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Information Document Requests SBSE Priorities SOL on Credits and Refunds
Editor:
Editors note: Mr. Ely is the former chair of the AICPA Tax Divisions Practice and Procedures Committee. Messrs. Buschel, Fiedelman, Parker and Turner are members of that committee.
IRS Initiatives to Decrease Audit Cycle TimesGood Ideas that Need More Work Beginning in 2002, the IRS decided to take action to decrease cycle times on examinations of large companies in the Large and Mid-Size Business division (LMSB). Initially, the focus was on audits being conducted under the Coordinated Industry Case (CIC) and the Coordinated Examination Case (CEC) programs. These examinations are more structured and there is early involvement by case managers, specialists and counsels office. Appropriate planning was critical to accomplish the examination goals. Formal examination plans are used to focus on critical areas. There is significant interaction between the examination team and the taxpayers/representatives during the planning and conduct of the examination. This worked well in the largest examinations. In 2003, the Service initiated a program to expand the principles used in the CIC/CEP examinations to all LMSB cases, and embarked on a strategy aimed at reducing cycle time in the examination process. This required development and use of techniques such as the Limited Issue Focused Examination (LIFE) process; it was hoped that LIFE would help to better manage issues and resolve differences more efficiently during examinations. It was also anticipated that the use of the LIFE process in appropriate cases would help to relieve the strain on limited IRS resources. The IRS was also active in developing and encouraging other initiatives, such as the use of pre-filing agreements, fast-track resolution alternatives, and the Industry Issue Resolution process, to help accelerate examinations. In light of the perceived need to increase enforcement due to the proliferation of abusive tax shelters, the IRS also wanted to create a structured process for use in the information-gathering phase of examinations.
The IDR Process The issuance of Information Document Requests (IDRs) and their response times have always been an area of differences between the IRS and taxpayers/representatives, as to response times, frequency of the issuance of IDRs during the examination process, adequate responses, etc. The Service, in January 2002, updated Internal Revenue Manual (IRM) Section 4.45.13.4.10, Individual Document Request Management Process, to formally lay out the IDR process. As part of this management process, the IRS is requiring a 20-day initial response time for IDRs, even though this is not required by new IRM Section 4.45.13.4.10. 15-day delinquency: When a taxpayers IDR response is 15 days late, IRM Section 4.45.4.13.4.10(3) requires a follow-up IDR with a reasonable response date, but not more than 15 days from the issuance of the follow-up IDR or 30 days from the original response date. The follow-up IDR should be issued after discussion with the taxpayer/representative as to the reasons for the delinquency and how long it will take to accumulate any missing information required for an adequate response. The follow-up IDR must carry the same number as the original IDR and in some way incorporate the original IDR request, either as an attachment or wording; see IRM Section 4.45.13.4.10(3)(a). 30-day delinquency: If the taxpayer/representative continues to be delinquent after 15 days, additional follow-up is required if there is insufficient information for the examiner to reach a conclusion on the issue. The examiner should again confer with the taxpayer/representative to resolve the problem. The examiner should also consider the issuance of an additional follow-up IDR or Form 5701, Notice of Proposed Adjustment. If a follow-up IDR is issued, the response date should be no later than 15 days from the last requested response date or 45 days from the original response date. 45-day delinquency: If the taxpayer continues to be delinquent on the 45th day, the team manager should request to meet with the taxpayer/representative and the examiner to discuss the issues and explain the consequences of continued noncompliance, including the issuance of a summons. Involvement of higher-level IRS officials (such as the territory manager) and involvement of more senior corporate executives in the process, may also be required. 90-day delinquency: If an IDR response is more than 90 calendar days delinquent, a joint status meeting should be held, involving the territory manager, examiner, the taxpayers senior tax officer and the taxpayers representative, to try to resolve the open issues. Under the new procedures, the issuance of Form 5701 takes on additional importance, because a revenue agents report (RAR) will not be issued. Form 5701 will have as an attachment a total sheet computing the tax on adjustments on unagreed issues. In other words, the RAR response time is significantly reduced.
Procedural Problems There are a number of problems with these new procedures. The 20-day response time is clearly inadequate, especially when multiple IDRs are issued, requiring significant amounts of information that need detailed analysis. In large complex examinations, when the requested information is voluminous, it may be impossible to meet the 20-day deadline. When information requested is required to be obtained from foreign subsidiaries, it often takes significant time to accumulate, translate, review and transmit such information. The complexity of questions posed in an RAR may also prevent adequate responses within the 20-day period. If Form 5701 effectively replaces an RAR (with its decreased timeframe for response), there will probably be many situations in which taxpayers/representatives will take positions that disagree with the proposed adjustments, instead of trying to answer Form 5701 fully. This could have the effect of decreasing, rather than increasing, efficiency in the audit process.
Possible Solutions Although the new process seems to require more communication between the examination team and a taxpayer/ representative, the rigidity of the timeframes and the lack of flexibility actually will, in many cases, work against achieving the stated goal of decreasing cycle time. For this process to work, there needs to be a great deal more built-in flexibility. There should be a requirement that before an IDR or Form 5701 is issued, an agreement will be reached between the parties as to a reasonable response time, and an adequate response to the questions or proposed adjustments. There must also be a method for agreements to extensions of response time without the responses being deemed delinquent (and subject to the attendant consequences and additional procedures). There should also be a method to allow, after discussion between the Service and the taxpayer/representative, an extension of time to adequately respond to Form 5701, so that a protest will not be required.
Conclusion One of the programs major goals, effective tax administration, requires full cooperation between the Service and the taxpayers, even when there is an agreement to disagree on an issue. This goal will be more difficult to achieve when one or both parties are under rigid and unrealistic timeframes and procedures that work against achievement of the programs goals. Taxpayers and representatives who find themselves caught up in the shortened timeframes or without the benefit of adequate time to respond to IDRs and/or Form 5701 should not hesitate to take their concerns up the line to area and/or territory managers, in appropriate circumstances. From Stephen R. Buschel, CPA, MBA, BDO Seidman, LLP, New York, NY
IRS SBSE Priorities: 2004 and Beyond At the July 2004 IRS/Texas Society of CPAs Liaison Committee Meeting, an IRS representative outlined numerous Small Business/Self-Employed (SBSE) priorities for 2004 and the next few years. This item summarizes these priorities. Although the SBSE is not the largest division in terms of the number of taxpayers served, the taxpayers falling into this category present the most compliance challenges. Most of these taxpayers use professionals to prepare their returns. Thus, through its Taxpayer Education & Communication pre-filing compliance activities program, the SBSE is enlisting the support of the professional community to help meet the challenge.
SBSE Strategic Goals Primary strategies for FYs 2004, 2005 and beyond intend to:
Priorities In addition to the primary strategies, there are numerous supporting priorities. Abusive tax avoidance transactions: These include domestic trust arrangements in which taxpayers use trusts to hide the true ownership of assets and income or to disguise a transactions substance. Off-shore credit card schemes are another form of abuse. Taxpayers use cards issued by tax-haven-domiciled banks to repatriate anonymously and covertly offshore funds that may not have been previously taxed. The Service is also targeting credits taken under the Americans with Disabilities Act. Promoters generally entice investors into believing they are entitled to a disabled access credit for nonqualified expenditures. Employment tax schemes that promote employee leasing, pay wages in cash and, in some cases, file false payroll tax forms, have also come under IRS scrutiny. The IRS will also identify and take action against promoters of all these types of arrangements, when necessary. High-income/high-risk taxpayers: The compliance risk associated with these taxpayers has centered on the IRSs ability to verify income and deductions through its various matching programs (such as Schedule K-1 matching), especially for income reported by corporations or passthrough entities. High-income nonfilers: The population in this category is growing. The IRS is increasing the number of audits conducted. To identify nonfilers, it is contacting state licensing agencies (e.g., state bar associations) and filing agencies to match its data against theirs. Unreported income: Unreported income is the largest component of the tax gap. The IRS has developed a new tool, known as unreported income discriminant index formula (UI DIF), to use along with its basic DIF formula. The score generated by the UI DIF formula indicates and rates the probability of income being omitted from a return. Returns with the highest risk for unreported income are then systematically selected for audit. Returns will now receive both a DIF and a UI DIF score. For years, the IRS has used the DIF process to identify returns with a high probability of error. Now, with its new tool, it is focusing on spotting returns with a high probability of unreported income. NRP: Through mid-March 2004, the IRS had (1) selected all the returns for its National Research Project (NRP) sample; (2) determined the type of contact required; (3) mailed letters to taxpayers requiring examinations; and (4) completed examinations in about 50% of the cases. Final data from this first phase of the NRP is expected by December 2004; a major analysis and use of the data will begin in 2005. The new audit selection formulas are expected to be implemented in early 2006. The second phase of the NRP will focus on Forms 1065, U.S. Return of Partnership Income, and 1120S, U.S. Income Tax Return for an S Corporation; pilot efforts will run through 2005. Burden reduction: The IRS is continuing to focus on reducing the taxpayer burden. Recent successful initiatives include (1) raising the income threshold on Form 1040, Schedule B, to $1,500; (2) permitting the use of the standard mileage rate for small businesses for up to four vehicles; (3) allowing the use of standard rates for daycare providers; and (4) adding a flowchart to Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts. Additional burden reduction initiatives are in various stages of development and include (1) redesigning Schedule K-1 (for Forms 1065, 1120S and 1041, U.S. Fiduciary Income Tax Return) to look more like Form 1099; (2) redesigning Form 941, Employers Quarterly Federal Tax Return, to a two-page scannable form; (3) eliminating quarterly Forms 941 in favor of an annual return, for certain small businesses; and (4) reducing the number of extension forms from 11 to four, creating a uniform six-month extension period for all extensions and centralizing submission sites.
Conclusion Some of these changes are long overdue; their successful implementation will require cooperation between tax advisers and the IRS. Interesting times lie ahead. By Ronald S. Fiedelman, CPA, Philip Vogel & Co. PC, Dallas, TX
SOL on Individuals Refund Claims Taxpayers lose millions of dollars annually because they do not file returns timely. Generally, taxpayers must file a claim for a credit or refund within three years from the date they filed their original return or two years from the date they paid the tax, whichever is later. If taxpayers do not file a refund claim within this period, they will not be entitled to a refund. If taxpayers do not file a return, they must file a refund claim within two years from the time they paid the tax; see Sec. 6511(a). The Tax Court can consider taxes paid during the three-year period preceding a deficiency notices date in determining any refund due to nonfilers. This means that if taxpayers do not file a return, receive a deficiency notice in the third year after the returns due date (including extensions) and file in Tax Court to contest the notice, they might be able to receive a refund of excess amounts paid within the three-year period preceding the notices date; see Sec. 6512(b)(3).
Exceptions There are exceptions to these rules. For example, if the President declares a location as a disaster area eligible for Federal assistance, the IRS may postpone, for up to one year, the refund claim filing deadline for taxpayers in that area. It may also delay deadlines for filing income and employment tax returns and for contributing to regular or Roth IRAs; see IRS Pub. 547, Casualties, Disasters, and Thefts, for details. The IRS will publicize deadline postponements and publish a news release, revenue ruling, revenue procedure, notice, announcement or other guidance in the Internal Revenue Bulletin. The IRS may also postpone the filing deadline for a tax refund for up to one year for taxpayers affected by terrorist acts occurring after Sept. 10, 2001. (For further information, see IRS Pub. 3920, Tax Relief for Victims for Terrorist Attacks).
Examples A refund may be limited for taxpayers who file a refund claim within three years after filing their return. The refund is limited to the tax paid within the three years (plus extensions) before taxpayers made the claim.
According to Sec. 6513(b)(2), [a]ny amount paid as estimated income tax for any taxable year shall be deemed to have been paid on the last day prescribed for filing the return under section 6012 for such taxable year (determined without regard to any extension of time for filing such return). If taxpayers file a claim after the three-year period but within two years from the time they paid the tax, a credit or refund cannot exceed the tax they paid within the two years immediately preceding the filing of the claim. However, there are exceptions to this rule, including the types of items that form the basis of a claim (e.g., carryback of a bad debt or net operating loss, or worthless securities). A timely refund claim based on one or more specific grounds cannot be amended to include other and different grounds after the statute of limitations (SOL) has expired; see Regs. Sec. 301.6402-2(b).
Suspension of SOL During financial disability, the time limits may be suspended under Sec. 6511(h). For individuals, the refund period can be suspended when they are unable to manage their financial affairs because of physical or mental impairment that is medically determinable and either (1) has lasted or can be expected to last continuously for at least 12 months or (2) can be expected to result in death. This suspension will not apply if someone is authorized to act for the taxpayer in financial matters (e.g., a spouse or guardian).
Timely Mailing Rule The date a return is deemed filed and the tax paid depends on the method by which the return was sent to the IRS. Sec. 7502 and Regs. Sec. 301.7502-1 set forth the applicable rules. The Exhibit below summarizes the deemed filing dates. Returns postmarked after the due date are deemed to be filed on the date the IRS receives the return.
Conclusion Taxpayers who do not want to lose their IRS refund should file their returns timely according to the above rulesunless they want to give the IRS a charitable contribution. From Kenneth M. Parker, CPA, Parker & Associates, CPAs, PLLC, Jackson, MS, and Tom Turner, CPA, Dooley and Vicars CPAs LLP, Richmond, VA |
