The IRS, within the last year or so, has begun issuing a final Information Document Request that requests the taxpayer to agree to underlying facts relating to an issue under audit (the Facts IDR).
My general advice to clients is to not respond to the Facts IDR.
The Facts IDR is problematic in that you generally do not have the Agent’s Notice of Proposed Adjustment (NOPA) when you are asked to agree upon the facts. Consequently, you are not yet in a position to know the Agent’s legal theory for proposing an adjustment on the tax issue under consideration. It might not be clear whether the facts being set forth are even relevant to the disputed issue. In addition, a list of agreed-upon facts can be used to write many alternative narratives (not alternative facts!), and different conclusions might be drawn from the same facts.
One alternative is to respond that you will comment on the facts after receiving the NOPA or the 30-day letter with the Agent’s proposed adjustments. The NOPA will contain the Agent’s statement of the facts in a narrative form, and his or her legal theory for proposing the adjustments. It is better to wait to have the facts put in this narrative context before commenting on them.
The more important issue is that the company should not let the IRS Agent control the narrative by dictating the list of facts that are relevant to the issue. Frequently, IRS agents misunderstand facts, take facts out of context or misstate the relevance of a fact to a particular tax issue. In all cases, you should present your own narrative of the facts in the Protest to any disputed issues that will be the subject of an IRS administrative appeal. Tax controversies are very often won or lost based on the factual narrative, and taxpayers should not cede that narrative to the IRS Agent.
The IRS’s motive in issuing the Facts IDR appears to derive from its position that IRS Appeals Officers are not fact-finders and that they should not have a role in developing the facts. An IRS Appeals Officer will return the case to the IRS Exam team if the facts relating to the disputed issues are not fully developed.
There is, however, no requirement that the taxpayer agree to the IRS’s version of the facts. The best practice is to set forth your version and factual narrative in the Protest, presenting the relevant facts in the best light to support your position taken on the tax return.
Be sure to provide all relevant facts and documents to the Agent either during the audit or as part of your Protest. If the taxpayer raises new issues at IRS Appeals, the Appeals Officer might return the case to the Exam team, or at least allow that team the opportunity to respond to any new facts.
Have a question? Contact Kevin Johnson
Your comments are welcome!
5 comments on “How Should A Company Respond To IRS’s “Agreement of Facts” IDR?”
Thank you, Kevin, this is a great article!!!
Hello David,
Thank you for your comment. I am glad that you found the article helpful.
Regards,
Kevin
Kevin, while I can appreciate your logic and where you are coming from, this issue should be addressed between the Tax Manager and the IRS Team Cooridinator. The purpose of this procedure is to reduce the length of the audit cycle and to ascertain the facts to eliminate the case being returned from Appeals (assuming it does not meet the criteria of settlement authority by the Case Manager). As a former IRS Team Coordinator, I can tell you that you are on a slippery slope with that approach. The agent can always summons the taxpayer representative (Tax Manager or other duly authorized representative and place him/her under oath to provide testimony regarding the issue. At that point, whatever testimony is provided, the taxpayer is bound to that position in an Appellate Conference. While that procedure is not the most desireable for all parties involved, it creates a number of obstacles for the taxpayer, not the least of being a potential violation of Circular 230 in providing records and testimony on behalf of the taxpayer. The intent of this IDR is to reduce audit cycle time as well as asceratining the “correct facts” of the particular issue.
This entire approach was developed to provide transparency of the issue as well as the IRS audit teams’ approach to resolving the issue.
Hi David,
I appreciate your response, and appreciate what the IRS is attempting to do in obtaining an agreement on the facts. However, a tax audit is an adversarial process and the IRS Exam Team is trying to support its position in its statement of facts. That can lead to a bias in which the IRS’s statement of facts are slanted against the taxpayer’s position.
I don’t think it is a viable option for the IRS to attempt to issue a summons to force a taxpayer to agree to its statement of facts. The Justice Department would need to agree to enforce the summons, and that process would add much more time to the audit. Again, as I stated, a taxpayer is under no legal obligation to agree with the IRS’s version of the facts. At some point, this might turn into a process similar to the a stipulation of facts.
I believe that if the taxpayer respectfully states that it will prepare its narrative of the facts in the Protest, the IRS should not object.
Regards,
Kevin
Hi Kevin,
I was not referring to issuing a summons but placing the corporate employee (tax Manager if you will under oath, not a common occurence but I used it on one ocassion to a successful conclusion). The adversarial process you refer to is no different than your position representing the taxpayer. Developing the correct fact pattern is in the best interest of all parties and can save time in the audit process. Yes you can provide the facts in the rebuttal to the 5701, however, the 5701 might not have been issued in the first place had the correct facts been known. Again, it is part of the process of putting issues “to bed” as they arise rather than addressing them at the end of the examination.
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