A Publication of Pepper Hamilton LLP
The Demise of the IRS Tiered Issue Program
Friday, November 30, 2012
In news greatly welcomed by the tax community, IRS Large Business and International (LB&I) Commissioner Heather C. Maloy announced in a directive issued in late August that the IRS is ending its Tiered Issue Program.1 Practitioners’ experiences were that the Tiered Issue Program frequently delayed IRS audits and administrative appeals and greatly increased taxpayer costs in resolving disputes with the IRS.
The Tiered Issue Program was initially created to combat the proliferation of marketed tax shelter transactions. The program was implemented to create uniform, coordinated positions and ensure that all taxpayers in the same shelter were treated consistently.
The IRS, however, expanded the program beyond tax shelters and listed transactions. If the IRS identified an issue as a Tier 1 issue, the national issue coordinator’s approval was needed before the IRS would enter into a settlement of the issue with a taxpayer. The national issue coordinators also exercised varying degrees of oversight of Tier 2 and 3 tax issues.
By requiring the approval of the national coordinator, the IRS’s program took the decision-making authority away from the IRS’s frontline employees who were dealing directly with the taxpayers. Taxpayers and their representatives were not given access to the ultimate decision makers in most cases. Attempts to negotiate settlements were frustrated because the agents and appeals officers acted as go-betweens from the taxpayer and the national issue coordinators.
This created a great deal of frustration in the tax community and generally increased the time and costs for taxpayers to settle tiered issues. The tax community has complained loudly about the Tiered Issue Program and is rejoicing in its demise.
To replace the Tiered Issue Program, Commissioner Maloy announced that the IRS is implementing a "knowledge management network." There will be two separate programs for domestic and international issues. For domestic tax issues, the IRS will establish Issue Practice Groups (IPGs), and for international tax issues the IRS will establish International Practice Networks (IPNs).
The IPGs and IPNs will be staffed with technical experts from the IRS, and will foster the sharing of knowledge across LB&I and Chief Counsel. The new programs are intended to differ from the Tiered Issue Program by not taking the ultimate decision-making authority away from the frontline IRS agents and appeals officers who are dealing directly with the taxpayer and its representatives.
In contrast to the issue coordinators in the Tiered Issue Program, the members of the IPGs and IPNs will act in an advisory role rather than controlling the settlement of the issue. The frontline employees will retain control and settlement authority over the tax issues even when they consult with a member of the IPG or IPN.
The IRS has promised greater transparency in the IPGs and IPNs, and we are hopeful that taxpayers will have access to the issue experts when that becomes necessary. This should facilitate the timely resolution of audits and decrease costs.
The tax community looks forward to the implementation of the IRS’s new knowledge management networks, and remains hopeful that the new program will foster greater cooperation between the IRS and taxpayers.
1 IRS Directive LB&I-4-0812-010.
Kevin M. Johnson
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Internal Revenue Service rules require that we advise you that the tax advice, if any, contained in this publication was not intended or written to be used by you, and cannot be used by you, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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