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New LB&I directive clarifies information document request procedures

IRS’s Large Business and International division (LB&I) has issued an updated directive on the requirements for issuing and enforcing information document requests (IDRs). Among other things, the new directive states that examiners and specialists have discretion, as warranted by the circumstances, to grant an extension to taxpayers who either fail to respond to an IDR or provide an incomplete response before the enforcement process begins.

Background. As part of the information-gathering phase of an IRS audit, IRS auditors make formal requests to taxpayers for information relevant to the audit by issuing IDRs.

Earlier guidance. On June 18, 2013, LB&I issued LB&I-04-0613-004, in which it summarized what its auditors had been told at IRS training sessions regarding new requirements for auditors when they issue IDRs (the “new IDR issuance requirements”). The new IDR issuance requirements provide that an IDR must be issue-focused, be discussed with the taxpayer, and contain a response date that has been discussed with the taxpayer and, in most instances, mutually agreed upon.

On Nov. 4, 2013, LB&I published another directive (LB&I-04-1113-009) reiterating the guidance in the June directive and addressing the situation of when a taxpayer fails to timely respond to an IDR that met the new IDR issuance requirements (see Weekly Alert ¶ 32 11/14/2013). All LB&I managers and auditors were instructed to ensure that all outstanding and future IDRs complied with the new IDR issuance requirements.

In February, LB&I delayed the new IRSenforcement process until Mar. 3, 2014. (IRS e-News for Tax Professionals (Feb. 7, 2014) Issue No. 2014-6) (See Weekly Alert ¶ 21 02/13/2014 for more details.)

New directive. LB&I Commissioner Heather Maloy has issued a new directive (LB&I-04-0214-004) that ” incorporates and supersedes the Prior Directives [i.e., those issued in February and November] and provides further clarification of the use of the new IDR processes.”

The new directive clarifies that there is one exception to the requirement that an IDR state an issue. An IDR that is issued at the beginning of an examination that requests basic books and records and general information about a taxpayer’s business is not subject to this requirement (but, once the initial IDR has been issued, subsequent IDRs must satisfy this requirement).

The new IDRenforcement process contains three graduated steps: (1) a delinquency notice; (2) a pre-summons letter; and (3) a summons. This process is mandatory and has no exceptions. However, the new directive clarifies that if, during the discussion of an IDR, a taxpayer indicates that the requested information will not be provided without a summons, the IDRenforcement procedures do not apply and IRS should move directly to the issuance of a summons.

The new directive also reiterated that the IDRenforcement process is effective beginning Mar. 3, 2014, and as of that date, applies only to IDRs that have been issued in accordance with the new IDR issuance requirements. If an IDR does not meet these requirements, it must be reissued with a new response date, at which time the enforcement procedures will apply to it. In addition, to ensure a smooth transition, the directive instructs examiners and specialists not to issue delinquency notices prior to Apr. 3, 2014.

The new directive also contains attachments that set out the IDR issuance requirements and enforcement process in greater detail, as explained below.

IDR issuance requirements. With regard to the issuance requirements, the directive clarifies that, in addition to the requirements outlined above, the LB&I examiners and specialists must also:

  • specifically discuss with the taxpayer the issue related to the IDR and how the information requested is related to the issue and why it is necessary;
  • prepare one IDR for each issue;
  • use numbers or letters on the IDR for clarity, and ensure that it is clearly written;
  • ensure that the IDR is customized to the taxpayer or industry;
  • provide a draft of the IDR to the taxpayer and discuss its contents;
  • determine with the taxpayer a reasonable timeframe for responding to the IDR, and if no agreement can be reached, set a reasonable response date; and
  • when determining the response date, commit to a date by which the IDR will be reviewed and a response provided to the taxpayer on whether the information received satisfies the IDR, and note this date on the IDR.
  • specifically discuss with the taxpayer the issue related to the IDR and how the information requested is related to the issue and why it is necessary;
  • prepare one IDR for each issue;
  • use numbers or letters on the IDR for clarity, and ensure that it is clearly written;
  • ensure that the IDR is customized to the taxpayer or industry;
  • provide a draft of the IDR to the taxpayer and discuss its contents;
  • determine with the taxpayer a reasonable timeframe for responding to the IDR, and if no agreement can be reached, set a reasonable response date; and
  • when determining the response date, commit to a date by which the IDR will be reviewed and a response provided to the taxpayer on whether the information received satisfies the IDR, and note this date on the IDR.

Enforcement process. With regard to the enforcement process, the new directive provides for discretionary extension authority before the process is triggered, as well as additional details on its timing and application. An examiner or specialist has the authority to grant a taxpayer an extension of up to 15 days before the enforcement process begins in cases where the taxpayer:

  • Fails to respond. If a taxpayer fails to provide any response by the IDR due date, the examiner or specialist should, within five business days of the due date, discuss with the taxpayer the cause of the failure to respond and determine if an extension is warranted.
  • Provides an incomplete response. If a response is received but the examiner or specialist determines that it is not complete, the examiner or specialist should discuss with the taxpayer the reasons why the response is not complete and determine within five business days whether an extension is warranted.

In situations where no response is received by the due date: (i) if no extension was granted, then the enforcement process begins on the date that the extension determination is communicated to the taxpayer; and (ii) if an extension was granted, then the process begins as of the extended due date.

In situations where the response is received by the due date, the examiner must determine, by the date stated in the IDR, whether the response is complete. If it is, then the taxpayer must be notified that the IDR is complete and closed. However, if it isn’t, and no extension is granted, then the enforcement process begins on the date the extension determination is communicated to the taxpayer. If the response is incomplete and an extension is granted, then (i) if no additional information is received at the end of the extension period, the IDRenforcement process begins at the end of the extension period, and (ii) if additional information is received at the end of the extension period, it must be reviewed for completeness (generally, within 15 days of receipt) and, (a) if deemed incomplete, the IDRenforcement process begins on the date the examiner or specialist notifies the taxpayer that the response remains incomplete, and (b) if complete, the examiner or specialist should notify the taxpayer and close the IDR.

The IDRenforcement process begins with the issuance of a delinquency notice within 10 days of when the process begins. The delinquency notice should include a response date that is generally no more than 10 business days from the date of the notice. If the taxpayer doesn’t provide a complete response to an IDR by the delinquency notice response date, the examiner or specialist proceed to the next phase-the pre-summons letter. The pre-summons letter, which has various signature and approval requirements, is generally issued within 10 business days after the due date of the delinquency notice and carries a response date that is generally 10 days from the date of the letter. If the taxpayer again fails to provide a complete response to an IDR by the pre-summons letter response date, the examiner or specialist must move on to the summons phase of the enforcement process, coordinating with the appropriate personnel and following procedures set out in the Internal Revenue Manual.

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