The Internal Revenue Service (“IRS”) Large and International Business (LB&I) has announced it will be implementing changes to its examination process, effective May 1, 2016.  LB&I’s new procedures are designed to provide an organizational approach for conducting professional examinations from the first contact with the taxpayer through the final stages of issue resolution.  By adopting these procedures, the IRS hopes to add efficiency to the examination process and permits the taxpayer and the examination team to work together in “the spirit of cooperation, responsiveness, and transparency.” Under the new procedures, the examination will be divided into three phases: planning, execution, and resolution, each of which focus on achieving certain specified goals.

The planning phase is focused upon identifying specific issues in the taxpayer’s case.  Once issues are identified, the exam team will explain to the taxpayer why each issue is being considered.  Thereafter, an issue team, comprising LB&I employees most familiar with the particular issue, will work with the taxpayer to establish the relevant facts.  Although a case manager will have overall responsibility for the case, each issue will have a designated manager who oversees the planning, execution and resolution of the issue.

During the execution phase, the issue teams will fully develop their particular issue, including determining the facts, applying the law to those facts, and understanding the various tax implications of the issue.  This process will include interactive discussions with the taxpayer followed by the issuance of Information Document Requests (IDRs) to develop the facts.  The new procedures note that a meaningful discussion with the taxpayer prior to issuing an IDR will result in a more effective process.  After gathering relevant facts, the issue team will document the agreed facts and obtain acknowledgement from the taxpayer with respect to the unagreed facts.

Finally, in the resolution phase, LB&I encourages its employees to use all available tools to resolve issues.  As facts have been fully developed and documented in the execution phase, the taxpayer and the issue team will be able to work more productively in the resolution stage.  Although there are numerous strategies to work towards resolution, LB&I requires its employees to consider Fast Track Settlement for all unagreed issues.  Fast Track consists of a mediation where the taxpayer, the issue team and Appeals must agree to participate and agree to a mutual resolution.   The goal of the resolution phase is tax certainty for both the taxpayer and LB&I.  Thus, at the conclusion of the resolution phase, taxpayers and LB&I may be asked to perform a joint critique of the exam process and recommend improvements.

LB&I emphasizes the significance of bringing all information to light as soon as possible to avoid issues relating to the expiration of the statute of limitations, or the possibility of new information coming to light during the Appeals process, which would return the case to Examination.  This policy is reflected in LB&I’s request that taxpayer’s bring any potential refund claim to the exam team’s attention as soon as possible.  LB&I specifically indicated it would only accept informal claims that are provided to the exam team within 30 calendar days of the opening conference.  If such claims are brought within that time period, they can be developed and processed by exam, providing higher possibilities for tax certainty for both the taxpayer & LB&I.  Refund claims submitted within this time period must meet the standards of Treas. Reg. § 301.6402-2, which provides that a valid claim must set forth in detail each ground upon which credit or refund is claimed, present facts sufficient to apprise the IRS of the exact basis for the claim, and contain a written declaration that it is made under penalties of perjury.   However, in the interest of incentivizing taxpayer’s to bring refund claims forward in a timely manner, LB&I has indicated it will discuss deficiencies not meeting the Treasury Regulations and provide the taxpayer an opportunity to correct the deficiencies.  If refund claims are not brought within the specified 30 days, they must be filed using the applicable amended tax return or Form 843, Claim for Refund and Request for Abatement.

The reorganization of the LB&I examination process reflects the IRS’s desire to achieve fair and final resolutions during the Examination Process that is achieved with an issue specific approach, involving issue teams that are well versed on the facts to fully develop the facts relevant to each issue.  Notably, Publication 5125 mentions the significance of meaningful discussions with the taxpayer on numerous occasions, including conversations to ensure the taxpayer fully understands the issues are identified, conversations prior to issuing IDRs, and acknowledgements of agreed and unagreed issues.  Upon its implementation, the IRS hopes the new examination process will allow LB&I to work transparently in a collaborative manner with the taxpayer to understand their business and share the issues that have been identified for examination.  This, in turn, should lead to LB&I’s ultimate goal of increasing the final resolutions reached during the exam process.