United States: IRS Revises Directive on IDR Issuance and Enforcement Process

On February 28, 2014, the Internal Revenue Service Large Business and International Division released updated guidance for examiners incorporating and superseding two directives relating to Information Document Requests.  The guidance provides further clarification of the use of the new processes and clears up confusion regarding the enforcement process.

On February 28, 2014, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) released updated guidance for examiners incorporating and superseding two directives relating to Information Document Requests (IDRs).  (See "The Other Shoe Drops" for prior coverage of the two directives).  Directive LB&I -04-0214-004 provides clarifying guidance on the June 18, 2013, directive for IDR issuance and the November 4, 2013, directive for enforcement.  The new directive was effective on March 3, 2014, but to ensure a smooth transition to the new enforcement procedures, Exam is directed not to issue Delinquency Notices prior to April 3, 2014.

Revisions to IDR Issuance Process

The new directive makes two minor changes to the requirements listed in the June 18, 2013, directive.  It clarifies that an IDR 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 the requirement that the IDR clearly state the issue under consideration.  Subsequent IDRs must meet this requirement however.  The new directive also provides that the process for providing a draft IDR to and discussing its contents with the taxpayer should generally be completed within 10 days.  The prior directive did not contain a suggested time period for this process.

The new directive generally adheres to the remaining requirements, including the requirement that Exam 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.  The new directive requires that this date be noted on the IDR, whereas the prior directive only stated that it "should" be noted on the IDR.  If the IDR is considered complete upon review, Exam must notify the taxpayer that the IDR is considered complete and closed.

Revisions to IDR Enforcement Process

The new directive provides guidance on Exam's authority to grant a taxpayer an extension of time when either the taxpayer fails to respond or Exam determines that a response is incomplete.  If the taxpayer fails to respond, Exam is instructed to, within five business days of the due date, discuss the cause of the failure and determine if an extension is warranted.  An extension of up to 15 business days may be granted if Exam determines that the taxpayer's explanation warrants it.  If no response is received by the extended due date, the enforcement process begins on that extended date.

If Exam determines that an IDR response is incomplete, it should also discuss with the taxpayer the reasons why the response is not complete and determine within five business days whether an extension is warranted.  Similar to its authority when a taxpayer fails to respond to an IDR, Exam can grant an extension of up to 15 days for the taxpayer to complete the response.  If no response is received by the extended due date, the IDR enforcement process begins on that extended date.  If additional information is received, it must be reviewed for completeness as soon as practical, but in no cases more than 15 days from the receipt of the additional information.  If the response is still considered incomplete, the IDR process begins on the date Exam notifies the taxpayer that the response remains incomplete.  Exam must notify the taxpayer if the response is considered complete and it will then close the IDR.

If the taxpayer fails to provide a complete response, the new directive retains the same three-step enforcement process.  However, in the first step involving the issuance of a delinquency notice, the new directive requires Exam to discuss with the appropriate personnel from the IRS and the taxpayer the IDR and the IDR response to identify what information is missing.  The new directive decreases the time for responding to the delinquency notice from 15 calendar days to 10 business days, but retains the right for a territory manager to approve a date beyond 10 days.  The new directive also changes the response time for issuing a pre-summons letter from 14 calendar days to 10 business days and for responding to a pre-summons letter from 10 calendar days to 10 business days.  The third step—the Summons—remains the same.

Practical Ramifications

The prior IDR directives created a steep learning curve for both Exam and taxpayers and, as the new IDR directive acknowledges, resulted in confusion as how to properly implement and apply the IDR process.  The new IDR directive clarifies how Exam and taxpayers should deal with responses that Exam determines are not complete.  Because the completeness determination is generally not made until after the IDR due date, it was unclear whether Exam was required to issue a delinquency notice without first discussing the deemed incomplete response with the taxpayer and providing the taxpayer with the opportunity to address any alleged defect in the response.  This clarification should be welcome guidance for both Exam and taxpayers.

The changes to the timing of the issuance of the delinquency notice and pre-summons letter are minimal, but still discouraging as they generally reflect shorter timeframes before moving to the next level of the enforcement process.  As discussed in our previous coverage, it remains to be seen if the new directive will accomplish the IRS's objectives of decreasing average IDR response time and result in more efficient examinations.

A copy of the February 28, 2014, directive is available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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