InsideCounsel » May 2008
Taxing Matters
The IRS’s business division implements new processes for greater efficiency.
Had General Electric’s e-filed 2006 income tax return been printed, it would have consumed 24,000 pages of paper, the nation’s longest tax return.
No small wonder, then, that the Internal Revenue Service’s (IRS) Large and Midsize Business division (LMSB), which examines business taxpayers with $10 million or more in assets, has a daunting mandate. LMSB taxpayers paid $206 billion in taxes in 2006 and filed 175,862 returns with many running to thousands of pages. “It behooves the IRS to do more with less and to be as efficient as possible,” says
Don Rocen, a partner at Miller & Chevalier and former IRS deputy chief counsel.
The agency’s history is dotted with repeated attempts to be more efficient, with varying measures of success. Its latest endeavor, however, highlighted by the July 2007 launch of the “industry issue focus” (IIF) process, has effected a sea change for taxpayers.
“In less than a year, a whole new environment has developed at the IRS,” says Walter Goldberg, executive director of Grant Thornton’s national tax office in Washington, D.C. “It raises cause for concern, but there are also definite benefits for taxpayers.”
Tiered Up
Essentially, IIF is an issue management process aimed at treating specific tax issues consistently across industry lines while improving audit currency. At its core is a focus on prioritizing and centralizing the administration and resolution of important issues.
“Behind the IIF is a desire on the part of the IRS to get as much as it can out of its resources by operating as closely on a business model as it can,” says Ellis Reemer, who leads DLA Piper’s tax controversy and tax disputes group.
To that end, the IRS has designed a tiered system for prioritizing tax compliance issues. After an IRS Compliance Strategy Council identifies the issues, it ranks them based on prevalence and compliance risk. The agency also takes into account visibility and uncertainty due to new legislation and litigation; materiality, in terms of the number of taxpayers affected and the resources required for the audit function; and the potential for abusive conduct.
Tier I issues have the highest strategic importance and most significant impact on one or more industries. Current issues on the Tier I list include abusive foreign tax generators and backdated stock options. See the full list of Tier I transactions at www.irs.gov/businesses/index.html. Tier II issues reflect areas of potential high noncompliance or significant compliance risk to LMSB or an industry.
For Tier I and Tier II issues, the IRS assigns an “issue owner executive” with nationwide jurisdiction to coordinate the relevant examinations. Issue management teams—including counsel, technical advisers, field staff and field representatives—then develop guidance for examiners.
“Under the old system, IRS field offices in different parts of the country could come up with different answers to the same question, meaning that a taxpayer in Oregon with an identical problem to that of a taxpayer in Maine might achieve a more or less favorable settlement than his counterpart across the country,” Goldberg explains.
