New IDR Policy Means Stricter Deadlines, More Discussions

Editor: Greg A. Fairbanks, J.D., LL.M.

Procedure & Administration

For years, the IRS’s Large Business and International Division (LB&I) has discussed privately and publicly the need to revise corporate exam practices by modifying how information document requests (IDRs) function in both scope and response (see Dolan, “IRS Tackles Inefficiency in Its Examinations of Large Taxpayers,” 44 The Tax Adviser 716 (October 2013); and Elliott, “IRS to Revise Corporate Audit Practices, Focus Savings on International, Midmarket Businesses,” 2012 TNT 59-1 (March 27, 2012)).

The IRS’s approach was said to be twofold: shorten the time frame for responses to an IDR by taxpayers and increase the number of summonses for delinquent responses. At the same time, the IRS hoped to narrow the focus of IDRs, many of which could ask for a multitude of documents, including “any and all” documents related to a specific issue.

On Nov. 4, LB&I followed through on its promise, issuing a directive (LB&I-04-1113-009) that aims to achieve those goals by instituting a mandatory enforcement mechanism and urging greater discussion between examiners and the taxpayer. Specifically, the directive contains guidelines for issuing an IDR and, separately, rules for enforcing the IDR.

The goal of the directive is to make life a little easier for the IRS and taxpayers. By narrowing the focus, taxpayers would not be overly burdened in providing appropriate documents, and, by shortening the time for response, the IRS could close its backlog and complete examinations more quickly. Greater discussions of the draft IDRs, where taxpayers and the IRS would discuss the relevancy of information and the focus of the IRS’s interest, are meant to foster a better overall relationship. Nonetheless, it remains to be seen how this policy will play out in the long run, for either the IRS or taxpayers, as trust between the parties is an important factor in achieving success.

IDR Issuance

Attachment 1 of the directive outlines a 13-step process for issuing an IDR. Examiners are instructed to discuss the issue related to the IDR with the taxpayer, explaining why the information requested is necessary and how it relates to the issue under consideration. After consulting with the taxpayer, the exam team is directed to determine what will ultimately be requested in the IDR and to ensure that the IDR “clearly states the issue that is being considered” and requests only the relevant information related to that issue.

Examiners are instructed to prepare only one IDR per issue, ensuring that the IDR is concise, clearly written, and customized to the taxpayer or the taxpayer’s industry. A draft IDR is then shared with the taxpayer, and both parties are encouraged to determine a reasonable time frame for a response.

Throughout the process, but especially at this point, it is incumbent upon the taxpayer to be engaged with the exam team on not only what the taxpayer believes is irrelevant to the IRS’s inquiry, but also to set expectations on how long it will take to respond to the IRS’s request. Each taxpayer is different, and depending on the time of year, the breadth of the IRS’s inquiry, and the resources of the taxpayer and its representatives, the length of time required to respond adequately to the IDR may differ.

A good exam manager will understand this, and taxpayers who have had a reasonably cordial relationship with their exam team will likely have an easier time reaching a joint resolution on the length of time for a response. But, again, an IRS goal is to foster more meaningful conversations between taxpayers and the exam team.

It is especially important for taxpayers to come to an agreement with the IRS on what a reasonable response time should be, because if no agreement is reached, the IRS can unilaterally set a response date. From there, exam managers have their hands tied when it comes to leniency. While the IRS has not described in any written guidance what a reasonable response date is, LB&I Commissioner Heather Maloy has mentioned publicly that some agents and taxpayers are agreeing on blanket IDR response times of 30 days (see Elliott, “LB&I to Shorten Information Document Request Response Times,” 2012 TNT 217-4 (Nov. 8, 2012)).

IDR Enforcement

Attachment 2 of the directive describes the enforcement procedures the IRS should follow if the taxpayer’s response is delinquent or inadequate. The process has three graduated steps: (1) the issuance of a delinquency notice; (2) a presummons letter; and (3) a summons. The process is “mandatory and has no exceptions.”

If the taxpayer fails to provide a complete response to the IDR by the response date, the examiner must move forward by issuing a delinquency notice (Letter 5077). At that point, the IRS and taxpayer will discuss what is missing from the response. The IRS will also ensure that the taxpayer understands the next steps if an adequate response still is not received in time.

The exam team manager will issue the delinquency notice to the taxpayer within 10 calendar days of the IDR response date, demanding a response to the IDR that is due no later than 15 calendar days from the date of the delinquency notice. A territory manager must approve any response date of more than 15 calendar days.

Barring a response at that point, the IRS will discuss the lack of response initially without including the taxpayer. The team manager, specialist manager, territory managers, and counsel will collaborate and prepare a presummons letter (Letter 5078). The territory manager will then discuss the presummons letter with the taxpayer and issue it to the management level of the taxpayer above the level communicating with the exam team up to that point, generally no later than 14 calendar days after the due date of the delinquency notice. The territory manager sets a response date of no more than 10 days from the date of the presummons letter. The director of field operations must approve a response time beyond 10 days.

Failure to respond to a presummons letter will result in a summons issued by IRS counsel. The IRS typically has broad summons power that may require a taxpayer to produce existing records, enforced by a court order.

Observations

The directive states that to achieve a smooth transition for examiners and taxpayers, the IRS was to begin discussing the new IDR requirements with taxpayers then under examination “as soon as practical,” but generally no later than Dec. 15, 2013. The new IDR enforcement process was scheduled to go into effect on Jan. 2, 2014, and as of that date only applied to IDRs that had been issued in accordance with the requirements of Attachment 1. An IDR that did not meet the requirements of Attachment 1 at that time was required to be reissued to conform to the requirements, including a new response date, at which time the new enforcement procedures would apply. The directive also instructed examiners and specialists not to issue delinquency notices before Feb. 3, 2014.

The IRS has conducted training for examiners and specialists within LB&I on both the IDR issuance and enforcement processes. The goal, to make the exam process more efficient and transparent, is admirable, but taxpayers and the IRS will likely encounter some rough patches, especially early in the new process. The most important period for taxpayers to consider is before the IRS issues an IDR. This is the only time when the examiner has true discretion, and an open dialogue at this time is essential. Once the IRS issues an IDR, timelines are strict.

The success of the new directive will depend largely on relationships between taxpayers and exam teams; those relationships could be strained under these new, stricter deadlines. Taxpayers should be aware that their collaboration with the IRS to not only narrow the focus of potential IDRs, but also to be open in their ability to adequately and timely respond to the request, will determine how smoothly this new process goes. By the same token, the IRS, and especially LB&I, have been open to taxpayer comments, if carefully crafted and reasoned. Taxpayers facing an overly inflexible exam team should make their concerns known to group and territory managers.

For now, like any new initiative, it may take some time to work out any institutional problems, but, if successful, the new IDR process could make long, drawn-out examinations a thing of the past for many taxpayers. That success, however, depends on cooperation and dialogue.

EditorNotes

Greg Fairbanks is a tax senior manager with Grant Thornton LLP in Washington, D.C.

For additional information about these items, contact Mr. Fairbanks at 202-521-1503 or greg.fairbanks@us.gt.com.

Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.