Peat Marwick Says Early Referral Procedure Will Expedite Case Resolution.

Sharon Katz-Pearlman and Ken C. Jones of KPMG Peat Marwick, Washington, have commented that the IRS's proposed early referral procedure will help to expedite case resolution, particularly when one significant issue will dictate the settlement for the entire case. However, they suggest that the IRS Appeals Office expand the procedure beyond coordinated examination program (CEP) cases. According to the authors, a pilot early referral procedure for non- CEP cases in limited locations would allow Appeals to better evaluate the overall effectiveness of the program. They also suggest assigning CEP early referral significant issues to Appeals team chiefs, suspending the CEP pre/post-conference procedures for CEP early referral issues, limiting communication between Appeals and Examination on unsettled early referral issues, permitting the subsequent reconsideration of unsettled issues, encouraging the early issuance of Form 5701, and permitting the early referral of potential Joint Committee cases.

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January 14, 1994

James A. Dougherty

Thomas C. Louthan

Dear Mssrs. Dougherty and Louthan:

The following comments are submitted with respect to the proposed Early Referral procedure. (Note that we are not requesting the opportunity to present oral comments at the hearing scheduled for January 28, 1994.) We share your optimism that for certain cases, particularly where settlement of one significant issue will likely dictate (or at least strongly influence) settlement for the entire case, the proposed Early Referral procedure should help expedite case resolution. We offer the following specific comments with respect to the proposed Early Referral procedure and Announcement 93-144.

APPEALS SHOULD CONDUCT A PILOT NONCEP EARLY REFERRAL PROGRAM. Appeals has proposed in Announcement 93-144 that the Early Referral procedure be initially limited to Coordinated Examination Program cases. The use of the term "initially" implies that Appeals may, at some point in time, consider expanding the Early Referral procedure to a wider universe of cases. In that regard, we recommend that Appeals conduct a test of the Early Referral procedure for nonCEP large cases in one or more districts. Certainly the Service's goal of expediting the resolution of key issues in multiple issue large cases is not limited to CEP cases, and there are a great many larger complex, multiple issue cases that are, for various reasons, not included in CEP. Since we suspect that a limited number of CEP taxpayers will utilize the Early Referral procedure at any one time, the addition of a pilot Early Referral procedure for nonCEP cases in limited locations would enable Appeals to more quickly and thoroughly evaluate the overall effectiveness of the Early deferral procedure as a supplemental tool to expeditiously resolve cases.

TEAM CHIEF SHOULD CONSIDER COMPLEX/SIGNIFICANT EARLY REFERRAL ISSUES. CEP cases are generally assigned to Appeals Team Chiefs under criteria set forth in IRM 8135, and we recommend that Appeals consider whether CEP Early Referral significant issues will similarly be assigned to Team Chiefs. Early Referral issues will often be complex and involve large proposed adjustments -- precisely the types of issues that Appeals Team Chiefs have expertise and experience in resolving. Moreover, it is probable that in some cases Examination will complete the CEP audits before Appeals has completed consideration of the Early Referral issues, thereby necessitating assignment of the cases to Team Chiefs.

CEP PRE/POST-CONFERENCE PROCEDURES SHOULD NOT APPLY. CEP cases are subject to the Pre/Post Conference procedures set forth in IRM 8628. Announcement 93-144 does not indicate whether such conferences will be held for CEP Early Referral issues. Given that the primary objective of the Early Referral procedure is to expedite the resolution of cases, we believe that the mandatory pre/post conference procedures should not apply. Additionally, the prospect of communication between Examination and Appeals during the course of an ongoing audit could inhibit taxpayers from utilizing the Early Referral process.

COMMUNICATION ON UNSETTLED ISSUES SHOULD BE LIMITED. We believe that it will be critical to taxpayer acceptance of the proposed procedure for Appeals to delineate more specifically what type of communication will occur between Appeals and Examination in instances where Early Referral issues are not settled. Announcement 93-144 indicates that Appeals will return the Early Referral file along with "a copy of the Appeals Case Memo on the issue" to Examination. Taxpayers will understandably have a great deal of concern about the contents of the Appeals Case Memo if they perceive that the Appeals Officer has recommended to Examination that it develop additional facts or pursue additional theories with respect to the Early Referral issue. Stated more directly, the purpose of the Early Referral procedure should not be to permit Appeals to provide audit guidance to the Case Manager.

PERMIT SUBSEQUENT RECONSIDERATION OF UNSETTLED ISSUES. Announcement 93-144 appears to permit subsequent reconsideration of an unsettled Early Referral issue by Appeals. We recommend that the procedure specifically provide that Appeals may subsequently revisit the issue when considering the entire case. Because the Early Referral issue will typically be significant, settlement of that issue will often be the key to resolving the entire case; therefore, the inability of the taxpayer and Appeals to resolve the issue during the Early Referral process should not preclude reconsideration by Appeals at a later date.

ENCOURAGE EARLY ISSUANCE OF FORM 5701. Announcement 93-144 outlines a scenario whereby the CEP taxpayer will initiate an Early Referral request, the Case Manager will act on that request, and lastly, if Examination and Appeals agree, Form 5701 will be prepared and issued. As a practical matter, we believe that it is unrealistic to expect that taxpayers will request Early Referral without having seen a written explanation of the proposed adjustment in Form 5701. /1/ It is fairly common (although clearly not ideal) in CEP examinations for the Forms 5701 to be issued at or near the end of the audit and in those situations Early Referral will not be feasible.

In addition, we note that in CEP examinations, typically many issues are developed simultaneously, information gathering is an ongoing process, and Examination is often hesitant to finalize its position on issues until near the end of the audit. We submit, therefore, that in many CEP cases it will be important for the taxpayer to formally indicate its interest in seeking Early Referral of an issue well before the completion of the examination. Assuming that the Case manager agrees, there would then be a mutual understanding that the audit team and the taxpayer would cooperate in order to conclude the examination of the issue and allow the Early Referral to go forward. Unless the taxpayer believes that the process will truly expedite the resolution of the case, there will be no impetus to utilize the Early Referral process.

PERMIT EARLY REFERRAL OF POTENTIAL JOINT COMMITTEE CASES. Announcement 93-144 indicates that the Early Referral procedure is not available for Joint Committee cases. As a threshold matter, we submit that often it will be difficult or impossible to determine whether Joint Committee review will ultimately be required. Additionally, we do not understand why the possibility or necessity of Joint Committee review prior to the payment of a refund should have any bearing on the applicability of the Early Referral procedure since, whether review is required or not, the objective is the same -- to expedite the ultimate resolution of the case.

Sincerely,

Sharon Katz-Pearlman

Ken C. Jones

FOOTNOTE

/1/ The announcement indicates that the Early Referral request should "fully describe the taxpayer's position with regard to the issue(s)." Presumably the taxpayer need only summarize its position, and, if the Early Referral request is approved, the taxpayer's detailed written protest for the issue will follow the issuance of Form 5701. Requiring a detailed discussion of the issue up front could deter taxpayers from making Early Referral requests.

END OF FOOTNOTE