedures involving earlier referral to Appeals have been used. The 23 cases have resulted in $6.5 billion being received by the IRS ($5.1 billion was resolved at Appeals). In addition, there are currently 8 cases pending in Appeals under the procedure, which involve 14 issues and $0.5 billion.

* Appeals Involvement in Competent Authority Proceedings: There have been 2 Competent Authority cases involving Appeals completed since Rev. Proc. 96-13 was released, and 11 cases are pending. [Editor's Note: One additional case has been initiated since the liaison meeting.]

* Mediation: Of the 9 cases in which mediation has been requested by the taxpayer, the IRS has agreed in 4; of those, 2 cases have been completed and 2 more are still in process.

Mr. Canciello stated that, all told, $8.4 billion in proposed adjustments has been involved in these alternative dispute resolution procedures. In response to a question, he added that the IRS was still considering whether to extend its test with mediation. [Editor's Note: The IRS subsequently issued Announcement 97-1, extending the trial mediation procedures for an additional year.]

Mr. Murphy reported that the U.S. General Accounting Office has contacted the Institute concerning the GAO's study of the IRS's use of ADR and, more generally, about the agency's response to 1990 legislation mandating the broader use of ADR procedures.

With respect to the shift of the Appeals function from Chief Counsel to the Commissioner's "side of the house," Mr. Canciello reported that the move had gone well overall. He added that the lapse time of CEP cases in Appeals had increased. One factor contributing to the increase, he added, may be the taxpayer's filing of claims; he noted that a review of 28 large cases suggested that the filing of claims late in the process was a cause of delay. Also, where the taxpayer provided additional information after the case reached Appeals, delays occurred because the Examination team is provided an opportunity to review the information. Mr. Canciello said that the review of cases also suggested that lapse time could be reduced by the wider sharing of the work plan. Where the Appeals Officers or Team Chiefs share the plan with the taxpayer, lapse time was reduced an average of 192 days. (Currently, lapse time is approximately 31 months.) Mr. Ashby said that, in his experience, the mutual setting of deadlines for both parties contributed significantly to reducing lapse time. Mr. Canciello agreed.

Similarly, Mr. Canciello said that assigning a technical analyst to do computations at the beginning of the process saved an average of 6 months. He added that taxpayers should be more involved in the computation process. Mr. Murray expressed the view that the Examination and Appeals functions should jointly perform the computations, rather than do them independently; he asked why Appeals duplicated computations that were done by the Examination team, often changing agreed issues. Mr. Canciello said that the presence of carrybacks and carryforwards could necessitate that Appeals recompute the amounts involved. He added, however, that by performing the computations upfront considerable time could be saved, and that the IRS was experimenting with the computation process in the Southeast Region. He explained that, specifically, the IRS was considering having Appeals and Exam use the same computational software. Mr. Murray said the comments were encouraging. Following a discussion of why the Examination and Appeals functions independently perform their computations, Messrs. Murray and Ezrati urged the IRS to go beyond using the same software programs and consider developing a shared Exam-Appeals resource to perform computations. Mr. Canciello said the IRS needed to consider the matter and reiterated his statement that the IRS should involve taxpayers more in the computation process.

Mr. Cherecwich said that a separate but related subject was interest computations. He said there seemed to be inconsistency and uncertainty in the field on how netting calculations are performed where there were periods of mutual indebtedness within an audit cycle. The result is not only delays in the resolution of cases, but the disadvantaging of taxpayers from a financial perspective. Mr. Canciello said that he believed the interest computation issue should be kept separate from other computational issues, but agreed that taxpayers and Appeals personnel should meet early to set the ground rules for performing computations.

The final issue Mr. Canciello addressed was a report that consideration was being given to making Appeals Team Chiefs "managers" as compared with "technicians." Mr. Canciello said that no such change would be made, but he added that Appeals Team Chiefs in the Western Region had been "managers" for some time (and hence not part of the bargaining unit). He elaborated that a task force had analyzed cases from around the country to determine whether the results were affected by the Team Chiefs' status and had concluded that the Team Chief's status did not affect the success or failure of the case. Accordingly, the status quo will be maintained; hence, Team Chiefs in the Western Region will be "managers," whereas Team Chiefs in the other three regions will be "technicians."

Ms. Murray inquired if the IRS had completed its review of whether the National Director of Appeals should be given line authority over field Appeals personnel. In other words, would the IRS structure be changed to centralize control over Appeals by providing that the Regional Directors of Appeals reported to the National Director of Appeals? (TEI had previously recommended such a structure.) Mr. Canciello said that the matter was under consideration. [Editor's Note: Commissioner Richardson subsequently announced that, effective January 1, 1997, the Appeals function would be centralized and the Regional Directors of Appeals would report to Mr. Canciello.]

Technical Advice/Field Service Advice

Mr. Shewbridge requested a status report on the IRS's use of technical advice and field service advice. He specifically inquired whether the use of the field service advice process had declined and whether the technical advice process was being used to set (or at least articulate) national policy in lieu of the issuance of revenue rulings. He explained that it seemed that once a taxpayer-adverse technical advice memorandum is issued, similarly situated taxpayers find themselves faced with analogous proposed adjustments (without the opportunity to engage in the process).

Mr. Brown responded that the IRS was mindful of taxpayer concerns about the field service advice and technical advice processes. He said that taxpayers (directly and through groups such as TEI) had expressed concern about the participation (or lack of participation) in the field service advice process. Often, that process moves too quickly to allow for meaningful taxpayer participation. He added, however, that the National Office encourages agents to ask for taxpayer input into the development of facts and to share the results of the process with taxpayers to the extent they feel comfortable doing so; there is no national policy to require such sharing.

As for the technical advice process, Mr. Brown said the primary taxpayer concern that he was aware of was delay, not distrust. Stated differently, the complaints seemed to go not to the quality of the advice provided, but rather the time it took to secure that advice. He added, however, that the IRS takes seriously the expression of concern that TAMs may be inappropriately used beyond the case in respect of which they were issued.

In response to Mr. Brown's comments, Mr. Shewbridge said that taxpayers may "distrust" the technical advice process because it is not as open as it could be. He explained that taxpayers perceive there to be considerable "lobbying" by Examination personnel after the submission of a technical advice request. Mr. Brown averred that the goal of the National Office was to reach the right result. Mr. Shewbridge said that if the technical advice process were more open, it would be utilized in more cases.

Mr. Brown said that the IRS is endeavoring to clarify the differences between field service advice and technical advice. He added that the technical advice process takes longer than field service advice because it involves more steps and more formal procedures. Taxpayers are involved in the technical advice process and there is no rule against the National Office's consulting with either field personnel or the taxpayer. Mr. Brown said that, beginning in 1991, the National Office attempted to address field concerns that the technical advice process is one-sided in favor of the taxpayer. In other words, the technical advice process was revised and the field service advice process was developed and refined in response to field concerns about inappropriate taxpayer lobbying. Specifically, the technical advice process was opened up and the National Office undertook to keep field personnel more fully informed.

Mr. Brown explained that the National Office continues to believe that it is appropriate to consult with both field personnel and taxpayers. He added that he did0 not think the process is unduly influenced by either type of consultation. He acknowledged, however, that taxpayers are correct in saying the process is different from what it was six or seven years ago; it is more open. He expressed surprise that taxpayers believe they are disadvantaged by the field's participation in the technical advice process and reiterated that the National Office believes that the IRS gets better results by taking steps to ensure that access to National Office personnel is balanced.

With respect to the use of TAMs by the field, Mr. Brown said that if the analysis, authorities, and conclusion of a TAM are correct, it is reasonable to expect that the same results would be reached in other cases with substantially similar facts. The key, he added, is the authorities relied on and the analysis contained in the TAM. He said he hoped that no one was saying that the result in one case is governed by the result reached in a TAM in a different case; on the other hand, if the analysis contained in a TAM is correct, that same analysis could properly be applied in other cases involving substantially similar facts.

Mr. Brown added that the use of TAMs beyond the case in which they were issued is not a phenomenon that is unique to IRS field agents. Taxpayers, too, rely on TAMs in advancing their positions. He acknowledged that section 6110(j)(3) provides that TAMs and private letter rulings may not be used as precedent, but that proscription prevents no one from invoking the analysis contained in the documents.

Mr. Murray thanked Mr. Brown for his explanation why changes had been made in the technical advice process. He said TEI appreciated the IRS's intentions in opening up the process to greater field participation, but added that taxpayers remain concerned that the National Office may become fixed in its views before the taxpayer's conference of right. (Ordinarily, taxpayers have little contact with the National Office between the submission of a case and the conference of right.) Mr. Murray proposed that there be greater interaction between the taxpayer and the National Office before a decision is made.

Mr. Brown said that the issue that TEI had outlined had not been previously identified as a major problem; rather, the problem seemed to be the amount of time it takes for a TAM to be issued. He asked whether there was a way to expedite the process, for example, by cutting down on the number of meetings or whether such a change would be counterproductive. Mr. Shewbridge said that compressing the time frame was a noble goal, and he suggested consideration be given to limiting or prohibiting ex parse contacts by the taxpayer and the field with the National Office. He repeated that taxpayers perceive the TAM process to be skewed in favor of the field.

Mr. Brown responded that, five years ago, the perception was just the opposite. He reiterated his belief that the process is both open and balanced. He said that he would accept TEI's comments about taxpayer perceptions as accurate (i.e., that is the perception), adding that he did not believe the perceptions reflected reality. Mr. Wilson stated that the field perspective continues to be that taxpayers have unfair access; hence, Examination personnel would prefer to have even more access.

In response to a question, Mr. Brown said the number of technical advice requests is declining. For the last four years, the National Office has issued a couple hundred TAMs a year. As for the number of field service advice requests, Mr. Brown said the numbers were relatively stable but slightly down. He added that the National Office wanted the right process (technical advice versus field service advice) to be used when the field requests guidance and that, to that end, there had been an educational process in respect of whether a TAM or field service memorandum is the proper vehicle for guidance. He referred to a March 1996 Chief Counsel notice concerning the distinctions between the two forms of guidance. (See CCDM-Notice-(30)-000-273.) He concluded that the National Office could not think of better language to use to explain the differences, but he recognized that the criteria were not always easy to apply in practice and that they required the exercise of judgment.

Capitalization Issues

Turning to the agenda item on the need for more generally applicable guidance on distinguishing capital expenditures from currently deductible expenses, Mr. Brown said he believed it would be helpful to review precisely what the National Office has done in the area. He then stated that the National Office had devoted considerable time and resources to capitalization issues, and had in fact issued five revenue rulings, which deal with expenditures for advertising, repairs, environmental remediation, severance payments, and a public utility's demand-side management programs. Mr. Brown continued that, through these rulings and otherwise, the National Office had endeavored to get the message across that taxpayers were not operating in a new world -- that the issue has been around as long as the tax law. The Supreme Court's decision in INDOPCO did not change the law; it merely affirmed an existing principle (while making it clear that the "separate and distinct asset" test in Lincoln Savings was not generally applicable).

Mr. Brown then stated that the IRS recognizes that there is unhappiness with the manner in which issues are being addressed and resolved in the field. Accordingly, the IRS issued Notice 96-7 in an effort to solicit views on whether a global response (rather than a case-by-case or expense-by-expense response) was possible. He stated that TEI's comments in response to the notice were among the very best the IRS received. What became clear through the process, however, was that there was no "magic formula" for resolving the conundrum; in other words, the IRS has not developed an approach to avoid a case-by-case analysis. He added, however, that to the extent the issues are discrete (such as with repairs or advertising or severance payments), they can appropriately be dealt with through the issuance of revenue rulings. The IRS is now in the process of considering whether there are other types of expenditures that should be the subject of rulings.

Mr. Brown explained that the IRS understood taxpayers' frustration because they typically did not "plan" their way into a tax dispute over the capitalization of an expenditure; the issues did not arise transactionally. Taxpayers are asking, why, all of a sudden, are we being asked to capitalize an expense that was incurred in the normal course of business. Accordingly, taxpayers find the raising of these issues disconcerting.

Equally important, the issues that are being considered today are more difficult than the issues raised 40 years ago. The changes may be attributable to a shift in the economy, away from a "bricks and mortar" economy to one that involves more and more intangible assets. Taxpayers and the IRS knew where to draw the line in respect of hard assets. To the extent that intangibles make up a greater proportion of total assets, one can expect that a greater percentage of expenditures may relate to these types of assets and, therefore, may be more difficult to deal with. As the amounts associated with the more-difficult-to-categorize expenditures increase, the IRS cannot simply ignore issues, even if in the past -- because of their relative size -- it could.

Mr. Shewbridge said that field agents seemed to be effecting policy changes through the examination process, and as an example, he referred to the costs associated with building a customer base (as opposed to purchasing a customer base). David L. Klausman continued that many of the expenses that were being challenged were incurred in a company's day-today operations; they did not, he explained, relate to corporate acquisitions or restructurings (as was the case in INDOPCO). Mr. Cherecwich noted that, in summarizing the capitalization issue, Chief Counsel Brown has acknowledged that many of the expenses now being scrutinized were recurring in nature; he suggested that attribute justified the current deductibility of such expenditures. Mr. Klausman next referred to a category of expenses that he said virtually every taxpayer was incurring (or would incur): those related to the "Year 2000" problem with computer systems. He recommended that the IRS National Office address the proper treatment of Year 2000 expenses in an expeditious manner, rather than deferring its consideration until the issue is raised on examination. Mr. Wheeler suggested that the deductibility of certain certification expenses (such as those associated with securing an ISO certification, thereby enabling marketing in the European Community) and reprogramming costs should be clarified, averring that such expenses should not be deemed to fall into the "gray area." He suggested that, unless the National Office interceded to lay down some general principles, taxpayers will "never catch up with ourselves" because agents will just "replace" an issue that is resolved in the taxpayer's favor (say, in a TAM) with another issue that was not covered in the National Office's targeted guidance. Hence, general guidance is needed to resolve issues on a widespread basis.

Mr. Brown thanked the TEI representatives for their comments. He agreed that it would generally be preferable to address the capitalization issue through guidance of general applicability and said that such guidance would be issued -- to the extent possible. He reported that the National Office was working on a number of issues, and appreciated the suggestion that the proper treatment of Year 2000 expenses is a category of expenses that should be addressed through general guidance. He concluded that TAMs are just as frustrating to the IRS as they are to taxpayers since they are limited to their facts.

Mr. Murphy observed that the capitalization issue is a difficult one. He said that early (and generally applicable) guidance could serve the IRS's goal of reducing taxpayer burden -- and likely would also reduce the strain on the IRS's own resources. Mr. Wheeler said that the more the capitalization issue festers, the more Congress may be tempted (or urged) to micromanage the area through legislation.

Mr. Brown repeated his earlier statement that the Institute's comments in response to Notice 96-7 were excellent, and he said the IRS was open to receiving additional comments on capitalization issues that need attention. In response to a question, Mr. Brown reported that the IRS was considering the proper treatment of asbestos removal expenditures. He concluded the discussion of capitalization issues by stating that the National Office continues to try to send the signal that "this is not a revolution!"

Other Issues

Mr. Cherecwich reported that TEI members remain interested in the revision of Rev. Proc. 91-59, relating to general record retention requirements, as well as in the issuance of a revenue procedure on digital imaging (along the lines of the draft procedure published as Notice 96-10). He explained that companies were moving ahead, setting up systems in the absence of guidance, and said that the situation should be addressed as soon as possible. Mr. Brown said that digital imaging guidance was a high priority item for the National Office and predicted that a revenue procedure on the subject would be issued before the end of 1996.

Mr. Ashby asked about the status of the IRS's efforts to streamline corporate filing requirements and, eventually, to move toward the electronic filing of Form 1120. Mr. Wilson responded by saying that the IRS task force on streamlining the Form 1120 was in its report-writing stage and that he hoped that a report would be submitted for review in December and subsequently be discussed at the January meeting of the Large Case Policy Board.

Joseph S. Tann, Jr. commended the IRS for its issuance of Notice 96-60 concerning the excise tax under section 1494(c). (The notice provided that the penalties enacted as part of the Small Business Job Protection Act of 1996 would not be imposed until 60 days after the issuance of guidance on how the provision's reporting requirements could be satisfied.) Mr. Tann said the notice would give taxpayers more time to analyze the provision and submit comments to the IRS and Treasury.

Mr. Tann next turned to recent legislation mandating the congressional review of regulations, asking how the new law had changed the IRS's procedures. In particular, he inquired whether the IRS believed congressional review of regulations would delay the issuance of guidance. Mr. Brown responded that the IRS wants to comply fully with the new law. To this end, the IRS has consulted with the staff of the Joint Committee on Taxation as well as the House and Senate tax-writing committees. Based on those discussions, the IRS has concluded that revenue rulings and revenue procedures, as well as final and temporary regulations, are subject to congressional review, but most other forms of guidance are not. He said that the IRS was not sure how the review process would work from the congressional perspective, but expressed the hope that guidance would not be unduly delayed by the new legislation. He elaborated that he did not believe the portion of the legislation relating to major rules (essentially delaying the effective date of such rules until after a specified review period) would affect the IRS inasmuch as the guidance issued by the IRS generally does not fall within that category (because most IRS rules are not "major rules" as defined in the legislation.)

Concluding Remarks

On behalf of TEI, Mr. Murray thanked the Commissioner, Chief Counsel, and other IRS personnel for their active participation in the meeting. The Commissioner echoed Mr. Murray's sentiments, stating that the meeting had been quite productive.


Margaret M. Richardson, Commissioner Michael P. Dolan, Deputy Commissioner Darlene Berthod, Commissioner's Chief of Staff John M. Dalrymple. Acting Chief Compliance Officer Thomas W. Wilson, Jr., National Director, Office of Corporate Examination Vincent S. Canciello. National Director of Appeals Stuart L. Brown. Chief Counsel Marlene Gross, Deputy Chief Counsel Patrick J. Dowling, Special Counsel (Modernization & Strategic Planning) Robert Castler, Office of Special Counsel

(Modernization & Strategic Planning) Sarah Hall Ingram, Associate Chief Counsel

(Employee Benefits/Exempt Organization) Charlotte E. Perdue, National Director, Strategic Planning Division Lee Monks, Taxpayer Advocate Suzanne M. Sottile, Office of Public Liaison Jane Sievers, Office of Public Liaison

TEI Delegation

James R. Murray (PacifiCorp), TEI President Paul Cherecwich, Jr. (Thiokol Corporation), TEI Senior Vice President Lester D. Ezrati (Hewlett-Packard Company), TEI Secretary Charles W. Shewbridge, III (Bell South Corporation), TEI Treasurer Susan M. Murray (ENRON Oil & Gas Company), TEI Executive Committee Raymond G. Rossi (Intel Corporation), TEI Executive Committee Donna Lee Walker (PPG Industries Inc.), TEI Executive Committee Roger D. Wheeler (General Motors Corporation), TEI Executive Committee Robert L. Ashby (Northern Telecom Inc.),

Chair, TEI IRS Administrative Affairs Committee David L. Klausman (Westinghouse Electric Corp.),

Chair. TEI Federal Tax Committee Joseph S. Tann. Jr. (Ameritech Corporation),

Chair, TEI International Tax Committee Michael J. Murphy, TEI Executive Director Timothy J. McCormally, TEI General Counsel and Director of Tax Affairs Mary L. Fahey, TEI Assistant Tax Counsel Jeffery P. Rasmussen, TEI Assistant Tax Counsel
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Publication:Tax Executive
Date:Jan 1, 1997
Previous Article:Tax Executives Institute-U.S. Department of the Treasury liaison meeting: minutes November 19, 1996.
Next Article:TEI-IRS Southeast region liaison meeting: December 17, 1996.

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