Remarks of IRS Chief Counsel Donald L. Korb at the May 2006 American Bar Association Section of Taxation Meeting
“Case Specific Legal Advice: Adapting the Process to the Service’s Changed Business Practices”
May 5, 2006
I have been Chief Counsel for a little bit longer than two years now. During that time, we have made a number of changes to our internal processes and procedures.
One example is the Matrix Management structure which I discussed in a speech on March 3rd at the Federal Bar Association’s Annual Tax Conference. You will recall that a significant feature of this structure is the introduction of the managing counsel position in each of our field offices.
We have also added a Senior Counsel for Legislation to our staff to work on proposed tax legislation with the Treasury Office of Tax Policy, the IRS Office of Legislative Affairs, and the tax writing committees on the Hill.
Another example is our revitalized new lawyer recruiting effort we call “A Great Place to Start.”
Today, I want to share with you another change, which is our plan to revitalize our Technical Advice Memorandum program as well as the balance of the process by which we in the Office of Chief Counsel, both in the field and in the national office, provide technical legal advice to IRS personnel and taxpayers during the course of tax examinations.
Traditionally, over the years we have provided this advice -- which I will call “case specific” advice in contrast to so-called published advice (i.e., regulations, revenue rulings, notices, etc.) -- in various forms, including Technical Advice Memoranda (TAMs), Technical Expedited Advice Memoranda (TEAMs), Field Service Advice (FSA), and other formal and informal written legal advice issued to revenue agents, Industry Directors, and other IRS personnel. You may recall that last year I asked Deputy Chief Counsel (Operations) Don Rocen to lead an internal task force to study the case specific advice process. I did this because it became clear to me that the IRS was changing its examination practices to vastly accelerate the time in which exams are conducted. I was concerned that, if we in Counsel did not adapt to these changed practices, we would be unable to provide appropriate legal advice that kept pace with our client’s accelerated work schedules.
Last month, the task force (which was so ably led by Lon Smith with a great deal of assistance from Andy Keyso) reported back to Don and me with its findings and with recommendations for improving the legal advice process. I agreed with the recommendations and I asked the task force to share the recommendations with the Operating Division executives for their input, which they did. Having once served as Chair of the ABA Tax Section Administrative Practice Committee, I am quite mindful that tax practitioners also are an integral and important part of the examination and tax controversy process. Of course, so are taxpayers. While I think the task force’s recommendations will be welcomed by taxpayers and tax practitioners, I am very interested in your feedback on our approach and that’s the reason for my talk here today.
Before I describe the recommendations, let me provide some background on how the changed IRS examination practices have affected Counsel’s internal legal advice program. As you know, the IRS in recent years has significantly modified its approach to conducting examinations of tax returns. These modifications were made in an effort to reduce cycle time, improve currency, and increase audit coverage.
As LMSB Commissioner Debbie Nolan has stated, currency and cycle time issues have been longstanding areas of concern in large corporate tax examinations. Currency problems -- that is, working cases that are multiple years old -- tend to inhibit LMSB’s ability to quickly identify emerging issues, including abusive tax avoidance transactions. Cycle time measures the duration of a tax examination. High cycle time on any particular case ties up examination resources and thereby affects the ability of the IRS to examine other taxpayers. Of course, high cycle time and currency problems impose administrative burdens on taxpayers as well.
How often do you see the situation where the people in a corporate tax department who worked on the transaction at issue have long since left the company to move to another job? How often is it impossible to figure out what happened and why because between the time the transaction was finalized and the commencement of the examination, a merger or acquisition has taken place involving the taxpayer, and all of the players have either changed jobs or retired and none of the relevant documents can be located?
Both LMSB and SBSE have introduced examination tools aimed at reducing cycle time and improving audit currency. In LMSB, these tools include the pre-filing agreement (PFA), in which taxpayers and the IRS come to a formal agreement on the treatment of specific tax issues before a return is filed; the limited issue focused examination (LIFE), in which the IRS conducts a risk analysis and limits its tax examination to specific material issues determined in the analysis; the compliance assurance process (CAP), in which taxpayers and IRS agents work together to examine transactions in “real time” during the taxable year with an eye toward reaching agreement on the taxpayer’s tax liability before the tax return is filed; and fast track appeals, in which the IRS Appeals Division works in conjunction with the exam team and taxpayer to expedite settlement of remaining issues of controversy.
These enforcement initiatives are showing measurable results in reducing cycle time and improving audit currency. It has been reported that audit cycle time has been reduced from 37 months to 29 months for the very large coordinated industry taxpayers. For midsize taxpayers, audit cycle time has dropped from 16 months to 13 months. The level of currency has gone from 57 percent of cases to 71 percent.
This is all good. But, as you can appreciate, the success of these initiatives raises issues for the Office of Chief Counsel. In the past, when IRS audits lagged significantly behind the current year and cycle time was not a concern, Counsel was able to consider issues raised on audit using a slow and cautious approach.
Unfortunately, if we in Counsel continue to conduct business as we have in the past, we risk alienating ourselves from the tax administration process. For example, we sometimes see a reluctance on the part of the field to seek advice from the national office, in particular through the TAM process. Agents, rightly or wrongly, may perceive that the national office does not respond timely enough to enable agents to meet cycle time goals. Also agents may opt to seek advice from field counsel only, and thus avoid formally seeking the advice of the national office. While the fact that field counsel is involved is certainly appropriate, and in many instances sufficient, there are other situations where national office counsel not being involved in a particular case is not the optimal way to administer the tax system as a whole.
Among the most important of my goals as Chief Counsel is to make sure we help the client (the IRS) achieve its goals. I am determined to ensure that Counsel, both in the national office and in the field, addresses these issues and that we appropriately use our case specific advice process to meet the changing needs of the client. I believe Counsel’s participation throughout the examination process is crucial because it is only with the involvement of the national office’s technical subject matter experts that the IRS can develop consistent nationwide legal positions. Further, through the national office’s involvement in advising the field on transactions identified during audit, the national office lawyers learn of emerging issues and then follow up by publishing guidance for all taxpayers addressing those issues.
It is for these reasons that we assembled the task force last year. The task force consists of a selection of executives and managers from our various Divisions. The task force conducted an intensive study into the case specific advice process in order to identify and recommend improvements that could be made to ensure that we are meeting our client’s needs for timely and accurate legal advice. It is instructive to highlight some of the issues identified by the task force.
First, the number of TAMs has declined steadily over the years, and precipitously since the mid-1990s. In the early 1970s we received approximately 1,400 TAM requests annually. By the mid to late-1990s that number was down to between 200 and 300 annually. More recently, from 2001 through 2005, the number of TAM requests received has hovered between 70 and 125 per year. The task force concluded that the time currently necessary to obtain a TAM does not permit examination personnel to resolve their cases within exam’s cycle time goals, and therefore TAMs are not being requested to the extent they have been in the past. Not surprisingly, the task force found that field counsel now rely more heavily on telephone advice from national office counsel than on written advice. Thus, in situations where examination teams previously would have requested a TAM, they now seek advice from field counsel who, in turn, contact national office counsel by phone for assistance.
Another problem identified is that oftentimes TAMs appear to be used as more than what they were originally supposed to be used for, i.e., a vehicle for resolving one or more issues in a specific case. It appears that TAMs are now sometimes used as a means of obtaining advice that can be applied not just in one case, but instead across a group of cases in a single industry. As you know, the LMSB Operating Division is organized along industry lines today. So, it should not surprise you to learn that the reasoning in a TAM requested in one case might be applied to other examinations throughout the same industry. Once TAMs are used in this way, the process of issuing a TAM becomes much more cumbersome and time consuming, since national office counsel feel the need to consider how the TAM might be applied to factual patterns that differ from one presented in the particular case that is the subject of the TAM. Where there is the potential for the result in the TAM to be misapplied where it is used to dispose of other cases, national office counsel may be reluctant to issue the TAM without briefing the issue to at least the Associate Chief Counsel level. Likewise, the Associate Chief Counsel may feel the need to brief a TAM to the Deputy Chief Counsel or even me. Obviously, this process adds time that examination teams cannot afford, and is part of the reason why the teams often choose not to request a TAM.
A third problem the task force identified is that some examination personnel and field counsel believe that there is no real mechanism for obtaining strategic or case development advice from national office counsel, and either they seek advice only by telephone, or in many cases, do not involve national office counsel in a case at all. At one time, national office counsel provided strategic and case development advice through the use of what was known as Field Service Advice Memoranda. With the reorganization, there was some confusion as to which office, field or national office, should give this type of advice and, as a result of that confusion, some examination teams thought that this type of advice from our technical subject matter experts in Washington was no longer available to them. Because of that perception, I am concerned that today many examination teams feel that they lack the ability to approach national office counsel for strategic or case development advice on an issue.
One final problem I want to mention is that taxpayers and their representatives are quite often responsible for the length of time it takes our office to issue a TAM. It seems to have become increasingly common in recent years that a taxpayer will decide not to participate in the field’s TAM request at the outset, only to request a conference-of-right later in the process and then use the conference to present information that was never presented to the examination team. This approach can often require national office counsel to reconsider its entire analysis, and consequently, negatively impacts the Service’s efforts to reduce cycle time and improve currency in the examination process. We in Counsel cannot delay our advice to the field simply because the taxpayer chooses not to participate until the end of the process. We have a responsibility to our clients to support them in their enforcement and service activities by providing meaningful and effective assistance as early in the process as possible.
Now, let me tell you what we are going to do to address these problems. The task force has recommended that the Office of Chief Counsel establish three ways for us to provide legal advice to the client. The first way is to create a streamlined TAM procedure to provide advice that results in a legal determination in a specific taxpayer’s case. The second way is to have an advice process which provides strategic or case development advice to examination personnel. The third way is for an Associate Chief Counsel to provide generic advice that may be applied to a group of taxpayers, such as an industry-wide segment. Which of these three ways is appropriate in any particular case depends upon the stage of the examination and the purpose for which the advice is requested. Let me elaborate on each of these three ways to provide legal advice.
The first is the TAM. TAMs serve an important role in the resolution of disputes between taxpayers and IRS personnel, and we need not only to keep them in our toolbox, but to actually enhance their role in the advice process. However, as I mentioned earlier, the current process has built-in impediments to timeliness. So, we are going to streamline the procedures for the TAM process so that we can issue them faster. For example, we will eliminate the mandatory conference of right in cases where the taxpayer has not participated in the TAM from the outset. Of course, we will retain the right for the national office to grant a conference in appropriate circumstances, but there will be no right to a conference for taxpayers who did not participate up front. We will also shorten the various time frames for taking certain actions during the TAM process. For instance, we currently ask our Associate Chief Counsel offices to issue TAMs within 180 days. We want them now to target 120 days. Also, we currently give taxpayers 21 days to submit additional information. We want to shorten this to 10 days.
The second is something we are referring to as “Case Specific Legal Advice.” This type of advice is similar to the advice that field counsel provides on a regular basis to IRS personnel and what some Associate Offices have been providing to field counsel and IRS personnel as Chief Counsel Advice, or CCAs. What we are stressing now is the importance of providing to IRS personnel, by either field counsel or national office counsel, timely and specific strategic or case development advice related to a specific taxpayer’s case. The emphasis now is to give this targeted advice when it is needed most in the examination process. This advice is to be issued within a 90-day time frame, which is similar to the time frame currently for legal advice from the national office. This 90-day time frame enables national office counsel to appropriately prioritize this type of advice.
The third is something we are calling “Generic Legal Advice.” This is a way we can provide non-taxpayer-specific advice to an industry director, service center program manager or other national program manager for the purpose of resolving audit issues that affect multiple taxpayers in a particular industry. This advice would have executive-level signature and would represent the Office of Chief Counsel’s view of the law. We think this form of advice is crucial to our legal advice process, and let me explain why. I mentioned earlier how the application of TAMs across entire industries impedes our ability to issue TAMs in a timely manner. If we can provide Generic Legal Advice, I anticipate the TAM process can operate more efficiently in those cases for which it was truly intended. That is to say, responses to TAM requests need not be delayed while national office attorneys consider how the response might be applied to various other factual situations if there is another way to address those other situations. The TAM can be issued timely, and the Associate Chief Counsel can subsequently issue Generic Legal Advice if he or she thinks broader advice is necessary to resolve the issue in other examinations occurring across the industry.
At this point, I want to make clear that written memoranda providing advice under each of these three methods by national office counsel to IRS or field counsel will be publicly available after issuance to the extent required by Section 6110 of the Code.
Before I finish, I want to elaborate on one last point. You will recall that of the three ways to provide legal advice I have described, two -- Case Specific Advice and Generic Legal Advice – will be internal to the Service and in nearly all cases would not involve formal taxpayer participation, while the third form -- the TAM -- would, as is now the case with TAMs, include substantial taxpayer involvement. I suspect that there are some who will say that this is our attempt to exclude taxpayers in some situations from the legal advice process. I want to emphasize that this is not the case. I believe that there is a clear justification for providing legal advice to our client that generally does not include taxpayer involvement.
I believe that it is appropriate and understandable that the Service should be permitted to formally develop its theories and positions on key issues confronting it within its own organization without having to formally consult taxpayers and involve them in its internal discussions. In this regard, I submit that the agency and its lawyers are behaving no differently than taxpayers and their counsel behave when they debate among themselves the strengths and weaknesses of legal positions they are considering advancing on behalf of the taxpayers. While it is typical that the positions likely to be advanced by the Service are considered and evaluated in those internal discussions by taxpayers and their counsel in order to adequately test the strength of the proposed positions, it is never the case that the Service itself is involved in those discussions. Likewise, it is my expectation that, in the Case Specific and Generic Legal Advice, the Service and Counsel will seriously consider and evaluate positions that they believe taxpayers are likely to advance and thereby test the strengths and weaknesses of potential Service arguments. Thus, we will continue to apply independent legal judgment and consider the strengths and weaknesses of our client’s arguments. Furthermore, our Case Specific Legal Advice will contain appropriate caveats to advise readers that the advice is not a TAM, that it is based on facts provided solely by IRS personnel, and that the legal conclusion might differ if the facts are not as presented. In this light, it does not seem unfair or inappropriate for such advice to be developed internally and without formal taxpayer involvement.
However, I submit that such a conclusion depends to a substantial degree on making available to taxpayers an improved, streamlined, TAM process. This process must include among its characteristics an honest and forthright effort by the Service and Counsel to reevaluate any positions formulated in either the Case Specific or Generic Legal Advice in light of specific arguments advanced by the taxpayers and their representatives during the TAM process. Consequently, it will be essential that we involve in the development of any TAM, the key personnel who were involved in the internal development of the Service position on the issue and who have the authority, the temperament, and the charge to fairly and honestly consider the arguments of taxpayer counsel and, when appropriate, to reconsider the proposed position set forth in the Case Specific or Generic Legal Advice on the issue in light of those arguments. I want to avoid the criticism that the positions developed without taxpayer involvement were in effect “set in stone” and taxpayers were effectively precluded from successfully challenging those positions through the TAM process. In short, in many cases, the TAM procedure can serve to effectively test the positions developed in a Case Specific or Generic Legal Advice and thereby allow for appropriate taxpayer involvement in the development of such administrative positions, as it applies to their particular facts.
I’ll conclude my remarks this afternoon by noting my view that providing legal advice to the IRS is today as much a priority as published guidance or litigation, and that the IRS’s business priorities are Counsel’s priorities as well. All of us here, taxpayers, tax practitioners, government officials, have an interest in a tax system that operates fairly and efficiently. I welcome your feedback on whether we’re on the right track as we implement the recommendations of the task force and provide these three forms of legal advice.