by George G. Jones and Mark A. Luscombe
The IRS is continuing its long-term efforts to do more with less.
As we discussed in our column in the last issue, out-going IRS Commissioner Charles Rossotti is very concerned about tax compliance and how the IRS is going to improve compliance. One of the commissioner’s goals is to increase audit resources. Facing the reality that the resources will probably not be a great as the IRS would like, the agency is also trying to do more with what it has. Rossotti has refocused audit efforts on the greatest areas of abuse.
If the IRS is to be successful in its efforts, it is going to have to be much more efficient about identifying and disposing of problem areas. The IRS chief counsel’s office has undertaken several initiatives designed to do just that.
The IRS chief counsel has expressed frustration at the slow pace at which Technical Advice Memoranda (TAMs) are issued. In an experiment to try to expedite the process, Technical Expedited Advice Memoranda (TEAMs) will be issued in areas under the jurisdiction of the associate chief counsel, Income Tax and Accounting. A number of specific time deadlines are included to try to help move the process along.
The overall goal of the program is to have guidance issued within 60 days. Some TAM requirements have been eliminated, such as the requirement that the IRS agent and the taxpayer agree on the underlying facts. It is possible that two TEAMs could be issued, one based on the field agent’s submitted facts and the other based on the taxpayer’s submitted facts.
A TEAM request can originate with IRS exam or appeals personnel or field counsel, or with the taxpayer during the audit process. The taxpayer may make a written or oral request to the examining agent or appeals officer that the legal issue be referred for a TEAM. In appropriate circumstances, a TEAM project may also lead to an expedited revenue ruling project.
The number of revenue rulings issued by the service has declined for several years, and IRS chief counsel B. John Williams Jr. has expressed a desire to increase that number. The hope is that increased published guidance on issues identified in TEAMs will reduce the number of similar issues being addressed in private letter rulings, TAMs and Field Service Advice Memoranda (FSAs).
Although the officially announced time for evaluation of TEAMs as a permanent program is early in 2003, IRS personnel have recently informally indicated that they are already open to the submission of TEAM requests outside of the specified income tax and accounting areas. This is an indication that the program is already receiving a positive evaluation within the service.
SAMs and BAMs
Although the service appears to have been satisfied with the speed of the Field Service Advice process, it appears not to be happy with the way taxpayers are using FSAs, as well as the redaction and disclosure process associated with releasing FSAs to the public. Some at the service appear to believe strongly that taxpayers have been utilizing the FSA process because of its speed for issues that were designed to be handled by the TAM process. In order to address this problem, the IRS is not only developing TEAMS, but is also planning to divide FSAs into two separate types of guidance: SAMs and BAMs.
The Strategic Advice Memorandum (SAM) will focus on substantive case development without a discussion of legal issues or the IRS’s position on those issues. It is hoped that this structure for SAMs will enable the IRS to protect them from disclosure.
Background Advice Memoranda (BAMs) will focus on a discussion of the legal issues involved in the case and are intended to be made available to the public. There is a history of the IRS being required under the Freedom of Information Act to eventually disclose to the public documents that they had not intended for disclosure. The usual reaction has been that the IRS starts to issue fewer of those types of documents and starts issuing a new type of document designed to avoid disclosure. The development of SAMs and BAMs appears to be a continuation of this practice.
The IRS has been fairly pleased with its program to encourage taxpayers to identify and resolve tax issues before filing their returns. The IRS is now looking toward expanding the scope of the pre-filing program to include international tax issues as well. It is also proposing the use of alternative dispute resolution mechanisms to dispose of issues more quickly and reduce the costs in time and resources of litigation
Tax shelter agreements
Commissioner Rossotti has already identified abusive tax shelters, both corporate and increasingly individual, as a major compliance problem for the IRS. The IRS has already initiated disclosure procedures to try to find out much earlier in the process what tax shelter ideas are being proposed and who is utilizing them. Riding on the relative success of that program, the service is now trying to encourage taxpayers to come forward to settle those cases voluntarily, reducing the expenditures of time and resources on audits and litigation. (For additional reporting, see the top story on page 10.)
In the areas of corporate-owned life insurance (COLI), basis shifting transactions, and contingent liabilities, the IRS has announced time deadlines for entering into settlement agreements with the IRS. In COLI cases, taxpayers will receive a letter giving them 45 days to accept a settlement permitting the taxpayer to retain 20 percent of the claimed benefits. Taxpayers engaged in basis shifting transactions have been given a deadline of Dec. 3, 2002, to notify the IRS that they want to settle the matter. In the case of contingent liability transactions, taxpayers have been given until Jan. 2, 2003, to apply for resolution of the case utilizing a fast-track dispute resolution procedure involving binding arbitration.
It remains to be seen how effective these deadlines will be in encouraging taxpayers to come forward and disposing of these cases. Some commentators have suggested that the IRS may be moving a little too quickly to impose settlement deadlines before it has sufficiently strong judicial authority to support its position. If taxpayers still feel that they might get a better deal in the courts, or even that they still might not be discovered, they may prefer to wait rather than coming forward now.
Summary: All of these initiatives being undertaken by the IRS are designed to enable the IRS to dispose of a greater number of tax issues more quickly and for more taxpayers. This will enable the IRS to improve tax compliance with its existing resources at a time when additional audit resources will probably not be sufficient to fully address the growing compliance problem.
By using a carrot and stick approach of promoting faster resolution of issues and rewarding taxpayers for coming forward now, the IRS hopes the threat of the stick will be sufficient. If the carrot doesn’t work, however, the IRS may not have enough sticks to go around.
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