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Thinking cooperatively: the IRS's vision statement.

Good afternoon, ladies and gentlemen. I am pleased to be with you today at [the New York Chapter's] Annual Tax Symposium. This Symposium is a perfect example of TEI's tradition of promoting education and communication in the administration of the tax laws. I am happy to be able to contribute to these worthwhile goals.

Last month your president, Tom Wharton, wrote me a letter suggesting that my remarks to you today focus on cooperation between the IRS and taxpayers. Tom explained very succinctly why cooperation must be our serious commitment, and I will take the liberty of quoting him. Tom said, "We are all citizens, whether individual or corporate, of the same nation. We should be striving wherever possible to reduce the compliance burden and the obstacles [we face in determining] the correct tax."

I agree wholeheartedly. In fact, I find it particularly fitting to discuss cooperative tax administration at this time, with this group. The time is fitting because my term as Commissioner is drawing to a close, and I intend to make the most of every remaining opportunity I have to underscore basic themes of the IRS vision for the future. Cooperation with taxpayers is central to that vision. The forum is fitting because TEI has been a leader in working cooperatively with the IRS, even before cooperation became fashionable. This organization has the potential to be one of the solid building blocks of our evolving tax administration, precisely because you place such value on the communication and education that this Symposium typifies.

Today I would like to focus particularly on one area where cooperation has already proved fruitful in improving tax administration, and that is the Large Case Program. I know that you are all very well acquainted with this program as corporate tax executives and as TEI members. TEI has been involved with our coordinated exam program from its inception, and most recently your members commented very constructively on CEP during our 1990 Quality Improvement Process review.

The Large Case Program stands as a hallmark of cooperation, an excellent example of what we can accomplish when we work together. Today I would like to reflect on some important aspects of the program and to mention some improvements that we are planning. I also want to follow up on my remarks at TEI's annual meeting in San Diego last month by sharing with you some exciting prospects for the future.

The first issue I would like to discuss is the role of the Office of Chief Counsel in the Large Case Program. As most of you know, we have been using a team approach to large case audits for many years. For the past few years, we have actively incorporated assistance from Counsel, both in the field and in the National Office, as an essential element of the large case team. As a general rule, I believe that by involving our lawyers earlier we have improved the process both for taxpayers and the Service. It is to everyone's advantage to identify, develop, and dispose of issues correctly and swiftly.

When we first undertook to achieve greater cooperation between Exam and Counsel, some taxpayers expressed concern that we might be emphasizing litigation as the preferred means of resolving cases. That has never been our objective -- in fact, our goal is just the opposite. We believe we can expedite the resolution of cases without litigation by bringing all the technical expertise at our command to bear at the earliest possible stage of a case.

If you reflect on this approach from a business perspective, I think you will admit that it makes sense. There is no reason that we should fail to use the talent we have, as long as our process is fair. You do the same in your own corporations. But I also believe that we are serving your interests. We are making sure that we give the fullest consideration to a taxpayer's position before forcing the issues to court. With our improved coordination, we are overcoming the obstacles presented by geographic distance, by communication difficulties, and by potentially inconsistent application of the law among the various jurisdictions. I think you are coming to realize that we are sincere in this objective to serve you better, based on the comments I hear from practitioners and from TEI members themselves.

I know one important issue remains for you, and that is whether our new approach might operate, whether intentionally or not, to deprive taxpayers of the traditional right, through formal technical advice or more informally, to present legal arguments to the person most directly responsible for deciding the Service's legal position. Today I want to assure you that our policy is to encourage these direct communications, not to discourage them.

Formal technical advice is just as available today as ever. In fact, the number of formal technical advice requests has been increasing over time, even with the advent of more informal communication between Counsel and Exam.

In addition, we are continuing to encourage our Field personnel to facilitate communication between taxpayers and our technical experts. In particular, when the Exam team is relying on legal advice from Counsel concerning a matter of substantive tax law, the taxpayer in the ordinary course should have an opportunity to discuss the legal issue with the persons providing the advice, and the Exam team should facilitate and participate in those discussions. This kind of communication is a necessary condition if we are to resolve cases cooperatively. Our goal, as yours, is to avoid protracted litigation.

Despite best efforts on both sides, there will inevitably be some large cases that go to court. For these cases, Counsel is committed to using a team approach to a greater extent than ever before. We expect our litigation teams to involve attorneys from both Field and National Offices, and to include our most knowledgeable subject matter experts on whatever legal issue is in dispute. We have used litigation teams on an ad hoc basis over the years, but the procedures now being developed will make the team approach the normal way of doing business in large case litigation -- just as it has been for years in large case audits.

In general, we are striving for a closer working partnership between the National Office and the Field Offices, spanning the entire process of large case litigation. To this end, we are developing guidelines for coordination at the various stages of litigation. Our hope is to improve the quality of our litigation efforts to achieve clearer decisions.

A second aspect of the Large Case Program I would like to discuss is the work of the Large Case Policy Board. The Large Case Policy Board was created in 1990 to set and oversee policy for the Large Case Program. Recently, the Policy Board has developed a vision statement for the future of the program. This vision statement only has a few more hurdles to clear in the IRS review and approval process, so I believe it is timely to give you a preview of its contents.

The Policy Board vision statement describes the future of the Large Case Program in terms of several discrete elements, each of which is directly related to the overall strategic objectives of the IRS: to enhance voluntary compliance, to reduce taxpayer burden, and to enhance quality and productivity. To achieve these objectives, the Policy Board has a number of proposals.

First, it proposes that we reduce the time required for the traditional process of audit, appeals, and litigation following the filing of a return. We have an ambitious goal: to complete the administrative part of the process within the time Congress specified by law in the statute of limitations -- normally three years from the filing of the return.

A second proposal is to acknowledge that there may be a better way to run the tax system than the traditional process of audit, appeals, and litigation following the filing of a tax return. Why not create an elective system where a taxpayer can obtain reasonable certainty that it is reporting the correct amount of tax on its return? This is the idea I mentioned in San Diego at TEI's annual meeting. We should learn to complete audits as part of the tax return preparation cycle, rather than years after the fact. This type of system would require that we use all of our available advance issue resolution techniques -- district determination letters, private letter rulings, advance pricing agreements, and some we haven't developed yet -- and we would use these techniques in a more coordinated way than has ever been done before.

A system like the one I have just described will be possible only if the IRS and taxpayers, working cooperatively together, reassess their concept of an "audit" so that it can be completed to the reasonable satisfaction of both sides in conjunction with the preparation and filing of the tax return.

Third, and perhaps most important of all, the Policy Board proposes that we create a system in which large corporations recognize that they are not just private, profit-making entities. They are corporate citizens of the United States with a serious responsibility to the sound administration of our tax system. To this end, we are developing the concept of "model corporate taxpayers," with substantial input from TEI representatives. I know that you are as committed to this ideal as we are. As a matter of fact, the ideal is exactly what Tom Wharton was expressing in the comment with which I began these remarks.

I am sure you can tell that these ideas express a very different vision of tax administration than we have followed in the past. But ask yourself: is our present system for dealing with large case taxpayers so close to perfect that we should only tinker at the margins, or should we instead force ourselves to think creatively about fundamentally new ways of doing business that might improve our performance dramatically? In the end, I think the choice is as much yours as it is ours.

These ideas are a dramatic illustration of just how great our potential is when we start to think cooperatively. In fact, the very principles we have discussed today for the Large Case Program have a broad application to many other areas of tax administration. What are the basic principles? They are: increased coordination across IRS functions, increased centralization of process, and the swifter resolution of issues, possibly even before the tax return is filed. We have only begun to see all the areas in which these principles might be productively applied.

One prime area of application is in the administration of the transfer pricing rules of section 482. In that context, we are trying to improve our litigation experience by involving Counsel earlier in the proceedings. While transfer pricing cases are more factual than legal, we must obtain and develop the right facts to mesh with a legal theory acceptable to a court. Our goal is to develop more uniform legal approaches that are practical and comprehensible to the field, to taxpayers and to judges.

We also believe we must establish more centralization of section 482 cases. You are probably aware that we now have two international field specialists whose time is devoted to assisting the field, coordinating the development of cases, and serving as a vehicle for sharing information. We need to build upon this structure and provide more opportunities for cooperation between agents and taxpayers. I believe that the Large Case Program is an excellent model to follow in achieving this goal. We have a number of ideas about ways that we can resolve issues more swiftly. One prime example is the Advance Pricing Agreement procedure, which allows a taxpayer to obtain an advance determination that its intercompany transfer-pricing methodology is acceptable. We are also working to develop an advance valuation procedure in other areas, including art valuation.

All these efforts show that the IRS is going beyond its past, with courage and determination, into a new future. When I began my term as Commissioner, I said that the IRS was at a crossroads. We faced a choice between an old road and a new one. The old road was familiar and had served us well for a long time. But the old road simply did not lead where we must go.

Today, I no longer see us at a crossroads. We have passed the intersection. We have made our decision well before time and circumstance left us without flexibility or options. We have chosen a new road, one that is somewhat strange to us. The new road involves a wholly new philosophy of doing business. It requires new equipment and new systems, and it demands new vision and insight. As I said at the outset, cooperation with taxpayers is a key, along with effective communication.

TEI, for its part, is well poised to travel down the new road with us. But you cannot rest on your laurels. We need your creativity, ingenuity, and initiative. In short, we need your participation. You can count on this: The entire senior leadership of the IRS will continue its work to move the Service in the right direction. I expect TEI to be an important part of the process. Thank you very much.

* The following article is adapted from the remarks that Shirley D. Peterson, Commissioner of Internal Revenue, made to the New York Chapter of Tax Executives Institute at the Chapter's 29th Annual Tax Symposium in New York City on December 8, 1992.

SHIRLEY D. PETERSON served as Commissioner of Internal Revenue from February 1992 to January 1993; for the three years before that, she served as Assistant Attorney General for the Tax Division. From 1969 until she joined the Justice Department in 1989, she was an attorney with the firm of Steptoe & Johnson, the firm to which she returned following her service as Commissioner. Ms. Peterson is a graduate of Bryn Mawr College and received her law degree from New York University School of Law.
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Author:Peterson, Shirley D.
Publication:Tax Executive
Date:Jan 1, 1993
Words:2341
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