How Will the LB&I Reorganization Affect Midmarket Taxpayers?

By Andy Mattson, CPA, and Chastity Wilson, J.D., LL.M., CPA

The Large Business and International (LB&I) division within the IRS serves corporations and flowthrough entities with greater than $10 million in assets. In September 2015, LB&I announced that it was reorganizing. LB&I Commissioner Douglas O'Donnell discussed several key components of the reorganization in the LB&I FY2016 Focus Guide (available at One noted change outlined in the FY2016 Focus Guide is how LB&I will approach its continuous audits by eliminating the coordinated industry case (CIC) designation.

As part of its reorganization, LB&I updated its procedures in the Internal Revenue Manual (IRM) and issued IRS Publication 5125, Large Business & ­International Examination Process (available The primary focus of the new procedures and process centers on issue-focused exams.

A couple of new concepts have been incorporated into the new exam process. For example, Publication 5125 talks about the issue team concept, which is described as a team composed of "LB&I employees who will work with taxpayer personnel, who are most knowledgeable about a given issue, to ensure the successful development and management of each issue examined." Each issue team will have an assigned issue team manager. A case manager will maintain responsibility for the overall management of the case and will collaborate with issue managers.

Another new concept incorporated into the LB&I exam process is that the issue team will seek the taxpayer's acknowledgment of the facts. According to the IRM and Publication 5125, the issue manager is required to seek the taxpayer's acknowledgment of the facts, resolve any factual differences, and/or document factual disputes before a case is sent to Appeals. The IRM states that the issue team will use a pro forma Information Document Request (IDR) along with a Form 886-A, Explanations of Items, to solicit a written acknowledgment of facts from taxpayers.

One thing that remains unchanged under LB&I's new exam procedures is the IDR process. In 2014, LB&I issued a directive outlining the IDR enforcement process, which included requirements for issuing IDRs (LB&I Directive 04-0214-004). Some of the key points outlined in the directive include (1) issuing one IDR per issue, (2) issuing IDRs in draft so that taxpayer feedback can be solicited, and (3) setting a reasonable response date in collaboration with the taxpayer. The IRM has been updated to incorporate these IDR requirements.

Impact of LB&I Reorganization on Midmarket Taxpayers

With LB&I's reorganization, the unknown is whether there will be a greater focus on midmarket taxpayers. With the elimination of the CIC designation and the move toward issue-based examinations, it is plausible that exam coverage of midmarket businesses will increase in the coming months and years. This means that tax practitioners should become familiar with the key concepts outlined in the new LB&I exam process if their midmarket clients are selected for exam.

Some practitioners have observed that LB&I does not always apply the exam process consistently across all sizes of taxpayers within its jurisdiction. The largest taxpayers within LB&I's jurisdiction (i.e., cases formerly designated CIC) were typically under continuous exam or were otherwise examined frequently. Large taxpayers and their representatives, because they were under continuous exam, generally understand LB&I's exam process and know what to expect. Many midsize taxpayers, however, typically have never been under an LB&I exam, or it has been several years since they were examined. These taxpayers, therefore, are not as familiar with the process and may not be able to identify when examiners are not following the process.

The IDR process is just one example of how knowing LB&I's procedures can help taxpayers obtain results that are more favorable. Practitioners should be aware of these processes in the event a less-experienced agent fails to comply with them. For example, if an LB&I agent articulates that a 15-day response time to an IDR is mandatory, a taxpayer or its representative who is familiar with the process can explain that the guidance provides that the IDR response deadline should be discussed collaboratively. Another example is understanding that issues should be discussed throughout the exam process (e.g., a Notice of Proposed Adjustment (NOPA) should be provided to the taxpayer as the issues are developed and not held until the exam is winding down). Practitioners should similarly be aware that:

  • IDRs must first be issued in draft;
  • Single IDRs should not contain multiple issues; and
  • The agent and the taxpayer should discuss and agree to the timeline for responding to IDRs.

An LB&I examination has many advantages compared with exams conducted by other divisions (e.g., Small Business/Self-Employed (SB/SE)). The formal IDR process and the NOPA process are two advantages. For example, SB/SE has no formal IDR process, meaning it does not generally issue IDRs in draft and includes multiple issues on one IDR. SB/SE also does not employ a NOPA process; therefore, it does not formally disclose IRS adjustments and positions until it issues the final report.

With the likelihood that LB&I will increase its exam coverage of midmarket taxpayers, practitioners would be wise to familiarize themselves with the new LB&I exam process. Being familiar with the process will allow practitioners to use it to their advantage when trying to resolve issues throughout the course of an exam.   



Andy Mattson is a partner with Moss Adams LLP in Campbell, Calif. Chastity Wilson is principal in charge of dispute resolution services at CliftonLarsonAllen LLP in Minneapolis. Mr. Mattson is the chair and Ms. Wilson is a member of the AICPA IRS Advocacy & Relations Committee. For more information about this column, contact

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