A few days ago, the IRS issued a directive stating that it no longer will rely on what it calls a “Tiered Issue Process” to determine exam priorities and address corporate tax issues.
Issue tiering within the Large Business and International Division (LB&I) of the IRS has been a way to separate issues according to their compliance risk, visibility and the number of taxpayers potentially affected, among other criteria. The process, in place since 2006, also was a way to combat abusive tax shelters. “The tiered issue process ensured consistency of treatment and uniform disposition” of cases before the IRS, the Service says in its directive.
Tier 1 issues have been those that present the highest compliance and significant dollar risk, involve large numbers of taxpayers, or are highly visible. Among those considered Tier 1 transactions are foreign earnings repatriation and research credit claims, according to this IRS summary.
Tier II issues have been those areas of potentially high non-compliance risk and/or significant compliance risk to an industry, and has included issues that require additional clarification and direction regarding LB&I’s position. Non-performing loans and cost-sharing stock-based compensation have fallen within this category, also according to the IRS.
Finally, Tier III issues have represented a high compliance risk and require unique treatment for a particular industry. Among the transactions categorized as Tier III is the amortization of intangibles in the communications and technology sectors.
In its recent announcement, the IRS stated that while the tiering process “may have been well suited for the audit of tax shelter type issues,” the Service now needs to take another approach when managing compliance priorities. The new approach should provide its examiners with clear, timely guidance on addressing issues, increase accountability and transparency in resolving issues and enable robust communication with taxpayers.
Now, in place of the tiered issue process, LB&I is piloting what it calls a “knowledge management network.” To facilitate this network, the IRS also is developing Issue Practice Groups (IPGs) and International Practice Networks (IPNs) for domestic and international issues, respectively. The IPGs and IPNs are resources to provide technical advice; they’re also designed to foster collaboration and knowledge sharing across LB&I. “The IPGs and IPNs reflect the fact that no one LB&I employee has all the answers,” the IRS says in its directive.
With the issuance of the directive, which was dated August 17, 2012, IRS issues no longer are tiered. However, the directive doesn’t affect the issuance of any mandatory document request on abusive tax shelters.