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Reorganization Update * LMSB Issue Editor:
Editor's note: Mr. Ely is former chair of the AICPA Relations with the IRS Committee. James Dougherty is the current chair. Ms. Pflieger, Ms. Jacobs and Ms. Gervie are members of the committee. Ms. Pflieger is also the immediate past chair.
An IRS Update for Practitioners In recent years, practitioners have heard many presentations from IRS officials about the Service's reorganization. Under the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA '98), the IRS made large-scale, functional changes. These changes were intended to be invisible to taxpayers and practitioners. Now that the reorganization is substantially in place, practitioners are beginning to learn about the details of changes that will affect them directly. The October 2001 AICPA-sponsored IRS National Issues Meeting, attended by approximately 100 representatives of the state CPA societies, provided a wealth of information. The gathering was small enough to facilitate active and informative question-and-answer periods. Speakers for the different sessions included Larry Langdon and Evelyn Petschek, Commissioners of the Large and Mid-Size Business (LMSB) and the Tax Exempt/Government Entities (TE/GE) Divisions; and Jerry Songy, Small Business/Self Employed (SB/SE) Division and James Grimes, Wage and Investment (W&I) Division, both directors in their respective Education and Communication areas. Daniel Black, Jr., National Chief of Appeals, was the luncheon speaker. Practitioners also heard from Nina Olson, National Taxpayer Advocate; David Williams, Chief of Communications and Liaison; Richard Skillman, Acting Chief Counsel; and Judith Dunn, Deputy Chief Counsel. The meeting covered a wide range of topics. In some cases, more than one speaker addressed several topics, because the subject related to more than one division.
Overview The IRS is working with taxpayers affected by the terrorist actions of Sept. 11, 2001, including taxpayers whose records were destroyed in New York, even though they live in other parts of the country. For these taxpayers, practitioners should contact the Service. IRS Pub. 3921, Help from the IRS for Those Affected by the Terrorist Attacks on America (September 11, 2001), includes information and phone numbers (see also Notices 2001-61 and 2001-68). On another note, taxpayers who did not receive a $300, $500 or $600 advance-payment check due to an address change can claim the advance as a credit on their 2001 tax return. Taxpayers should file 2001 business returns with either the Ogden or the Cincinnati Service Center. However, the IRS will process returns sent to the wrong service center this year without penalty.
OICs The Service receives approximately 120,000 offers in compromise (OICs) annually. Currently, it has a huge backlog of unprocessed OICs. Since August 2001, all new OICs are being processed through the Brookhaven and Memphis Service Centers, with the IRS sending complex cases to local revenue officers for investigation. The Service has decided not to use a FIFO system for its existing backlog. Instead, it is processing post-August 2001 cases as it receives them, while catching up on the older OICs. Thus, there may be disparity in OIC processing times. The IRS will return an OIC to a taxpayer if the OIC is (1) not materially different from a prior OIC that the Service rejected, (2) submitted within one year of a defaulted OIC, (3) intended to delay collection when the taxpayer clearly can pay a larger amount or (4) submitted for taxpayers not in compliance with estimated tax requirements.
Applications for EINs The Service is working to streamline the application process for employer identification numbers (EINs). Beginning in June 2002, practitioners will no longer need a completed Form SS-4 to call for an EIN. Third parties can call on behalf of the taxpayer. The IRS will fax the EIN back to the taxpayer at the address of record. Practitioners still need a power of attorney (POA) to get EINs for their clients. Beginning in 2002, only the Brookhaven Service Center (fax number: 631-447-4991) and the Cincinnati Service Center (fax number: 859-669-5760) will handle EINs. The Philadelphia Service Center (fax number: 215-516-3990) will handle only international taxpayers. The Service is setting up a single toll-free number, available 7:30 am to 5:30 pm, local time, to handle EINs. Fax lines will be available 24 hours a day, seven days a week. The December 2001 revision of Form SS-4 includes a third-party authorization, which practitioners should find helpful.
K-1 Matching The IRS has begun to keypunch information into its computer system from non-electronically filed Schedules K-1. It expects to begin test-matching for certain entries on the Schedules K-1 in 2002, probably for the 2000 tax year. The Service will mail mismatched notices to taxpayers. Anticipating possible problems with the matching program, however, it will have a Tax Examiner screen each notice before it is mailed. According to the IRS, 6–15% of Schedules K-1 were entirely omitted from 2000 returns. There were approximately 8.5 million passthrough entities in 2001.
E-filing Issues The Service wants taxpayers to file all Forms 1120 and 1120S electronically by the 2003 filing season (for 2002 returns). Taxpayers can expect to see expanded electronic options in the future, such as filing POAs, making refund inquiries and getting transcripts online. As a test, the IRS anticipates offering options to practitioners with a strong history of filing electronically. It plans to offer online e-file provider applications (by June 2002) and transcript requests (by September 2002). Direct debit payments can be authorized on electronically filed tax returns. The Electronic Federal Tax Payment System (EFTPS) online-payment capability has been available since September 2001. At www.eftps.gov, practitioners can schedule payments, view a payment history (e.g., individuals for 365 days and businesses for 120 days) and confirm payments made through certain banks.
POAs and PPAs Since July 2001, the Service has been using a single POA Centralized Authorization file (CAF) database instead of 10, meaning that taxpayers no longer have to file a different POA with each service center. Practitioners must send POAs only to the Memphis Service Center (fax number: 901-546-4115) or Ogden Service Center (fax number: 801-620-8249). The IRS will release new information on POAs in January 2002. Checking the paid preparer authorization (PPA) box on a return is effective for the entire life of a module (i.e., while there is activity on the return). The IRS recognizes only the person (paid preparer) signing the return as the PPA contact (not any unnamed staff members). However, it is exploring the possibility of allowing more than one contact on future returns. By January 2003, the Service anticipates having just one type of third-party identification number. This number will replace CAF numbers, Treasury numbers, Enrolled Agent Card numbers, Preparer Tax Identification numbers and every other existing type of practitioner number. IRS representatives have confirmed that the new number will not be a Social Security number.
Telephone Information The Practitioner Hotline hours will be 7:30 am–5:30 pm, local time, beginning in January 2002. A toll-free number (to be announced) will be staffed in five of the 10 service centers. Calls will be routed according to a caller's area code, which will always connect practitioners to the same group of service representatives. The local Practitioner Hotlines are expected to remain in existence for approximately a four-month changeover period. Hours for the Customer Focused Phone Service will be:
LMSB Division The LMSB Division is planning to offer more published guidance. It plans to modernize its examination function, to improve efficiency and lessen the burden on taxpayers. The Examinations section will concentrate on material issues and permanent differences (instead of timing differences).
SBSE Division The Service is moving taxpayers with assets of $5–10 million from the LMSB Division to the SBSE Division. This may increase these taxpayers' audit risk; they are now the largest cases in the SBSE Division (instead of the smallest ones in the LMSB Division). The IRS made this change as a result of the staffing demands of the two divisions. The SBSE Division recently hired 1,000 Revenue Agents, Revenue Officers and Compliance Agents. It anticipates hiring an additional 500 such employees in June 2002. As a result, practitioners should expect more audit and collection activity. The SBSE Division is reengineering its examination function. Beginning in May 2002, the Service intends to discuss audit issues (e.g., examination time frames) early in the audit process. Its collection-function reengineering process is still open-ended. The SBSE Division is aware that case inventories are aging, which means it is less likely to collect on them. The SBSE Division is also asking Counsel if the division can resolve installment-agreement cases for amounts less than the total owed.
W&I Division Eighty percent of W&I Division taxpayers have incomes under $51,000 per year. The W&I Division may consider an alimony-matching program.
Appeals The IRS has introduced different types of appeals programs, including Fast Track Mediation and Alternative Dispute Resolution. To date, most of these programs apply only to LMSB Division taxpayers. Over time, many programs should become available to SBSE Division taxpayers and others. More information on Appeals programs is available at www.irs.gov/appeals. From Harriet Jacobs, CPA, EA, MST, Michael Silver & Co., Skokie, IL
Issue Resolution and LMSB Division Appeals The Appeals Division that handles taxpayers under the jurisdiction of the Large and Mid-Size Business (LMSB) Division is changing to meet the needs of its customers. The vision of Appeals, according to Daniel Black, National Chief of Appeals, is "to provide premier dispute resolution services that meet our customer needs through a highly skilled and satisfied work force, utilizing innovative approaches, dynamic processes, and interpersonal skills that promote quality business results" (IR-2000-57). To meet this vision, Appeals is introducing new initiatives, as well as focusing on some other existing programs. In either case, it hopes to facilitate the issue-resolution process. In a recent survey, customers were the least satisfied with what they considered a lengthy process. As a result, Appeals has made reducing the time it takes to resolve an appeal a top priority.
MAAP To decrease both the cycle time of the Appeals process and the inventory of cases, Appeals introduced the Mutually Accelerated Appeals Process (MAAP); see IR-2000-42. Appeals designed the MAAP initiative to reduce the time it takes to resolve Coordinated Examination Program cases. MAAP handles cases involving $10 million or more in disputed tax. Under the MAAP initiative, both the taxpayer and Appeals must agree to a specific schedule to resolve all issues. In addition, both parties must agree to add resources, if necessary, to accelerate the pace to meet the schedule. At the beginning of the Appeals process, the taxpayer signs a statement agreeing to try to resolve the issues prior to an agreed-on date. If the taxpayer does not meet the date, a new date will be renegotiated. The IRS has committed 50 Appeals officers to work on the MAAP initiative. Appeals reviewed the existing cases to determine how adding team members, shifting workload among current team members or creating new teams might accelerate case resolution. In addition, Appeals reviews all new cases to determine whether MAAP would be the appropriate avenue to accelerate resolution. Appeals decides appropriateness based on a taxpayer's level of cooperation, a case's age and status, and whether the case requires the expertise of an IRS Specialist.
LMSB/Appeals FTDR Program On Nov. 14, 2001, the LMSB Compliance Division and Appeals jointly introduced the Fast Track Dispute Resolution (FTDR) Program; see Notice 2001-67. The objective of this initiative is to promote issue resolution at the lowest levels within the Service. The program will use Appeals tools while a case is still under Compliance Division jurisdiction. The FTDR Program has several benefits, which include reducing the time and the cost to resolve issues, keeping dispute resolution at the lowest level possible and fostering cooperative relationships between taxpayers and the IRS. Under the LMSB FTDR Program, taxpayers can opt for either mediation or settlement, depending on the circumstances. FTM. Under Fast Track Mediation (FTM), an Appeals Officer or an Appeals Team Case Leader acts as a mediator to help the parties resolve factual issues. The objective is to facilitate communication and negotiation to reach resolution of the issues between the parties. Under FTM, a hazard-settlement option is not available; the parties cannot reach a settlement based on the hazards of litigation, which would be available if the case were under Appeals' jurisdiction. Under FTM, the parties examine factual issues and reach a voluntary agreement. FTS. Under Fast Track Settlement (FTS), Appeals may use its settlement authority to achieve a mutually acceptable agreement by the parties. An Appeals Team Case Leader facilitates the resolution of both legal and factual issues. FTS allows both Appeals and taxpayers to assess the hazards of litigation when resolving disputes.
FTDR Program Benefits There are several key features to the FTDR Program process, including no "hot interest," which act as taxpayer incentives for program participation. Hot interest is the additional two-percent interest that corporations must pay on deficiencies over $100,000 when an issue goes to Appeals. Generally, hot interest begins to accrue 30 days after Compliance issues a 30-day letter. Because the FTDR Program process must take place before issuance of the 30-day letter, hot interest does not begin accruing. Taxpayers in the FTDR Program can enjoy the benefit of having Appeals' tools and settlement techniques available to them while they are still under Compliance's jurisdiction. Another feature of the program is that the process is relatively fast; the goal is to resolve the issues within 120 days. This is a significant savings of time over the two years it generally takes for the normal procedure, in which an examination and an audit occur sequentially. In addition, instead of multiple computations being completed at both the Compliance and Appeals levels, only one computation is done, saving a significant amount of time for both parties. The taxpayer and Compliance may also withdraw from the process at any time. Thus, if events do not progress as the parties anticipated, either party could withdraw, and the taxpayer would retain its right to an appeal under the traditional process.
How the Process Works After Compliance issues Form 5701, Notice of Proposed Adjustment, and the parties fully discuss the issues, either the taxpayer or Compliance may request FTDR. Both parties must agree to use the FTDR Program. It is most appropriate when the issues have been fully developed, the taxpayer has stated its position in writing, and there is a limit to the number of unresolved issues. The taxpayer should provide a written response to Form 5701 as part of the request. After the Team Manager and the taxpayer agree to enter the FTDR Program, they decide whether to use either the FTM or the FTS process, and complete an "LMSB Fast Track Agreement" (a one-page form). Compliance forwards the paperwork (including the agreement form, Form 5701 and the taxpayer's response) to Appeals within three days. Appeals takes on the case within seven days of receiving the paperwork, contacting the taxpayer within 10 days of its receipt of the paperwork. Appeals meets with the taxpayer and Compliance to try to reach a settlement. The meeting may be held at Appeals or another site to which the parties agree. The Appeals Officer leads the negotiations with the anticipation that the parties can reach a voluntary agreement. If the case involves litigation hazards, the parties must use the FTS option. When the parties reach an agreement under this option, Appeals exercises its settlement authority to accept a settlement. If the parties cannot reach an agreement, either may withdraw from the process. The taxpayer may withdraw at any time, by notifying the LMSB Team Manager and the Appeals representative in writing. The Appeals representative or the LMSB Team Manager also may terminate the process if it becomes apparent that meaningful progress toward resolution of the issues is unrealistic. In addition, if an agreement is not forthcoming, Compliance issues a 30-day letter, allowing the taxpayer to prepare a protest to proceed to Appeals. The taxpayer retains all of its usual Appeals rights, because the case is under Compliance's jurisdiction during the FTDR Program process. The ex parte communications rules do not apply to the FTDR Program, because cases are under Compliance's jurisdiction. Therefore, Appeals may talk to both parties separately about issues prior to their meeting. The FTDR Program cannot be used for issues that were (1) designated for litigation by Chief Counsel, (2) the subject of a request for competent authority, (3) requested by the taxpayer for a simultaneous Appeal/Competent Authority procedure, (4) outside Appeals' settlement authority (e.g., application of certain international penalty provisions under Chapter 61 of the Code) and (5) part of cases not within the LMSB's jurisdiction.
Pilot Program A pilot for the LMSB FTDR Program began on Nov. 14, 2001; it will be accepting applications through Nov. 14, 2002. The intent of the pilot program is to test whether an expedited process reduces time and cost to the government and taxpayers. The pilot is open to large and mid-size businesses (i.e., those with assets over $10 million) that currently have at least one open year under examination and at least one issue in dispute. During the pilot, the IRS would like a minimum of one case from each of the five LMSB industry groups participating in FTM, as well as a minimum of one case from each industry group in FTS. Taxpayers interested in participating in the pilot may contact the Team Manager for their current examination; Jim Fike, LMSB Fast Track Program Manager (at (202) 283-8353); or J.W. Wyatt, Appeals Fast Track Acting Program Manager (at (314) 612-4639). The new FTRD Program seems to provide an excellent opportunity for taxpayers to resolve issues with the IRS at the lowest possible level. Taxpayers will benefit from the negotiation skills of Appeals' personnel, as well as their settlement authority in FTS cases. This will allow taxpayers to reap the benefits of Appeals without having to pay the hot interest that generally accrues during the Appeals process. From James A. Dougherty, Director, and Tracey A. Fielman, Senior Manager, Tax Controversy Services, Washington National Tax, Deloitte & Touche LLP, Washington, DC
The Makings of Disaster Relief: Putting Taxes in Their Proper Place As everyone knows by now, by September 14, the IRS released the broadest disaster relief ever granted, through Notices 2001-61 and 2001-63. Few realize, however, the efforts of the AICPA and other organizations to obtain that relief or the difficulties the IRS and Treasury faced in granting it. Prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Sec. 7508A authorized the Secretary to postpone tax-related due dates for taxpayers determined to be affected by a Presidentially declared disaster for a period of up to 90 days. With the enactment of Section 802 of the EGTRRA, however, the 90-day period of Sec. 7508A was expanded to 120 days. The Senate Amendment to Section 802 (which was not adopted by the Conference Agreement) called for the Secretary to create in the IRS a Permanent Disaster Response Team to assist taxpayers in clarifying and resolving tax matters associated with a Presidentially declared disaster. Historically, disaster relief has been granted on a local basis as the result of natural disasters (such as earthquakes, fires and tornadoes), but never on a national basis or as the result of a man-made disaster. On September 12, Pam Pecarich, Chair of the AICPA's Tax Executive Committee, sent letters to Treasury Secretary O'Neill and IRS Commissioner Rossotti, urging them to grant broad disaster relief, particularly in light of the September 17 filing deadline. She wrote:
Later that day, the Service issued Information Release 2001-79, which stated, in part:
Notice 2001-61 Late in the day on September 13, the Service released Notice 2001-61, which granted extensive relief to taxpayers directly affected by the attacks. These taxpayers included (1) any individual whose principal residence or place of employment, and any business entity whose principal place of business, was located in a covered area; (2) any individual whose principal residence, and any business whose principal place of business, was not located in a covered area but whose records needed to meet a filing or payment deadline were maintained in a covered area; and (3) any estate or trust with tax records necessary to meet a filing or paying deadline in a covered disaster area. Under the notice, individuals with extensions for filing their 2000 returns beyond Sept. 10, 2001 were granted a postponement to Feb. 12, 2002. Taxpayers other than individuals (corporations, partnerships, etc.) were granted a six-month extension to file returns otherwise originally due after Sept. 10, 2001 and before Dec. 1, 2001, and to pay the tax shown on those returns. Affected calendar-year corporations and other entities that had six-month extensions of time to file their returns that expired between Sept. 11–Nov. 30, 2001 were granted a postponement of 120 days to file their returns. Thus, for example, the 2000 tax return for an affected calendar-year corporation that had been extended to Sept. 17, 2001 would be due on Jan. 15, 2002. Likewise, in Notice 2001-68 (supplementing Notice 2001-61), the IRS issued additional relief for tax returns on extension (not a postponement under Sec. 7508A) that expired after Nov. 30, 2001 and before Feb. 1, 2002. The deadline for such taxpayers to file their returns was postponed to Feb. 15, 2002. The additional relief applied only to taxpayers that had difficulty in meeting their Federal tax obligations because their records, computers or other essential supporting services were lost or damaged, or essential personnel were injured, killed or missing as a result of the terrorist attacks. The due date of estimated tax payments originally due after Sept. 10, 2001 and before Jan. 16, 2002 for these taxpayers was postponed until Jan. 15, 2002. In addition, paragraph five of Notice 2001-61 provided relief to those "who have difficulty in meeting their federal tax obligations because of the disruption in the transportation and delivery of documents by mail or private delivery services resulting from the terrorist attack." These taxpayers had until Nov. 15, 2001 to file returns and make payments required to be made between Sept. 11, 2001 and Oct. 31, 2001. While taxpayers and practitioners in New York City were relieved to receive Notice 2001-61, the notice was problematic for taxpayers and practitioners throughout the rest of the country. It did not provide national relief as the AICPA had requested, and the language in paragraph five was poorly drafted. National relief had not been granted because there were some within the Service and Treasury who believed that taxpayers outside of the Presidentially declared disaster areas could not be "affected" taxpayers for Sec. 7508A purposes. The Institute also understood that the intent of paragraph five was to cover all taxpayers who faced delays due to disruptions in the transportation system, but paragraph five did not clearly indicate this. Nor did paragraph five specifically state that it provided relief under Sec. 7508A, thereby assuring a taxpayer that filing a return by November 15 under the paragraph would be treated as timely for purposes of making certain elections. As the IRS began to hear rumblings from the practitioner community about these issues, the IRS National Public Liaison's office hastily called a meeting on Sept. 14. Each of the major practitioner groups, including the AICPA, was invited to attend. Both Commissioner Rossotti and Assistant Secretary (Tax Policy) Mark Weinberger were present. While Commissioner Rossotti reiterated the Service's position that the government wanted to minimize the distraction of tax issues during this terrible time, Assistant Secretary Weinberger reminded the group that Treasury needed to continue to receive tax deposits. They then welcomed the practitioners in the group to comment. Many expressed concerns about the limit of paragraph five of Notice 2001-61, and others expressed concern about the inability of individual taxpayers to liquidate funds to pay their estimated tax payments (keeping in mind that the New York Stock Exchange did not reopen until September 17). Meanwhile, representatives of the AICPA also explained that firms across the country had experienced significant losses in productivity during the week due to early closings, bomb threats and general work force disruptions. Such losses, less than a week before the major corporate due date, could not be made up over the course of just one weekend; more importantly, partners and staff needed to spend that first weekend after September 11 at home with their families. The Commissioner and Assistant Secretary clearly understood these concerns and promised additional relief that afternoon. Several hours later, The Service issued Notice 2001-63 . Notice 2001-63 Notice 2001-63 provided relief to "taxpayers who, regardless of their location, are continuing to experience difficulties in meeting their filing and tax payment requirements." Given the communication, security and emotional issues that Americans faced that week, it was almost impossible for a taxpayer not to qualify for this relief. Under Notice 2001-63, taxpayers had until September 24 to meet their Federal tax obligations that otherwise fell between September 10–24. Pam Pecarich and Gerry Padwe (AICPA, Vice President—Taxation) said it best in a subsequent letter to Commissioner Rossotti and Assistant Secretary Weinberger:
From Deborah J. Pflieger, J.D., LL.M., Senior Manager, Washington National Tax Office, PricewaterhouseCoopers, LLP, Washington, DC
The New IRS "Customer Satisfaction" Survey Reports Are you a satisfied IRS customer? If not, you can report your feelings to IRS management and Congress using a customer satisfaction survey, designed and administered by an independent research consultant, Pacific Consulting Group (PCG). The company administers the survey to taxpayers and presents the results to the IRS on a quarterly basis. Taxpayers rate how well the Service treated them; how well it explained information, procedures and taxpayer rights; how much time it took the IRS to resolve an issue; how fairly they thought it treated them and how satisfied they were. The survey is administered either by an IRS employee over the telephone or through correspondence. PCG mails Appeals Division surveys as well as surveys from other IRS issue resolution divisions to taxpayers or their representatives. Responses to questions on the survey range from "very dissatisfied" to "very satisfied." The taxpayer or representative returns the questionnaire by mail. A telephone automated response system handles the Automated Collection Systems (ACS) questionnaire, which takes approximately 10 minutes to complete. The quarterly report provides statistics on 11 categories. Exhibit 1 presents the survey results from December 2000.
According to PCG's Tenth Period Report, the most satisfied customers were those who initiated contact with the IRS. The least satisfied were those with complicated or compliance issues. Employee courtesy and professionalism received high ratings. Evident in all 11 survey categories was the customers' desire for quick resolution and fair treatment. The Service recognizes that responses from a tax professional might be different from a taxpayer's. Thus, the report included a chart that differentiated between the two. Overall, the outcome of a taxpayer's case with the IRS affected the rate of customer satisfaction with the Examination or Appeals Division. If a taxpayer's experience with the Service lasted a few years, the satisfaction rating was low. Also, small-dollar cases ($300–$6,000) had a lower rating than cases that exceeded $6,000. Incidental trends that emerged over the 10 survey periods show that tax professionals cared about the amount of time it took to resolve an issue, how easy it was to navigate the telephone automated answering system and whether they thought the IRS's office hours were convenient. The Service places a lot of importance on the customer-satisfaction survey results. It is worthwhile for tax professionals to take the time to respond to surveys whenever possible. The IRS is listening to the concerns of their customers, and now is the time to be heard. From Mary Lou Gervie, CPA, CFE, Watkins, Meegan, Drury & Company, LLC, Bethesda, MD |
