The IRS Large Business & International (LB&I) Division recently issued three recent Directives relating to the issuance and enforcement procedures regarding Information Document Requests (IDRs)(See previous Blog “NEW IRS LB&I Revised IDR Enforcement Process“).
LB&I is generally responsible for examinations of wealthy individuals, closely held entities and partnerships, corporations, and S-corporations with assets greater than $10 million. These entities typically have large numbers of employees, complicated issues involving tax law and accounting principles, and conduct their operations in an expanding global environment.
THE DIRECTIVES. The Directives are commonly referred to as the LB&I Directive on Information Document Requests (IDR Directive); the LB&I Directive on Information Document Requests Enforcement Process (Enforcement Directive); and the LB&I Directive on Updated Guidance for Examiners on Information Document Requests Enforcement Process (Guidance Directive). The Guidance Directive incorporates and supersedes the earlier IDR and Enforcement Directives and provides further clarification of the use of the new IDR processes by LB&I examiners. The IDR Directive, the Enforcement Directive and the Guidance Directive are collectively referred to as the “Directives.”
IRS TRAINING MATERIALS REGARDING THE IDR ENFORCEMENT PROCESS. Every IRS LB&I examiner and specialist have recently been trained with respect to the new Directives. Although the IRS will try to mutually agree on a reasonable time frame for a response to any IDR, the training materials reveal that adherence to rigid timelines will more likely be the rule rather than the exception.
The Training Materials include several enlightening comments:
IDR Enforcement Training – “As the LB&I Commissioner states in the Field Focus Guide, the principles for sound tax administration are accountability, professionalism, discipline, and transparency. It is critical that we demonstrate to the taxpaying public that we adhere to these principles so there is confidence in both the voluntary compliance system and the agency charged with administering the tax law. To this end, we continuously review and assess our examination practices to accomplish these objectives.”
Effective IDR Review – “Let me recap some best practices that you heard in the IDR Process training. The issues should be stated on the IDR and discussed with the taxpayer. We saw that, limiting the IDR to a single issue, identifying questions using numbers and/or letters make it easier for the taxpayer to track and respond to IDRs. Asking specific questions using clear and concise language with terminology used by the taxpayer will help the taxpayer understand what you are asking for. And also writing an effective IDR is not only critical to effective information gathering, it is also important in the event that you need the enforcement process.”
Process Review – “For the IDR process to be effective we need to hold the taxpayer accountable for the agreed to response time and we need to be accountable to provide a response to the taxpayer whether the IDR is complete within an agreed upon and reasonable time frame. When the agreed upon IDR response time frames are not met, we will follow the IDR enforcement process. This process will be used for all LB&I cases. As with any process you should use your professional judgment considering the taxpayer’s history of cooperation and the issues you are working to determine the most efficient way to implement the process.”
Continuous Review and Assessment of the Examination Process – “The information gathering process relies extensively on communication, collaboration and commitments with the taxpayers in planning and executing the Information exchange. There will be a renewed emphasis on securing complete responses within the timeframes to which the taxpayer has agreed.”
Information Availability – “With our examinations being very current, with modem technology such as e-mail, e-fax, electronic media these are just some of the reasons why information is much more readily available. Therefore, if the taxpayer has taken a position on their return there should be documentation available which they relied upon. It follows then, that this information should be available and accessible when requested.”
Delinquency Notice, No Exceptions – “The delinquency notice will be issued regardless of the reasons given by the taxpayer, with no exceptions. Once a response date is set, you cannot reset or extend the date. Regardless of whether they notify you before or at the due date that their response will not be timely and complete, the maximum amount of time that can be granted by a frontline manager is 15 days on the delinquency notice.”
Partial Response –
“QUESTION: How would you handle a situation where you have a historically cooperative taxpayer that completes 90% of an IDR on time? Don’t you think it’s a little harsh to be issuing a Delinquency Notice for the missing items?
RESPONSE: It doesn’t matter what percentage or portion of an IDR is completed, to ensure consistency throughout the process: the only two outcomes of an IDR response are either completed or delinquent. Any items on the IDR not completed by the due date will be considered delinquent.”
Elevating to Taxpayer Executives –
“QUESTION: “What’s the significance of raising this to the next level of taxpayer management. Isn’t that like going over our contact’s head?
RESPONSE: This is simply to ensure the executive level of the taxpayer is aware of the delay in responding to a request The Pre-Summons Letter ensures that the delay has risen to an appropriate level.”
Due Dates – “Due dates need to be both reasonable and realistic taking into account the complexity of the IDR and your taxpayer’s history. In this example, the information requested already existed and should be readily available. . . It is important that we follow the process and engage management quickly to keep the process moving.”
Communication – “Communication and persistence is key to successfully executing the enforcement process. There is an expectation to establish a response date for ‘each’ IDR. All actions and discussions with the taxpayer should be properly documented so there is a clear record of our attempts to secure the information requested.”
IDRs and Summonses – “An IDR request may be broader than a summons. You may appropriately ask for items in an IDR that you cannot legally obtained by summons. A simple example might be a request for items that the taxpayer may not presently possess and would have to create, such as an organizational chart. Counsel will advise you that you cannot summons an item that doesn’t exist. However, clearly you should still request chart informally if it would assist in the examination. If the taxpayer does not produce the chart, then Counsel may suggest that you summons testimony to ask for the names and positions of employees in order to create your own chart. In this regard, summonsed testimony can serve as the functional equivalent of the item you requested in the IDR, but cannot summons.”
Changing Behavior – “Credibility is the key to changing behavior. We should never say we are considering using a summons, unless we mean it and unless we are prepared to actually issue a summons. Likewise, we should never issue a summons unless we are willing to seek enforcement These IDR enforcement procedures are designed to assure that we will follow-though with the summons process if necessary to complete our examination.”
Set the Date Scenario– “I’ve noticed that you consistently request 60 days or more for many response dates and in many cases you’ve been late on those responses as well. The information requested on this IDR wasn’t overly complicated and we just can’t have every request taking 60 days. Like you, we have limited resources and specific time frames to meet so we need to eliminate the long delays in securing the data.”
Scenario Highlights – “Remember the exam team maintains control of the IDR process. Due dates need to be both reasonable and realistic taking into account the complexity of the IDR taxpayer’s history. In this example, the information requested already existed and should be readily available. You have some flexibility here based on your particular circumstances. Remember we want to be reasonable but at the same time we need to maintain control of the examination.”
Role of the Taxpayer – “The taxpayers have a responsibility to validate transactions reflected on the return, it would be key for the taxpayer to be proactive and participate in a robust discussion with the IRS Team on the issue identified and the records available to validate the position taken on the return. It is expected that the taxpayer work with the team to determine a “firm” yet reasonable response date on IDRs. In summary, if the parties have worked to identify the appropriate information needed to evaluate the issue identified and have agreed to a firm response time for each IDR, there should be no exception to a timely response. However, if the response is not received, the team will initiate the enforcement process.”
Closing – “This IDR Enforcement process has been created to give LB&I examiners the ability to more consistently manage the flow of information received from taxpayers and conduct their examinations comprehensively with as little delay as possible.”
PRACTICE TIPS. Most taxpayers and practitioners maintain a courteous, professional relationship with the IRS during an examination. Information requests are made, discussed, whatever can be readily obtained is provided and a cooperative path forward is discussed for whatever information is not yet provided.
The Directives set forth fairly rigid timeframes in the event an agreement on a response date cannot be agreed upon. In such event, the examiner or specialist will have the sole responsibility of setting a reasonable response date for the IDR.
All discussions regarding IDR responses should be well documented and include the location (foreign or domestic) of the requested documents, availability of key employees, and time frame necessary for a review of potential privileges.
If the taxpayer is unable to agree with a response date set by the examiner, it is imperative that this disagreement be documented and elevated to a Territory Manager. Although some taxpayers fear that doing so might harm their working relationship with their exam teams, such issue elevations are generally expected in a business environment. For large taxpayers, company management should be apprised of the status of IDR requests during the examination.
The LB&I examiner is generally required to issue the IDR within 10 days following issuance of the draft IDR. As such, it is imperative that any perceived difficulties in responding timely should be thoroughly discussed with the examiner. A request for a lengthy response date should not occur with respect to each IDR – agreeing to shorter timeframes with respect to information that might be readily available will lend credibility to requests for longer timeframes for other information.
Any concerns regarding the requested response date should be elevated, in writing, to the exam team manager and possibly beyond. Once the IDR becomes delinquent on either the original due date or any extended date, the mandatory three-step enforcement process must be implemented.
Many, but not all, high wealth individuals maintain a family office providing assistance with investments and coordination with outside professional advisors regarding investments, financial reports, tax return preparation, business operations and the like. However, upon receipt of a notice of examination, such individuals and/or their family office may not be able to readily ascertain the foreign or domestic location of requested information, may have to seek outside representation to coordinate the examination and make determinations regarding potential privileges, etc. In such event, it would seem overly optimistic that information requested near the commencement of an examination being conducted under the new IDR enforcement procedures would be provided in a timely manner. Further, much of the requested information is likely possessed by others who may not feel the pressure to immediately search their files for responsive documents and information.
The new IDR enforcement procedures create an enforcement process that seems to have little patience for unanticipated situations, vacations and real life personal issues that often arise during the course of every examination.
There would seem to be sufficient overall time built in to the process to avoid an actual federal court summons enforcement proceeding since, along the way, taxpayers will presumably be continuing their efforts to locate and provide missing information requested in the IDR.
Meaningful, regular communications and cooperation between the IRS and taxpayers at each stage of an examination is essential. Ensure that every member of the exam team clearly understands exactly what is being requested in the IDRs, who has responsibility for obtaining the requested information, that the IDR is issue-focused and includes a response date is realistic and achievable.
When appropriate . . . elevate, elevate, elevate each concern to upper IRS management. Good night and good luck!
 LB&I Directive on Information Document Requests (IDRs) [LB&I– 04-0613-004 issued on June 18, 2013]; LB&I Directive on Information Document Requests Enforcement Process [LB&I-04-1113-009 issued on November 4, 2013]; and LB&I Directive on Updated Guidance for Examiners on Information Document Requests Enforcement Process [Directive LB&I-04-0214-004 issued on February 28, 2014]. The IDR Enforcement Process became effective on March 3, 2014 although Delinquency Notices could not be issued prior to April 3, 2014.
 In U.S. v. Powell, 379 U.S. 48 (1964), the Supreme Court enunciated a four-part test by which the IRS can establish a prima facie case for summons enforcement. Often demonstrated by an affidavit from the IRS examiner who issued the summons, the government can meet its burden by demonstrating: (1) the investigation has a legitimate purpose, (2) the information summoned is relevant to that purpose, (3) the documents sought are not already in the possession of the government and (4) the procedural steps required by the Internal Revenue Code for issuing the summons were followed. Most successful defenses to the summons enforcement relate to claims of privilege.