IRS Releases Publication 5125 Setting Forth the Exam Process for Large Cases

In late February, the IRS made available a new Publication 5125, Large Business & International (LB&I) Examination Process, which is effective beginning May 1, 2016.

The publication outlines the new Examination Process, which I outlined in my previous post on the IRS’s LB&I reorganization plans. This enhanced process, which includes significant input from the LB&I workforce and was jointly developed with external stakeholders, establishes roles and responsibilities for both LB&I examiners and taxpayers, and sets specific expectations with respect to claims for refund.

The primary objective of the enhanced process is to implement an issue-based examination approach, in contrast to prior guidelines that relied on tax return examinations. Perhaps the most controversial area of Publication 5125 deals with new Claim for Refund Requirements. The publication establishes a rigid and inflexible time period of 30 days after the opening conference to file a claim, requiring significant upfront planning by the taxpayer. 

Publication 5125 highlights and clarifies a number of key factors in each phase of the examination, including Planning, Execution and Resolution. Below are some of the most notable changes identified in the new guidance:
  • LB&I Examination Process Publication 5125
    • Replaces Publication 4837 (commonly referred to as Quality Examination Process, or QEP)
    • Sets clear expectations for LB&I examiners, taxpayers and representatives
    • Mandates that examiners work transparently and in a collaborative manner with taxpayers to understand their businesses and share any issues that have been identified for examination
    • Encourages taxpayers and/or their representatives to work transparently with examiners to provide an overview of business activities, operational structure, accounting systems and a global tax organizational chart
    • Establishes expectations for working collaboratively to develop audit steps and timelines, in addition to providing appropriate personnel to actively assist in the development of any issues identified
  • Claim for Refunds Requirements
    • Requires adherence to Treas. Regs.301.6402-2 and 301.6402-3
    • Defines a designated period for the acceptance of informal claims
    • Allows for early identification of issues and resource needs in the exam planning stage
  • Issue-Driven Examination Process
    • Focuses the right resources on selected issues
    • Encourages collaboration within issue teams wherein every examiner and their managers are equally responsible and accountable for the examination
    • Leverages knowledge transfer among technicians
    • Establishes case timelines as determined by the most complex issues
    • Provides examiners an optional issue-driven risk analysis form
  • Issue Development Model
    • Relies on active dialogue and fact sharing  
    • Seeks ongoing acknowledgement of facts to ensure accurate tax determinations
    • Updates IRM 4.46 to include the directives issued on the Information Documentation Request (IDR) Process
    • Introduces the “Acknowledgment of Facts” IDR process for cases heading to Appeals
Overall, this publication aims to provide taxpayers with more insight into the complex examination process, in addition to helping to set expectations. As the IRS continues to review—and, on occasion, revise—specific guidelines, it behooves organizations (including restaurants) to stay abreast of these updates and carefully consider how they may need to adapt their existing practices to align with the IRS’s expectations.

Be sure to keep up with Restaurant tax issues by following both practices on Twitter: @BDORestaurant and @BDO_USA_Tax.