The effective date for a new IDR enforcement process has been pushed back to March 3 while the directive is being prepared.
“It is not surprising that the effective date of the new IDR process has been extended,” said Ken Clark, a partner of Fenwick & West. “The IRS from time to time announces deadlines on projects and then extends its own deadlines. It is likely to have received significant input from field personnel on this issue and perhaps from practitioners, information that it hopefully is considering.”
Information document requests were the subject of two IRS directives in 2013.
On June 18 last year, Paul DeNard, the then acting commissioner of the IRS’s Large Business & International Division (LB&I), which deals with the tax affairs of corporations and partnerships with assets of more than $10 million, as well as certain high net-worth individuals, told the division’s examiners and specialists that from the end of that month:
IDRs must be issue focused;
IDRs must be discussed with the taxpayer; and
The taxpayer and the agent need to discuss the appropriate deadline for the IDR.
DeNard’s directive said changes to the IDR enforcement process would be announced in the following months.
Last November, Heather Maloy, by then the LB&I commissioner, issued another directive on IDRs. She repeated the guidance for issuing IDRS from the June directive, including setting a “reasonable” response rate, if one can not be agreed with the taxpayer. The directive added that if information requested is not received by the IDR response date, an LB&I examiner or specialists should follow the enforcement process, consisting of a Delinquency Notice, Pre-Letter Summons and Summons, which “is mandatory and has no exceptions”.
A Delinquency Notice is required to be issued within 10 calendar days of the IDR response date, with its own response date of 15 days from its issue. An IRS territory manager has to approve anything beyond 15 days.
If the taxpayer still has not responded to the IDR completely by the response date for the Delinquency Notice, a Pre-Summons Letter must be issued no later than 14 days after the response date for the Delinquency Notice, to an officer of the taxpayer at a level above the tax department.
The response date should, without approval, be no more than 10 days from the date of the Pre-Summons Letter.
If the taxpayer still does not send a complete response to the IDR by the response date in the Pre-Summons Letter, the IRS agent must prepare a summons with one of the Service’s counsel.
While the directive set the effective date of the new IDR process as January 2 this year, officials were told not to issue Delinquency Notices until at least February 3.
Don Korb, a partner of Sullivan & Cromwell and a former chief counsel of the IRS, said the November directive was too rigid.
“There was not enough discrimination at the examination level. It is definitely not the way to want to run these sorts of examinations. There are concerns not only at the practitioner level, but also the agents, who have no ability to be flexible.”
Clark said this lack of flexibility for examining agents and taxpayers in the proposed directive is a concern.
“It would not be surprising if the new directive provides greater discretion to agents and taxpayers with respect to such matters as the timing of IDR responses and the timing of potential summonses,” he said. “Providing a longer period for dialogue on draft summons and clearer rules permitting agents to take into account the potential burden of their requests would be helpful.”
Alan Kravitz, an associate of Sullivan & Cromwell, said guidance for agents in setting deadlines was important.
“There was nothing out there that we have seen to give the agents guidance about on how to set deadlines for responding to IDRs, which give the increased rigidity in the timeline set forth in the directive, has become absolutely crucial. Guidance could cover, for example, the size of a tax department, the number of IDRs outstanding, the location of the records, particularly if only available in hard copy, etc..”
Korb believes there will be no bigger issue in US tax controversy than IDRs for taxpayers in 2014.
“It is even bigger than the roadmap for transfer pricing cases that is due to come out, because while there are a finite number of transfer pricing cases, IDRs are used in every LB&I examination, so every corporate will have to deal with the new process.”
International Tax Review (ITR): Are you surprised by the extension in the effective date of the directive? Patrick Evans (PE), chief tax counsel, Tax Executives Institute: I am not surprised. Change is always tough, particularly for large government agencies like the IRS. The changes LB&I is making to the IDR process are fundamental and require a variety of different actors to take on new responsibilities. I commend LB&I executives for stepping back and extending the effective date of the IDR enforcement procedures until they can take necessary steps to ensure a smooth transition. ITR: Is a reissued directive a priority? Or should the IRS take as much time as possible to get it right? Is it likely that a new directive will come out after March 3 and be retrospective? PE: Reading tea leaves always gets me in trouble, but I do think a reissued directive is an LB&I priority. Overhauling the IDR procedures to hold taxpayers and examiners accountable for timely and efficient fact gathering is a key objective for LB&I, and I believe the division will expend necessary resources to get it right. In a perfect world, LB&I would publish detailed rules of engagement contemporaneously with the effective date of the new IDR enforcement procedures so taxpayers and agents would be on equal footing. Thus far, LB&I has applied the new enforcement procedures on a prospective basis, and I do not expect that to change. ITR: What is required to make the process clearer? Do you expect a new directive to be substantially different from its predecessor? PE: I do not expect the new procedures to change significantly, but I am hopeful they will flesh out some key points. Taxpayers face a host of practical challenges when forecasting IDR response times—particularly for IDRs touching international operations—and when dealing with unforeseen circumstances that complicate data collection efforts. I am hopeful the new directive will build additional discretion into the delinquency procedures or, at a minimum, provide guidelines for exam team management to use when exercising their discretionary authority to approve extended due dates for problematic IDR responses. Additional guidelines for setting IDR due dates in the first instance would also be helpful. I have heard numerous accounts of field agents demanding the same 10 to 15-day response times under the new procedures as they did under the old system. If taxpayers are going to be held to tighter enforcement standards, then agents must consider all the facts and circumstances expected to be encountered in the document collection process, including scheduled leave and other human resource constraints, as well as agents’ work-flow and availability to review and respond to the information produced. ITR: Some reports say that taxpayers found the November directive too rigid. Is that fair? What would make it less so? PE: I have heard similar reports from both taxpayers and LB&I exam teams. Adding discretion to extend IDR due dates for unforeseen circumstances would be a major step towards allaying these concerns. |
