Interim Review Produces Changes to the LIFE Process
The LIFE Design Team conducted an interim review of the process in April. This review consisted of fifty-two interviews with LMSB personnel and six taxpayers who had experience with the LIFE process. The Team also conducted four focus group sessions, held a conference call with the LMSB Managers Advisory Group, and reviewed feedback from internal and external sources. As a result, several changes and clarifications are detailed below:
1) New materiality threshold methodology
Many expressed confusion on how materiality thresholds relate to issue selection and how they are established in the MOU, especially when a dollar value for an issue cannot be identified. Originally, the thresholds governed the selection of issues for inclusion in the LIFE examination and any scope expansion. Now, the thresholds only govern scope expansion and have no bearing on the issues selected for a LIFE examination.
The LIFE team originally intended that materiality concepts such as dollar value, and timing vs. permanent nature of issues would be used to prioritize the large, unusual, and questionable (LUQ) items identified during the risk analysis. From this, the LIFE issues would be selected. The lowest dollar amount for each type of issue (permanent, timing, and credits) selected would become the threshold(s) used in the MOU. The Service would not expand the scope and the taxpayer would not file claims or affirmative issues for amounts below these threshold(s). Thus, the thresholds enumerated in the MOU would be based on the dollar value of the issues selected for exam.
Based upon field experiences, the LIFE Team is rescinding the requirement to select issues based on thresholds and is endorsing a different method to establish thresholds in the MOU to govern scope expansion. This method is a two-step process. First, the risk analysis is completed and significant items are identified. All pertinent risk factors and materiality considerations are used to prioritize and select issues to be included in the LIFE examination plan. No dollar thresholds are utilized for issue selection. In step two, the materiality threshold(s) in the MOU are established to govern any subsequent scope expansion. This would include expansion by the Service when raising new issues as well as by the taxpayer when raising claims or affirmative issues. These materiality thresholds need not bear any relationship to the dollar value of the issues that were selected for the LIFE examination.
2) Modified MOU to incorporate changes you recommended
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Added language relating to employment tax issues
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Allows multiple types of tax for the same entity
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Clarified section on establishing materiality thresholds including adding issues that are exempt from thresholds
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Clarified other sections and instructions to remove redundancy
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Edited language to incorporate best practices used in the field
The revised MOU can be found in the LIFE webpage within the irs.gov website
3) Revised instructions regarding unagreed rollover and recurring issues
Examiners may include unagreed rollover and recurring issues in the LIFE examination plan regardless of any thresholds that have/will be established. Inclusion of these issues should be based on the risk analysis. This decision will normally be made before the thresholds are determined.
4) Clarification on common misconceptions (Facts of LIFE)
Several misconceptions were identified during the interim review. The LIFE Team responded to these misconceptions. Please refer to the “Facts of LIFE” within the LIFE webpage.
5) Revised internal and external Frequently Asked Questions (FAQs)
Many of the original FAQs have been updated or replaced to reflect the recent changes.
New questions have also been developed. All of these FAQs can be found in the LIFE webpage.
6) Internal Revenue Manual (IRM)
The LIFE Team has drafted the IRM section on the process. It is currently under review and will be published in the near future.
You are encouraged to ask questions and provide feedback on the process by contacting the LIFE Team through the “Share Your Perspectives” link.
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