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 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.