Tax Analysts®Tax Analysts®

My Subscriptions:



Effective Tax Administration and Transparency:
What lessons can be learned from changes made in the
IRS Large and Midsize Business Division and
what improvements can be made?

Washington D.C.

Friday, April 13, 2007



President of Tax Analysts


Commissioner of the IRS Large and Midsize
Business Division

Mayer, Brown, Rowe & Maw
Former Commissioner, IRS Large and Midsize
Business Division

Miller & Chevalier
Former IRS Commissioner

Other Participants


* * * * *


(9:06 a.m.)

MR. BERGIN: Good morning. I'm Christopher Bergin, the president of Tax Analysts, which is the nonprofit publisher of Tax Notes magazine, Tax Notes Today, State Tax Notes, Tax Notes International, and many other print and online tax publications which, I'm sure, most of you here enjoy on a regular basis and we thank you for that, by the way.

Welcome to the latest in our series of discussions on key issues in tax policy. The topic for today is effective tax administration and transparency. In particular, we will focus on changes made at the IRS's Large and Midsize Business Division to improve compliance. And we will discuss the impact of these changes on both the IRS and corporate taxpayers.

This is the fourth year in which we have conducted a series of discussions. If you are new to our discussions, let me first say welcome. Let me also take just a little time to explain our process. I will open things up with some brief remarks to introduce our topic. I will then introduce our distinguished panel of three speakers. Each of them will address aspects of our topic and then engage one another in the discussion. After that, we will open up the discussion to all of you and we encourage all of you to participate. Just wave and I will find you.

We are recording this event, and we'll post the transcript to our Web site, so — as we do for all our discussions. Also, for media purposes, we are on the record. So when you are recognized, please tell us who you are even if I know you. Also, please speak into a microphone. We have handheld mikes around the room that we will quickly get to you. I will moderate the discussion and we will end at 11:00.

Among the things that Tax Analysts is best known for is our work in making the administration of our tax laws as transparent as possible. Ever since our founding nearly 40 years ago, we have worked hard to bring to light the IRS's administrative law as represented by such documents as private letter rulings and technical advice memorandums. To get the IRS to release those documents we have used, among other things, the Freedom of Information Act and, when necessary, the courts.

But that's not the sum total of our efforts in the area of transparency. Far from it. We don't think transparency is a one-way street. We work just as hard to ensure that transparency extends to the private sector. For example, Tax Notes was writing about abusive corporate tax shelters long before the problem was on the radar screens of many people in and out of government. Many of these shelters were being peddled behind screens of secrecy.

I was the editor of Tax Notes at the time and I can tell you that powerful forces did not want us poking around the problem of corporate tax shelters. Several of us who were writing about the problem took a beating from people who were telling us that we were inventing a problem that didn't exist or if it did exist, it was a problem that wasn't really that big, certainly not the problem we were making it out to be. Well, as we all know now, it was and is quite a problem. So we believe in transparency for both sides.

But in the interest of better tax administration, we also believe in communication. That too cannot be a one-sided exercise. We believe in communication both from the IRS to the practitioner community and taxpayers as well as from the tax community and taxpayers to the IRS. In essence, that's what we want to discuss here today, good corporate tax administration and good communication. A bedrock principle that we follow at Tax Analysts is that sunshine makes everything grow better, including relationships.

We have three excellent panelists here today. Each will present opening remarks and then we will break the discussion up into components. After each component, we'll have a period of question and answers and we will stick to the topic that was just discussed for the question and answers. Our panelists are, in the order in which they will first speak, to my left, Larry Langdon, the former commissioner of the IRS Large and Midsize Business Division and now a partner with Mayer, Brown, Rowe & Maw. Larry Gibbs will speak next, former IRS commissioner and now a member with Miller & Chevalier. And Deborah M. Nolan in the middle who is the current commissioner of the IRS Large and Midsize Business Division. Thank you all for being here. It's a pleasure to have you. And now I'm going to turn it over to Mr. Gibbs.

MR. GIBBS: Can everybody see who wants to see? I'm looking at the back of the room and it's —


MR. GIBBS: I'm going to take just a moment to set our subject in perspective. And, you know, I must say as a Washington lawyer, it never ceases to amaze me how the dialog — how the jargon changes. I don't remember, until relatively recently, transparency as a noun, adjective, and all the ways it's being used. But then I didn't realize I was an intermediary until recently either. I thought those were banks and other financial institutions.

I'm going to take a look, and admittedly a selected historical look, at transparency. As I looked back and thought about today's subject in the context of what has happened, say, over the last 20 years, I thought I would just share a perspective about transparency. And I'm going to start with the 1986 Tax Reform Act.

Most remember the 1986 act as the act that lowered the income rates by broadening the base, basically, by decreasing or eliminating deductions and credits. What many forget, however, is that this was done for individuals, in part, at the expense of corporations. Thus, in passing the 1986 act, it's clear that Congress intended to shift a portion of the income tax burden of individuals to corporate businesses. And at the time it was done, everyone was wondering how was the corporate business sector going to respond. And everyone realized that it was going to depend to some extent on how the corporate business sector reacted.

Well, during the 1990s, some companies reacted by buying into tax shelters that were sold by accounting firms, law firms, and investment banks. This led Janet Novack and Laura Saunders to begin their seminal 1998 Forbes article, The Hustling of X-Rated Shelters, by observing that, and I quote, "respectable tax professionals and respectable corporate clients are exploiting the exotica of modern corporate finance to indulge in extravagant tax-dodging schemes." 1998; not quite 10 years ago.

My co-panelists today led the response by LMSB to tax shelters when, in December of 2001, the IRS published Announcement 2002-2 offering taxpayers a form of penalty amnesty in exchange for voluntary disclosure to the IRS of certain prior transactions. Here's where I look at it and say, "Hmm, transparency." That offer was made with the promise that if taxpayers did not disclose, the IRS would use tougher measures to find and penalize the transactions.

Over the last five years through a combination of measures including additional taxpayer and promoter disclosure requirements, more transparency, taxpayer and promoter audits, and increasingly severe penalties and other sanctions against noncompliant companies and their advisers, LMSB has conducted its compliance efforts to deal with the corporate tax shelter problem. These tax efforts, of course, took place at the same time that the Sarbanes-Oxley regulatory efforts were being taken to address the post-Enron financial reporting concerns, regulatory efforts that focus on companies' internal controls in section 404 of SarbOx and more recently, the promulgation of FIN 48's financial accounting for companies' uncertain tax positions. More transparency.

Casualties in this era include Arthur Andersen and, more recently, Jenkins & Gilchrist, two major professional firms whose demise can be traced to criminal investigations triggered, at least in part, by the failure of these firms to react responsively to requests by the government for information about their clients' activities. A lack of transparency. The point of this brief history is to emphasize the government's responses to noncompliance in both the financial accounting and the tax areas. And the fact that they have been predicated for the most part on efforts to cause companies and their outside advisers to become more transparent to the government regulators.

Unlike the 1986 Tax Reforms Act's response to the shelters on the 1970s and 1980s, which was primarily a statutory legislative response. The government's response to tax shelters in the 1990s seems to me to have been and continues to be primarily a tax administrative response. The 1986 act addressed noncompliant tax behavior in large part by changing the statutory rules.

Much of today's effort by the government to address the noncompliant corporate tax behavior relies upon initial taxpayer disclosures to target potential non-compliance, and then the threat of ultimate taxpayer disclosures about penalties and reputational damage to discourage the behavior.

As the IRS begins to move away from listed transactions, and the tax shelter days, and LMSB turns its focus towards the international arena and other areas of potential noncompliance. Transparency raises some very interesting issues that we will be discussing today.

First, what is the role of taxpayer transparency and how important is it in determining whether or not a company will be considered a compliant taxpayer?

Second, what will be the role of penalties and other sanctions in encouraging taxpayer transparency and compliance?

Third, what role will tax practitioner transparency by attorneys and accountants play in future compliance efforts of the IRS and LMSB? How transparent will the IRS and LMSB become in their attempts to cope with taxpayer and practitioner transparency and compliance?

Finally, what are the roles and relationships of LMSB's audit currency program? The various LMSB dispute resolution programs? And the recently announced industry issue focused program of LMSB? What will be the relationship of these programs to transparency?

These are the some of the transparency areas and issues I look forward to exploring and discussing with Debbie, Larry and all of you today.

MR. LANGDON: Now, you understand why we had Larry to go first because I think he has done a good job of teeing it up. This program was my idea, and I'm glad that all of you showed up. But more importantly I'd like to subtitle this as, "A fireside chat with Debbie Nolan", with Larry and Larry as a bit players to facilitate that.

Because in effect she's in the fulcrum with regard to all of the issues that Larry described. We are interesting commentaries — commentators with regard to the scene. We have our own view of historical perspective with regard to all of that. But in effect it's up to senior tax administration officials to in effect parse out these issues in a way that's constructive and positive.

The first major point, the word transparency. I guess you could synonymously use disclosure as a parallel term. Even though, quite frankly, Debbie, we started talking about transparency from the very beginning as being an efficient and effective way to describe what was going to happen with regard to the vision of tax administration. And let me describe perhaps what I saw as the LMSB process from perhaps a different perspective than perhaps has been articulated before.

The design teams had a vision of tax administration that would frankly improve the relationship between corporate America and the IRS. And it had both positive, and shall we say assertive aspects to it, with regard to different levels of tools, techniques, and playing into better information, better disclosure, better transparency, and better solutions — quicker solutions with regard to the many problems that we are facing; both revenue agents in the field, people in Appeals, and the LMSB taxpayer base.

Second major point, frankly Larry I thought it was the greed principle that drove corporate America to lower effective tax rates and buying the tax shelters. And it really started with regard to marketing of products on contingent fee basis. Now, I just I telegraphed my view, at least ethically, with regard to contingent fees. And then I think a lot of people joined the party; promoters on the one hand, and company people on the other. And it created a bright fault line between people who within the profession who participated, and people that didn't. And so, in effect everybody believed, who joined the party, that it was going to — that it was either going to end nicely, or they would go find another company to work for after they got their bonus or other compensations.

So, in effect turning that around was obviously one of our objectives right in the beginning of LMSB. Debbie reminded me of the establishment of the Office of Tax Shelter Analysis because the current manager just retired. And I think it is an interesting story because — I don't know how she discovered it in November of 1999, but Debbie discovered there were 40 IRS agents holed up in the basement of the IRS building from all across the country, who were keen on discussing the tax shelter phenomenon.

And they were from various industries, various geographies and they wanted to talk and to share. Debbie is a process person and she tried to break them up into small groups as an efficient way of doing it. One of the few times I saw IRS people not take Debbie's suggestion, they said, "No we want to hear everybody's story, and we are going to work into the night to hear what is going on." Remember that Debbie?

So, in effect they were IRS people that were beginning to see a phenomenon — that phenomenon. And there were a number of us on the outside who saw it as well. But that is all a post vote, with regard to, you know, putting in place processes. And we're going to talk about some of those processes for effective resolution. And then Debbie, we're going to turn it over to you, with regard to new processes that you put in place to, in effect, get better coordination.

There is a sense in which I think where the IRS is today would not have occurred without the restructuring act and basically looking at problems on a nationwide basis. Nationwide coordination of these issues is absolutely essential for the future.

And then last and not least, we're going to engage you with regard to effective dialogue. I'm still in this business because one, it's still fun. But secondly, I think quite frankly the administration of the tax laws and our roles as tax administrators, tax practitioners and company people is key for the future.

We are stuck, rightly or wrongly, with an income tax system. And income tax system by definition is complex. It's hard to administer — there are gray areas. Business evolves in very material ways. But by the same token, happily or unhappily, from a brain trust standpoint, some of the brightest people in all of America had been attracted to this business.

And I think together we can work on solutions for the future that will allow us to continue to move ahead constructively in a way to make the system work. That is my hope and that is what I hope will happen as a result of today's dialog. Debbie.

MS. NOLAN: Thank you, Larry. I am first of all very pleased to be on this panel having a dialog. And even though it is a fireside chat with Debbie, Larry assured me that I could ask questions as well. So, I thank you for being here. You know, one of the significant shifts, for the Internal Revenue Service in recent years, has been our ability to respond to the changing business environment of the corporate taxpayer; both from the service and enforcement standpoint.

And that in large part is due to the restructuring that Larry mentioned. And I think that the relevance of both Larry's mentioning the tax shelter phenomenon of late 90s and early 2000s, was because it served in part as a burning platform for us. There are a number of lessons learned when that happened, and for those of you who might be too young to remember, this is that Forbes article that Larry mentioned back in 1998, December 14th.


MS. NOLAN: And it's something that Larry and I had used in training classes as we begin to build the tax shelter strategy. But I know the purpose of this conference today is not to talk about, and focus on tax shelters but the relevance of that is, it was a significant event at the IRS.

Now, we are continuing to learn and evolve. But from my vantage point, the pace of change in the past seven years has far exceeded my first 25 years of service. And it's in large part due to the restructuring, but also the cultural shift, and the capabilities of the organization that were driven, and first led by Larry Langdon as our first commissioner, advised of course by Larry Gibbs who is one of our advisers, has also necessitated the increased efficiency and effectiveness of the IRS.

So while the corporate environment is changing, our drive for efficiency was also key, because of the dynamics that Larry and Larry have described, both from the area of corporate governance and oversight, as well as our needs the standards for transparency have been raised. The standards of transparency on the part of corporate taxpayers, but also on the part of the IRS just from a responsibility standpoint.

Not only the form of the transparency, but also the substance. For disclosure and transparency, coupled with a heightened sense of accountability is what has driven a number of our initiatives and our approaches to improving compliance in the Large and Midsize Business Division.

Today, we hope to explore why this is important, and for those who want or need resolution of tax controversy, or know quickly at least if we cannot agree, we can talk about the tools and the different behaviors that will try to facilitate that result.

At the IRS, we do recognize that the tax law is very complex. And that reasonable people can disagree. We also recognize that, oftentimes there is no exact right answer, but perhaps an answer that lies within a range of answers.

We are prepared and we have developed a number of tools over the past years, which we'll be discussing to resolve those issues with taxpayers and practitioners, who work in a collaborative way and are transparent with us. Because their need for certainty — again, the level of accountability, the need for quick resolution has been heightened not only because of the increased corporate governance and the oversight from both within the companies, but also from outside of the companies, but again our need as a tax administrator to be efficient. So for those taxpayers who want to collaborate and are transparent, we are prepared to work with them. But it is a two-way street.

As taxpayers think through what their needs are, and how they should resolve issues, and what their responsibilities are as corporate taxpayers in this country, they should also be giving consideration to the level of transparency to the level of collaboration and the professional relationships that they have, not only with practitioners, but with the tax administrator and with the teams as well.

There are other taxpayers who step over the line, and that's when the appropriate and responsible use of our enforcement tools come into play. And we are prepared to go both ways. The responsibility for compliance with tax laws lie with the taxpayer, the practitioner, and the service. This is a guiding principle and a belief that helps drive a lot of our initiatives.

And I believe that particularly in today's environment, most taxpayers want to get it right. And there are others who consciously choose not to comply. But it's not a one-size-fits-all. And a lot of our approach, a lot of the tools that we use both enforcement and service, are designed with those distinctions in mind.

As America's tax agency, we are responsible for the fair, efficient, and effective administration of our tax laws. The initiatives that we have, and that we will be discussing today on issue management, our philosophy on transparency and disclosure, our design with that end in mind, and I look forward to that discussion. Thanks.

MR. LANGDON: With that we'll move to my unashamed advisedly marketing piece, which more importantly shows all the tools and techniques that have been ruled out primarily, in the last seven years, even though some of them predated that. Look on both sides. Debbie looked at one side, said, "Larry what happened to all the pre-filing stuff?" And I said "Look at the other side."

And what we did — and it's really a challenge to basically look at all the tools that LMSB has at its disposal to work with taxpayers, because in effect, there are pre-examination tools, there are examinations tools, appeals, and ultimately litigation.

And I am glad, Debbie, that the list gets shorter as you get close to litigation, because based on my practice, I've yet to have a case go to litigation, which I think is an accomplishment that really supports the use of these tools.

MS. NOLAN: That's also our objective, Larry. I mean, we recognize that there are some issues that lend themselves to litigation where you need clarity of the law. But for the majority of the cases, we strive to resolve this at the lowest level, at the team level, and, in fact, have been fairly successful in the use of these tools even in resolving the issues before the return is filed.

MR. LANGDON: Right. Now, the first one I want to kind of highlight is pre-filing agreement because I remember you leading the design team into a meeting with Charles Rossotti that kind of had a cast of thousands there. And it was a — I believe, a November or a December of 1999 basically changing the delegation order, so that exam people could in effect deal with an issue even before a return was filed.

And through the years, you've expanded the portfolio. The key issue is what issues have the degree of certainty from a legal standpoint that can be resolved, at the exam level. What's your scorecard with regard to that tool so far? And what's the future of it?

MS. NOLAN: Yeah, thanks. I think it might be helpful to put the issue management in perspective —

MR. LANGDON: That's right. Yes.

MS. NOLAN: — because —

MR. LANGDON: We should have started with that.

MS. NOLAN: Yeah, you were key to that.


MS. NOLAN: Just thinking back upon the traditional issue resolution process, it was a very elongated process where oftentimes our examinations could take up to five years plus depending on the path that we chose to take. But it was also dealing with years in arrears. So from a taxpayers' perspective, oftentimes the documents or the people involved in the transaction were not there. It was very resource-intensive.

And they may not get certainty for some years in the future. The need for certainty sooner and the need for efficiencies both on the part of taxpayers and us, the desire and the necessity for us to identify emerging issues such as tax shelters when they are actually happening rather than five years later drove us to take a step back, to identify ways to resolve issues sooner, become more efficient, get more current, less burdensome to taxpayers and for us.

So a series of tools was developed, designed with this mind. The pre-filing agreement was one of the first. It modeled what you — advanced pricing agreements for transfer pricing as an example. But where it's post-transactional, facts applied to fairly certain law.

And anything that a revenue agent can resolve post filing, the revenue agent should be able to resolve pre filing. And it resulted in agreement with the taxpayer assuming that they applied that when they filed their return, we wouldn't challenge it. So it avoided the post-filing controversy process altogether.

There are a number of other tools. Fast track settlement is probably one of our most successful tools. As most of you are aware, the exam team does not have the authority to resolve issues based on hazards. Appeals has that authority, counsel has that authority. But the Appeals process can be very elongated also. It involves an agreed issue, a 30-day letter, taxpayer's response, it goes to Appeals, it could take two years plus.

The fast track process brings Appeals authority into the exams stream. The taxpayer waives ex parte, there are three parties, the taxpayer, the team and Appeals. And it allows the team and the taxpayers and Appeals to come together for a resolution.

This one is probably been one of our more successful tools in terms of taxpayer satisfaction and employee satisfaction and resolution. In terms of timeframes, the average time is reduced from about 700 plus days to about 82. And so that's significant. We can talk about CAP later, but that's probably the most significant re-engineering effort.

MR. LANGDON: Right, right.

MS. NOLAN: Larry, you recall LIFE, the Limited Issue Focused Exam.


MS. NOLAN: Larry, you've been involved in that as well, where it is a process where we have an understanding what the taxpayer on response times to IDRs, on the issues of high-risk that we'll focus on. So as opposed instead of timing issues, that might just be one year to three years or instead of focusing on every line item on the return, we need to use our resources efficiently and focus on the high-risk issue of material amount.

But it again involves a level of collaboration and transparency to make this process work. And if it doesn't work, the team has the latitude to come out of the agreement.

MR. LANGDON: I recall earlier, about 25 percent of the cases were qualified into the LIFE Program, is that still the current stat or is it high or lower, Debbie? And then also explain with regard to some disappointed taxpayers who were told, "No, you don't qualify for LIFE."


MR. LANGDON: And they thought that was a death sentence.


MS. NOLAN: And actually — thanks, Larry. No pun intended.

MR. GIBBS: Well, said.


MS. NOLAN: The LIFE Program again, it is an agreement between the team and the taxpayer, and involves memorandum of understanding and certain behaviors and transparency to achieve that. There were some taxpayers who had relationships with the teams that in effect achieved that result without the formal agreement.

What the agreement did was it formalized a process, it brought some discipline to it, and it brought some standard agreements. Oftentimes, there'll be contentious relationships between the taxpayer and the team. And this can be used as an opportunity to draw a line in the sand, and say, "From this point on, we are going to behave a little differently because we both have the same interest in mind, and that's to resolve these issue quickly."

And in a way that allows for sound tax administration. I need to mention that we aren't taking about a compromise of tax in anyway here. What we are talking about is arriving at the same answer from a tax perspective, but doing it much more quickly, much less resource-intensive for the taxpayer and more efficient for us.

MR. LANGDON: Now, one of the things that Larry and I discussed with you and — is the process by which a taxpayer can move from death to life, or to get into what I call a more professional relationship with the IRS audit team. Larry, you had some views on that, and Debbie did too. But what have you seen as some things that have been successful in that regard?

MR. GIBBS: I wanted — the issues that I have seen really boil down to the question a lot of people ask me with — now, let me start back this way. It has seemed to me that some of the reaction, Debbie, that we've seen recently both in the press and down on the hill has been critical of the Internal Revenue Service for moving toward currency.

MS. NOLAN: Uh-huh.

MR. GIBBS: Because the allegations basically have been that this was done at a price, and is being done at a price where the IRS is not focusing or not allowing their agents to focus on issues involving noncompliance or potential noncompliance.

I don't know about you, Larry, but as you move to your currency, I was involved with clients that basically were told that they were simply not going to move as fast because they were — they had returns that were at risk.

MR. LANGDON: Returns — uh-huh.

MR. GIBBS: And so I am not quite sure I've understood the TRAC studies and the conclusions they've drawn and some of the other reports because at least from what I've seen not everyone has moved at the same speed in terms of becoming current, and I have not seen the IRS walk away from noncompliance even though I and my clients would like to have seen that. We did not see it. And I am curious of — is this something, Debbie, that you would care to respond to.

MS. NOLAN: Yeah, in fact I would appreciate an opportunity to respond to that, Larry, because there has been a lot of press recently about the impact of our currency and cycle-time initiative. And to explain again that the part of the purpose of that, was to create efficiencies for us, where we knew that we needed to increase our audit coverage, but do it in a way that allowed for sound tax administration in the long run.

And so we were very careful to send messages internally and externally that what we wanted our agents to do was take a broader view of looking at tax administration.

So as an example, if we had an agent who would be examining a large corporate return, we have provided different tools to enable them to assess risk more quickly. As an example, the M-3, e-file was intended to do that.

But rather than take a traditional approach as an example on an M-1 where they can only reconcile with book to tax by opening an examination and looking at a lot of line items, we are asking them to be more focused in what they examine looking at material amounts and high-risk amounts.

And perhaps not being able to go for the last dollar, or the last hundreds of dollars on a particular taxpayer, but to make some practical business decisions about how they spend their time so that they could take their valuable time, and go to another taxpayer or another issue.

And so it's — you know, when I speak about not compromising compliance in the long run, I don't mean to say that perhaps there is a corporate taxpayer who didn't pay their last dollar, but in terms of substantial compliance, that's our goal, so that we can increase compliance overall. And it's a matter of productive use of resources. That's what it comes down to.

In spite of the complaints that you read about in the newspaper, I believe that the majority of our agents and managers who have a lot experience have made very sound decisions on what to do. So that if — even if they have an expected date of completion and they see lack of disclosure on the taxpayers part, or a high-risk issue that emerges even at the end of the audit, or the need to develop penalties, or request tax (off mike) papers, they are expected to do that as opposed to just walking away to meet an artificial numerical.

And again, our indicators, and our responses, and feedback from taxpayers as well as some of our managers and agents indicate that on the whole that's happening. But this change is difficult; it's a shift, it's a culture shift for taxpayers as well as for us.

And it's clearly the direction that we need to head in. We just need to do a really good job of setting expectations for our agents, and knowing that they'll be supported in doing the right thing, but they are also expected to be efficient with their own time.

MR. LANGDON: Now, Chris, you will want to intervene here, and ask for questions?

MR. BERGIN: Yeah, if you don't mind.

MR. LANGDON: Because we've covered a whole host of interesting topics.

MR. BERGIN: I am sure there's a lot.


MR. BERGIN: If you don't mind, I am going to stand up.


MR. BERGIN: We've got a few minutes for questions. I'll stand so I can see you better. Just — please remember to state your name, we have got a lot of ground to cover here, so please keep your questions short. Thanks.

MR. LOBEL: Marty Lobel. I have a two-part question for you, Deborah. Given the scarce resources the IRS has and the stellar power of the two guys sitting on either side of you, and their team of slaves in their large firms —


MR. LOBEL: — how do you expect the IRS agents to function when most of the really experienced ones are starting to retire, and you have got a whole bunch of young 'uns in there who are still learning, do you have the resources? And the second part is, if transparency is so important, and you want to set the guidelines for all the taxpayers, why does the IRS keep trying to hide the guidance it provides to its agents?

I mean, the latest one is Tax Analysts has filed suit on this two-hour rule. You know, advice that takes two hours to render according to the IRS is non-disclosable. Well, you know, can you explain that because it seems to me contrary to the transparency that you are trying to establish?

MS. NOLAN: Yeah. Thank you for the question. Let me respond to the first one first. You know, the baby boom and the brain drain and succession planning at the IRS, that's one of our key challenges over the next several years. When we stood up, Larry and I said, "Boy, wait until 2006, 2007, and 2008, the baby boomer bubble is going to hit," and it is.

And so we are looking at ways because we do have a very experienced and highly skilled workforce. Ways to try to accelerate the learning of the people coming in. But we have also hired people which is — has been nontraditional for the IRS from the outside with corporate accounting experience — three years for a Grade 12, five years for a Grade 13.

And what we're trying to do is get the best of both worlds and take the experience and the skill of our experienced agents, and blend that with the financial accounting knowledge of the newer agents again so that we can create our efficiencies. We're looking for perhaps non-monetary incentives.

Employee satisfaction is very high on our list of business requirements for the Large and Midsize Business Division. But we are also looking at creative ways to recruit people and retain them. So that's the first piece.

MR. LANGDON: And your external recruiting of experienced people has gone very well.

MS. NOLAN: It's gone very well, but not unlike corporate tax practices and accounting firms, the — there's a scarcity of resources. And I think we're competing — BusinessWeek magazine recently identified the IRS as number 39 out of 50 as one of the best places to work. So I'll pull that plug in, but —

MR. LANGDON: And you're still recruiting.

MS. NOLAN: That's right. And we also have — we have a lot of benefits and a terrific training program. The days of the 25/30-year- employee I think are going away, but we're happy if we could leverage somebody's skills and experiences for three to five years as well.

MR. LANGDON: Marty, with regard to your second question we agreed with Debbie that we wouldn't discuss any pending litigation as being inappropriate in her role, but let me make a couple of comments without discussing that. On both sides, I think we've got creative tension with regard to the predetermination process.

And the tax practitioner community use that as attorney-client privilege, and the government attorneys believe it as predetermination with regard to the process. I think it's fair to say that all three of us are — on this panel are fans of increased published guidance. That is a good way to facilitate the process.

Published guidance is a challenge having spent early part of my career in Chief Counsel's office doing that. But by the same token, there can be — is a reluctance on the part of both sides to share their views on issues that I think needs to go away based on trust. I think the issue is trust rather than legal determinations. And it's been my experience where trust has been improved in the audit relationship.

I've got an audit that started out very contentious two years ago. There no IDR has been issued, and the taxpayer is supplying information to the audit team within 48 hours to move the thing ahead. Now, they're motivated because there's a large refund.

But it was one of the things, Debbie, you and I talked about at the beginning, because I envision moving the audit process more to something that — like happens in corporate America in merger and acquisition activity which you're very familiar with, where in effect both sides get down at the table and they share the issues, they share the facts, and they work on resolution.

I think we're not there yet. And the idea is to move things in that direction.

MR. LOBEL: Yeah, but there's still a lot of stuff that you could — there's still a lot of material — you know, if you're giving guidance to a particular taxpayer just because he's in one industry, that guidance could be applicable to all the other industries or many other industries, and could avoid a whole bunch of problems down the road. And I think from —

MR. LANGDON: Yeah, and —

MR. LOBEL: — the institutional point of view as President Reagan said, "Trust, but verify."


MR. LOBEL: And by putting it out in public, you're allowing the public to see that the IRS is in fact doing its job and is not being manhandled by a bunch of expensive very sophisticated lawyers.

MR. LANGDON: Yeah. Now the other — let Debbie end, but let me — to me the thing that surprised me and even though I understand it is why the industry issue resolution program hasn't taken off like a rocket. Now, part of it is frankly companies within the same industry don't trust one another with regard to going to the IRS and negotiating.

I think that's probably the biggest obstacle. We were hoping that that tool would move things materially in that direction, but it hasn't happened. Debbie, you want to comment further?

MS. NOLAN: Just that from an administrative standpoint, I very much believe in transparency. And for those of you not familiar with the industry issue resolution process, it is industry guidance and the — there is external stakeholder input. But we also have industry director guidance that goes out to our field, and those are also posted on our Web site.

And they're — they may deal with issues, they may deal with process, but those we believe should be — we should be transparent, because consistency and fairness is one of our guiding principles in LMSB. As far as the dynamic that Larry spoke about where the taxpayer and the team sit at the table, both with the same interest in mind to resolve an issue, we are there in many cases.

I think the compliance assurance process models that type of behavior, and it is a change. But that's before a return is filed, there is no stake in the ground per se, and we agree that we both want to try to get to this, the right answer.

MR. GIBBS: Debbie, could I follow up on Marty's first question? I see the benefits to both taxpayer and to LMSB to up currency; that's what we discussed. I also understand the concept that if you can't get current and you can work more efficiently and shorten the audits, then you can do more audits.

But here's my question to you. I look at the size of LMSB. Forget SB/SE for a second. That's another story, and that's not why we're here today. We're just focusing on LMSB.

A lot of discussion about CIC taxpayers, a lot of discussion about somewhat smaller taxpayers, but given the entire universe for which you are responsible, are you going to be able to simply use — and forget you, talk about — think about it from the standpoint of you and also your successors. You succeeded Larry. One of these days someone's going to have to come in and fill your shoes, or try to.

MS. NOLAN: Maybe Larry will come back.

MR. GIBBS: How is LMSB going to do it? I mean how — I look at the size of the IRS now compared to what it was 20 years ago when I was commissioner, it's about the same size. Every year the tax returns are going up. LMSB is got to grow. How are you going to do it?

MS. NOLAN: Right. We can only do it by looking at how we do our jobs differently, and the tools that we have. And so for instance how — what information can we obtain to identify areas of compliance risks sooner and more quickly, so that instead of a team going out to the taxpayers, maybe spending six months, 12 months going through the records to identify compliance risk.

It begs the question how can we shorten that process and what type of disclosure and transparency can we have to identify those risks sooner. Again, the M-3 was one example of that. The e-file mandate was a way to take the information and be able to leverage technology to do some data analytics. There may be some other things that we do as well.

The CAP Program, where we're looking at pre-filing, that program is intended not only to obtain currency, but to do with much fewer resources than the post-filing process. And when you have a collaborative environment like that, it happens much more quickly, everything is contemporaneous.

And so again, we can't continue, we can't maintain the status quo and be successful a year from now, two years from now, three years from now. There have to be a lot of different levers that we pull, and you know, the taxpayers are confronted with the same types of challenges.

SPEAKER: How about more auditors, more resources?

SPEAKER: We'll take them.

MS. NOLAN: We'll take them.

MR. BERGIN: That is — we've sent letters to Congress. We're trying to get a couple more in here real quick.

MR. DOLAN: Mike Dolan. This is a follow on, Larry, to kind of your last two points. One is I think we probably all appreciate you giving Debbie a chance to kind of address what's been in print, but — and then with respect to the question of the size of LMSB it seems to be Debbie too one of the issues out there is that the metrics that are still sort of being overlaid on your success are metrics that only look at the end of the day, sort of the value adjustments.

And I think a lot of what you've done in the kinds of things that you've made reference to today, the initiatives that give people the certainty, whether they be PFAs or whether they be CAPs or your FIN 48 initiative, those are all things that count for something in the final analysis if the something is a level of compliance.

And even the commissioner's metrics, when the commissioner goes to the Hill to defend himself, he's kind of defending himself in all the classic ways. And it strikes me if that's all the scorecard accounts for, you're always going to kind of have one foot in the ditch.

And I don't — I'm not smart enough to figure out how to make that metric accomplish that, but I think that's really a missing piece in terms of people who've tried to assess for what's the help of your — you know, your broad efforts of that compliance and — I mean as a practitioner now — I mean I think we'd all, like, when somebody holds you accountable to say, "Yeah, here's your — here are your dollar results and here are the numbers and the types of issues and the value."

I mean there have been some huge issues in the pre-filing agreements, I mean huge dollar value issues that got resolved correctly, and didn't end up an adjustment; it might have been a huge adjustment had they not been resolved earlier. So it's sort of an observation that I think — and maybe a question insofar as you have thought about, is there a way to get that on the record?

MS. NOLAN: Now, I appreciate the question, Mike. And this is — this has been a question for years. What's the impact of our actions on voluntary compliance overall? But it's been highlighted more in the past year as we roll out more pre-filing programs such as the Compliance Assurance Program, pre-filing agreements. What is the impact on compliance of those types of pre-filing activities?

And our traditional metrics measure post-filing activities. And so we have been moving more and more towards a desire to focus on outcomes, not outputs. And we have a research department who is trying to manipulate data to try to arrive at that number, because you know, with any business we have to look at how we use our resources and how they can be most effective.

And if we're only measuring a small slice of what we do and it's becoming smaller as we roll out more pre-filing activities, it's important that we look at the overall impact of compliance of any of our activities. You may have some ideas.

MR. BERNARD: My name is Dave Bernard. I'm here representing TEI. Debbie, I guess this is primarily directed to you, but I'd appreciate the two Larrys to try me; and also following up a little bit more on the transparency trust and I guess hiding guidance themes that have come out. One of the things that frustrates TEI members in the field is the involvement of counsel without the members knowing exactly what the story is that's been told to counsel.

And as a result, issues end up being prolonged if you will, sometimes all the way through the Appeals — into the Appeals process when the fact surrounding the issue, the business reasons for entering into a transaction, or the economics around a transaction are not fully disclosed from the field to the counsel's office.

Given the fact that taxpayers quite frankly can't get much more transparent, you know, between the tax return disclosure rules, the penalties, FIN 48, the possible laws of privilege on opinions now given what the accounting firms are demanding, it doesn't feel from a taxpayer's standpoint like we can be much more transparent.

What can we do in terms of improving the access that taxpayers have to counsel and other decision makers in their large case examinations?

MS. NOLAN: Okay. Thanks, Dave. You know, counsel does play a key role and a strong role, particularly field counsel in supporting the teams. And we do have a client-attorney relationship. But they — counsel is oftentimes — will participate in the opening conference where it's — they're right there with the taxpayer.

And that relationship should be one that's fairly fluid and very open. When the — if it — there is a taxpayer who feels that the team is not being forthcoming with them, or that they feel that all of the facts as they would portray them such as business purpose, need to be heard by counsel and don't feel that that's being passed on, then there are certain rules of engagement that taxpayers can use, whether it's that situation or there is a situation about the behavior of the team where they can elevate an issue to the team manager, to the territory manager just to get a different perspective.

And sometimes it requires intervention. I don't think it's based on the bad intent on the part of our teams. But oftentimes a team manager or a territory manager will have a broader view of the situation and can actually support the team, but also help resolve the issues that you might have.

MR. BERGIN: The one over here.

MS. HOLLINGSWORTH: Hi, I'm Tracy Hollingsworth with the Manufacturers Alliance. Debbie, I wondered if you could share with us some of the highlights of what you're learning from the M-3s.

MS. NOLAN: Yes. And in fact, Bob Adams is here too. I know he worked with a number of people on the M-3. He's the senior advisor to the commissioner of LMSB. As you're aware, in 2004 we only had the two columns that we looked at. And so we actually did some data analytics and were going to move forward to looking at those more closely in developing some filters.

But we decided that we should wait until the 2005 data came in. And some of it came in electronically, not all of it. We are running some of those filters right now, and assigning some of the cases to the field so that we can assess whether the M-3 is sharing with us the information that we intended that they do.

So Tracy, I don't have a lot of results of those yet, but we are — we design that with the purpose in mind of helping us to identify risks much more readily. And we are testing those. And our research departments are stratifying them in a number of different ways by industry, by geography, by issue.

MR. BERGIN: All right. We're going to move on to the second component here, go back to Larry.

MR. LANGDON: Yeah, we've already touched on it in a large measure, which is currency. But Debbie, you've had some interesting feedback with regard to how both taxpayers and audit teams are viewing that entire process. Why don't you key into that topic a little more acutely if you don't mind?

MS. NOLAN: Okay. Well, I mentioned earlier one of the drivers of our need to get current was to be able to identify emerging issues not only from an enforcement perspective, but from a service perspective so that we could work with counsel and Treasury to get guidance out if we found areas of risk.

But to know what's — what was happening in the current environment from a taxpayer perspective, being current was important, because it was much easier for them to respond to IDR request as an example, because of — again people in documents where they're contemporaneously, plus we were hearing because of corporate governance that need for certainty and currency was heightened.

We've actually made some great strides in that area in order to achieve currency. The Compliance Assurance Program is the highlight of that. That's the most significant reengineering effort that we have had, and has enabled us to do a number of things. For instance, we rolled out the CAP Program in 2005. We had some legislation at that time dealing with section 965 and 199.

We were able to learn from that process being that current to get guidance out, not only to our field teams, but also to taxpayers as well. That drive for currency again is enabling us not only to identify issues of risk, but also to ensure that we can build filters so that when other returns are filed, we can identify those areas much more readily, and use our resources much more efficiently.

MR. GIBBS: Debbie, could I ask you a question? Speaking about looking at emerging issues, I have been [off mike] repeatedly since legislation in December creating the new office of the whistleblower at the IRS. And my qui tam folks basically look at this, and they're absolutely convinced since IRS is basically traditionally offered somewhere between 10 and 15 percent of tips from informants.

And by the way, I was told yesterday — I didn't realize this — unlike the qui tam statute, it's not — we're not talking necessarily about fraud. It can be just a plain old mistake. So the breadth of this in terms of our qui tam folks, they are absolutely convinced that when you move it to 30 percent, that this is going to trigger a new final, a new source for emerging issues from folks within taxpayer groups.

And I'm just curious. I understand the whistleblower office is getting started at the IRS, but are — do you all anticipate that this is going to be something in addition to what you've traditionally seen in terms of emerging issues?

MS. NOLAN: Yeah. I think, you know, there are a number of different data sources for the identification of emerging issues, the disclosure requirements, the reportable transactions, current examinations, CAP. We don't have a lot of experience yet with the whistleblower office. You're right, Larry. Steve Whitlock was just identified as the director. He is standing up that organization. We look back on our performance claims, the claims of the past. We identified some issues, but they weren't necessarily emerging issues, but the incentives for somebody sharing information right now is probably greater.

I know that the corporate community has expressed some concern that we may get a lot of frivolous claims, and that will result in being very burdensome to them. And we will be very careful in the review of those. I don't have a lot of experience yet, but it could very well be that we will receive data and information that we would not have otherwise known that will be helpful to us.

MR. GIBBS: You're privatizing a lot of things. The idea of privatizing OTSA is kind of interesting to me.


MS. NOLAN: That's not currently on my list.

MR. LANGDON: That's a different case.

MR. GIBBS: No comment.

MS. NOLAN: That's not something on my list. What is your experience in resolving issues with the IRS, and what have you seen work and what have you seen getting in the way?

MR. LANGDON: A whole series of observations — what — and probably like Larry's experience for some reason people in my position having had a former position in the IRS tend to be a lightning rod with regard to what I call the hard corner cases. The people I practice with we — we kind of call ourselves emergency room surgeons —


MR. LANGDON: — and we get — I get surprising telephone calls first thing in the morning with regard to people that — corporate people primarily, but individuals in another case — that there are trouble with the IRS, and then trouble with the audit team, and in effect what they need is help with regard to resolving the disputes.

And I have to say, and I have a few items of this even with small business. I have never encountered lack of professionalism on the part of the IRS teams with regard to working to resolve things even when things have really gotten off the track. And that also includes a fairly large host of — you would think that they would ignore me, people that engaged in tax shelters.

So from that standpoint, I am very pleased to be alumni of the organization, because in effect, you know, the — the component of service and trying to resolve things is still very much alive and well within the IRS. It really though is with regard to an issue where there is a lack of trust between the corporate taxpayer and the audit team, that's a long process with regard to — now, I'll call it effective marriage counseling.

And you're trying to avoid a divorce, because in effect taxpayers can't fire audit teams and audit teams can't fire taxpayers. So in effect in large measure you've got to assume that they are going to have to continue to work together.

But ultimately sometimes relationships can't be rebuilt if both sides begin to realize what is — are the challenges, the opportunities, and frankly the deliverables on both sides. Unhappily on both sides, but I would even say even more so on the taxpayer's side, there is a strong minority of people who believe that confrontation, lack of disclosure, and playing hardball is still out there.

And then they are surprised when the IRS audit team plays the same way, and I keep warning them. By the way the IRS has better tools than you do if things go awry, because jeopardy assessments, stat notices, penalties are real and are very costly to a company. Sometimes company management intervenes and replaces the company team too; and I have seen that as well. Larry, what has been your experience?

MR. GIBBS: Yes, if I had to just single one out, Debbie, I would say that the biggest change I have seen during my lifetime has really been the fast track problem. And I'll say this, I agree with Larry completely. There is just — the longer I practice, the more convinced I become that there is an easy way, and there is a hard way for taxpayers, particularly large corporations and audit teams to get along together.


MR. GIBBS: And it just — it depends on what you are going to choose; but even if things are going in kind of a bumpy fashion, and even if you have got a very — one or more very aggressive transactions. Fast track has a way of crystallizing everything for everybody in terms of getting in front of the Appeals conferee.

I've frankly — rarely, I can't remember, maybe I have had one where we actually got to the Appeals conferee talking about risks of litigation. It's the — the mediation process is an amazing process, particularly when it is done by an Appeals conferee with your audit teams; and the taxpayer also realizing that if you don't get things worked out, then it is going to Appeals and probably with penalties coming out of exam today.

And that's kind of the thing that balances from the standpoint of the taxpayer, from the standpoint of the LMSB team, Debbie. There is something about sitting in the same room with the taxpayer and having an Appeals conferee tell the LMSB team, "I think you're being too tough," that kind of facilitates honestly the discussion and the negotiations. So I would say if I had to pick one that would be the one I would pick.

MS. NOLAN: Well that's interesting. We, every year we conduct customer satisfaction surveys for taxpayers who have been through examinations. And in 2005 we asked the same revenue agent teams very similar questions, and what was very apparent to me is that for both sides, well, how they determine the level of satisfaction with the process — not necessarily the result, but the process — the key to that was professional business relationship.

And how that facilitated the ability either to resolve issues or to know quickly which issues we couldn't resolve and move on to the next process. But we do have a highly professional workforce who have been through a lot of different experiences, and a lot of what their experiences with a particular taxpayer will factor into how the team behaves with that taxpayer as well.

MR. GIBBS: Debbie, could I ask you some — I would like to ask you just some questions about taxpayer and practitioner transparency. First question I have is, is from a taxpayer's standpoint. Let's take a corporation, how important — well, let me start this way; lore is in the real world out there that taxpayers can be classified in some fashion, perhaps not formally. But the law is that IRS sometimes sees taxpayers in one of two categories; a cooperative compliant taxpayer or an uncooperative noncompliant taxpayer.

And that you treat it differently in terms of the programs that you and Larry developed and so forth. And I guess my question is, one, is there anything to that concept, and secondly, what's the role of transparency; how important it is — is transparency with respect to whether taxpayers get put in one of the two categories.

MS. NOLAN: Well, if you're asking me if we have a list?

MR. GIBBS: I understand.

MS. NOLAN: The answer is "no".


MS. NOLAN: We don't.

MR. GIBBS: Okay.

MS. NOLAN: However, what I — what I mentioned earlier about the level of taxpayer collaboration transparency, the level of trust among the teams, it is not something that's pre-decided.

It's something that once the team experiences the aggressiveness of the taxpayer, the — again transparence — the level of transparency, how they respond to IDRs, the professional respect that they have for one another, that will — and the position taken on the tax return, that's what will drive whether the agent will use the service tool or enforcement tool; and — or sometimes both. But as far as issue resolution, the teams understand what the inventory of tools are, and that's something that they would generally be offering to taxpayers to resolve issues.

MR. LANGDON: Let me add a — put a note if you don't mind, to that. I know in TEI circles and within practitioner circles, as I get an e-mail like this almost everyday. "Do you know X, Y, or Z, i.e. team manager et cetera, and what's their reputation?" I would submit that that's even more alive and well within the IRS that that practitioners' reputations and company people's reputation — that's why I tell TEI audiences, you realized that you've got a reputation out there, that's alive and well, and IRS people share that within themselves.

Now, to me an interesting anecdote is that, I've seen so-called aggressive taxpayers constructively use these tools and techniques, and change their reputation with IRS people. So there is a sense in which you know, improved relationships can occur in a constructive way. But it's got to be genuine; it's got to be real. And you've got to stop hiding the thimble, for lack of a better term.

MS. NOLAN: Well, that's true Larry. I think — I mean it is human nature.

MR. LANGDON: Uh-huh.

MS. NOLAN: And if a team has an experience with a practitioner or taxpayer that has them form a belief about that. A new experience can shift that belief, but — you know, and I think that is human nature just to do that.

MR. GIBBS: Just out of curiosity, I'll accept that. I thought — frankly in my experience, I think it's true. And I think it is — I think there are reputations, and I have been to opening conferences with new audit teams, where something slips out, we understand you are kind of difficult to deal with. And that's usually a pretty good indication that there is something out there that has to do with reputation.

If you've got a situation where that type of thing slips out in the opening conference and you are interested in doing something about it, you'd like to change your reputation. How do you do it? I mean, is there a list some place, do you go up in the organization. What do you do?

MS. NOLAN: No, I would say, sometimes you can — taxpayers and teams have very contentious relationships and they can change. Oftentimes, it will require an intervention, maybe on the part of upper management; maybe it will be getting the team manager involved. Maybe it will just be the taxpayer sitting down with the team, saying, "look our relationship hasn't facilitated resolution in the past, let's sit down and talk about what we can do to make it better, so that we can, it can be less burdensome to us, and you can be more efficient."

So it can be an — very informal dialogue like that, or it might require a more formal intervention. If — we have rules of engagement. I do receive calls from practitioners or taxpayers, who feel that the teams are being unreasonable, but I don't intervene at that point, I kick in the rules of engagement and ask them to try to work with the team or elevate it to the next level.

And I think that's very important, because you know, we have a professional group out there, they need to be given an opportunity to work with taxpayers, if its their behavior, or to hold the taxpayers accountable for their behavior as well.

MR. GIBBS: Can I ask you a question about practitioners? I began my comments with — I never considered myself to be or I didn't realize I was an intermediary. How many of you all saw the OECD report that came out late yesterday afternoon that talked about intermediaries? If you are a practitioner, you are an intermediary. There are certain taxpayers that are intermediaries. And as I understand it Debbie, and I don't want to ask you this, let me just lay some background, and then, respond to it as you wish.

I gather there was something called a Seoul Declaration that came out sometime last fall, where tax administrators got together in Seoul, Korea — met. And one of the things they talked about was a need for taxpayers and practitioners to become more transparent in terms of being willing to share with tax administrators, not just in the United States, but around the world, situations in which they are seeing noncompliance occur.

And that — I gather there has been a discussion with practitioners and certain taxpayers coming — led by U.K., but something that the other tax administrators are interested in, in terms of trying to persuade intermediaries, to become more transparent in terms of sharing with tax administrators, instances, examples, situations, dealing with noncompliance. And I'm just curious, is this something that is IRS-wide, it — is LMSB participating in this, could you tell us a little bit more about it? Because in light of the study report that came out yesterday, and the rumors that have been floating around, there is a lot of interest in what this is, how does it work, where is it coming from, that type of thing?

MS. NOLAN: Yes, thank you. You know, in today's age of globalization, particularly for corporate taxpayers, what you are seeing and hearing more about our relationships with foreign tax administrators, and more of a cooperative effort on the part. This is — and one example of those, as a part of the OECD there is a group Forum of Tax Administrators, it is 30-35 countries and Commissioner Everson is the chair of the FTA currently. They had a meeting in Seoul, and out of that came a Seoul Declaration, which identified a few projects.

One of the projects was the role of the intermediary in facilitating tax compliance. Intermediary as defined by attorneys, accountants, and investment bankers. And focusing more on the technical tax issues and they are beginning to focus more and more on corporate tax issues. The project is being led by the U.K., Dave Hartnett, Chris Davidson are key to that, here in the United States we have John Klotsche who is our representative on a team. And there are 11 countries who are involved in coming up in September with a draft, and January with a final product of a report for this larger group.

One of the outcomes of that report could very well be an internationally adopted standard — rules of conduct, or engagement on the part of the intermediaries to facilitate compliance. As a part of that data-gathering effort, there have been meetings with investment bankers, attorneys, accountants in the U.K. and the U.S., and we are just about to embark on a meeting with U.S. multinational tax leaders here in the United States. And we are helping to facilitate that.

MR. GIBBS: Does — is somebody looking for me, basically, to rat on my clients?

MS. NOLAN: Well, I think that — that we will be talking about how practitioners can facilitate compliance, the responsibility that the practitioner's intermediaries have to achieve compliance and what the role might be. And so, perhaps I wouldn't use those words, but —


MS. NOLAN: But, frankly if practitioners identify an area of risk or something that's over the line, the question is what responsibility do you have for tax administration, to bring that forward, maybe not client-specific, but do you have a responsibility?

MR. GIBBS: We — the reason I raised this Debbie, is we are in the — right now, we are living in a world were people patent tax strategies. We are living in a world where folks no longer mass- market things, but they are very proud of concepts that they come up with. We are living in a world where at least from attorneys' standpoint and I suspect from the accounting profession as well, there are duties of loyalty to clients.

By the same token, Chris, you'll recall that in this room not that many months ago, I commented that at least the way I was brought up, and maybe I'm just getting to be old, but I have thought that there was a duty on the part of practitioners. Not to become client-specific at all, but basically, to work through professional organizations to bring to the service, situations that involve tax noncompliance. It is going to be interesting as we shift from professions, to emphasis in large, medium, small law firms, accounting firms, and so forth, to more of a business orientation.

How those things are going to get sorted out, as we move forward. And yet, with the emphasis on transparency, I've got a sneaking suspicion that there are going to be tougher issues for practitioners to face, in this regard.

MS. NOLAN: Yes. I mean, for practitioners, whether you are an accountant or an attorney, we all have professional rules, and ethical rules of conduct. I know that for many of the firms with whom we've come into contact, they are building quality assurance offices, if they don't already have them, just to ensure that they do some due diligence, so that they can serve their clients well. They have a sense of fiduciary responsibility for compliance. I think that's a positive direction.

MR. LANGDON: That's kind of an interesting segue into our last topic, which Larry; you were going to lead this upon with regard to what we euphemistically now call IIR, our Industry Issue focus program.

And it also relates to transparency as well. Why don't you tee that up, and then Debbie you tell us about tier 1 and 2 and what's going to happen next.

MR. GIBBS: Debbie, LMSB recently announced as Larry said, the Industry Issue Focus Program. And it was announced as part of the LMSB's efforts to coordinate its approach to developing strategic issues, for enforcement and litigation. That by the way is another name change. I thought compliance and enforcement, basically, meant criminal investigation.

But enforcement if you've noticed kind of crept into our lexicon in the tax area, and it kind of means a "tougher compliance" as best I can tell. In doing so, I understand that LMSB has indicated that it plans to identify certain strategic issues through examinations, M-3 reviews and other sources. And that issues so identified are to be prioritized into three tiers.

Tier one, for high dollar, high visibility issues, we've got a list of those, but the importance of tier one is highlighted, by the appellation accorded tier two. Tier two which presumably is below tier one is potential litigation vehicles. And tier three is industry-specific issues.

For each issue, LMSB has indicated that it will appoint an Issue Owner Executive, a new acronym, an IOE, who will be responsible for overseeing the identification of the issue, developing the IRS position, and coordinating the disposition or resolution of the issue. If the Industry Issue Focus issues a rise in an audit of an LMSB taxpayer, the LMSB examination team is required to coordinate with the IOE, at least for the first two tiers.

This is interesting to me Debbie, because this seems to me to really roll out of a tax shelter concept in the sense of the matrix management approach, to handling specific issues. That is to say, we all got familiar with the issue champions. And we all, if you dealt with any of the tax shelter issues, you dealt with the vagaries of the matrix management.

And the matrix management at least as I have run into it, meant that it was not always clear, what the roles were within IRS, with respect to certain issues, who had final responsibility for what, who in LMSB council or even other parts of the IRS were to be involved.

And in any event, if you had difficulty in representing taxpayers, trying to figure out who you should go to, to try to deal with the — the problem was not always the easiest thing to do. And in short, it seems to me that matrix management, has its own set of transparency issues, by comparison with dealing with team managers, territory managers, DFOs, industry directors, your office, that's pretty — that's pretty — those rules of engagement, and so forth, are pretty interesting, and they are pretty well known.

Matrix management seems to me to be less obvious. So could you, kind of tell us a little bit more about the Industry Issue Focus Program. And also tell us if there are going to be rules of engagement with respect to the transparency matters, how you can get issues resolved, and who the taxpayer or the advisor can turn to, to try to deal with the issues that at least arose during the issue champion, that is, the tax shelters?

MS. NOLAN: I promise, it's not intended to be as bureaucratic as you just sounded.


MS. NOLAN: But you are right Larry, the concept around Industry Issue Focus is consistent with what we did when we first established the issue management teams for tax shelters. And it was to take a strategic approach to compliance, related to a particular area of risk, and ensure a certain level of consistency for similarly treated taxpayers. Okay.

So strategy for compliance, consistency for similarly situated taxpayers. And what — one of the benefits of it was that we formed an issue management team with an executive champion. There's an Appeals member on the team, there is a counsel on the team, technical advisers, specialist, and an executive who leads the team.

They will identify the issue, scope it — scope it out in terms of do we — whether we have cases in the field and Appeals teed up for litigation. They will try to get a handle on the full breadth and scope, and then they'll look at different treatments to try to resolve the issue. It could be that an issue could be resolved through guidance.

Or, it may be — it may necessitate, because we have cases that need a litigating strategy. And so there is a wide range of activities that could result in some sort of settlement initiative. Or a guidance that tells taxpayers, if you resolve in this way because there are hazards and we can apply hazards in this instance, because Appeals is involved broadly, then it can result in a settlement initiative.

So there are a lot of different outcomes and it really depends on the issue. If you take a look at the tier one issues, they are the result of the commissioner's June 13th testimony to the Senate Finance Committee, on the significant compliance challenges for LMSB.

Each issue is on that list, for a different reason. And that's something that I think is worth mentioning because I met with our ABA liaison Armando Gomez, a while ago, and he — he got — he told me that the perception externally was that they were all on the list, because they were deemed bad transactions. And that's not the case.

So we recently put a link on our IRS Web site that links back to the commissioner's testimony. You have issues on there, as an example, foreign tax credit generators that we have deemed to be high-risk material issues. We would use one approach for that. Section 199 is on that list.

Section 199 is on that list because it was a fairly new piece of legislation. We wanted to ensure that if guidance was needed we would be able to get guidance out, not only internally, but externally. We needed to better understand what the documentation requirements were. And so there is a different purpose for section 199 being on that list.

And if you look at the testimony it will become more clear that they are distinct. But each executive champion is intended to monitor and develop a strategy around those issues, again, again issue specific, but with that intent in mind. As far as issue resolution, we have the executive champion, and we also have the executive who has line authority over a particular case.

And depending on the issue, the executive champion might be involved in the resolution of the issue, again depending on what that issue is. It's our hope and desire that we don't begin to clog-up the pipeline, if you will, for issue resolution in an attempt to achieve consistency.

And so we do have a sense of urgency to the extent that we can, to try to get a field settlement guidelines and decide whether or not we want to coordinate an issue, what the role of counsel will be. Whether or not an initiative, a settlement initiative is appropriate, or whether or not we should just continue to examine the issues and the cases, individually.

So there is a wide range of activities. Let me stop there for a minute to see if you have some questions that can help you.

MR. LANGDON: Yes, because I am engaged in at least a couple of these obviously. And to me the interesting thing was the territory manager in negotiating with the taxpayer, kept saying, "Well, this is a tentative arrangement." And then I've got to go back to the steering committee, and then, quite frankly, then nickel-and-diming occurred.

And I know that this early in the process, would you envision that as being an ongoing process or ideally gets you back to Larry's matrix management thing, because that can in effect clog up the process and it does debilitate the field people to negotiate effectively with the taxpayer to resolve things?

MS. NOLAN: Yes, one of the things, and the executive champions may be reading about it for the first time, when they read this transcript. But I am going to remind them that one of the things they need to do for their particular issue is get guidance to our agents, and when they need to coordinate with the team, and when they can just move on. Because that — that is not clear. I went back this weekend, took a look at the internal guidance that we gave our teams, and I think that's what's happening.

MR. LANGDON: Uh-huh.

MS. NOLAN: So additional guidance will go out.

MR. GIBBS: Just a comment, Debbie. And this is intended to be a constructive comment. After the experience with matrix management that we've had in the tax shelter area, it really did seem as though the audit teams basically were in charge of getting the statute extended, waiting to understand how things were going to be resolved, and then writing up things.

And if you couldn't agree, then they got more active in terms of taking a look to see whether penalties were appropriate. And certainly, say in the son of BOSS settlements and that type of thing. So what I am saying is many practitioners out there when they have interfaced with matrix management before, within the service, they have a vision of it where, as Larry says, "The team is really kind of out of it."

I mean, that things are going on elsewhere within the organization. If this is going to be different, I would simply urge to get that message out, and then see if you — how you go about making that work. Because the image that a lot of people have in dealing with matrix management in the most recent experience previously, it really became less than transparent in terms of how things got resolved if there were problems.


MS. NOLAN: And it's our intent, for many of those issues, if we can share with our teams a set of guidelines that if the taxpayer falls within a similarly factuated circumstances —


MS. NOLAN: — if they can apply those guidelines that would be one of the positive outcomes —


MS. NOLAN: — of being able to use these teams effectively.

MR. LANGDON: Maybe this is the time to open up for questions, because we have covered another host of topics, and I'm sure some people didn't get their answers completely.

MR. BERGIN: Yeah, I apologize for missing the second round of questions, but we have got 20 minutes here, so fire away.

MR. STEUERLE: Hi, Gene Steuerle from Urban Institute. I'm really interested in the second topic you covered, which is how to engage the practitioners to be in some sense more on the side of good public administration, and how you play that. And I have long believed that our tax system works well when the private incentives are set right, that it's not just the public sector trying to regulate what tens of millions of people do.

A simple example being — one reason, I think, we get corporate income reported moderately well is that there is an incentive for financial reporting purposes. To report positive income whereas there is a tax incentive report for negative income, and they work in conflict with each other, and they really in substance help the tax authorities in the long run.

And I'm wondering with respect to practitioners, if there is not a way to in some sense reward the good — let me use the term, "good practitioners" versus the "bad practitioners" through some announcement effect. So for instance, suppose IRS were to announce that firms or practitioners who were found to sell abusive tax shelters or whatever else it is, were more likely to be audited and their clients more likely to be audited in the future. It seems to me that is a powerful effect.

If I am the good accountant in Arthur Anderson and my neighbor next door is getting the private clients, who are saying they like him better because he has lowered their taxes and I'm losing my job and so I have an incentive applied scheme. And now — I now have a counter way to use — to the firm to say, "Hey, wait a second, if this goes on too much, we are going to lose a lot of clients." Because if he really sells an abusive shelter, our clients are going to get audited more. If that's going to be announced, then we are going to lose it.

I think — I think there are ways. Maybe this isn't the only way. I think there are ways to set up the incentives for practitioners much better than we do now. And I don't know that you get at them just by the things you might deal with say, in — in your individualistic dealings with the firms where what you are doing isn't really announced. I'm just curious whether any of you thought about that type of incentive question.

MR. LANGDON: Gene, that I thought was a very interesting outcome of the disclosure initiative that, that was 2002-2. Because one of the key things, at least from the tax administration standpoint, that LMSB's Office of Tax Shelter Analysis got, was who was the practitioner that sold the shelter, and that resulted in hundreds of promoter audits that I think has been one of the most therapeutic things within tax administration.

I frankly, I am a fan of doing it that way rather than perhaps the way you suggest, because I think we — I think the IRS will get into trouble trying to determine who are the proper practitioners. And frankly, what we sort of learned is that it, and in particularly the major firms, it was only a small minority of people that were basically selling shelters. And that's been corrected as was pointed out by Debbie by good quality assurance in all major firms. I'm very pleased, in our offices and in other large firms I talked to in both the CPA and law firms, that ethics is talked about every day.

And the younger people are getting lessons on ethics and professional responsibility that frankly didn't occur in the '90s, and if that would have occurred maybe some of that stuff would have been curtailed. But what has happened as a result of promoter audits, which is one, the visibility of some people having disclosed publicly that they sold tax shelters, two the penalties that occurred from that, and then the due diligence that followed from that. I think it has been very, very healthy to the system.

MS. NOLAN: Yes, and we have as a part of promoter investigations, obtained investor lists.

SPEAKER: Uh-huh.

MS. NOLAN: And that's part of the process as well.

MR. GIBBS: Gene, I was thinking of it more from the standpoint of this. My perception is that no professional organization wants to be seen as a trade group, a trade association. Professional associations want to be seen as professional associations. They enjoy access, and they don't enjoy dialogue about whether they really are supporting the system in addition to the issues that their members are interested in.

And it will be an interesting dialogue, but I think a way to sort of, test whether individual practitioners who see things, and think they are perhaps indications of noncompliance, would be to see if you could, and I don't know whether this is going to be possible.

But to see if you could basically run it through professional organizations, ABA tax section, CPA tax division, TEI, and other professional groups; do they have the capability to stand up to take a hard look at what is going on? And boy, we all know — people know what is going on. People know what is happening out there. We talk about it, that type of thing.

Is there some way, because if you don't do this, what you are going to run up against is — you are going to run up against very, very tough issues in terms of client confidentiality, duty to client, obligation to clients. These are tough things and these are mentioned, by the way, in the intermediary's report, by the OECD as things that are — they look at them as potential barriers. I look at them and say, I think this is part of life.

But if there is some way that you can vet things through organizations to try to get balanced, but also get something that will come through to the IRS. I don't know whether it can be done. If it can't be done, then it seems to me that if something like this is going to happen, it is going to happen, in other ways, in other — through other channels.

And that simply means that you are professional associations representing the interests of their folks, who will be cut out of the process because they choose not to participate. It is going to be difficult, but I think it is something that if our tax system is to work, and work properly into the future, I think, it is something that's worth vetting.

MR. BERGIN: If I could step out of my role for just one second to add something, looking at my experience in the corporate shelter area, it will get found out. If you are doing wrong, someone will find out, and then you are going to end up in Tax Notes or in Forbes or on the — above the fold of the Wall Street Journal, and by that time it's too late. But that was the experience with the shelters. We eventually found them. Now, I will stand up and get out, back in my role.


MR. BERGIN: Who is next? Oh, I'm sorry, over here first, and I will get to you Bob, I'll head to Tom first.

MR. OCHSENSCHLAGER: I'm Tom Ochsenschlager with the AICPA, and if I could just tag on to some comments that Lawrence made just a moment ago. It strikes me there is a balance, perhaps a delicate balance between advocacy and transparency. And there would be some of the professions that would say now that with things like the M-3 and FIN 48 and other pronouncements recently that there — the balance has maybe swung a little bit away from the advocacy and towards the transparency and maybe that's a good thing.

I would be interested in your comments on that, and maybe specifically on the comments that, I think, Larry, mentioned earlier, alluded to, was the attorney-client privilege. Under the current pronouncements of the PCLB, there appears to be some erosion if not elimination of the attorney-client privilege in regard to tax matters. You combine that with the FIN 48, and frankly it's almost like transparency on the speed, I think, for some clients who are subject to GAAP. I wonder if you would like to comment on that please.

MS. NOLAN: Well, I would just like to comment on your statement about the M-3, and FIN 48 being increased disclosure. From my perspective of course, that's a very good thing, because it helps us focus in on areas of risk and for — I would think that for taxpayers who want to get it right that's a good thing for them too, because it facilitates our ability to do that. I'll let Larry respond to the other comment.

MR. LANGDON: I think, on both sides there needs to be a bright line with regard to, on the one hand effective disclosure and transparency, and on the other side, the ability to consult with one's advisers in the dispute resolution process. And I think that's true of both government people and the corporate practitioner community as well.

Where we draw that line I think is the point of creative tension and doing that effectively, I think, we're going to have to work some more out — with regard to that. But I think it is extremely important that one, the IRS does have the ability to require taxpayers to disclose all of their issues of softness, or in the grey area as a matter of good tax administration. And the M-3, the disclosure needs these, and the ongoing dialogue with regard to what's next, and those rules need to be constantly rephrased, revised, as has happened over time.

In addition, I think there is a real obligation on the part of the IRS to disclose the process they are using at a couple of levels. I am very comfortable with the tier 1, 2, 3, process, because in effect it does articulate that the IRS does view different issues at different means, and they are trying to address resolution of it. And I would comment coming out sooner rather than later, which I know is your objective, Debbie with either a process, you know, decisions and more importantly, you know, how these issues can be resolved effectively. That, I think, is extremely important to make the system work.

MR. GIBBS: I'll make a comment. We're awfully late in the program to make this comment, but I'll make it anyway. If you look at what is playing out in the public today, I would encourage the legal profession, the accounting profession, and the large corporations to look very, very carefully, at what Larry just said.

My recollection of what happened after Arthur Young was that many companies began to explore the possibility of using lawyers to deal with tax reserves. And I think that the concern that arose over that caused the SEC to contact the IRS. And I think it was something that Roscoe Egger understood very well, and it is what led to the current policy of restraint on tax accrual work papers.

If we get back to the point where the legal profession and the accounting profession start squabbling with one another again, then it's going to be most interesting, particularly in what is happening today. The juxtaposition of Debbie's comments yesterday at lunch, while Commissioner Everson was being beaten up, down on the Hill over the tax gap, over not doing enough. I am telling you that I look at it, and say tensions are moving in such a way where the IRS is getting squeezed to do more, and more with less.

And the tensions that puts on having more disclosure, more transparency with respect to things, for example, in the tax reserve. Attorneys have been using this type of thing, is getting pretty intense folks, and I think it's in everybody's best interest to kind of back off, take a deep breath, and look at where we are, before we start getting into things that I think can lead all of us to a much more difficult planet.

SPEAKER: Great point.


MR. GOULDER: Yes, I'm Bob Goulder with Tax Analysts, and I'll apologize in advance for asking what might come across as a cynical question. But I can visualize an outcome where things get worse rather than getting better. From what I understand, a lot of people, the intermediaries you speak of, they are just not scared of the Seoul Declaration and the OECD and its Forum on Tax Administration, the 35 countries Ms. Nolan mentioned before, it just doesn't have any attraction.

They are not scared of it, they might be scared of JITSIC, because that involves actual information exchange but that's another matter. What happens if this report comes out in 2008, and it lands with a thud and the people rub their hands together and say, "All right, no one is going to put a gun to our head, and make us rat on our client, so let's just get down with business like in the old days." Can you see things actually getting worse because of all this? In other words, would the constructive tension end up backfiring?

MS. NOLAN: I don't think so, I don't think that that declaration is intended to necessarily be the starting point, I think right now what you have among 35 tax administrators are different governance structures, different sanctions over the practitioner community. And the IRS frankly, I think, is one of the few leaders in that are as far as our approach not only to Circular 230 but promoter investigations, and just having a regime that has sanctions for bad behavior. And so in an attempt to arrive at an international agreement or a standard, I don't see that as tying anybody's hands to move forward. Perhaps you see that differently.

MR. GIBBS: I guess, I am looking at, I don't think things are over yet. We still don't have a trial in KPMG. We still don't have a trial with respect to attorneys that are involved in the KPMG and certainly are going to be involved given what's happened to Jenkens & Gilchrist that's one of the reasons I mentioned it.

This process has more to play, and we will see how the public reacts, based on what happens in those. I'm simply saying that I think it's time for professionals, and taxpayers to take a hard look at the fact that we are not that far from the demographic shift. The next president, whoever he or she is going to be, if they want to be a two-term president are basically going to — they are going to have to deal with the initial issues of the escalating healthcare costs, retirement costs at the federal level.

When you — the stakes get to that point, we will see, and you continue to have tax gap put out there, and the tax administrators continue to be told you've got to do more with less, and we want to deliver these programs. We will see how hard the squeeze is going to be on taxpayers and professionals. So I just don't think things have played out yet in terms whether people, you may be absolutely right, in terms of whether people today are very worried about the situation. But we would just see how it plays out, it's all I'm saying.

MR. LANGDON: Frankly, I see that as thinking globally, but the implementation is going to be acting locally. And the reason I say that is we're in a global economy and the OECD, the U.N., or you think of any other international body is not going to be able to create uniform tax laws, and uniform processes of administration. But they can provide leadership, to provide that — on U.K., Australia, China that in effect local implementation of good tax rules, to good tax processes and I'll say standards of ethics and professionalism do occur. So that's where I think the OECD can be of a great deal of influence.

MR. BERGIN: Okay, thank you.

MR. BRANDT: Hi, I am Dan Brandt with the Senate Budget Committee. I was wondering if people on the panel have noticed an increase in transparency from dividend paying companies, since JGTRRA was enacted in 2003.

MR. GIBBS: I'm sorry, could you repeat the question once again?

MR. BRANDT: Have you noticed an increase in transparency from dividend paying companies since JGTRRA was enacted in 2003.

MR. GIBBS: I'm sorry I don't understand the context of your question.

SPEAKER: Yeah, I do.

MS. NOLAN: Yes, sir, I do.

MR. BRANDT: I guess, my point is that I would expect a company that has to pay a dividend regularly to have more accuracy in their financial information because if they withdraw the dividend, then they'll be penalized by the financial markets, so I would expect a commiserate increase in the accuracy of their reporting on their tax returns.

MS. NOLAN: I'm afraid I am not able to respond to that.

MR. LANGDON: Yeah, yeah. I don't think we are either, because that, I don't think you run things through that filter.

MR. BRANDT: Thanks.

MS. NOLAN: Sorry.

MR. BERGIN: Can I impose on you guys just to take two more questions.


MR. BERGIN: Got two more.

SPEAKER: Good morning, Chuck Lacijan. Do you see any increased pressure on intermediaries not to rat out their clients, but to rat out their partners? We've seen two cautionary tales in the last several months, one with Jenkens & Gilchrist and another with Jackson Hewitt, which maybe serves a different audience. But clearly where the value of the partnership was eroded by small number of intermediaries, who essentially caused the demise of the entire organization. And will franchise owners or partners in these organizations of intermediaries put more pressure on the corporation to enforce better standards of integrity lest their whole value of their partnership of franchise go down the tubes?

MR. LANGDON: No, I have clearly seen that and there is another major driver for that, which is, you know, the professional liability insurers insisting that both law firms and CPA firms have high standards of ethical conduct with regard to issuance of opinions. And it's kind of a, I think an interesting corollary to our mandatory Circular 230 statements, which at one level frankly are worthless. But the internal part of that with regard to all of a sudden the risk management people within the firm realizing that a bad tax opinion is going to affect everybody's equity, and that — and also the liability insurance is a real measure of accountability that it think is very healthy.

MR. BERGIN: One last question, anybody? Okay well, let me thank our distinguished panel. I appreciate you greatly. Thank you.


(Whereupon, at 10:58 a.m., the PROCEEDINGS were adjourned.)

* * * * *