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Time period for filing protests.

During the past two weeks, we have engaged in a debate concerning the time period for large case taxpayers to administratively protest proposed tax adjustments. Although TEI sincerely believes the CEP protest period should be extended, it was never our intent to make more out of this issue that it is. Rather, we have pursued it because it seems to us to be an area where the Commissioner could singularly act to resolve the matter. We have also pursued it because we sincerely believe that CEP taxpayers' desire for additional time to prepare complete and high-quality protests can be balanced with the IRS's desire to stay true to its currency initiative. To this end, we recommend favorable consideration of the following proposal:

* Retain the current rule requiring protests to be filed within 30 days of the issuance of a Revenue Agent's Report.

* Issue a revenue procedure providing that the protest period for CEP taxpayers will be automatically extended an additional 60 days upon the taxpayer's filing an extension request with the District Director.

* Couple the new rule with an IRS effort to issue a greater number of Forms 5701 earlier in the examination.

Under this proposal, the 30-day letter will remain a 30-day letter, thereby reducing any potential confusion between that notice and a deficiency notice (the 90-day letter) -- a concern expressed during our February 14 liaison meeting. In addition, by adopting an automatic extension approach (rather than extending the basic protest period), the IRS could obviate the need to amend the Statement of Procedural Rules. It should also temper concerns about the "unequal treatment" of different classes of taxpayers.

Although TEI does not fully appreciate the IRS's deep seated concern over extending the CEP protest period, the Institute does recognize that it is time to "move on" to other, weightier matters. Thus, we recommend that the IRS undertake to try the aforementioned proposal for a year or possibly 18 months. If, at the end of the test period, the IRS remains convinced that an automatic 60-day extension is inimical to the IRS's currency initiative (a finding we hope would be based not on anecdotal evidence but on a survey of all affected case managers, Appeals officers, and CEP taxpayers), it could revert to the straight 30-day rule (with extension being granted only on a case-by-case basis).

Finally, for your information (and in a desire not to prolong the debate but rather to "close the loop"), I enclose a memorandum that discusses both (i) the poins made in opposition to our recommendation that the protest period be extended and (ii) the alternative proposal relating to the issuance of Forms 5701 that you outlined on March 27.

In his March 27, 1991, remarks to Tax Executives Institute's 1991 Mid-year Conference last week, Commissioner Goldberg discussed a TEI recommendation that the time period for a taxpayer included in the Coordinated Examination Program to administratively protest proposed tax adjustments be extended from 30 days to 90 days by means of an automatic 60-day extension of time. The Commissioner playfully and concisely summarized the concerns on both sides of the issue. Although the Institute does not believe it necessary to repeat its reasons for proposing an extension of the protest period, this memorandum does address both (i) the points made in opposition to the proposal and (ii) the alternative proposal relating to the issuance of Forms 5701 that the Commissioner outlined on March 27. We have taken into account not only the Commissioner's remarks, but also the views expressed by Chief Counsel Shashy, Chief Operations Officer Blattner, and CEP Executive Director Monaco during their separate conversations with TEI representatives during the last week of March; we have also reviewed the draft discussion paper on this subject that Mr. Monaco was kind enough to share with us.

1. Effect on the IRS's Currency Initiative. TEI shares the IRS's commitment to increasing the currency of audits. TEI respectfully disagrees, however, that extending the protest period for CEP taxpayers would send the "wrong signal" with respect to currency. We think it would simply be a recognition of the reality that CEP audits are so complicated that more than 30 days is generally required to complete a comprehensive protest. More fundamentally, the "wrong signal" argument attempts to shift responsibility for lack of currency to the taxpayer. Concededly, every delay contributes to a lack of currency, but in the experience of most TEI members, the primary focus of the IRS's currency initiative should be pre-Revenue Agent's Report (RAR), not post. In other words, an additional 60 (or 30) days between the issuance of the RAR and the filing of a protest more often than not represents little more than small cracks on the multi-year highway of a cEP audit; the monster potholes form long before the issuance of the RAR.

TEI does not believe a commitment to currency by itself can justify a decision not to extend the CEP protest period. The applicable rules must make sense when measured against all that goes into a large-case audit and protest. Indeed, in theory, currency would be facilitated by shortening the protest period to less than 30 days -- but given the scope of a CEP audit, that would not be realistic, just as it would not be realistic to adopt an iron-clad rule that the RAR must be issued within 180 (or 360 or 540) days of the commencement of an audit or that an Appeals Conference must be scheduled within 90 days of the filing of a protest. Currency is a laudable goal, yes, but proposals to aid currency must be anchored in reality. (1)

2. Interaction with Section 6621(c). During our discussions with IRS representatives, several references were made to section 6621(c) of the Internal Revenue Code, the so-called hot interest provision. It was suggested that extending the protest period would put a taxpayer more at risk because interest would begin accruing at the enhanced section 6621(c) rate 30 days following the issuance of the RAR even if the taxpayer were accorded an additional 60 days to file its protest.

TEI believes section 6621(c) is irrelevant to the issue. First, extending the protest period from 30 to 90 (or 60) days would neither require taxpayers to wait until the 90th (or 60th) day to file their protest nor forestall their payment of the proposed adjustments in advance of any such filing. Secondly, the filing of a protest has no bearing on whether interest will accrue at the enhanced rate -- the issue is whether there is a payment of the disputed tax before the expiration of the section 6621(c) 30-day period. More to the point, the choice of whether to pay in respect of unagreed issues and when to file their protests would be the taxpayers'. We assume that, if a taxpayer chose to file its protest before the expiration of the 90-day (or 60-day) period, the IRS would not decline to take any further action until 90 days (or 60 days) had passed.

3. Earlier Issuance of Forms 5701. During the Commissioner's March 27 remarks, he summarized a proposal pursuant to which the protest period would remain 30 days, but the IRS would undertake to issue Forms 5701 (Notice of Proposed Adjustment) no later than 90 days before the issuance of the BAR. It has been suggested that such a "cooling off" period approach would further the IRS's overall goal of achieving currency -- to which TEI certainly subscribes -- while providing taxpayers with ample notice of the items that will be included in the RAR. Thus, it has been suggested, a taxpayer could undertake to prepare its protest early with certain knowledge that Forms 5701 would not be issued at the 11th hour that could significantly affect the items to be protested.

With respect to the time period for preparing protests, we realize that in the majority of cases, Forms 5701 are being given to the taxpayer throughout the course of the audit. Many of the forms, however, still do not contain sufficient detail to permit the taxpayer to begin the drafting of a protest. In addition, frequently the discussion of an issue in the RAR varies markedly from that in the initial Form 5701 (in part because of the taxpayer's response to the Form 5701). Finally, some companies have the policy of involving outside counsel in the preparation of the protest. To avoid unnecessary costs (since many issues raised in Forms 5701 will ultimately be dropped by the IRS -- again, in part because of the taxpayer's response to the forms), counsel does not become involved until the RAR is issued. For these reasons (as well as internal personnel constraints), many companies cannot begin preparation of the protest until the 30-day letter is issued -- no matter how much lead time is given between the issuance of the last Form 5701 and the birst of the RAR.

Given the multiplicity and complexity of issues raised in the audits of CEP taxpayers, TEI continues to believe that CEP taxpayers should be entitled to more than 30 days in which to prepare their protests. We believe that the preparation of more complete and detailed protests, which the guaranteed additional time would permit, is beneficial to both the IRS and taxpayers. This is not to say the Institute would oppose the earlier issuance of Forms 5701: we clearly would welcome it, for it nothing else, it would provide the case manager with more time to see how the various pieces of the audit fit together from the IRS's perspective. (2) We do not believe, however, that a "cooling off" period would vitiate the need for a longer protest period. Moreover, unless properly implemented, a "cooling off" rule could lead not to the earlier resolution of audits but to their protraction; that is to say, if the only difference from current procedures is to suspend the issuance of the RAR until the 90-day period elapses (rather than to issue Forms 5701 earlier), the proposal could delay, not accelarate, the examination.

From a quality management perspective, we must express our concern about the manner in which the proposal for a 90-day "cooling off" period has been presented by some IRS representatives (though not by the Commissioner on March 27). Specifically, notwithstanding what seems to us to be the clear merits of front-loading the audit (by the early issuance of Forms 5701) without regard to the resolution of the protest period proposal, more than one IRS representative framed the "cooling off" period proposal as an all-or-nothing proposal. Thus, the statement was made that if TEI were to persist in insisting on a longer protest period, that would be "all you would get"; in other words, taxpayers might be given 60 days to file their protests but Forms 5701 would continue to be issued right up until the issuance of the RAR and no extensions would be granted of the (albeit lengthened) protest period. To us, this approach reflects less a desire to craft a solution that reconciles the interests of both taxpayers and the IRS than an intention to use "administrative procedures to bludgeon taxpayers" (to use the evocative term that Chief Counsel Shashy coined during TEI's Midyear Conference).

4. Effect on General Program. The discussion paper that John Monaco shared with us devotes a considerable amount of space to discussing the perceived problems that would be associated with either (a) extending the protest period with respect to all taxpayers or (b) extending the protest period only with respect to taxpayers included in the Coordinated Examination Program.

TEI does not dispute that extending the general protest period from 30 to 60 days would delay the close of general program cases. Although we question the generalization that the "group inventory will obviously age at least another 30 days" (if the protest period were extended to 60 days), we have never recommended a general extension of the protest period. (Similarly, we do not believe the period of time to respond to a correspondence audit should be generally extended.) Rather, we believe that the extraordinarily complicated nature of, and necessarily large dollar amounts associated with, large-case audits justify lengthening of the protest period. Thus, just as the complexity of the business dealings of large corporations (as well as other exigencies) dictates that the IRS take more time in completing its audits, it also dictates that more time is necessary to respond to the ensuing RARs.

The discussion paper warns that there would be a "major concern" if the IRS were to accord CEP taxpayers a longer protest period than that provided to taxpayers in the general program. "Most practitioners will complain that both groups are not being treated the same. This may have an adverse impact on the general program moving cases within a 30 day time frame," the paper says.

With due respect, the argument proves too much. Large cases are different: after all, CEP taxpayers do not volunteer for the privilege of a continuous audit. There is never any concern expressed about "unequal treatment" when the IRS's selection criteria snag another taxpayer; it is not inequality but (as the Commissioner has said on more than on occasion) "going where the money is." There is never any concern expressed about "unequal treatment" when a team of 10 or more IRS employees descends upon the CEP taxpayer to audit its return; the agents are just doing their jobs. There is never any concern expressed about "unequal treatment" when the IRS, as a matter of course, seeks facilities at a CEP taxpayer's premises; such requests are just "part of the territory." (3) We do not believe there should be any concern when, as a result of all the "special" treatment CEP taxpayers are accorded, additional time is provided to them to file their protests.

Don't get us wrong. TEI agrees that disparate treatment of classes of taxpayers must be justified, and we recognize the political sensitivity of according large corporations a "benefit" not made available to taxpayers at large. We suggest, however, it is disingenuous to ascribe a spurious complaint of unequal treatment to "most practitioners" in order to justify an institutional reluctance to extend the CEP protest period. Indeed, to the extent the IRS needs more to justify an extended protest period than its own determination of which taxpayers are to be subject to intensive, continuous examinations, it can look at (i) the amount of time the examination takes, (ii) the number of Forms 5701 issued or number of adjustments proposed in the RAR, or (iii) the aggregate dollar amount of proposed adjustments. Assuming proper thresholds are set, any or all of these objective criteria could be used to explain why CEP taxpayers should be accorded more time to prepare and file their protests. Again, however, we believe the IRS should have enough to confidence in its own CEP selection criteria to let them stand on their own.

5. A Modest Proposal. TEI sincerely believes that CEP taxpayers' desire for additional time to prepare complete and high-quality protests can be balanced with the IRS's desire to stay true to its currency initiative. To this end, we recommend favorable consideration of the following proposal:

* Retain the current rule requiring protests to be filed within 30 days of the issuance of an RAR.

* Issue a revenue procedure providing that the protest period for CEP taxpayers will be automatically extended an additional 60 days upon the taxpayer's filing an extension request with the District Director.

* Couple the new rule with an IRS effort to issue a greater number of Forms 5701 earlier in the examination. (4)

Under this proposal, the 30-day letter will remain a 30-day letter, thereby reducing any potential confusion between that notice and a deficiency notice (the 90-day letter) -- a concern expressed during our February 14 liaison meeting. In addition, by adopting an automatic extension approach (rather than extending the basic protest period), the IRS could obviate the need to amend the Statement of Procedural Rules. It should also temper concerns about the "unequal treatment" of different classes of taxpayers.

TEI recommends that the IRS undertake to try the new proposal for a year or possibly 18 months. If at the end of the test period, the IRS remains convinced that a Form 5701 "cooling off" rule is by itself sufficient (based not on anecdotal evidence but on a survey of all affected case managers, Appeals officers, and CEP taxpayers), it could revert to the straight 30-day rule (with extensions being granted only on a case-by-case basis).

If you should have any questions about this letter, please do not hesitate to call either Ralph J. Weiland, chair of the Institute's IRS Administrative Affairs Committee, at (708) 937-8523, or TEI's professional staff (Timothy J. McCormally or Mary L. Fahey) at (202) 638-5601.

(1) TEI finds it ironic that one response to its recommendation that an extension of time be granted has been extension requests are almost always granted. (The experience of most -- but not all -- of our members confirms this.) If that is the case, however, why subject taxpayers to the uncertainty of not knowing whether, with respect to a given cycle, the District Director might choose to play "hard ball"?

(2) You will recall that a principal concern of CEP taxpayers is that the international examiners, engineers, and other specialists often do not complete their work until near the end of the audit and the case manager frequently seems effectively compelled to include those specialists' proposed adjustments into the Revenue Agent's Report without conducting any type of independent review. A 90-day "cooling off" period would ensure that such an independent review could take place and would seem desirable as a quality control measure without regard to its effect on a taxpayer's ability to prepare its protest in fewer than 90 days.

(3) TEI appreciates that, at least in respect of the substantial understatement penalty, the IRS has provided CEP taxpayers with a reasonable means of making an "adequate disclosure" short of requiring the filing of a formal amended return. We note our concern, however, that some consideration is being given to revoking Rev. Proc. 85-26 whereby a CEP taxpayer may make a qualified disclosure within 10 days of being notified of the commencement of an audit.

(4) We question, however, the wisdom of postponing the issuance of the RAR until some artificial deadline passes.
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Publication:Tax Executive
Date:May 1, 1991
Words:3059
Previous Article:Temporary and proposed "hot interest" regulations under section 6621(c).
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