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MSP #09: Field Examination

The IRS’s Field Examination Program Burdens Taxpayers and Yields High No Change Rates, Which Waste IRS Resources and May Discourage Voluntary Compliance.

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #9-1

Periodically survey taxpayers after field exams to determine the impact of the exam on the taxpayers’ understanding of the audit process and audit adjustments, and attitudes towards the IRS and filing and paying taxes.

IRS RESPONSE TO RECOMMENDATION: The IRS has conducted Customer Satisfaction (CSAT) surveys since the Restructuring and Reform Act of 1998. LB&I and SB/SE, alongside the Research, Applied Analytics, and Statistics (RAAS) function, periodically conduct post-filing burden surveys, customer satisfaction surveys, and other root-cause analyses related to taxpayer understanding of and engagement with IRS examination and issue resolution processes.

The CSAT survey questions are designed to solicit feedback from the taxpayer to gauge their understanding of the examination process and their attitude and feelings toward the IRS. Taxpayers are asked to rate the overall way the IRS handled their audit and if our correspondence to them adequately explained the examination process. The taxpayer is also invited to provide any positive or negative feedback and comments regarding their experience.

The survey results are reviewed and analyzed for trends and are shared with examination directors. Taxpayer feedback is taken into consideration and used to find ways to improve processes.

Further, the IRS is engaged in discussions with other tax authorities, through the Organization of Economic Cooperation and Development and the Forum on Tax Administration, related to understanding taxpayer attitudes and behavior with an eye toward finding methods and processes that could be employed at the IRS.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is pleased the IRS has engaged with other tax authorities to better understand how exams affect taxpayer attitudes and behaviors. This collaboration should allow the IRS to learn from other countries and apply best practices to its own field exam program. Notwithstanding this positive action by the IRS, the National Taxpayer Advocate does not agree that the IRS’s actions address her recommendation. As explained in the Most Serious Problem, the field exam customer satisfaction surveys are more focused on how the taxpayer feels about a specific encounter and not how the taxpayer might alter their behavior in the future. The National Taxpayer Advocate would welcome the opportunity to work with the IRS to draft additional questions that would help the IRS better determine the effects of field exams on taxpayers.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #9-2

Periodically study taxpayers’ filing behavior following field exams to determine whether the exams had an impact on whether the taxpayer filed, how much income the taxpayer reported, and whether the taxpayer repeated a mistake made on a previous return.

IRS RESPONSE TO RECOMMENDATION: Due to the large volume of taxpayers we examine in a given year, the monitoring of individual taxpayers’ post-audit behavior would be cost prohibitive. In addition, we cannot assume a change in a taxpayer’s behavior is a result of an examination. A taxpayer’s behavior can change from year to year for a variety of reasons, including changes to their employment, business operations, or other environmental factors. We also may not know whether a subsequently-filed return is accurate. To know for certain whether a return is accurate, or the reason for the behavioral change, would require a follow-up examination of the taxpayer. This would be burdensome to the taxpayer and may not represent the most effective use of IRS resources. For this reason, from a cost-benefit perspective, we do not believe this is the best use of limited IRS resources. However, we do analyze closed examination results for use in improving our audit selection process. We will continue to use aggregated examination data to find areas that need further taxpayer education, form or instruction changes, or outreach events.

In addition, LB&I is collaborating with RAAS on a set of reporting tools and special studies looking at taxpayer filing and reporting responses to enforcement efforts. Outside researchers from Treasury as well as the academic community are also involved in some of these special studies. The IRS reviews their findings for relevant insights.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate appreciates the IRS’s collaboration with RAAS to better understand how enforcement actions, such as field exams, affect taxpayers’ subsequent filing behavior. Still, the IRS misses an opportunity to study how its field exams of different types of taxpayers on different issues may affect their subsequent behavior. While the IRS is correct that a taxpayer’s behavior can change from year to year based on several factors, the IRS could conduct an analysis and control for other factors so that it was comparing like taxpayers. The IRS could compare taxpayers’ likelihood to make a specific mistake for taxpayers who were previously audited on an issue versus those who were not, controlling for things such as filing status, income, and other factors. A discrepancy between these two groups would suggest that the examination played a role in changing taxpayer behavior.

It is surprising that the IRS is characterizing a follow-up examination as burdensome, given that it is common practice for the IRS to conduct related-year audits on taxpayers already under audit for another year. Finally, although conducting audits does use resources, the IRS should consider the cost benefits that would result from increasing voluntary compliance and better selecting taxpayers for audit.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #9-3

Require SB/SE to provide an examination plan similar to what LB&I requires for all audited taxpayers for all field examinations.

IRS RESPONSE TO RECOMMENDATION: SB/SE Revenue Agents provide taxpayers information similar to what is outlined in LB&l’s Internal Revenue Manual (IRM) 4.46.3.9.1, Elements of an Examination Plan, in a manner appropriate for the size and type of return under audit.

IRM 4.10.2.8.1.2, Field Examination Initial Contact, requires SB/SE Revenue Agents to mail an initial contact letter to the taxpayer. Generally, SB/SE examiners initiate the examination by mailing Letter 2205-A to the taxpayer. The Revenue Agent is required to complete the “preliminary issues” section of the letter. The letter states, “The issues listed below are the preliminary items identified for examination. During the course of the examination, it may be necessary to add or reduce the list of items. If this should occur, I will advise you of the change.” SB/SE’s IRM provision also states, “Revenue agents must mail a detailed Form 4564, Information Document Request, with the confirmation letter listing all the information needed at the initial appointment.” This IRM provision further references Lead Sheet 120-1, which is a checklist for Revenue Agents to follow with respect to initial taxpayer or representative contact that addresses the items a Revenue Agent should discuss with the taxpayer or representative during their initial conversation. One of the discussion items is “Issues to be examined (including the type of books and records available).”

Additionally, IRM 4.10.2.8.2(1)(e) requires the SB/SE Revenue Agent to “Discuss the issues to be examined and inform the taxpayer or representative that the examination may be expanded to additional issues’’ during the Revenue Agent’s initial telephone contact with the taxpayer or representative.

IRM 4.10.3.3.8, Mutual Commitment Date, generally requires SB/SE Revenue Agents to discus and establish a Mutual Commitment Date (MCD) for issuing the audit report with the taxpayer or representative at the conclusion of the first appointment. The MCD process establishes mutual responsibilities such as identifying and discussing potential areas of examination (including issues raised by the taxpayer); requesting, providing and reviewing pertinent information; keeping all parties advised of unavoidable delays; addressing all parties’ questions and concerns raised during the audit; and keeping all parties fully informed about the adjustments being proposed as well as the progress of the audit.

The information and expectations above exhibit SB/SE’s requirement to share the “audit plan” with the taxpayer and representative and conduct the examination in a collaborative and communicative manner.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS response details actions SB/SE takes to communicate with the taxpayer during the field exam, but these are not the equivalent of an individual exam plan. As explained in the Most Serious Problem, the exam plan allows LB&I to share the relevant information with the taxpayer regarding scope, timeline, personnel involved, and expectations. The taxpayer also signs the plan, committing to achieving the timeline. As discussed in the Most Serious Problem, the Information Document Request (IDR) may not provide the same level of detail and is not shared and discussed with the taxpayer before being finalized. It is a request for documents, not a plan for conducting that audit that is agreed to by the taxpayer. The Most Serious Problem discusses complaints by practitioners about how the IDRs are so broad that they do not help the taxpayer understand the scope of the exam. An initial conversation does not fulfill a taxpayer’s right to be informed in the same way a written exam plan does.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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4.

TAS RECOMMENDATION #9-4

Notify taxpayers during an audit of any consultations with specialists and provide an opportunity for taxpayers to discuss with the specialist any technical conclusions that result from these consultations.

IRS RESPONSE TO RECOMMENDATION: ​In May 2016, LB&I launched the LB&I Examination Process (LEP) outlined in IRM 4.46. An updated LEP IRM was published in December 2018. Updated training for managers and employees will be launched before the end of the third quarter of fiscal year 2019. The revised IRM and training clarify the roles and responsibilities of all parties to the examination and emphasize the principles of collaboration between the examination team and the taxpayer to ensure end-to-end accountability and to reinforce the importance of transparency. All issue team members, including assigned specialists, work collaboratively with the taxpayer. Each issue identified for examination will have a designated issue manager, who is the decision maker for that issue and is responsible for promoting communication, collaboration, and cooperation among LB&I issue team members, consultants as appropriate, and with the taxpayer.

SB/SE examiners utilize various tools and resources most conducive to their taxpayer population to assist with issue development. These resources provide the examiners with the background and knowledge to discuss technical issues with the taxpayer or representative. In the event a specialist is necessary to explain a technical issue, the examiner can coordinate a meeting with the taxpayer or representative and the specialist.

Update: ELMS (now ITM) training has been delivered for LB&I managers (Course #71231 – LEP MGR Training) and revenue agents (Course #70908 – LEP Training). Both courses have been successfully delivered through the end of Fiscal Year 2019.

This training was provided to highlight IRM 4.46 revisions (December 2018) and to include areas of emphasis and best practices. Per 4.46.3.4.8.7, Preparation for Meetings with Taxpayer:
(3) When the examination team is scheduling a meeting with the taxpayer, the relevant issue team member should communicate the planned agenda in advance and request that the taxpayer provide their own relevant personnel who can add value to the meeting. Regular communication between the taxpayer and the examination team should be ongoing to assure attendance of essential personnel for each particular meeting.

Changes with regards to MIRA/SIRA (Managers Initial Risk Assessment and Specialist Initial Risk Assessment) were also highlighted from a policy perspective. The revised IRM and training clarifies the roles of responsibility and emphasizes the principles of collaboration between the examination team and the taxpayer, to ensure end-to-end accountability and to reinforce the importance of transparency.

All issue team members, including assigned specialists, work collaboratively with the taxpayer. Each issue identified for examination will have a designated issue manager, who is the decision maker for that issue and is responsible for promoting communication, collaboration, and cooperation among LB&I issue team members, consultants as appropriate, and with the taxpayer.

CORRECTIVE ACTION: Updated training for managers and employees will be launched before the end of the third quarter of fiscal year 2019. The revised IRM and training clarify the roles and responsibilities of all parties to the examination and emphasize the principles of collaboration between the examination team and the taxpayer to ensure end-to-end accountability and to reinforce the importance of transparency. All issue team members, including assigned specialists, work collaboratively with the taxpayer. Each issue identified for examination will have a designated issue manager, who is the decision maker for that issue and is responsible for promoting communication, collaboration, and cooperation among LB&I issue team members, consultants as appropriate, and with the taxpayer.

TAS RESPONSE: The National Taxpayer Advocate is pleased to learn that LB&I is updating its procedures to provide for one issue manager who is the decision maker for the issue. This will provide transparency and certainty to taxpayers. Although LB&I states that an examiner will coordinate a meeting between a specialist and the taxpayer where necessary, experience has not shown this to always be the case. The National Taxpayer Advocate hopes LB&I will update its guidance to examiners to further encourage examiners to provide this consultation when a taxpayer requests to speak to the specialist.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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5.

TAS RECOMMENDATION #9-5

Track and report on the number of field examinations (including audit reconsiderations) that go to Appeals and the resulting adjustments.

IRS RESPONSE TO RECOMMENDATION: ​The examination functions and Appeals are unlikely to benefit from tracking or reporting on the aggregate results of appealed cases because the resulting adjustments or outcomes are uniquely drawn from the facts and circumstances of each case. Therefore, tracking the results in the aggregate would not be informative to our processes or our examiners. We do receive Appeals Case Memoranda, which allow us to better understand Appeals’ case resolution on individual cases and can inform our future work by providing examiners feedback on their technical  positions.

In addition, we do not support the calculation of dollar-based sustention rates. Appeals’ mission is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the government and the taxpayer. A fair and impartial settlement reflects the probable result in the event of litigation or mutual concessions based on the relative strength of the opposing positions where there is substantial uncertainty of the result in the event of litigation, as outlined in Internal Revenue Manual (IRM) 8.6.4.1.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is disappointed the IRS will not agree to track the number of field exams that go to Appeals. Tracking which issues taxpayers appeal and which issues taxpayers ultimately succeed on should guide the IRS’s audit selection process. While each case is based on specific facts and circumstances, tracking these cases would allow the IRS to identify trends that may indicate certain issues require further guidance to taxpayers or certain issues should receive a different enforcement approach. The fact that Appeals settles issues based on the hazards of litigation does not negate the usefulness of looking at the resulting adjustments. Less important is the amount of the adjustments and more important is which issues are settled, indicating that perhaps the taxpayer should or should not have been audited on that issue.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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