Business taxpayers can now benefit from yet another alternative tax issue resolution approach offered by the IRS. The new tool is the pre-filing agreement (PFA) program, which lets a taxpayer request an advance IRS examination of specific issues before filing a tax return. Revenue procedure 2001-22, dated January 22, 2001, is effective immediately and contains the objectives and guidelines of the PFA process that eligible taxpayers can follow to apply for inclusion in the program. Eligible taxpayers are businesses with assets of more than $5 million that are under the jurisdiction of the new IRS Large and Mid-Size Business (LMSB) division.
The LMSB PFA program is designed to enable eligible taxpayers—whether or not they are under IRS audit—to resolve the tax treatment of issues the agency is likely to challenge or dispute in a post-filing audit before the business files next year’s tax return (including extensions). Pre-filing examinations are expected to resolve issues more effectively and efficiently than a post-filing examination that takes place several years after the return is filed. This means both the taxpayer and the IRS will have easier access to the records and personnel relevant to the PFA issue under audit.
In addition to speeding up the resolution process, there are other significant benefits when a company elects to participate and is accepted into the PFA program.
The program minimizes the contentious environment that often exists between the taxpayer and the IRS during an audit.
The business avoids a time-consuming and costly IRS audit.
IRS and company personnel are used more effectively.
Less CPA time is devoted to resolving the issue.
The company can finalize its tax liability exposure sooner.
The taxpayer can file a tax return that complies with all applicable rules.
For example, say your company completes a significant acquisition or other transaction during calendar year 2001 that will be reflected as a material item on the company’s 2001 tax return. Because of the nature of the item, the IRS may be expected to challenge it in a future audit. The PFA program would be an excellent way to resolve the issue up front before the company files its 2001 return in 2002.
PFA application process. LMSB taxpayers currently under IRS examination on another matter should contact the IRS team manager supervising the audit to initiate the process and work with the exam team to prepare the formal PFA request. Taxpayers not being examined should prepare the PFA request based on the guidelines in revenue procedure 2001-22 and forward it to the address indicated in the revenue procedure. The IRS hopes to respond within 14 working days from the date of the taxpayer’s request. Participating taxpayers should establish a follow-up system with the IRS to ensure their request stays on the fast track.
The revenue procedure provides examples of both suitable and inappropriate PFA issues, as well as an exclusive list of acceptable international issues. PFA issues should relate to closed or completed transactions based on supportable and agreed-upon facts and “settled tax law.” In accepting or rejecting PFA requests, IRS screening personnel will give considerable weight to the period of time remaining from the time the company submits the PFA request to the final due date of the taxpayer’s return. The IRS’s key objective is that there is enough time available for the PFA process to be completed before the return is filed to ensure the company can report the PFA item in accordance with the LMSB PFA agreement, which should be attached to the return when filed.
To achieve the desired results, IRS personnel and the taxpayer will have to approach the examination as a team effort, using nontraditional auditing approaches that meet quality auditing standards. To save time, both sides should be involved in writing the closing agreement, as the document is subject to review and approval by IRS counsel. The IRS will assess a user fee of $1,000, $5,000 or $10,000—depending on the dollar amount of the taxpayer’s assets—on PFA requests accepted into the program.
The success of the PFA program will depend on the contributions of people on both sides of the issue and how effectively they work together to achieve a solution. The ability of all parties to maintain a positive attitude, work cooperatively and make a commitment to complete the PFA in a short period are the keys to making the LMSB PFA program a winner for businesses nationwide. For additional information, the text of revenue procedure 2001-22 is available on the IRS Web site, www.irs.gov . The checklist at right lists the steps companies will follow in the pre-filing agreement program.
—David R. Stubblefield
DAVID R. STUBBLEFIELD is manager of specialized tax applications for Jackson & Rhodes, P.C. in Dallas. Mr. Stubblefield spent 38 years with the IRS and was a member of the team that designed the LMSB PFA program. His e-mail address is email@example.com .