The IRS announced in a recent memo (LB&I-4-0812-010) that its Large Business & International (LB&I) Division is terminating the Tiered Issue Process previously used to set exam (audit) priorities and manage exams. The new exam process will be more decentralized and is intended to provide more authority to examination agents and teams to craft taxpayer-specific approaches to issues.
The development is being hailed by taxpayers and government officials alike, some of whom had criticized the tiered issue process for not effectively bringing cases to resolution. Complaints often also centered on how, when the IRS reviewed its pool of tax returns up for possible audit, it was sometimes unclear who should control the outcome of a particular issue or case.
Tiered issues: What came before
The tiered issue process, initiated in 2006, was intended to the ensure consistency of treatment and uniform disposition of tax shelters and other types of cases. Under the tiered issue process, the IRS identified certain compliance issues and then prioritized each issue based on stated factors, including the prevalence of the issue and level of risk it raised. For example, an issue involving significant monetary value or strategic importance to the IRS, such as a claim for a research credit, a Code Sec. 118 abuse, or foreign earnings repatriation, would have been designated as a Tier I. A Tier II issue would have involved a potentially high compliance risk, but would likely have involved issues where the law was fairly well established and only needed further clarification. The last tier, Tier III, was designated for issues viewed as high compliance risks in particular industries.
Specialized practice groups
The new exam process will draw on the extensive experience of the many new LB&I employees with private industry experience. It involves specialized practice groups for domestic and international issues. These groups are designed to provide exam teams with technical advice to manage their cases. "LB&I views [the groups] as a better mechanism for balancing the need for consistency with the recognition that there is no "one size fits all" approach to examining and resolving issues," LB&I stated in its announcement.