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Tax Executives Institute-Internal Revenue Service liaison meeting.

Reprinted below are the minutes of the February 25, 1994, liaison meeting between Tax Executives I officials of the Internal Revenue Service's National Office. The minutes have been reviewed and appr the IRS. The agenda for the meeting was reprinted in the March-April 1994 issue of The Tax Executive

I. Introduction

On behalf of the Internal Revenue Service, Deborah S. Decker, IRS Chief for Strategic Planning and Communications, welcomed the delegation from Tax Executives Institute. Commissioner Margaret M. Richardson had been unavoidably detained in an urgent meeting on Capitol Hill, but joined the meeting in progress.

On behalf of Tax Executives Institute, TEI President Ralph J. Weiland thanked the IRS for meeting with the Institute. He observed that neither the IRS nor companies have the resources they once did and that they hence must examine how the operation of the tax system--and their specific functions within it--can be streamlined and improved.

Commissioner Richardson welcomed the delegation, adding that the agenda for the meeting contains many "interesting and meaty" topics. Referring to TEI's history of working with the IRS, she said that she fully expects the productive relationship to continue during her tenure. She stated that the IRS wants to be responsive to its outside stakeholders and, while TEI and the IRS may not always agree, a continuing dialogue will ensure a better tax system.

II. The IRS-TEI Partnership

A. Electronic Filing of Tax Returns. Commissioner Richardson referred to recent congressional hearings on refund fraud, which focused particular attention on the electronic filing of tax returns. The IRS has agreed to work with the staff of the Subcommittee on Oversight of the House Ways and Means Committee and the U.S. General Accounting Office to study ways to prevent fraudulent refunds. The Commissioner added that the problems are not confined to returns that have been electronically filed, but encompasses other returns, as well. She asked for TEI's help in detecting and preventing such fraud.

The Commissioner stated that the IRS wants to change the emphasis in the commercial "marketing" of the electronic filing program; she encouraged companies to make electronic filing available to its employees. Such a move, she added, will preserve and increase the integrity of the system. She stressed the importance of the IRS's--and taxpayers'--moving forward in the electronic filing area.

Mr. Murray said that employers generally endorse the electronic filing concept. He expressed several concerns, however, about the program, particularly issues relating to the cost of hardware and software, as well as staff; confidentiality; potential employer liability for mis-delivered returns or missing information; and scattered operations (making it difficult to provide the service to the workforce). Mr. Carver stated that the IRS has been working on the initiative for six years, adding that several companies originally volunteering for the pilot program have now dropped out. Noting that the IRS wants employers to honestly evaluate the efficacy of the system, he agreed that the employer liability issues raised by the original program (which called for questions about the return to be transmitted through the employer as the return transmitter) had been a "real problem." Mr. Carver stated that the IRS now acknowledges that if questions arise about the return, the employee--not the employer--should be the person contacted. He added that the IRS is rewriting the revenue procedure on electronic filing. Mr. Murphy asked whether the IRS is contacting those employers involved in the pilot program to learn why they dropped out. Mr. Carver replied affirmatively, adding that the IRS invites additional comments from employers.

B. TAXLINK. Commissioner Richardson next referred to the IRS's TAXLINK pilot program for the payment of federal tax deposits through the use of electronic funds transfer (EFT), which she noted is currently undergoing a major overhaul. The IRS hopes companies will voluntarily participate in the program, though (under the NAFTA enabling legislation) it will not become mandatory until 1999. Ms. Burke said companies will generally support the system, and then noted her surprise when she discovered that a deficiency cannot be paid electronically. Mr. Weiland agreed, adding that companies are seeking ways to reduce costs by cutting the use of paper.

Mr. Murphy stated that there remains some "muddy water" in the TAXLINK program that still needs to be resolved, especially with respect to next-day depositors. Mr. Carver agreed, adding that there are several "players" in making the system work, including the Federal Reserve System and the Treasury Department's Financial Management Service. He noted that the government entities involved in the program have sometimes divergent views that must be resolved openly and honestly. The IRS is working on the mechanics of the program and proposals are still being developed, he said. The Commissioner assured the TEI delegation that the issues surrounding TAXLINK will be resolved in a satisfactory manner.

C. Earned Income Tax Credit. The Commissioner next referred to the advanced earned income tax credit (EITC), which she encouraged employers to make available to their employees. She explained that many large employers may not realize they have eligible employees working, for example, in mailrooms, cafeterias, and certain clerical positions. The IRS will launch an advertising campaign on the credit in early April.

Mr. Weiland reported that Assistant Secretary Leslie B. Samuels had mentioned the EITC in his opening remarks during the Treasury Department's liaison meeting the previous day. Mr. Weiland agreed that an educational campaign is needed, adding that many companies are surprised when they discover they have employees who are eligible for the EITC. Employees are generally unaware of the credit, he said, perhaps because a "negative" tax is a foreign concept to them. Commissioner Richardson agreed, adding that the credit does not cost the employer anything, but helps people who want to work (which is a goal of the Administration). Mr. Carver added that there is a public perception concerning the burden associated with the credit that the IRS needs to combat. Mr. Weiland offered to distribute information about the advanced EITC to its members (e.g., through publication in The Tax Executive.)

D. Records Retention and Digital Imaging. Mr. Adams referred to Rev. Proc. 91-59, relating to the basic records retention requirements under section 6001 of the Code where all or part of a taxpayer's accounting or financial records are maintained within an automated data processing system. He noted TEI's long history of working with the IRS to formulate the current procedure, a process that began well before the issuance of Rev. Proc. 86-19. Because of significant taxpayer concerns about Rev. Proc. 91-59, TEI members last year sat down with IRS representatives to redraft the revenue procedure; TEI submitted the proposed revision to the Commissioner in July 1993, and held follow-up meetings in the fall (which resulted in a revised draft). Mr. Adams expressed the Institute's appreciation for the IRS's cooperation in producing the revised draft and asked the status of the project. He also asked the status of a proposed revenue procedure on digital imaging.

Ms. Gabrysh reaffirmed the IRS's interest in reducing the cost and increasing the efficiency of its records retention policy. She noted that, in issuing Rev. Proc. 91-59, the IRS had been aware that the procedure would need to be revisited sooner than most revenue procedures because the technology is so dynamic. She thanked TEI for submitting a "mature work product." She characterized TEI's support as "uncommon" and then observed that the draft is still under consideration by the IRS (specifically, the Office of Chief Counsel).

Ms. Gabrysh also noted taxpayer interest in a revenue procedure on digital imaging. The procedure will take ideas not only from TEI's proposed revision of Rev. Proc. 91-59 but also from a "no-action" letter on imaging technology issued last year by the Securities and Exchange Commission with respect to SEC-required records. Mr. Adams offered TEI's assistance in either drafting the revenue procedure or providing other technical (or technology-related) support. Ms. Gabrysh replied that the IRS is receiving technical support from the Association of Image Information Managing in drafting the procedure, but promised to keep TEI's offer in mind. Mr. Keightley said that the IRS has considerable expertise in this area but needs to be sensitive to how the procedure works for taxpayers. Mr. Adams asked when the procedure will be issued. Mr. Kennedy responded that it is too early to predict a release date, since this draft is still under consideration.

E. Generally Accepted Auditing Standards and Key Performance Indicators. Mr. Wilson stated that TEI's recent comments on an IRS initiative to develop "generally accepted auditing standards" for the Coordinated Examination Program have been very helpful and are on point with other comments on the draft, especially with respect to the need for better training of examiners. He added that the IRS hopes to issue the final standards in April or May. Ms. Norton said the Institute is pleased to have been part of the IRS's development of key performance indicators with respect to its international enforcement program. She expressed concern that the use of a separate measurement system in the international area will diminish the case manager's role in the audit process. Mr. Wilson asserted that the case manager remained in control of the audit, but that the IRS wants the involvement of the international examiners as early as possible. Mr. Carlow agreed, adding that the IRS and TEI worked well together on the project. The standards were released to the field in October, he stated.

F. Announcement 93-144. Mr. Louthan referred to the recent IRS hearing on Announcement 93-144, which sets forth proposed procedures for the early referral of issues to Appeals and for the involvement of Appeals in the Competent Authority process. He thanked the Institute for both its written comments and its oral testimony on the announcement.

Mr. Louthan stated that the IRS will publish another announcement in March or April, urging taxpayers to use the early referral procedure in the interim before a revenue procedure is issued. He noted that the IRS is inclined to adopt several TEI recommendations, including opening the process up to smaller taxpayers and removing the requirement that the issue be deemed "significant" before it will be subject to early referral. (He explained that the taxpayer's judgment that an issue is significant will be sufficient.) The IRS is also reconsidering its position on whether the early referral procedure should be available in respect of Joint Committee cases; Mr. Louthan said this issue can be resolved by agreeing to deferring final approval of the proposed resolution (e.g., entering into a closing agreement) until the Joint Committee review is completed. The final procedure will also provide that the request for early referral of an issue must be approved or denied within 45 days of the date the request is made and that all regular Appeals procedures--including the requirement for an Appeals conference--will apply. [Note: Announcement 94-41, which was released in early March, incorporates most of TEI's recommendations Announcement 93-144.]

Mr. Louthan stated that he is working with Ms. Halphen on the Competent Authority procedure. He requested TEI's continuing assistance in refining the role of the taxpayer in that process. Ms. Norton replied that Announcement 93-144's competent authority provisions are "encouraging," emphasizing that the IRS and the taxpayer share a common interest in expediting the competent authority process. She agreed to provide the IRS with comments on the taxpayer's role.

Finally, Mr. Louthan said that the IRS is considering the use of a questionnaire to taxpayers to evaluate programs. Mr. Adams endorsed the use of additional tools to evaluate as well as to speed up the entire examination process.

G. TEI Quality Survey. Mr. Weiland explained that with the IRS's support, last year the Institute surveyed its members to determine how well IRS personnel in Examination, Appeals, District Counsel, and the National Office adhere to the IRS's Mission Statement and Statement of Principles of Internal Revenue Tax Administration. The results of that quality survey, he stated, closely parallel the results of an IRS survey conducted by the University of Michigan. Mr. Weiland noted that the Institute's members assigned the following "grades" (due to rounding, percentages do not always add up to 100 percent)

Mr. Murphy explained that TEI chapters are in the process of holding meetings on the quality survey (among other issues), with the results of the local liaison meetings percolating up to TEI's Regional Vice Presidents (who will be meeting; with the IRS Regional Commissioners and other regional officials). He added that the results of the survey have also been discussed with John J. Monaco, formerly Executive Director of the CEP Program and currently Assistant Commissioner (Examination). Mr. Murphy said that the reactions to the meetings thus far have been positive, with some chapters exploring the possibility of conducting their own surveys.

Mr. Harrington stated that he has met with representatives of El's Baltimore-Washington Chapter and viewed the survey as "good feedback" to the IRS. Mr. Weiland noted that, the quality survey has provided a vehicle for TEI chapters and regions to strengthen their liaison activities with the IRS Districts and Regions and that has even prompted some TEI regions to hold their first meetings in some time with their Regional Commissioners.

Commissioner Richardson asked whether the IRS had given the Institute feedback concerning taxpayers' performance in the examination process. Mr. Murphy stated that several meetings have focused on the interaction of the two organizations and on ways to improve communications. He explained that in some districts open and candid dialogue has a long history, and that the relationship is good; in other words, each side already talks forthrightly about issues and problems that concern it. Ms. Burke noted that the Pittsburgh Chapter has agreed to present a program featuring a panel of taxpayers at which IRS representatives will be able to ask questions. Mr. Murphy suggested that the survey results can form a baseline for new District Directors to evaluate their performance. Mr. Keightley stated that local IRS employees need to hear and see the "success stories" of taxpayers who have cooperated with the IRS, and he urged the Institute to help communicate program successes.

Ms. Muenchen noted that Region IX (which covers much of the Western Region) intends to take one issue and work with the IRS on resolving problems during the next year; the issue chosen will likely relate to information document requests. Mr. Wilson emphasized the importance of feedback to the IRS, which is encouraging its districts and regions to become involved in the survey. He noted that satisfaction with the examination process is related to currency and issue resolution. Mr. Keightley added that the Chief Counsel's Office is in the process of conducting a quality survey of its own personnel. Mr. Roley concluded that surveys such as TEI's are an important way to measure taxpayers' views of the process; he said the IRS is getting feedback not only from taxpayers, but also from its examiners. The IRS plans to continue the process.

III. Role of Counsel in the Examination Process

Ms. Burke noted TEI's continuing concern in the appropriate role of Counsel personnel in the examination and Appeals processes. She stated that, although many companies have experienced good results with the IRS's informal field service advice process, the experiences of many other taxpayers have not been good. More fundamentally, TEI has several process concerns about field service advice, including the taxpayer's right to know whether and when the contact is made with District Counsel, the taxpayer's ability to meet with Counsel (especially as the facts are being developed), and the taxpayer's ability to review and discuss the field service advice (which is sometimes called "technical assistance") rendered by Counsel.

Ms. Burke emphasized the importance of taxpayer input in the development of the facts, upon which any legal advice is based. She noted that an IRS CEP task force in which she was involved has suggested a procedure whereby the IRS and the taxpayer would agree (and sign off) on) the statement of facts in the Form 5701. This will ensure that Counsel does not spend a lot of time pursuing--and taxpayers do not spend a lot of time refuting--legal theories that are not supported by the facts.

Mr. Keightley stated that an IRS "cross-functional" study group is examining the issues raised by the IRS's field service advice process. He agreed that it is a waste of everyone's time to pursue issues based on bad facts. He expressed concern, however, that a more formal process may inhibit the candor of the advice and slow the entire process down; that will be in neither party's interest. Mr. Keightley added that the IRS is interested in receiving comments on this issue, especially with respect to the problems that exist with the current procedure. It was agreed that a separate meeting should be arranged. Mr. Keightley reiterated that the IRS wants to ensure that the informality of the process not be stifled.

Commissioner Richardson stated that a problem may also exist with taxpayers who are not completely candid with the examining team. She endorsed the proposal to hold a separate meeting to explore the issues further. She also noted that the Industry Specialization Program was the product of taxpayer concern that agents were not being adequately trained and not focusing on the issues. The IRS, she stated, is not interested in wasting its resources in the pursuit of bad issues.

Messrs. Weiland and Murphy emphasized the need for good communications between the taxpayer and the CEP team. Mr. Keightley agreed, adding that there may be personality conflicts that exacerbate the problems. Mr. Wilson noted that, a recent IRS meeting in Dallas, the need to confirm facts with the taxpayer before pursuing an issue was emphasized. Mr. Keightley concluded the discussion by stating that the goal of Counsel's field service advice process is to give objective legal advice to the examination team, not simply to support a (pro-IRS) position developed by the team.

IV. TIN Verification Program

Mr. Weiland expressed TEI's commitment to work with the IRS to develop effective, efficient, and minimally burdensome ways of enhancing compliance, especially among those "market segments" that have been identified as raising compliance concerns. He noted that his company (Abbott Laboratories) is one of 200 companies to volunteer to be a part of the IRS's pilot taxpayer identification number (TIN) verification program.

Ms. France characterized the IRS's proposed TIN verification program as an "innovative" means of improving communications between payers and the IRS and of producing a more efficient process. The program will eliminate paperwork for both the government and the taxpayer. She added that the IRS is working on proposed regulations and, once they are released, taxpayer comments will be invited.

Mr. Weiland stated that John F. Devlin, Executive Director of the Office of the Information Reporting Program, has visited his company to discuss the pilot program and to learn more about the administrative problems taxpayers currently experience with information reporting. He said taxpayers need to know how the system will work, noting that there are several problems to be resolved, including technological and confidentiality issues.

Ms. France stated that a revenue procedure accompanying the regulations will discuss systems issues. Mr. Keightley acknowledged that the confidentiality provisions of the Code, which limit the IRS's ability to give certain taxpayer identifying information (such as a Social Security Number) to a payer, may present a problem since they were drafted for another time and provide little flexibility. A statutory amendment may be necessary, he said.

Mr. Weiland stated that taxpayers need to be consulted before any legislation is sought. The goal, he concluded, should be to "get it right the first time." The Commissioner and Mr. Keightley agreed.

V. Specific Technical Issues

A. Lobbying Disallowance Rules. Mr. Weiland next referred to the new rules relating to the disallowance of lobbying expenditures under section 162(e) and the correlative rules concerning membership associations that engage in lobbying activity (which associations must either provide a notice to their members concerning the portion of their dues that are nondeductible under section 162(e) or pay a proxy tax on the associations' lobbying expenditures). He commended the IRS for issuing guidance before the beginning of the year. Nonetheless, he expressed frustration with the lack of additional guidance on the definition of lobbying. "How do taxpayers comply with the new law?," he asked.

Mr. DeLuca noted that the section 4911 regulations contain a definition of "lobbying" that can reasonably form the basis for the section 162(e) definition. He recommended this approach to make the definition understandable and workable for taxpayers. Mr. Baker stated that the IRS is focusing on defining the statutory term "influencing legislation," as well as the recordkeeping requirements. He added that the proposed recordkeeping/allocation regulations have been well received thus far and encouraged further taxpayer comments. [Note: TEI's comments on the proposed regulations were filed with the IRS on March 18, and the Institute testified at an April 6 public hearing on the regulations.] Commissioner Richardson assured the Institute that the IRS is working closely with the Treasury Department on the lobbying rules to make them administrable for both the taxpayer and the government.

Mr. DeLuca next referred to the five-percent de minimis rule set forth in the proposed regulations. He expressed the view that a higher de minimis figure would not substantially affect revenue, but would lessen the recordkeeping requirements by keeping companies from inadvertently "tripping over" the five-percent threshold. He also suggested that the direct contact lobbying exception to the de minimis rule--i.e., the rule that any direct contact lobbying will give rise to a disallowance regardless of how insignificant or nominal it is--is "misguided" and should be deleted. Finally, he stated that taxpayers need a definite cut-off point for when the "monitoring" of legislation becomes "lobbying." Ms. Muenchen noted that the IRS should consider a year-end cut-off point for tracking monitoring expenses. Mr. Baker stated that the statute does not use the term "monitoring," suggesting the need for flexibility.

Mr. McCormally stated that the 175-percent figure used in the regulations' gross-up method of calculating disallowed expenses will likely result in too great a percentage of expenses being charged to lobbying activities. He added that the section 263A method will be more difficult for taxpayers to comply with and for the IRS to audit, but the result under that method is more reasonable than the result under the gross-up method. Mr. Weiland confirmed that the 175-percent figure is "too rich," based on his company's analysis of its expenses.

Ms. Burke pointed out that many associations are seemingly unaware of the new rules and have made no attempt to determine their allocable expenses. Mr. Murphy agreed that a communications issue may exist. Mr. Baker noted that. in the absence of notification by the association, 100 percent of the dues are deductible. In other words, the burden is on the membership association to inform its members of the disallowed percentage of dues; the association, not the members, will bear the consequences of no notice being given.

B. Environmental Remediation Expenses. Mr. Skinner noted that the IRS has requested comments from taxpayers and practitioners on the proper income tax treatment of environmental remediation expenditures, laying out a number of specific issues that have been identified in its initial analysis and study. Noting that the Institute had filed comments on the issue, he asked the status of a joint Treasury-IRS study group that is analyzing whether general guidance may or should be issued in respect of the various remediation fact patterns identified in the submissions. Ms. Feldstein stated that the study group is still reviewing the comments, noting that the group is being "overwhelmed" by the varying fact patterns. Mr. Weiland reiterated the Institute's desire to remain involved in this area and to meet with appropriate IRS and Treasury personnel to discuss possible resolutions.

C. Substantiation of Charitable Contributions. Mr. Weiland stated that the new substantiation requirements for charitable contributions threaten to create a real problem for companies that participate in combined-giving campaigns, such as the United Way. Companies may also conduct their own combined-giving campaign. He explained that companies often solicit contributions from their employees either through payroll deductions or lump-sum payments; the funds are then transferred to the charity by the company in one payment. He stated that the companies receive checks from their employees, consolidate these funds, and send a single check to the designated charity. In these situations, the charity may be unaware of the names of the individual donors and hence unable to supply the required documentation for lump-sum payments over the $250 threshold. Mr. Weiland expressed concern that if the substantiation requirements are imposed on employers, it may result in the withdrawal of support for these community programs. Ms. Gross agreed that it is not the employer's obligation to provide an acknowledgement of the contributions.

Mr. Murphy stated that the Treasury Department had indicated it is working on a solution to the problem with the United Way. He offered TEI's assistance in reviewing any guidance on the issue, noting that the system should encourage companies, as good corporate citizens, to participate in such campaigns. Mr. Feinberg noted the IRS's desire to craft rules to reduce the administrative burden on employers. Ms. Gross stated that a combined giving campaign run by an employer represents a "new twist" for the IRS that has not previously been brought to its attention. She asked Mr. Weiland to provide the IRS with more specific information on how these company campaigns are conducted. Mr. Weiland agreed to do so.

VI. Conclusion

On behalf of the IRS, Commissioner Richardson thanked the TEI delegation for taking the time and effort prepare for the meeting. She noted her appreciation for the Institute's views and its willingness to work with the IRS on a wide variety of subjects. Mr. Weiland then thanked the IRS representatives for meeting with the Institute.

[Note: Following the liaison meeting, the IRS provided TEI with written comments on two issues that were included on the agenda, but were not addressed during the meeting. Those written comments are reprinted as Exhibit I and Exhibit II on page 207.]
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Date:May 1, 1994
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