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March 16, 2016
LB&I -- the Case for a New Management Paradigm
by Samuel M. Maruca

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Samuel M. MarucaSamuel M. Maruca is a Washington tax lawyer who served as the first director of transfer pricing operations in the IRS Large Business and International Division.

In this article, Maruca discusses LB&I's new strategy for issue selection and development, which appears to promote quality over quantity. He argues that changing what it means to be a manager in LB&I would increase the likelihood of success in implementing this welcome new strategy.

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The IRS Large Business and International Division must be commended for the steps it is taking to align the examination workforce with the daunting realities of limited resources and growing demands. The steps include the focus on strategic issue selection, especially in the international area; the development of more sophisticated training programs; and the creation of a practice group structure for issue management (through which the executive team will have greater visibility into specific examinations) . Those efforts should better position LB&I to improve enforcement credibility and program efficiency overall. This approach stands in stark contrast to the status quo ante, in which virtually all large-company returns were staffed up and processed without much forethought about actual risk exposure -- and without much guidance from the leadership, which viewed its role as "being there to support the team." And it suggests that LB&I is pivoting from a "volume game" (when case closure is the all-important metric) to a more targeted, quality-oriented approach regarding issue selection and development, with different measures of success.

But in tax administration as in golf, it's the follow-through that counts, and the leadership team will need to pursue these new objectives aggressively and relentlessly if real and lasting change is to occur. Moreover, if LB&I is to be a successful, knowledge-based organization that is able to hold its own in the big company enforcement arena, LB&I should reconsider what it means to be a manager in the division. The old volume game put a premium on administrative skills rather than programmatic elements, such as (but not limited to) technical tax expertise. The more quality-oriented approach envisioned in the new business model demands a different kind of manager who is focused on different objectives. Specifically, the LB&I management team, up and down the chain, should be reasonably skilled in issue selection and development, capable of performing quality control functions, and able to provide mentoring for more junior personnel.

That is not to say that the current LB&I management team is inherently deficient in those areas. Rather, the current orientation results from either an institutional choice of management models, simple inertia, or some combination of the two. Put otherwise, LB&I managers are trained to do the wrong things. The IRS's historical approach has been to produce mostly internally grown managers, who are by design "fungible" in the sense that they are prepared to take on a leadership assignment anywhere in the agency. Consequently, executive training has emphasized administrative skills that include how the agency is organized, how it operates, how to pull the bureaucratic levers, employment matters, and budgeting. There is little or no instruction on timely tax topics, strategic issue identification, or improving case development.

This might be appropriate training for some operating divisions or for some administrative roles within LB&I itself, but it is not well suited to execute the plan now envisioned for the program side in LB&I. The institution needs to make a different choice, which implies a reinvention of the management training regime, retraining for existing managers, and the recruitment of experienced tax practitioners from outside the agency, as well as from within, to augment and refresh the management ranks.

Given that LB&I seems to be moving towards a practice group structure, it follows that the management team within each group should have a solid grasp of the technical aspects of the issues for which the group is responsible. This means not that they should be required to master all the nuances of the law (counsel can help with that) but rather that they should be capable of asking the kinds of questions and providing the kind of guidance that will foster the best use of resources. That means smart issue selection, "strategic abandonment" of less worthy issues, and effective use of the transaction-based audit tools that have been developed in recent years. Those include the international practice units and the transfer pricing audit roadmap, for example.

Other desirable qualities should be inculcated in LB&I managers (qualities that are often lacking in those large organizations). Mentoring skills are critical to ensure perpetuation of the knowledge base and to create the next generation of leaders. Teamwork is important, as is a sense of independence and empowerment. LB&I is a very hierarchical, lockstep organization. This can have the effect of blunting initiative, encouraging conformity, and institutionalizing a fear of failure. Those characteristics are not conducive to the kind of debate and experimentation required for success in a business, like that of LB&I, that is fundamentally an intellectual one. The issues carry high stakes and can be very complex. If it is to compete with the best and brightest in the private sector, LB&I is going to have to bring its "A" game. That requires well-trained and motivated people acting collectively and feeling that they are safe from retribution when inevitable mistakes are made. Conversely, impeding free discussion or "going it alone" should be strongly discouraged.

In the new LB&I model, it will be important to clarify roles and responsibilities. The priority of program managers should be the program! To the maximum extent feasible, the administrative aspects of program delivery should be addressed by others trained for that role. Currently, executive assistants (EAs) for operations are charged with making the trains run on time. But in my experience, program executives often cannot avoid spending inordinate time on nonprogram matters. To be sure, it isn't always easy to distinguish between the substantive program and program administration. And there is no escaping the need for managers to perform personnel reviews for their reports, among other things. Rigorous training and empowerment for EAs, together with more explicit task allocations, would be immensely helpful, though, in freeing up program managers to concentrate on optimizing LB&I's basic work product, which is the quality examination.

The typical management structure in a different sort of knowledge-based organization -- a university -- could provide a useful analog for building a more effective LB&I management team. Like the precursor LB&I practice groups of recent years (transfer pricing operations and the foreign payments practice), the program side at a university usually features a team of managers who are all, to some degree, experienced in their field and engaged in the substantive work and report to more senior and more experienced practitioners. The dean of the faculty is the senior program officer, followed by department heads, other full professors, junior professors, instructors, and teaching assistants. The more senior faculty (by design, at least) provide guidance, mentoring, and quality control to junior faculty: learning occurs both up and down the chain. On the other side of the house is the business operation, headed by a chief business officer to whom administrative department heads report. The role of the business operation is to ensure that the budget, the physical plant, and other administrative functions fully support the program activities including teaching, research, and performance art.

Transfer pricing operations brought a new way of doing business to LB&I, with an experienced management team that effectively connected senior leadership with a field operation embedded in examination teams across the country. The success of that type of model depends on the personal involvement of management in the scoping and delivery of the work. One hopes that LB&I can leverage that experience and re-engineer the management role so that it aligns with the expanded practice group structure envisioned for the reorganized examination function.

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