Menu
Tax Notes logo

Memo Provides Guidance on Exam Process Policy Statement

JUN. 9, 2021

LB&I-04-0621-0006

DATED JUN. 9, 2021
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2021-23757
  • Tax Analysts Electronic Citation
    2021 TNTF 113-55
    2021 TPR 25-16
Citations: LB&I-04-0621-0006

June 9, 2021

Expiration Date: 06/09/2023
Affected IRM: 4.46.3

MEMORANDUM FOR
ALL LB&I EMPLOYEES

FROM:
Theodore D. Setzer
Acting Assistant Deputy Commissioner Compliance Integration
Large Business and International Division

SUBJECT:
Policy Statement 4-5 Guidance

Purpose: The purpose of this memorandum is to provide clarification on the application of Policy Statement 4-5 (P-4-5) “Restrictions on Examiners' and Specialists' Consecutive Survey or Examination Responsibilities.” This memorandum contains an overview of the June 19, 2019 revision and clarification of the issues since raised.

Overview and Background

The rationale behind P-4-5 is that the IRS is exposed to a greater risk of the appearance of bias or lack of impartiality the longer its employees maintain working relationships with taxpayers and their representatives. To guard against this risk, LB&I places restrictions on consecutive examination or survey responsibilities for the same taxpayer. This policy attempts to balance LB&I's need to manage its professional resources effectively with the need to maintain an examination process that is both efficient and free from bias.

The prior version of the policy had been in effect since 2006. The 2019 update stemmed from changes in the LB&I organization and the examination process with the advent of issue managers as decision makers. Previously, the policy only applied to case managers, not specialist or practice network managers. Specialists or practice network managers were not tracking their time on cases until the policy was revised in June 2019.

Under the prior version of the policy, an assignment of 25 staff days (or less) was not considered part of the examination (not to include survey actions). Any part of a day, even if only one hour, was considered a staff day. As revised, the policy now considers any assignment of 200 hours or less per examination cycle not to be part of an examination. This is sometimes referred to as “exception time.”

Since December 2019, the LB&I Policy Office has received numerous questions and requests for guidance. Different interpretations have emerged about P-4-5's applicability to managers and specialist managers, and whether the policy applies “retroactively.” Further complicating implementation is the lack of technology to assist managers in tracking exception time and start dates in IMS (Issue Management System). This memo addresses issues and defines scope and applicability for LB&I.

Issues

A) Lack of Technology to Support Time Tracking: IMS doesn't track manager start dates or time for P-4-5. There is no Issue Based Management Information System (IBMIS) automated report that shows manager P-4-5 time on a case or a start date. This is not a new issue; LB&I has never been able to track manager P-4-5 exception time or length of time on cases. Case managers have used manual templates. With new practice areas now subject to P-4-5, this limitation has received new attention.

Resolution — IMS Change Request: We are working to secure programming changes within IMS to facilitate manager P-4-5 start date tracking. The earliest this could be fixed with an IMS change is October 2022. We chose not to pursue having managers charge time to cases in IMS because of the increase to administrative burden. While we are waiting for a technical resolution, managers should develop their own means of documenting their start dates and time applied.

B) Interpretations of the Transition Statement: The attached exhibit is the transition statement posted to LB&I's IRS Source in June 2019. Different interpretations have emerged regarding the intent of the transition statement. Particularly, “prospective” vs ”retrospective” time tracking when applying the 24-month transition period. Depending on the particular perspective, good supporting points on “intent” can be made on this topic on either side of this matter.

For the bulk of employees who were previously subject to P-4-5, (case managers, revenue agents and specialists on LCC cases), this was not an issue and the transition period was to allow for moving from the 25-day to the 200-hour exception.

For those not previously subject to the policy (primarily specialist managers and subject matter experts within the practice networks), there was no requirement for them to retrospectively compute time on a case pre-June 2019.

Resolution: While the new policy was effective on and after June 19, 2019 there is a resolution that can be implemented immediately. The policy is generally prospective in application, meaning that managers or employees not previously subject to the policy are not required to retrospectively compute whether they would have been subject to it as of the June 2019 effective date. However, if a manager or other employee can reasonably estimate they have been on a case cycle or consecutive cycles for more than five years as of the June 2022 transition date, they should transition off the case by June 2022, (extending the transition period from 2-years to 3-years) and follow the policy to determine eligibility to return to the case.

Every effort should be made to determine a good faith estimate including consulting with other managers on the case and gaining agreement as to the manager's and or employees' start date. It is not expected that anyone would retrospectively compute hours before June 2019 at this time. If a retrospective application has already been enacted, the employee (or manager) should continue with this approach. If determining a start date is not feasible, due, for example, to lack of documentation before June 2019, the policy should be followed prospectively with the start date being July 1, 2019.

C) Mechanics of the 200-hour Exception

Q1: Does the 200-hour exception apply to managers?

A1: Yes. All employees and managers are subject to P-4-5 when assigned to a case, and the 200-hour exception applies to them.

Q2: Does the policy apply to the manager only after his or her employee charges more than 200-hours to a case?

A2: No. The manager's "date of assignment" starts when the employee applies time to the case or the manager is assigned as the case or issue manager. The manager's computation of exception time is not tied to the employee's time charges. If a manager does not meet the 200-hour exception, P-4-5 applies even if his or her employee(s) did meet the 200-hour exception on the same case. A manager who may be eligible for the 200-hour exception must keep a log of case activity that reflects they fall under the 200-hour threshold on any case or directly related issue. The presumption is that P-4-5 applies; that may be refuted by documentation supporting the 200-hour exception.

Q3: If a case or issue manager assigns two agents to the same issue but neither charges 200 hours during the cycle, are the employees' hours combined to determine if the manager is subject to the policy? For example, if two specialists begin charging time to the same case on July 1, 2019, and each employee charges 150 hours, does the manager's P-4-5 clock begin on July 1, as the total hours exceed 200 hours?

A3: No. As noted above, the manager's time is not tied to the employees' time. The employee time is not aggregated and attributed to the manager. The manager uses their own time on case when applying the policy. Since both employees in the example above charged 150-hours to the case they both qualify for the exception. The manager's own activity time must not exceed 200-hours for the P-4-5 exception to apply. See Q1 above for an explanation of how the 200-hour exception applies to managers.

Q4: Isn't it likely that Practice Network technical employees or other Subject Matter Experts (SMEs) and their managers will never have to remove themselves from exam activity with respect to a taxpayer because these employees don't track case specific time when dealing with technical questions?

A4: Yes. SMEs and their managers who address technical issues that could arise in any number of examinations not as team members on a specific case addressing a specific issue would not have to factor in this time when complying with P-4-5.

However, SMEs and their managers who are involved in the application of unique facts to a highly specialized issue should consider the time spent on the effort as part of their exam activity calculation. If the SME can reasonably estimate they will be actively involved in case issues on an ongoing basis, they should be added to the issue team and charge case time in IMS to the assigned issue(s). If the SME or SME manager believe they could be eligible for the 200-hour exception, they should maintain an activity log as noted above.

D) Team Manager Involvement in Case Issues

Q1: A manager who participates in a case, but is neither the case manager nor issue manager, does not have to consider P-4-5 because the manager is not making exam decisions, correct?

A1: No. This is not correct. An issue team member or manager who participates on a case issue in any manner, (a “low threshold”) is considered a team member and subject to P-4-5. Even managers who are not case or issue managers but function as issue team members are subject to P-4-5. This manager should track time for purposes of applying the 200-hour exception.

P-4-5 determination is based on case issues controls, not the reporting chain. Therefore, a team manager, who is not the case manager, need not track time if their employee is working on the case solely under the direction of the case manager.

Due to the unique scenarios around issue specialty or practice networks, incidents have arisen since June 2019 where team managers, who are not the case or issue manager1, are actively participating on case-related issues, essentially functioning as team members2. For example, an Engineering manager may have an employee assigned to an international issue where the CBA Manager is the issue manager. However, the Engineering manager is actively participating on case related calls and directing the engineer on issue approaches. That Engineering Manager would be subject to P-4-5 if there were more than 200-hours of such participation. In some cases, as many as three or four specialty managers may be participating in case issues regularly.

Q2: Specialist managers whose employees have non-issue specific roles such as a CAS manager are not case or issue managers and therefore P-4-5 does not apply to them, correct?

A2: In general, these managers are NOT subject to P-4-5 as long as their employee is not involved with issue development or resolution.

For example, a CAS is doing their normal work of converting data provided by the Taxpayer into a LB&I preferred format. Their entire role revolves around this process and they have no role in a specific issue. The CAS employee and manager would not be considered part of an issue team and would not be subject to P-4-5. In contrast, if the CAS were, for example, involved in deriving statistical samples to develop a specific issue, then the CAS would be deemed an Issue Team Member for P-4-5 purposes. The CAS manager would then also be subject to team member aspects if they became involved with the case as well. However, if the statistical sampling work was done consistent with and analogous to converting data in the manner noted above, without involving a specific issue(s), then P-4-5 would not apply.

E) FAQ 4: When can an employee (issue team member, subject matter expert or manager) return to a case after being rotated off for P-4-5? In other words, when does the P-4-5 period or clock restart?

The P-4-5 period restarts after the employee (issue team member, subject matter expert or manager) has rotated off the case for at least one intervening examination or two surveyed or unexamined years. The employee must not be involved in any of the following types of cycles: R (Regular), C (Claim), or CAP (Compliance Assurance Process).

If the required intervening examinations have not closed, and or they overlap with the prior cycle from which an employee left due to P-4-5, and there has been a significant period of inactivity since the P-4-5 cycle, of at least 24-months, then the manager can consider requesting approval for P-4-5 deviation to restart that employee's p-4-5 start date for the next cycle.

Note: The decision to survey must be made by another examiner and/or manager.

Effect on Other Documents: This guidance will be incorporated into IRM 4.46.3, LB&I Examination Process — Planning the Examination by a date not to exceed two years from the date of this memorandum.

Contact: Questions about this memorandum may be directed to the LB&I Policy Office.

Attachment

cc:
www.irs.gov


Exhibit: Original P-4-5 Transition Statement (will be removed from IRSource)

LB&I Transition Rules for Implementation of Revisions to Policy Statement P-4-5

The purpose of this memorandum is to provide LB&I employees with guidance for the implementation of revisions to the existing Policy Statement P-4-5 (existing P-4-5). Since the last revision date (February 9, 2006), the IRS has seen many changes. Accordingly, the policy statement has been updated to reflect who is subject to the rules of existing P-4-5 and how long examiners and managers should remain assigned to a particular taxpayer. The revised Policy Statement is effective as of June 17, 2019.

Major Changes

The major changes that will apply as of the effective date of the revised Policy Statement P-4-5 (P-4-5) are as follows:

  • The P-4-5 rules apply to all managers who serve in the capacity of the case and/or issue manager.

  • The previous 25-day rule has been updated to a 200-hour exclusion. Employees who spend 200 hours or less per examination cycle are not subject to P-4-5 including; Issue Team Members, Tax Law Specialists, Subject Matter Experts, Senior Revenue Agents or other advisors. Therefore, employees' who spend 200 hours or less on an open examination will not have that time considered in determining the (60) months limitation for the purposes of rotation requirements under P-4-5.

Transition Rules

For managers not previously subject to P-4-5 rules, a 36-month transition period from the effective date (transition period) is provided as follows:

  • For in process open examinations, specialty managers who are currently serving as the issue manager must plan a transition that will bring them into compliance with the new policy within the transition period.

For all new examinations or cycles started as of the effective date, the revised Policy Statement will be applicable for all relevant LB&I Employees.

If you have questions related to the P-4-5 program, please contact your manager or Practice Area analyst assigned to administering the P-4-5 for your area or search for "P-4-5 Overview" on IRS Source.

FOOTNOTES

1Please see IRM 4.46.1.1.3.3 (12-13-2018): Managers of Team Members Who Are Not Designated as the Case Manager or Issue Manager

2Please see IRM 4.46.1.1.3.5 (12-13-2018): Issue Team Member Roles and Responsibilities. Among other things relevant in this context, issue team members, (in IRM numbering)-11. Participate in the planning, development and resolution of the tax issue(s) they are assigned; 12. Plan, develop and lead in issue presentations to the taxpayer for their assigned issues; 13. participate in presentations made by the taxpayer for their assigned issues; 14. Participate on issue team(s) and 20. Collaborate with issue team(s) on proposed adjustments (Forms 5701/886-A) to ensure the appropriate review occurs and coordinate discussions with the taxpayer; 21. Prepare a timely rebuttal to the taxpayer's protest and ensure a copy is provided to the taxpayer; 22. Coordinate with the TC and other issue team(s) when preparing the Form 4665, Report Transmittal, to Appeals; 23. Coordinate and support issue exit strategies.

END FOOTNOTES

DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2021-23757
  • Tax Analysts Electronic Citation
    2021 TNTF 113-55
    2021 TPR 25-16
Copy RID