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The new coordinated examination program.

In June 1988, a Quality Improvement Program (QIP) team began its evaluation of the Coordinated Examination Program, more commonly known as the large case program. QIP team members included IRS representatives from Examination, International, Appeals, and Chief Counsel. Methods used to conduct the study were case reviews, personal interviews with IRS employees and members of outside professional groups and organizations, and employee questionnaires.

There is clear and convincing evidence that this QIP -- and the recommendations that resulted from it -- represent a major turning point in the history of the large case program. In addition to describing this evidence, I propose to discuss the following:

* A historic perspective on large case, and

* Why the program was ripe for a quality makeover.

I. History and Background of Coordinated

Examinations

The idea of taking a different approach to examining large corporate taxpayers took root in the 1960s. There were a number of contributing factors -- first among them, an increase in corporate sales and assets resulted in larger and more diversified companies. Diversity introduced greater complexity.

Subsidiaries began popping up in places away from corporate headquarters. Ultimately, these changes made it impossible for IRS to do its audit business the old-fashioned way -- one revenue agent assigned to one company's audit. The combination of corporate growth and physical distance forced us to switch to a team audit approach. And the large case program was born.

Case managers headed up examinations of large case taxpayers. Reporting to case managers were team coordinators, on-site people with hands-on control of the examination. Over the years, teams broadened to include specialists -- IRS employees from excise tax, employment tax, pension trusts, exempt organizations, and international as well as economists, engineers, and computers audit specialists. These people come together to plan, execute, and conclude examinations on an agreed or unagreed basis.

In the late seventies, recognizing that the trend toward greater complexity was not slackening but stepping up, IRS agreed on a need to develop expertise within industries -- specifically, to familiarize specialists with accounting and business practices peculiar to different industries, encourage them to find ways to promote better identification and development of issues under examination, and ensure that taxpayers received more consistent treatment of issues regardless of where in the country -- or the world -- they conducted their business.

We fashioned an industry specialization program to do just that. Currently, 20 nationwide industries are part of the industry specialization program. Besides advising case managers about how to develop issues and proceed with an audit, industry specialists stay current with the economics of different industries. The industry program was to deal not only with issues in years under examination but to stay up on a contemporary basis with the economics of given industries to deal with potential future issues as well as those in the current year. They also recommend computer programs to agents, and in the case of Section 482 transfer-pricing cases, help develop expert systems. A principal role of the program can be described to include: identification of unique industry issues and coordinated issues; economic conditions in the industry; a description of the accounting or business practices peculiar to given industries; suggested audit procedures; computer programs which may have potential applications; guidelines for development of issues; and position papers on how each issue should be handled.

But despite program changes over the years to try to adapt to a changing world, an assessment of the large case program in the late eighties indicated that we were missing the mark. Reasons included the incredible pace of change in corporate America and on Capitol Hill, IRS budget constraints, and the draining effect tax shelter cases had on IRS' resources. First, a look at the corporate environment of the late 1970s and the 1980s. We witnesses a proliferation of large, multi-layered corporate structures with subsidiaries, divisions, and branches in this country and around the world. More United States companies began doing business overseas, including running businesses through tax-haven countries. These trends have made it increasingly difficult to construct an audit plan to identify those entities that need to be examined and to trace transactions which would be indicative of potential tax.

But two words probably best describe the era and our dilemma -- mergers and acquisitions. More agressive than ever before, the merger and acquisition fever resulted in extremely complex restructurings. It became increasingly difficult -- and often impossible -- to develop an audit plan that properly identified all the entities that needed to be examined and then traced all the transactions that might result in additional tax due.

Additionally, a substantial number of corporate tax law changes throughout the 1980s -- with a significant percent of these changes aimed at raising corporate revenues -- placed an increased burden on corporate America for effective tax planning, as well as on the Service to identify and effectively deal with these new and emerging issues. Corporations scrambled to find ways to limit their tax liability. The scrambling became increasingly aggressive over time.

The Service also faced its own internal concerns. With a good deal of resources consumed on dealing with tax shelters, a limited number of experienced revenue agents and specialists were available to deal with these more complex issues. A good number of revenue agents, because of circumstances, had not had the opportunity to gain experience working corporate examinations and were placed as team members or specialists to participate in coordinated examination programs.

Some lean budget years hampered forward progress in automation and hurt our ability to hire and keep employees. Agent salaries fell behind the private sector, a development that affected the entire examination function and the coordinated examination program in particular.

And then there were some numbers that alerted us to problems:

* 92 percent of the proposed deficiencies went unagreed; and

* the bottom line result of the first twenty years of CEP -- net tax of about 25 cents on the dollar when you adjust what was proposed by Examination versus what was actually collected.

This was the backdrop for beginning a large case Quality Improvement Project in 1988. On previous occasions, National Office and regional studies of large case had been conducted, and in the early 1980s there was a nationwide review. Many of the studies repeated the same recommendations but substantive change never occurred or were never effectively implemented.

Recommendations made by past studies but never properly followed up on include:

* the use of experts at the examination stage,

* the development of litigating strategies,

* more effective use of Counsel in dealing with issues at the examination stage,

* better control and management of examination of a parent company's subsidiaries, and

* reliance on a variety of proven methods for outside training in various specialty and non-specialty areas.

Over the years, some significant changes did occur which had an impact on the CEP program. The Office of Chief Counsel created positions of special trial attorneys in 1980, and special litigation assistants in 1988, to deal with the most difficult and significant cases. In 1982, there was a reorganization in the IRS which moved Technical and Appeals under Chief Counsel. In 1983, both the Mid-Atlantic and North Atlantic regions reconducted studies that identified a good portion of the problems enumerated in the 1988 Quality Improvement Project (QIP) report. In 1986, the international functions were separated from the Examination function to become part of the Assistant Commissioner (International). There was also a separation of the international functions in Chief Counsel. In 1987, there was a major study of CEP called the Sawyer-Blattner report, and of course, in 1988, we had the QIP report.

Recognizing a history of identifying problems but not following through on changes, the QIP's focus was equally divided between the two.

II. The New CEP Program

In mid-July 1990, top IRS executives approved ten recommendations for improving the CEP program. They incorporate comments from professional groups like TEI, AICPA, and ABA, the IRS Commissioner's Advisory Group, trade associations, and the like. While these organizations did not necessarily concur with all the management initiatives, they certainly agreed with the thrust of the Quality Improvement Project. As a result of these recommended changes, the large case program is significantly changing the way it does business.

A. Goals and Objectives

Major changes in the CEP program are consistent with the goals and objectives that are driving the rest of the organization -- reducing taxpayer burden, simplifying procedures and process, modernizing the tax system, balancing enforcement with information and education, valuing a diversified workforce, and strategic planning. The objectives are part of the IRS Annual Business Plan and the corporate functional critical success factors.

* To make the tax administrative systems and laws more conducive to corporate taxpayers paying the proper amount of tax with the filing of their tax returns and less from the audit process.

* To relieve taxpayer burden through tax simplication and improved systems and procedures.

* To resolve most factual issues at the examination level.

* To provide proper and timely training and resources to all employees.

* To improve the effectiveness and efficiency of the examination process.

* To substantially improve the currency of examinations.

B. Recommendations and Initiatives

to Achieve Goals

To meet these broad goals, there are ten recommendations and management initiatives:

1. Establishment of a National Policy Board. The policy board consists of the A/C (Examination); the Executive Director for CEP; the A/C (International); the National Director of Appeals; the Associate Chief Counsels: Litigation, Technical, International; one Regional Commissioner; and, two District Directors. The board, which meets once a month, sets and oversees policy for the CEP and looks at CEP in the larger context of tax administration to make sure it is properly focused and managed. The creation of the board is evidence of the fact that CEP will only work well if affected functions -- both in the field and National Office -- cooperate fully.

2. Establishment of a National CEP Director and Regional CEP Managers. In any organization, executive leadership is key to emphasizing the importance of the program to the overall mission. I am excited by the challenge of being the first Executive Director of CEP. Formerly, I was the Deputy National Director of Appeals for two years and prior to that, Chief, Examination Division in Chicago. The Executive Director is responsible for overall coordination and evaluation of all cases and issues emanating from the Coordinated Examination Program. Responsibility covers the following programs: Computer Assisted Audit Program; Industry Specialization Program; Economist Program; Engineering Program; and, CEP Program; as well as a liaison with the Office of the Assistant Commissioner (International). CEP managers are: Dick Valdez (Southeast Region); Ben Hyde (Southwest Region); Marc Greenfield (Mid-Atlantic Region); Bob Padilla (Central Region); Herb Goldbeck (Midwest Region); Ron Schwartz (North Atlantic Region); and Al Gee (Western Region).

Regional officials have identical authority and program responsibility in their respective regions. In additions, those regions that choose to have the industry specialization program managed directly out of the Region will have direct line authority in that particular program area. There will also be a District ISP coordinator in most districts. The purpose of these new positions is to ensure that industry issues get applied and coordinated into non-coordinated examination cases at the district level.

Appeals and Counsel will also establish similar regional positions. The expectation is that, at each region, the three functional areas will better be able to coordinate, and control significant issues involving the CEP.

3. Use of Top Field Executives and Managers in the CEP Planning Process and Improvements in Service Monitoring and Control of Support Examinations. The lan is better communication in-house about CEP and more proactive involvement by top executives and managers with large corporate taxpayers under their jurisdiction. The expectation is that district directors will acquaint themselves with the largest corporate taxpayers in their jurisdictions, make themselves available to the taxpayers, and assist case managers as needed in the examination of these important customers.

Dick Valdez, the Regional CEP manager in the Southeast Region, will head a study group to determine better ways to involve the taxpayer in the planning process. This groups has also taken on a complete review of our entire planning process.

Our goal is to have a viable plan of examination that will keep the taxpayer informed about areas we are examining, and the time frames for accomplishing that examination. Our communication goal is also to ensure that any changes in our plan will be discussed and mutually agreed upon with the taxpayer. With the taxpayer involved in the planning process and on-going dialogue taking place, the examination should be run in a much more effective, efficient, and professional manner.

Ron Schwartz, the Regional CEP manager in the North-Atlantic Region, is in charge of a study group responsible for making recommendations on how to conduct support audits in the future.

4. Increase Managerial Oversight and the Use of Available Procedures to Increase Taxpayer Cooperation. A letter to approximately 80 trade association and professional organizations introduced me as the Executive Director of CEP and shared my vision of the future regarding this program area. The letter requested an opportunity to share in more detail the changes being recommended to the CEP program, and to receive input from these various organizations. To date, the response has been overwhelming and the feedback we are getting from particular industry groups is invaluable.

a. Currency of Examinations. We see taxpayer cooperation as a key to a successful CEP. That requires, on our part, better communication with taxpayers and a serious effort to close the gap on examination start-up and conclusion. Herb Goldbeck, the CEP manager in the Midwest Region, is leading a study group that will attempt to define -- along with the corporate taxpayer community -- what are reasonable time frames for conducting CEP corporate examinations. (For shorthand, this is referred to as our currency initiative.)

While the concept and definition of currency are being developed, we have asked our case managers to get together with large corporate taxpayers and plan future cycles to be current. For this planning purpose, we are defining "current" as beginning an audit within 18 months of the return being filed. In this planning exercise, both the taxpayers and the Service must recognize and deal with resources needed to accomplish whatever plan they establish.

b. Communications. We see "communications" as a two-way street -- case managers more sensitive to taxpayer needs, and taxpayers communicating more with case managers. This should lead to a better examination process. Our goal is to have a viable, flexible examination plan, and a mutually cooperative examination.

c. Issue Resolution. In an attempt at better communications, we stress two important areas to our case managers. First, the need to resolve cases at the examination level; and second, issue resolution. With regard to resolving issues at the Examination level, we have pointed out to case managers that as of September 30, 1990, over $26 billion of the $36 billion of CEP case issues in dispute at Appeals represented factual issues. Revenue agents have always had authority to resolve factual issues but weren't exercising it. Revenues agents admit that there is a significant opportunity for improvement in this regard. In addition, in December 1990, the IRS Commissioner signed an order [Delegation Order No. 236] that gives case managers the authority to settle recurring and roll-over issues settled by Appeals in prior years.

The concept of total issue resolution is multi-faceted and we are dealing with it in a comprehensive fashion. First, we have asked our industry coordinators to recommend to National Office what actions are necessary to "get the issue off the table." If legislative changes are necessary, we will seek them. If regulations, revenue procedures, and the like will move the process forward, we will recommend them. If the line is drawn in the sand between our opinion and that of taxpayers, we will plan a litigating strategy and accelerate the cases in that direction. Obviously, these actions will be coordinated with the Office of Chief Counsel.

d. Resolving Issues through the Current Filed Year. We have introduced the concept of carrying issues through to the current filed year. With the agreement of the Examination Division, this would permit the taxpayer to allow Examination to audit an issue through to the current filed year and enter into a closing agreement to resolve that issue. For example, if an issue was present in the 1986 year being examined, and the 1987 through 1990 years were not under examination, the taxpayer could request that the issue be examined through the current filed year. If Examination Division concurred, this process could take place. In addition, we asked that the procedure include a look-back on similar issues into Appeals and Counsel status in cases. With the concurrence of the taxpayer and these two functions, if issue resolution is possible, agreements could be reached involving prior years as well as the current and unfiled years. This concept is currently being tested in several districts around the country.

Other tools also being introduced are in the conceptual stage. For example, where there are advanced pricing agreements being reached, we are asking Examination Division to consider using similar methodologies, if applicable, in preceding years.

Another concept being explored in conjunction with the National Director of Appeals is that under certain circumstances a taxpayer would be able to take a limited number of issues to Appeals while the examination is in process. This would be done only when resolving several issues not under the delegated authority of a case manager could lead to the resolution of the entire examination case at the Examination stage.

All of the above procedures are being developed in an effort to reduce the time span of the examination and to minimize both the government and taxpayer's cost and burden.

5. Create and/or Expand Industry and Issue Specialization. Based upon the ever-increasing complexities of corporate tax laws and the growth of international activities, IRS top executives recognized a need to re-visit the industry specialization area. We want to make sure we have the proper number of industries represented and establish issue specialists in those areas that cross industry lines. This would represent a greatly expanded role for the industry specialist -- involvement up-front with legislative proposals, regulations, revenue procedures, private letter rulings, and the like. While these areas are under the jurisdiction of the Office of Chief Counsel, clearly the Examination function is in unique position to contribute to the decision-making process.

6. Establish CEP Training Programs. Executives recognized the need to set up the best affordable training for Examination, Appeals, and Chief Counsel personnel involved in CEP cases. This training would be cross-functional to ensure that all personnel have a common basis of understanding from which to develop Service positions and CEP issues. A study group headed by Ben Hyde of the Southwest Region will devise a training strategy for the future. We are looking to colleges, universities, and outside organizations, as well as in-house, for ways to facilitate our training needs.

We have developed an employee profile form that will give us information about all employees involved in CEP -- case managers, team coordinators, revenue agents, international specialists, economists, engineers, computer audit specialists, and audit accounting aides. From this data we will be better able to determine our short range and long range training needs. Obviously, we recognize the critical importance of a significantly improved training program in the years to come.

7. Develop Effective Communications Systems. In order to do their job in the most effective and efficient way possible, employees working in the large case program area must have all the tools they need. A primary requirement is laptop computers for revenue agents at the audit site. Personal computers are available to the team and the case managers. With adequate funding we will be able to develop networks for information sharing and for the call-up of important statistics needed by case managers and team coordinators. We plan to establish an electronic bulletin board system to improve dissemination of technical information. We are also looking to develop systems to track issues through Appeals and Counsel. Issue tracking is extremely important not only for us to build strategy into our audits, but also to increase sensitivity to emerging issues. In this regard, by December 31, 1991, we will have a total coordinators on site, including all time reporting. This system will tie into the Total Integrated Examination Systems (TIES) currently being developed.

8. Provide Legal and Technical Assistance Expeditiously. We believe early involvement of Counsel in the Examination process is essential to the overall success of the large case program. Our use of Counsel includes not only the District and Regional Counsel located in the field, but also the Office of the Associate Chief Counsel (Technical) at the National Office level, and Associate Chief Counsel (Litigation), and Associate Chief Counsel (International) also at the national level. It is not acceptable for examiners to develop issues that would not be sustainable through Appeals or the court system because of a lack of the appropriate documentation. It is essential that case managers and their teams be fully aware of what information is needed should issues be unagreed at the Examination level. Counsel's role is twofold -- to make sure that issues are developed in order that revenue agents' and specialists' positions are sustained and, secondly, where issues are raised that are inappropriate, Counsel can advise to drop them as early as possible in the process, sparing taxpayers and the government additional costs and considerable frustration. Counsel, in this regard, are advisers to the Examination team and should clearly be used as such. There is no question that case managers are in charge of the case and will determine if and when Counsel involvement is necessary. Effective communications would dictate that our case managers keep the taxpayer informed if and when Counsel is involved, and why they are involved.

9. Quality Assurance and Measurement Systems. A high quality, successful examination program requires the development of standards and measures. A peer review concept has been developed similar to that used by Certified Public Accountants. Bob Padilla, the CEP manager in the Central Region, is responsible for the peer review process. The review provides case managers with the criteria for doing a quality audit and provides management with the information it needs to ensure a quality process.

In addition to this review, questionnaires will be sent to taxpayers and the audit team upon the completion of each examination. We see this as another avenue to assess the quality of individual examinations and the process itself.

Most essential to the success of the large case program is the development of a measurement system to determine what successful CEP program is. Marc Greenfield, Regional CEP manager in the Mid-Atlantic Region, is in charge of a task force established to define key measurement elements. As part of this measurement system, Ben Hyde, Southwest Region's CEP manager, is responsible for determining a formula for our return-on-investment. Equally as important is the concept of "good corporate tax citizen." Al Gee, the CEP manager in the Western Region, is reviewing what expectations tax administrators should have about corporate taxpayers. We are looking for opportunities that would encourage voluntary compliance with all aspects of tax administration, not just the income tax return itself. We are very interested in developing a system that would recognize corporate taxpayers for complying fully with their tax responsibilities, for reducing the burden of the entire system to them.

10. Early Settlement Offers and Improved Functional Coordination. A new delegation order extends authority to case managers to settle roll-over and recurring issues previously resolved by Appeals. To improve functional coordination, Appeals will conduct, in conjunction with Examination, pre-conference and post-conference meetings. As of the beginning of May 1991, all regions had fully implemented this new direction. This concept will permit Examination Division employees to meet with Appeals and explain their issues. It also will help the Appeals officer by pointing out important facts, key work paper pages, and other important information needed by the Appeals officer to better frame the issues. Obviously, the Appeals officer also could determine that the issues are not valid, and return the case to Examination for resolution. The post-conference will give Examination insight into the disposition of the case so that they can better affect the delegation order on subsequent cycles with respect to roll-over and recurring issues, as well as better understand issues of a similar nature on other taxpayers. Taxpayers clearly benefit from this process in that their issues will be better understood and they will be able to move through the Appeals process in a more timely manner. When roll-over or recurring issues exist they will be able to resolve these at the Examination level, which should save several years in the tax administration process.

III. Conclusion

The Coordinated Examination Program is in a period of major transition. We will continue to seek employee and taxpayer advice about improvements to the tax system and feedback about the changes already made.

We are committed to maintaining an on-going dialogue with the taxpayer community and employees so everyone is aware of the progress we are making on all commitments involving CEP.

We ask for continued taxpayer and employee cooperation and support so together we can make the tax system operate as it was intended -- on a truly voluntary basis and with the least amount of burden on the taxpayer and government.

JOHN J. MONACO is the first Executive Director of the Internal Revenue Service's Coordinated Examination Program. He is responsible for giving overall direction to the IRS program that examines returns of the largest corporate taxpayers. Before his appointment in September 1990, Mr. Monaco was the Deputy National Director of Appeals, which is responsible for resolving tax disputes between the IRS and taxpayers who want to have their cases reviewed without (or before) litigation. Mr. Monaco has been an instructor-lecturer at Northwestern University. He has a bachelors degree and a masters degree in accounting and taxation from Farleigh Dickinson University.

Mr. Monaco prepared this article on IRS's CEP initiatives for distribution to IRS field personnel and subsequently made it available for publication in The Tax Executive.
COPYRIGHT 1991 Tax Executives Institute, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Author:Monaco, John J.
Publication:Tax Executive
Date:May 1, 1991
Words:4349
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