1. What is the rationale behind the tiered process?
LMSB continues to take steps to implement its overall issue management strategy. These steps include electronic filing, Schedule M-3, IMS/IBMIS, the use of issue management teams, an increased emphasis on risk analysis, and now the Tiered Issue Focus Strategy.
The issue focus approach concentrates on high-risk (for the IRS and taxpayers) tax issues and ensures that we employ a strategic approach to managing them. This approach gives LMSB the focus and flexibility to keep pace with and respond to changes in business practices, which may create compliance risks, and bring greater consistency to the resolution of compliance issues across industry lines. The issue focus process provides greater insight and accountability to the resolution of compliance issues and provides the Field with clear and consistent guidance for addressing significant compliance issues.
Current emerging issue and issue management processes are interwoven within the tier procedures.
LMSB wants to demonstrate flexibility in tailoring each issue management strategy within the issue focus process to the unique characteristics of the issue. Each of the tiered issues is unique, requiring different treatment streams and approaches. There is no “one size fits all” strategy.
2. What is the difference between the three tiers?
Significant issues are classified by the Industry Directors as potential Tier I, II, or III issues. Potential Tier I or II issues are presented to the Compliance Strategy Council (CSC) for approval. If approved by the CSC, the Tier I or Tier II issue is assigned to the primary affected Industry or to another LMSB executive to develop a compliance strategy.
Tier I issues are of high strategic importance and have significant impact on one or more Industries. Resolution of these issues is of critical compliance importance. These issues require oversight and control by an Issue Owner Executive. The issue owner is responsible for ensuring the issue is fully developed with appropriate direction and a compliance resolution strategy. This is accomplished by an issue management team (IMT) under the leadership of the executive owner. To ensure consistency, all audit teams must address Tier I issues in accordance with the IMT's direction. Note that all listed transactions have been designated Tier I issues.
Tier II issues are those of potential high non-compliance and/or significant compliance risk to LMSB or an Industry. Tier II issues are also assigned an Executive Issue Owner. The LMSB issue owner is responsible for providing technical support on the issue to LMSB examiners while direction to the Field is being formulated. Tier II direction may initially be an alert, with or without specific audit techniques. Generally, the issue will be required to be addressed if present.
Tier III issues are generally industry-related and have been identified as issues that should be considered by LMSB teams when conducting their risk analysis.
3. What is the role of the Issue Management Team (IMT)?
Upon designation of the issue as a Tier I or Tier II issue by the CSC, the designated Issue Owner Executive will generally establish an Issue Management Team (IMT). IMT’s are an essential part of the IIF process and should be used on issues of high strategic importance. One of the purposes of the IMT is to develop the issue and gather information so that clear direction can be issued to the field as quickly as possible. The IMT can facilitate the development and resolution of significant issues. At the outset of its formation, each IMT must attempt to clearly define the goals it intends to pursue with regard to the issue. An IMT should be flexible with regard to the options it pursues, and will consider whether an issue needs to be addressed through litigation. IMT’s should strive to identify the best case(s) for factual and legal development.
4. Who participates on the IMT?
In consultation with the LMSB Issue Owner Executive, the LMSB Division Counsel will assign a Counsel Issue Owner (an LMSB Area Counsel) to advise the Issue Owner Executive on the issue and provide executive-level coordination of the issue within Counsel.
Issue Management Team Members:
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LMSB Technical Advisor;
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Appeals Technical Guidance Coordinator (TGC) - The Appeals representative will be assigned by the Appeals Director, Technical Services in consultation with the Issue Owner Executive and/or the Issue Champion and is tasked with making the IMT’s issue a coordinated issue.
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LMSB Industry Counsel – In addition to the Counsel Issue Owner, there will generally be an Industry or Issue Counsel with expertise on the issue who can assist in the identification of cases and provide expertise related to the factual scenarios of the issue, the legal issues raised by taxpayers, and the appropriate application of legal positions.
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National Office Chief Counsel - The National Office Chief Counsel representative will be assigned to the IMT to provide support until direction is drafted and issued to the field. The representative will be an attorney or attorneys assigned by the Associate Chief Counsel(s) with subject matter jurisdiction over the issue in consultation with the LMSB Division Counsel, the Counsel Issue Owner and the Issue Owner Executive.
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Other Members: At the discretion of the Issue Owner Executive other members that may be included on the IMT at any point, as needed, are: Team Managers, Revenue Agents, representatives from other affected LMSB Industries, representatives from other affected operating divisions, and other specialists as deemed appropriate, such as engineers, financial products specialists, economists, etc.
5. What is the difference between Issue Management Teams (IMT) and Issue Specialization Teams (IST)?
IMT’s are formed to develop an issue and gather information so that clear direction can be issued to the field as quickly as possible. The IMT is comprised of executives and other representatives from the various functions impacted by the IIF process, including LMSB Industry, Appeals, and Counsel.
Under the IST concept, all of the cases with a similar issue would be examined by experienced specialists resulting in the expeditious development of the issue and greater consistency in the examination of an issue in the field. Membership on an IST would be a temporary assignment. ISTs can be formed by assigning an existing or temporary group of specialists, or by choosing examiners from multiple groups and locations around the country. Depending on the needs for a particular issue, the IST members would be trained and work on the issue on either a part-time or full-time basis. An IST should be considered for:
Complex issues or transactions;
Issues requiring time-consuming factual development (i.e. numerous documents to be secured and analyzed;
Issues involving a significant number of taxpayers with the same or similar transactions.
6. Who determines which tier an issue is in and how it is managed?
Significant issues are classified by the Industry Director as potential Tier I, II, or III issues. Potential Tier I or II issues are presented to the Compliance Strategy Council (CSC) for approval. The IMT is responsible for developing guidance and providing other direction to control and provide consistent resolution of the issues.
7. How are cross-industry issues treated in the Issue Focus process?
Teams, senior leaders, or executives may determine that the need exists to elevate case interactions across industries. Such cross industry interactions might be appropriate when it is determined:
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that a case is not aligned with the proper industry;
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the case consists of clear industry-specific issues that require guidance or leadership from Issue Owner Executives;
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potential exists for the case to be designated as a litigating vehicle;
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the impact of an issue on a particular industry is significant;
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the potential for setting precedent within the industry exists;
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and the issue has high visibility with an industry group.
Interactions across industries should be managed carefully. Following this protocol is critical to ensure the benefits of industry alignment and consistent issue treatment. To ensure consistent treatment of identified industry issues, the Line Authority Industry Executive controls the case while the Issue Owner Executive controls and/or influences the identification, development and resolution of the specific industry issue. It is essential that all parties involved interact in a collaborative manner ensuring that:
Issue Owner Executives will have access to significant industry aligned cases regardless of geographic location or assigned industry.
The Issue Owner Executive (Industry Director/Director of Field Operations or delegate) will contact and coordinate with the Line Authority Executive to secure briefing from the team, contact and/or visit the team, exchange information, and provide assistance and guidance on specific industry issues. The Issue Owner Executive will be sensitive to established line authority relationships as they provide guidance and direction on specific Industry issues.
Potential issue focus issues that are sufficiently developed and determined to be of importance will be sent to peers for review by the Industry Directors in order to further identify cross-industry issues. Copies will also be sent to the Directors, Pre-Filing and Technical Guidance (PFTG), International Compliance Strategy and Policy, and Field Specialists. Feedback will be sent to the Industry Issue Coordinator who will then reconcile similarities and differences for each cross-industry issue for the Industry Director to identify the issue owner. Industry Directors will work with the Directors of International Compliance Strategy and Policy, Field Specialist, and PFTG to assign ownership of cross-industry issues.
8. What is the role of the Issue Owner Executive (IOE)?
The IOEs have been encouraged to engage external stakeholders to try to understand the issue from their perspective (not to negotiate.) The IOE establishes the IMT, selects an Issue Champion, and determines if an issue will be worked as a single issue or as a primary issue with a series of related sub-issues. Depending on the number and size of the sub-issues that may be involved, the IOE may decide sub-teams are needed and that more than one Issue Champion should be appointed. The IOE retains oversight responsibility for the IMT.
9. What is the process if an issue is identified as a Tier I and there is no IMT in place yet?
The examination team should contact the appropriate Technical Advisor for interim guidance.
10. What is the Industry Issue Coordinator’s role?
The role of the Industry Issue Coordinator is a very important one. The person in this position in each industry serves as the focal point for communications relating to industry issues and acts as a liaison between LMSB technical advisors/specialists and other industry coordinators. The Industry Issue Coordinator maintains open lines of communication with Appeals, Counsel, other business operating divisions and government agencies regarding industry issues to be aware of all activities that will affect the issue. See also IRM Exhibit 4.51.5-1
Other roles and responsibilities include:
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Solicitation and control of Industry Issues [ IRM 4.51.5.2(1)]. Encourages the submission of issues by technical advisors, specialists and examiners closest to the facts. Gathers information from sub-industry meetings to gain insight on new issues. Maintains industry records on issues submitted and their disposition.
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Evaluation of Industry Issues [ IRM 4.51.5.2(4)]. Coordinates the preliminary review of new issues within the industry using Technical Advisor teams, Counsel and other specialists. Continuously briefs the Industry Director on potential industry issues.
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Peer Issue Circulation [ IRM 4.51.5.2(5)]. Circulates issues to other coordinators to identify cross industry issues. Directs the review of the issues being circulated by coordinators from outside the industry.
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Industry Tier Designation [ IRM 4.51.5.2(6)]. Arranges briefings with the Industry Director on issue findings. Works with the Industry Director or Delegate to recommend issues warranting continuing coordination as Tier I-II Issues.
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Presentations to Compliance Strategy Council (CSC) [ IRM 4.51.5.3]. Coordinates the preparation of reports (tier, summary, findings and proposed direction to examiners) with the technical advisors, emerging issue teams and others for CSC approval of proposed Tier I-II issue/changes.
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Industry Directives [ IRM 4.51.5.4 ]. Coordinates the circulation and processing of directives on Tier I and II issues working with emerging issue/issue management teams. Requests assignment of UIL/SAIN number to issues.
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CSC Status Reports [ IRM 4.51.5.6]. Gathers Tier I and II status reports prepared by IOEs for review by Industry Directors before forwarding to SRPP.
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Tier II – [ IRM 4.51.5.5]. Works with the Industry Director to coordinate the establishment (or continuation) of emerging issues teams for fact finding/legal analysis, if needed.
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Tier I – [ IRM 4.51.5.4]. Works with the Industry Director to coordinate the establishment of issue management teams to control issue development and closure, if needed.
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Tier I – III Industry/TA WEB page and IRS.gov. Coordinates with PFTG and C&L the distribution of Tier I-III issue announcements and procedural directives to internal and external stakeholders, as required.
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Provide communications to ensure that an issue expert is available to assist management and examiners in properly planning, developing and resolving Tier I issues. Assists in the coordination of issue seminars/training, as requested.
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Act as a point of contact for the Industry Director to facilitate in obtaining the Director’s concurrence of the disposition of any Tier I issues that adopt a position contrary to that reflected in Industry Director guidance.
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Coordinate with Appeals and Counsel the tracking of Tier I and II issues in those functions to determine the progress and effectiveness of guidance.
11. What are Industry Director Directives (IDDs)?
The purpose of LMSB Directives is to provide guidelines and instructions to examiners on procedures and administrative aspects of compliance activities to ensure consistent treatment of taxpayers. Directives may address one or more of the following:
LMSB Examiners are expected to follow guidelines and instructions provided in LMSB Directives. If the Directive is jointly issued with another Operating Division, then examiners of both divisions must follow the Directive. Further information may be found in IRM 4.51.2.6.
12. What is the PFTG Technical Advisor’s role?
It is the job of the PFTG Technical Advisor to:
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determine cases under audit;
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notify Industry Director of significant cases;
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communicate with CIC and IC agents regardless of industry alignment;
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provide examination teams with timely updated information;
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maintain mailing list for employees working industry and emerging issues;
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contact teams with industry and emerging issues;
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provide value added input to team;
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develop and maintain auditing guidelines and techniques;
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communicate with the team in the early stages of audit;
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be part of the team and ensure timely resolution of issue;
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ensure that Tier I and Tier II issues are identified, coordinated and properly developed in accordance with guidance from IOEs;
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work with IOEs and Line Authority Executives as necessary to reinforce consistent treatment of similarly situated taxpayers with respect to specific issues.
13. What is Appeals’s role?
When the CSC designates an issue as a Tier I or II issue, notice should be provided to the Appeals Division. Appeals will establish a contact, the Appeals Technical Guidance Coordinator (TCG), who will coordinate each Tier I and II issue and will represent Appeals on the issue management team and ensure appropriate issue coordination in Appeals.
The TGC can:
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provide insight to the IMT on factual scenarios for the issue and the legal issues raised by taxpayers and their representatives
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assess proposed tax positions in terms of administration and application; and
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draft Appeals Settlement Guidelines (ASG) or an Appeals Settlement Position (ASP) that reflects the hazards of litigation.
The Appeals role on the IMT is circumscribed by the exparte provisions of Revenue Procedure 2000-43 and the mandate for independence and, as a result, will not include certain activities/efforts. Examples include:
The IMT, working with the TCG, should ensure that the issue is properly coordinated with the Office of Appeals. Possibilities include:
IMTs will generally be disbanded when guidance is issued and cases in examination no longer pose a significant compliance challenge. Issue experts in Appeals, LMSB and Counsel may support the field after disbanding of the IMT.
14. What is Counsel’s role?
There may be one or more Counsel team members from each category described below. Each category has a different purpose.
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The Counsel Issue Owner is an LMSB Area Counsel, who may in turn delegate responsibility for the issue to a Deputy Area Counsel or Associate Area Counsel. The Counsel Issue Owner advises the IOE and Issue Champion on the issue and provides executive-level coordination of the issue with Counsel.
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In addition to the Counsel Issue Owner, there will be an LMSB Counsel representative assigned to the IMT. This person will generally be an Industry or Issue Counsel with expertise on the issue who can assist in the identification of cases and provide expertise related to the factual scenarios of the issue, the legal issues raised by taxpayers, and the appropriate application of legal positions. The LMSB Counsel representative will participate in the drafting of direction on the issue to the field, as well as the identification of potential cases for litigation designation. This representative will be assigned by the LMSB Division Counsel and/or Counsel Issue Owner in consultation with the IOE and/or the Issue Champion.
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Finally, a representative from National Office Chief Counsel will be assign to the IMT to provide support to the team until the direction is drafted and issued to the Field. This representative will be an attorney assigned by the Associate Chief Counsel with subject matter jurisdiction over the issue in consultation with the LMSB Division Counsel, the Counsel Issue Owner, the IOE, and/or the Issue champion. The representative will assist by providing legal expertise on the issue and will serve as a liaison between the IMT and National Office Chief Counsel to facilitate effective and prompt communication and feedback between the IMT and the Associate offices, and will also participate in the drafting of the direction to the field on the issue.
15. Are all Tier I Issues mandatory for examination?
There are two categories of Tier I issues: Tier I Compliance Issues and Tier I Tax Shelter Issues. The Tier I Tax Shelter Issues are mandatory work and continue to be one of LMSB’s top priorities. The Tier I Compliance Issues are not always treated as mandatory work. It is not LMSB policy to unilaterally examine every Tier I Compliance Issue.
Direction on Tier I issues must be tailored to the specific issue and circumstances. Examiners should always consider Tier I issues as part of every examination. Each of the Tier I issues is unique and each requires different treatment streams and approaches. While emerging issues and certain mature issues require strict coordination, there is no “one size fits all” strategy. Risk factors for scope of inventory include adjustment potential, materiality, impact on future years, appeals and litigation implications, and resources.
16. Does an RA have any latitude to settle tiered issues?
Revenue Agents may resolve issues based on individual facts and circumstances. Therefore, resolution of an issue must be determined on a case-by-case basis. However, Revenue Agents may not settle issues, because that authority is in the jurisdiction of Appeals.
Revenue Agents are provided guidance in working and completing the issue. There is no “one size fits all” strategy. The disposition or resolution of each Tier I issue must be in accordance with the IOE’s guidance for that issue. The IOE is responsible for ensuring the disposition or resolution of Tier II issues, so as not to hinder LMSB’s broader direction and/or guidance. The Line Authority Industry Executive retains unilateral decision making authority, including ultimate disposition and resolution, over Tier III issues. Teams working Tier III issues should use available direction, guidance and/or Audit Technique Guidelines in the development and resolution of the issue to ensure consistency throughout LMSB.
17. What if the taxpayer offers a settlement to the team? For example, what if the taxpayer comes in with a proposal to resolve the issue that is not in full agreement with the Form 5701? Does this proposal again have to be presented to the IMT?
Whether the proposal to resolve a Tier I issue needs to be presented to the IMT will depend upon many variables. For example, the level of issue “maturity”; whether Counsel has provided published guidance on the issue; whether the issue been designated for litigation; or whether the issue is being considered for litigation in a different case.
Consistent treatment among taxpayers is paramount to the issue focus program. If the issue is tiered, but not listed, published guidance for the issue should be consulted and followed. The appropriate Technical Advisor should be contacted with any unresolved questions.
On the other hand, if the issue is listed, examiners must consult with and secure the concurrence of the Technical Advisor, Issue Specialist, and/or Counsel before going forward with any resolution other than full concession of the issue by the taxpayer. No proposals should be accepted without the concurrence of the IOE.
18. What is the timeline for resolution and response from IMT?
In August, 2007, LMSB published a new IRM section ( IRM 4.51.6) that provides for two tracks or timelines for addressing a tiered issue and providing direction to the field. Factors such as the complexity of the issue and whether an established legal position exists will determine which track is appropriate for an IMT to follow. IOEs have the flexibility to change tracks or modify actions in response to changes in compliance risk or as facts are developed that indicate a different approach should be used.
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Track A: The goal under this track is to provide direction to the field on an issue within 120 days. The types of issues worked using this process will generally have established legal positions and/or be factual issues.
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Track B: Track B is used when the IOE recognizes that the type of direction needed on an issue will require more than 120 days to develop. The goal under this track is to provide direction to the field as quickly as possible. The types of issues that will be managed under this track are more complex transactions, which will require more development and legal analysis than those issues that fall under Track A. In these situations, a stepped approach will be used by the IMT, requiring the issuance of interim administrative guidance to the field on the issue within 120 days.
19. Is the Taxpayer allowed to talk to the IOE?
Yes, taxpayers are allowed to talk to the IOE, but only in compliance with the Rules of Engagement (see IRM 4.51.1). “Case Interaction” is defined by IRM 4.51.1.3 as, “a case-related positive contact to achieve a shared outcome. Such interactions may occur at any phase of the tax cycle, pre-filing through post-filing. Case interactions can be triggered by teams or by leaders for a variety of reasons. In most instances, a team invites interaction from senior leaders in response to particular needs. In other instances, a leader may proactively become involved after identifying the need for interaction or uncovering a situational opportunity that warrants involvement.
Reasons for a team to invite senior leader or executive interaction may include:
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Questions regarding availability of team resources; ability of the team to handle or resolve a particular issue or situation; team/manager experience levels; competing resource demands; and scheduling concerns resulting from taxpayer’s untimely furnishing of documents.
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Disputes within teams; disputes between teams and taxpayers, difficulties dealing with contentious taxpayers; taxpayer requests for senior leader or executive interactions; or taxpayer’s need to elevate issues or discussions within its own organization.
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Potential impact or visibility of an issue; potential for precedent- setting and/or concerns about undermining the tax system; need to coordinate issues across LMSB; lack of published guidance on a particular issue; the need for strategic industry input or assistance; need to ensure consistent industry treatment of issues; resolution that requires additional technical and/or procedural guidance or support; and emerging industry/specialist needs.
Senior leaders or executives may determine a need for interaction. Typical reasons include:
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Requests from team leaders or taxpayers; involvement of new taxpayers; need to improve service to taxpayers; Trade Association of Industry group contact; or for other “relationship management” purposes.
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Increase understanding of particular cases/issues; ensure consistent industry treatment; propagate best practices; introduce new initiatives; instill the values of and apply Issue Management Strategy.
20. When do tiered issues get removed from a tiered platform…either going from different levels of importance or dropped from the tiering process altogether?
New findings or further issue development will sometimes result in a need to change an issue from one Tier to another, or to remove the issue from the Issue Focus process altogether. IRM 4.51.5 describes the process by which issues become part of the tiered Issue Focus program. Approval will be requested in the same manner from the CSC to change an issue’s level of importance (Tier II to Tier I, Tier I to Tier III, etc.).
De-tiering is possible. Evaluation of the issues will take place on a continuing basis to determine if the need to be categorized as a tiered IIF issue continues.
21. What are the procedures for nominating issues for the tiered process?
Each LMSB Director will identify an Industry Issue Coordinator to manage the process of identifying and ranking industry issues. Refer to Q. 10 for more information about the Industry Issue Coordinator. Industry issues will be identified for each sub-industry from various sources and sent to the industry issue coordinator. These sources would include both internal (examinations) and external sources (outside stakeholders, new legislation). Issues will be received from Technical Advisors, Industry Counsel, Schedule M-3 reviews, and other specialist programs (International and Field Specialists). Known cross-industry issues will be submitted by Technical Advisors or other submitters to all industries impacted for consideration. Additionally, Industry Directors, Director Field Specialists and Directors of Field Operations will gather information to identify issues for each sub-industry through attendance at sub-industry meetings and field visits.
Each Industry Director in coordination with the Directors International Compliance Strategy and Policy, Field Specialists, and PFTG will evaluate issues received at least annually to determine which issues are of industry importance. In doing so, the industry will consider both issues unique to the industry and cross industry issues.
In determining industry importance the following factors should be considered:
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Visibility and public uncertainty of the tax treatment due to new legislation or litigation.
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Materiality (affects a significant number of taxpayers, large permanent or long-term timing adjustments, undue amount of time spent auditing issue).
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Potentially an abusive tax avoidance transaction or promotion.
The evaluation process reviewers will include the Industry Issue Coordinator, Technical Advisors, Field/Issue Counsel and other specialists (Field Specialist/International) as needed. Some issues will need further development of their compliance impact or technical merits and need to be assigned to a Technical Advisor or other specialist for development.
Issues that are sufficiently developed and determined to be of importance, will be sent by the Industry Directors to peers and to the Directors, PFTG, International Compliance Strategy and Policy, and Field Specialists for review in order to further identify cross-industry issues.
Feedback will be sent to the Industry Issue Coordinator who will then reconcile similarities and differences for each cross-industry issue for the Industry Director to identify the issue owner. Industry Directors will work with the Directors of International Compliance Strategy and Policy, Field Specialist, and PFTG to assign ownership of cross-industry issues.
After cross-industry issues have been identified and assigned, issues of
industry importance owned by the industry will be reviewed by the Industry Director or delegate to determine if they should be designated as Tier I or II as defined in IRM 4.51.5.1. If not, they will be designated as Tier III to be considered by examiners in their examinations per IRM 4.51.5.7.
Proposed Tier I and II issues will be presented to the CSC for approval. In advance of the meeting the Industry or specialty Issue Coordinator will complete Sections I and II of Exhibit 4.51.5-3, Compliance Strategy Council Reporting Template. This report includes the proposed tier designation, issue summary, findings to date on compliance impact, and proposed industry direction. Cross-industry issues without clear ownership affiliations can be presented to the CSC by the Directors of PFTG, Field Specialists, or International Compliance Strategy and Policy for Tier I or II designation. Approval will also be requested in this manner from the CSC to change an issue’s level of importance (Tier II to Tier I, Tier I to Tier III, etc.) because of new findings or further issue development. Upon approval, the CSC will assign ownership to an industry or specialty area.
22. How and when will the tiered issues lists change or are they considered relatively static? How will taxpayers be notified of changes?
The lists will change when issues are added to a tier, elevated or lowered from one tier to another, or deleted from the list altogether. Taxpayers will be notified of adjustments to the lists via irs.gov.
23. How is the Industry Issue Focus program/strategy different from the Compliance Initiative Project (CIP) process?
The CIP process provides procedures for conducting tests of high risk compliance issues. If the CIP results identify a significant compliance issue, the issue may be tiered based on how prevalent it is across industry lines and the level of compliance risk it presents. Management direction and resource deployment would then be focused on those issues with the greatest risk.
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