Issue Tiering Fact Sheet - LB&I
LB&I adopted the Issue Tiering strategy in 2006 to ensure that high-risk compliance issues are properly addressed and treated consistently across the division for all LB&I taxpayers that are involved in the issue.
Issue Tiering provides LB&I a consistent framework for identifying, prioritizing and addressing significant compliance risks in a nationally coordinated manner.
Issue Tiering helps LB&I focus compliance resources where they will be most effective. In addition, Issue Tiering promotes greater consistency and accountability in the resolution of high-risk compliance issues that cross industry lines.
It provides LB&I examiners and teams clear and timely guidance on how to address significant compliance issues. The tiering approach dovetails with other LB&I issue management activities, allowing LB&I to target its compliance and specialist resources where most needed.
Compliance issues are identified by the Field through examinations, Schedule M-3 reviews, and other sources. Industry Directors, working with their industry issue coordinators, evaluate the compliance issues identified in the Field and elevate those deemed most significant as potential Tier I, II, or III issues.
Tier I - High Strategic Importance. Tier I issues are of high strategic importance to LB&I and have significant impact on one or more Industries. Tier I issues could include areas involving a large number of taxpayers, significant dollar risk, substantial compliance risk or high visibility, where there are established legal positions and/or LB&I direction.
Tier I includes listed transactions as well as other “high-risk” transactions and issues that represent LB&I’s highest compliance priorities.
Tier II - Significant Compliance Risk. Tier II issues reflect areas of potential high non-compliance and/or significant compliance risk to LB&I or an Industry. Tier II includes emerging issues, where the law is fairly well established, but there is a need for further development, clarification, direction and guidance on LB&I’s position.
Tier III - Industry Risk. Tier III issues are those issues that represent the highest compliance risk for a particular industry, and which require unique treatment for an industry.
Industry Directors present their potential Tier I and II issues to LB&I’s Compliance Strategy Council (CSC) for additional review and approval. If the CSC approves an issue as appropriate for Tier I or Tier II, the CSC will assign the issue to an “Issue Owner Executive” (typically, the Industry Director who surfaced the issue in the first place).
Issue Owner Executives are accountable for designing and implementing strategies for the identification, development and resolution of their assigned compliance issues.
Once an issue is assigned to a particular tier, it generally will remain in that tier. However, an issue that has been fully researched, developed and resolved may be moved from “active” status in its tier to a “monitoring” status in the same tier. Monitoring is described below.
LB&I is committed to maintaining internal and external transparency of the process and authority for examining and resolving the issue. IRM 4.51.5, “Industry Focus and Control of LB&I Compliance Issues” and IRM 4.51.6, “Issue Management Process Guide” provide additional details on Issue Tiering and process management.
Upon designation of an issue as a Tier I or Tier II issue by the CSC, the Issue Owner Executive will generally establish an Issue Management Team (IMT). Issue Management Teams are responsible for researching and developing fact patterns associated with specific tiered issues and developing resolution strategies and tools.
The IMT typically consists of LB&I specialists, technical advisors, representatives from LB&I Division Counsel and Chief Counsel, and others as needed. Technical advisors and specialists bring knowledge and expertise critical to addressing the issues.
Appeals may participate in IMT discussions to stay informed on the technical position of exam and Counsel, but no specific cases are discussed with Appeals within the IMT.
When an exam team identifies a taxpayer with a Tier I or II issue, an attorney assigned by Division Counsel will work with the team on the case. The exam team and local Counsel generally will manage all taxpayer interactions. In some cases, however, taxpayers may also have contact with the technical advisor and/or industry counsel for the particular issue, or with the Issue Owner Executive or area counsel.
Ensuring Flexibility and Efficiency
There’s no “one size fits all” approach to managing tiered issues.
LB&I tailors its resolution strategy for each tiered issue to the unique characteristics of the issue.
Issue Management Teams are encouraged to seek input from external stakeholder groups in developing industry issue strategies. This helps the IMT better understand the issue from the stakeholder/taxpayer perspective.
A key goal is to give the Field latitude to exercise as much judgment and authority as possible. Therefore, Issue Owner Executives should control only those aspects absolutely necessary to ensure effective, consistent resolution of the issue.
Taxpayers should address questions pertaining to their specific cases through their examination team and management chain under LB&I’s normal Rules of Engagement.
In some instances, it may be appropriate for taxpayers to discuss general – but not case-specific – questions regarding an issue with the Issue Owner Executive. Such communications should be fully transparent and with the goal of ensuring that any direction or guidance issued on the issue considers all relevant facts.
Elevation of an issue into Tier I or Tier II does not necessarily mean the issue will be automatically disallowed on all returns. Whereas listed transactions are automatically subject to examination, Tier I high-risk issues are not necessarily examined and/or disallowed. Determinations as to the allowability of particular issues are made as they are fully developed.
Once an issue has been fully developed and a resolution strategy prepared, it will move from “active” status in its tier to a “monitoring” status in the same tier. LB&I will not “demote” issues from higher-priority to lower-priority tiers.
An issue will be considered eligible for monitoring status when the IMT has:
Identified the universe of returns that are likely to contain the issue;
Provided the necessary direction to the Field;
Issued appropriate procedural guidance and legal position;
Developed a resolution strategy;
Determined that there is no need to continue the heightened level of oversight.
LB&I’s official Tiered Issues listings will continue to reflect all active Tier I, II and III issues, and in addition will show those that have been placed in monitoring status.
While issues in monitoring status may no longer require the focused attention of an Issue Management Team, they still need to be managed in accordance with established guidance whenever they appear on a tax return.