On November 21, as most of us were preparing for a relaxing Thanksgiving holiday, the IRS publicly released two internal guidance memoranda (both available at TEGE-04-116-0028) addressed to “All TE/GE Examiners,” the first of which describes new procedures for the preparation and issuance of IDRs in connection with tax-favored bond audits and procedures for the enforcement of responses to those IDRs, and the second sets forth IDR “Best Practices.” The announcement of the new procedures on the IRS website describes their purposes:

“The updated process will:

  • Provide for open and meaningful communication between the IRS and taxpayers.
  • Reduce taxpayer burden and provide consistent treatment of taxpayers.
  • Allow the IRS to secure more complete and timely responses to IDRs.
  • Provide consistent timelines for IRS agents to review IDR responses.
  • Promote timely issue resolution.”

A review of the new procedures, however, gives the clear impression that they are primarily designed to provide IRS agents increased leverage to force issuers and their counsel to respond more quickly to the often lengthy and burdensome IDRs that the IRS has been lately issuing, while imposing no pressure on the IRS to resolve audits more quickly.

The following are some key excerpts from the new IDR procedures, with a little commentary of my own.

Initial Contact:

The examiner will mail initial contact letters . . . to notify a taxpayer and POA [Power of Attorney] when a return is selected for examination. . . .

After 10 business days have elapsed, the examiner may then initiate contact with the taxpayer or POA by telephone.”

Comments: At this first stage of the examination, there likely will be no Power of Attorney unless the issuer and its counsel hustle to get one filed with the IRS within this 10-day period. If no POA is filed, the IRS will presumably contact the representative of the issuer (i.e., taxpayer) identified on the Form 8038, and there’s no telling where that conversation might go. So we should all sensitize our issuer clients to the possibility of an “initial contact letter” and encourage them to contact counsel as quickly as possible upon receipt of this letter.

Discuss IDR:

The examiner will call the TP to discuss the issue being examined and the items being requested on the IDR.

. . .

Prior to mailing the IDR, the examiner and the taxpayer should agree on the response date – which may also be an appointment date. If they cannot agree on a response date, the examiner will assign a reasonable response date.

The examiner will determine the date that he/she plans to review the IDR response for completeness and will note the acknowledgement date on the IDR.

The examiner will issue the IDR.”

Comments: The discussion of the IDR is apparently intended to tailor the IDR more closely to the issue under examination, which sounds like a worthwhile goal that could reduce wasted time in explaining why certain IDR questions are irrelevant for a given issue. On the negative side, attempting to agree upon a due date for the response will be dangerous because it is often impossible to predict the amount of time required to prepare a response to the tens of questions generally included in an initial IDR, not to mention predicting the issuer’s availability over the coming weeks to assist in preparing the response. This is a particularly sensitive point given the restrictions on extensions, described below. Finally, note that while the issuer is required to commit to a date for its response, the examiner merely commits to a date by which he/she “plans to review the IDR response for completeness” – not what I would call a symmetrical obligation.

Follow-up:

. . .

If the response is complete, the employee must call the taxpayer to advise the taxpayer that the response was complete . . . .

If the taxpayer did not respond or if the response was not complete, the examiner must determine within 5 business days if an extension will be granted. Two extensions may be granted.

. . . If the extension is warranted, the examiner may provide the taxpayer up to 15 business days to provide the incomplete information. . . .

If the taxpayer did not respond or if the response is still incomplete, the examiner may grant a second extension for up to 15 business days, but only after discussion with the manager and with the manager’s approval. . . .

. . .

If the information is not received after the second extension, the examiner will begin the Enforcement Process.” Emphasis added.

Comments: In my experience, the IRS has been reasonable in granting needed extensions so long as the examiner believed the issuer and its counsel were acting in good faith. Sometimes those extensions have been for several months where legitimate reasons existed. These new procedures appear to tie the hands of examiners and their managers – limiting them to granting no more than two 15-day extensions – regardless of the reason, before the enforcement process described below is undertaken. While I can imagine that some issuers and their counsel have abused the willingness of examiners to grant extensions, it would seem more appropriate to deal with those situations on a case-by-case basis rather than by imposing restrictive and absolute extension limits.

Enforcement Process: Delinquency Notice, Pre-Summons Letter and Summons

During the review, if the agent determines the request is not complete, the agent notifies the Group Manager of the delinquency notice, prepares the delinquency notice, calls the taxpayer to discuss an appropriate due date and mails the delinquency notice with the revised due date noted. Managerial approval must be obtained if more than 10 business days is needed for the taxpayer to respond. The employee signs the Delinquency Notice.

. . .

If the taxpayer does not respond or if the response is not complete, the examiner will discuss this with the group manager and Area Counsel. The examiner will then advise the taxpayer of the next action: proposal of adjustment, summons or proposal of revocation.

If a summons is warranted, the examiner will prepare and issue the Pre-Summons Notice (Letter 5077-A) within 10 business days of the taxpayer not responding to the delinquency notice. The examiner will notify the taxpayer and determine a response date. Group manager approval is needed to grant more than 10 business days. The Pre-Summons Notice is signed by the group manager.

. . .

If the taxpayer does not respond or the response is not complete, the agent will hold a discussion within 10 business days with the Internal IRS team, coordinate the issuance of the summons with Area Counsel and follow the summons procedures in IRM Chapter 25.5.”

Comments: While the above enforcement process provides for a couple of additional short extensions to respond to the IDR, the first extension will be granted by way of a Delinquency Notice and the second extension is granted in conjunction with a Pre-Summons Notice. Neither of these steps sounds particularly collegial and either would undoubtedly send most issuers into a state of panic.

In conclusion, these new IDR procedures, which are being promoted as issuer-friendly and as a means of accelerating the resolution of bond examinations, on their face provide almost all rights and tools to the examiner and few if any to the issuer. Of course, the real test will come on and after April 1, 2017, when these procedures become effective and we get a sense as to how the procedures will apply in real cases. But for now, the IRS does not appear to have done us any favors.