LB&I Rolls Out Revised IDR Process

As you may have recently read in the tax press or heard about at TEI’s Annual Conference, LB&I has redesigned its examination process to increase the efficiency, effectiveness, and transparency of its audits. A central aspect of a tax audit is information gathering, generally through the use of Information Document Requests or IDRs. LB&I executives believe the current IDR management process lacks the rigor necessary to hold taxpayers and examiners accountable for timely and efficient fact gathering. Thus, as part of reengineering the exam process, LB&I has overhauled its IDR procedures. On September 24, 2013, a TEI delegation met with senior IRS executives and received a briefing on the new enforcement guidelines. Below are the key highlights of this process redesign, as well as our takeaways from the meeting.

The new IDR procedures represent a fundamental change in the IDR process. It will likely take time for agents to fully embrace the transparency required under these new procedures, and taxpayers will also face practical challenges forecasting response times, particularly for IDRs touching international operations, and dealing with unforeseen circumstances. Please keep us informed of any recurring problems (or successes) your company experiences with the new procedures by contacting Patrick Evans at [email protected] or 202.464.8351. This feedback will allow us to work with LB&I executives to improve the process. [Note:  We expect the new IDR process will be an agenda item during our LB&I liaison meetings in February 2014.]

In an IRS Directive dated June 18, 2013, LB&I announced that all IDRs issued after June 30, 2013, must comply with principles articulated in LB&I’s mandatory IDR training program. Under the training, three principles are essential to a validly issued IDR:

  1. the examiner must identify and state the issue that has led the examiner to request the information identified in the IDR;
  2. the examiner must discuss the IDR with the taxpayer in advance of issuing it; and
  3. the examiner and the taxpayer must discuss and determine a reasonable timeframe for response.

Other IDR best practices covered in the mandatory IDR training program include:  an IDR should cover a single issue; multi-pronged IDRs should separate each individual question or request with a number or letter; IDR language should be clear and concise; IDRs should be customized for each taxpayer; a draft IDR should be provided to and discussed with the taxpayer.

Since issuing the June 2013 Directive and conducting its IDR training sessions, LB&I has focused on enforcement, with the objective of implementing clear guidelines that can be consistently applied to all LB&I taxpayers. LB&I’s new IDR enforcement procedures are set forth in the attached Directive dated November 4, 2013. The procedures become effective January 2, 2014. All LB&I examination teams have been instructed to discuss the new enforcement procedures with taxpayers no later than December 15, 2013. Further, to ensure a smooth transition to the new enforcement procedures, examiners and specialists have been directed not to issue Delinquency Notices (discussed below) prior to February 3, 2014.

Nonconforming IDRs will not be enforced under the new enforcement procedures. LB&I’s revised enforcement procedures only apply to IDRs that meet the standards announced in the June 2013 Directive (i.e., IDRs that are issue focused, are discussed with the taxpayer prior to issuance, and have a reasonable response date based on discussions with taxpayer). IDRs that do not comply with these principles must be reissued to conform with the June 2013 Directive, including a new response date, at which time the enforcement procedures will apply to the IDRs. We strongly recommend that taxpayers discuss nonconforming IDRs with their exam teams.

Before an IDR is issued, taxpayers must discuss the IDR with their exam teams and elevate if consensus cannot be reached. LB&I structured the new IDR procedures to increase communication and collaboration between taxpayers and their exam teams. Thus, it is imperative that taxpayers discuss IDRs with examiners before they are issued. This is your opportunity to gain an understanding of the issue addressed by the IDR, refine the scope of the request, and negotiate an agreeable due date. If you cannot reach agreement with the agent, elevate the discussion to the next level of management within the LB&I chain of command (i.e., case or specialist manager, territory manager, director of field operations, deputy commissioner, LB&I commissioner). A central objective of the revised enforcement provisions is to involve LB&I management in the IDR process at an early stage. We strongly encourage you to take full advantage of this important safeguard.

IDR due dates are entirely negotiable at the front end, but firm upon issuance. Agents and taxpayers should discuss and agree upon a reasonable response time for the IDR before it is issued. Once an IDR is issued, the response date cannot be changed, and the new enforcement procedures start immediately upon default, regardless of substantial compliance to the IDR or a good compliance history. Agents are encouraged, but not required, to provide draft IDRs and allow taxpayers time to conduct due diligence and determine the time required to respond. Timing of an IDR response should consider all the facts and circumstances expected to be encountered in the document collection process, including scheduled leave and other human resource constraints. In addition, agents should consider their work-flow and availability to review and respond to the information produced. For example, an agent should not issue multiple IDRs with the same due date because it would be impracticable for the agent to act on a large volume of information produced on the same day.

The enforcement procedures have safeguards for unforeseen circumstances, but they are limited. When an IDR deadline is missed, the enforcement guidelines require the examiner to meet with his or her manager within a short period, but no longer than 10 days, to discuss the delinquent IDR. The examiner documents the reason for the delay and prepares a Delinquency Notice. The Delinquency Notice identifies the outstanding information and provides a deadline for producing it. Agents are instructed to use their “professional judgment” in determining the deadline and have authority to provide up to 15 days. The deadline set forth in the Delinquency Notice should take into account the taxpayer’s IDR compliance history and any extenuating circumstances that caused the failure to respond timely. If a taxpayer demonstrates “very good business reasons” for needing more than 15 additional days to respond, the Territory Manager has discretionary authority to approve an extended due date. In evaluating whether an adequate business reason exists, the Territory Manager should consider the information requested, production difficulties, and the taxpayer’s compliance history. These safeguards highlight the importance of communication with the exam team. If a taxpayer encounters unforeseen circumstances that prevent a timely IDR response, the circumstances should be documented (both problems encountered and steps taken or proposed to overcome them) and communicated to the exam team in a timely manner.

If a taxpayer fails to comply with a Delinquency Notice, the taxpayer will receive a Pre-Summons Letter signed and issued by its Territory Manager. To ensure executive-level management of the taxpayer is aware of the delinquency, the Pre-Summons Letter is issued to a taxpayer management official that is at a level equivalent to the LB&I Territory Manager. As explained in the November 4 Directive, the recipient should be a level of management above the taxpayer management official that received the Delinquency Notice.

The response date in the Pre-Summons Letter will generally be 10 calendar days from the date of the letter, but a Director of Field Operations may approve a longer period. If the outstanding information is not produced by the designated response date, the exam team will begin to prepare a Summons with Counsel’s involvement.

The November 4 Directive provides a welcome set of guidelines for LB&I’s revised IDR procedures, but it does not cover all of the aspects of the process, e.g., the standard a Territory Manager will use when determining whether to extend the Delinquency Notice response time beyond 15 days. LB&I expects to publish a comprehensive set of rules in the Internal Revenue Manual during first quarter 2014. The lack of detailed rules of engagement during this implementation period will add to difficulties faced by agents and taxpayers alike. We urge you to actively participate in the IDR development process and to elevate disputes early in the process as they arise, rather than after missing an unrealistic deadline.

Again, please keep us informed of any recurring problems (or successes) your company experiences with the new procedures by contacting Patrick Evans at [email protected] or 202-464-8351. This feedback will allow us to work with LB&I executives to improve the process.