Issue Tiering Process Frequently Asked Questions - LB&I

Q1. What is the rationale behind the Issue Tiering process?

A1. Issue Tiering is a key element of LB&I's issue management strategy. It promotes taxpayer compliance by strengthening LB&I's  ability to identify, prioritize, analyze and address significant tax compliance issues in a coordinated, consistent manner.

Under Issue Tiering, LB&I evaluates tax compliance issues for the levels of risk they pose to taxpayers and the tax system. Issues that are high profile or are found to present high levels of risk may be assigned to one of three risk tiers for coordinated oversight and management.

Each tax compliance issue is unique; there is no “one size fits all” strategy. LB&I tailors its approach to managing every issue based on its unique characteristics.

Other elements of LB&I’s issue management strategy include electronic filing, Schedule M-3, IMS/IBMIS, the use of issue management teams, and an increased emphasis on risk analysis.

Q2. What differentiates the three risk tiers?

A2. Tier I issues are of high strategic importance to LB&Iand have significant impact on one or more Industries. They may be of high visibility, involve large numbers of taxpayers, pose significant dollar risk and/or reflect substantial compliance risk. .Tier I includes recognized abusive and listed transactions, including tax shelters, as well as other high-risk compliance issues.

Tier I issues require oversight and control by an Issue Owner Executive (IOE). The IOE is responsible for ensuring that the issue is fully developed, and that appropriate direction and resolution strategy are provided to the field. The IOE also assembles an issue management team (IMT) to develop the issue and provide a resolution strategy. Field examiners and teams must address Tier I issues in accordance with the IMT's direction.

Tier II issues reflect areas of potential high non-compliance and/or significant compliance risk to LB&I or an Industry. Tier II includes emerging issues where the law is fairly well established but a need exists for further development, clarification, direction and guidance on LB&I's position.

Like Tier I issues, Tier II issues are also assigned an IOE and supported by an IMT. The IOE is responsible for providing technical support on Tier II issues to field examiners, while the IMT prepares formal guidance for the field and, where applicable, resolution strategies. Field examiners and teams must address Tier II issues in accordance with the IMT's direction.

Tier III issues typically represent the highest compliance risk for a particular industry, and require unique treatment within that industry. The Industry Director of the impacted Industry is typically the IOE for a Tier III issue. Tier III issues do not typically require the formation of an IMT.

Q3. What is the role of the Issue Management Team (IMT)?

A3. Issue Management Teams are essential to the Issue Tiering process. The role of the IMT is to gather information and develop the issue so that clear direction and resolution strategy can be provided to the field as quickly as possible.

At the outset of its formation, each IMT must attempt to clearly define the goals it intends to pursue with regard to the issue. An IMT should be flexible with regard to the options it pursues, and will consider whether an issue needs to be addressed through litigation. IMTs should strive to identify the best case(s) for factual and legal development.

IRM 4.51.6 - Issue Management Process Guide provides a detailed discussion on the composition, roles and responsibilities of IMTs.

Q4. What differentiates Issue Management Teams and Issue Specialization Teams?

A4. An Issue Management Team (IMT) exists to gather information and develop an issue so that guidance (and a resolution strategy, if possible) can be delivered to the field as quickly as possible.

The IMT is comprised of executives and other representatives from the various functions impacted by the Issue Tiering process, including LB&I Industries, LB&I staff functions, Appeals, and Counsel.

An Issue Specialization Team (IST) exists to review an issue as it appears in cases across multiple Industries. It seeks to expedite development of the issue and promote greater examination consistency in the field with respect to the issue.

The IST consists of specialists knowledgeable in the issue and/or examiners from various teams and locations around the country. Depending on specific circumstances, IST members may be trained and assigned to work on the issue on either a part-time or full-time basis. IST membership is a temporary assignment.
ISTs should be considered for:

• Complex issues or transactions;
• Issues requiring time-consuming factual development (i.e. numerous documents to be secured and analyzed;
• Issues involving a significant number of taxpayers with the same or similar transactions.

Q5. Who determines whether an issue becomes tiered and how it is managed?

A5.  LB&I's Compliance Strategy Council (CSC) has ultimate responsibility and authority for determining placement of issues in the tiering structure.  LB&I Industry and staff directors periodically review emerging and existing tax compliance issues to assess the levels of risk they pose to taxpayers and the tax system, as well as to determine the extent to which the issues impact multiple LB&I Industries. Those issues determined to be high risk in character and impacting multiple LB&I Industries will be forwarded to the CSC for additional review. The CSC will make a determination as to whether the issue is suitable for inclusion in one of LB&I's three risk tiers.

The CSC also determines ownership of tiered issues. Once an issue is assigned to a particular risk tier, ownership of the issue is assigned to a specific Industry or staff director. That individual henceforth becomes the Issue Owner Executive (IOE) with respect to that issue.

The IOE makes decisions about how particular issues are managed. For each Tier I and Tier II issue, the IOE typically will assemble an Issue Management Team to assist in researching and developing the issue, crafting guidance for the field and establishing a resolution strategy. For Tier III issues, the IOE will typically work with the appropriate Technical Advisor and Counsel to research and develop an issue and prepare a resolution strategy.

Q6. How are across-industry issues treated in the Issue Focus process?

A6.  There may be instances when teams, senior leaders or executives will determine the need to elevate case interactions across industries, for example, when it is determined that:

• A case is not aligned with the proper industry;
• A case includes an industry-specific issue that require guidance or leadership from an Issue Owner Executive in another Industry;
• Potential exists for the case to be designated as a litigating vehicle;
• The impact of an issue on a particular industry is significant;
• Potential exists for setting precedent within the industry;
• The issue has high visibility within an Industry group.

Across-industry interactions will be managed in accordance with provisions of IRM 4.51.1 Rules of Engagement. According to the IRM, Line Authority Executives (LAEs) are responsible for the administration and control of tax cases within Industries, while Issue Owner Executives (IOEs) are responsible for the identification, development and resolution of specific tiered issues in tax cases across Industries.

In all instances, across-industry interactions shall be managed carefully to ensure that they add value, build trust and promote fairness and consistency in tax administration.

Q7.  Is the taxpayer allowed to talk to the Issue Owner Executive?

A7.  Taxpayers are allowed to talk to Issue Owner Executives (IOEs) in accordance with provisions of LB&I's Rules of Engagement (see IRM 4.51.1).  Such contacts are known as “case interactions” and are defined by IRM 4.51.1.3:

“A case-related positive contact to achieve a shared outcome. Such interactions may occur at any phase of the tax cycle, pre-filing through post-filing.”

Case interactions can be triggered by teams or leaders for a variety of reasons. In most instances, a team invites interaction from senior leaders in response to particular needs. In other instances, a leader may proactively become involved after identifying the need for interaction or uncovering a situational opportunity that warrants involvement.

Reasons for a team to invite senior leader or executive interaction may include:

• Questions regarding availability of team resources; ability of the team to handle or resolve a particular issue or situation; team/manager experience levels; competing resource demands; and scheduling concerns resulting from taxpayer’s untimely furnishing of documents.
• Disputes within teams; disputes between teams and taxpayers, difficulties dealing with contentious taxpayers; taxpayer requests for senior leader or executive interactions; or taxpayer’s need to elevate issues or discussions within its own organization.
• Potential impact or visibility of an issue; potential for precedent- setting and/or concerns about undermining the tax system; need to coordinate issues across LB&I lack of published guidance on a particular issue; the need for strategic industry input or assistance; need to ensure consistent industry treatment of issues; resolution that requires additional technical and/or procedural guidance or support; and emerging industry/specialist needs.

Senior leaders or executives may determine a need for interaction.  Typical reasons include:

• Requests from team leaders or taxpayers; involvement of new taxpayers; need to improve service to taxpayers; Trade Association of Industry group contact; or for other “relationship management” purposes.
• Increase understanding of particular cases/issues; ensure consistent industry treatment; propagate best practices; introduce new initiatives; instill the values of and apply Issue Management Strategy.

Q8.  What is the role of the Issue Owner Executive?

A8.  The Issue Owner Executive (IOE) has ultimate responsibility for researching and developing the tiered issues he/she is assigned to lead, as well as delivering appropriate, timely guidance to the field and preparing a resolution strategy as soon as possible. 

For Tier I and Tier II issues, the IOE establishes an Issue Management Team (IMT), selects an Issue Champion, and determines if the issue will be worked as a single issue or as a primary issue with a series of related sub-issues. Depending on the number and size of the sub-issues that may be involved, the IOE may decide sub-teams are needed and that more than one Issue Champion should be appointed. The IOE retains oversight responsibility for the IMT.

For Tier III issues, the IOE will typically work with the appropriate Technical Advisor and Counsel to research and develop an issue and prepare a resolution strategy. As with Tier I and Tier II issues, the IOE typically appoints an Issue Champion to lead issue-related activities on a day-to-day basis.

IOEs are encouraged to engage (but not negotiate) with external stakeholders to try to understand the issue from their perspective.

Q9. What is the process if an issue is identified as a Tier I and there is no IMT in place yet?

A9. The examination team should contact the appropriate Technical Advisor for interim guidance.

Q10.  What is the Industry Issue Coordinator’s role?

A10.  The Industry Issue Coordinator (IIC) plays a key role in the Issue Tiering process. The IIC serves as the focal point for communications relating to potential tiered issues and acts as a liaison between LB&I technical advisors/specialists and other industry coordinators.  The IIC maintains open lines of communication with Appeals, Counsel, other business operating divisions and government agencies regarding industry issues to be aware of all activities that will affect the issue.  See IRM Exhibit 4.51.5-1 for additional information.

Q11.  What are Industry Director Directives?

A11. LB&I Industry Director Directives (IDDs) are memorandums issued by LB&I Industry Directors intended to provide guidelines and instructions to examiners on procedures and administrative aspects of compliance activities to ensure consistent treatment of taxpayers.  Directives may address one or more of the following:

• Identification of a new tiered issue
• Examination planning;
• Issue development;
• Audit techniques;
• Operational guidance; 
• Resource allocation; and/or
• Transition of an issue from Active to Monitoring Status.

LB&I examiners are expected to follow guidelines and instructions provided in IDDs.  If a Directive is jointly issued with another Operating Division, then examiners of both divisions must follow instructions contained in the Directive. See IRM 4.51.2.6 for additional information.

Q12.  What is the PFTG Technical Advisor’s role?

A12.  Technical Advisors (TAs) are responsible for:

• determining cases under audit;
• notifying Industry Director of significant cases;
• communicating with CIC and IC agents, regardless of Industry alignment, on matters pertaining to the TA’s area of expertise;
• providing examination teams with timely updated information;
• contacting teams with industry and emerging issues;
• maintaining mailing lists of employees working emerging issues and tiered issues;
• providing value added input to team on matters pertaining to the TA’s area of expertise;
• developing and maintaining auditing guidelines and techniques;
• communicating with the team in the early stages of audit;
• being part of an Issue Management Team, where necessary; 
• ensuring that Tier I and Tier II issues are identified, coordinated and properly developed in accordance with guidance from IOEs; and
• working with Issue Owner Executives and Line Authority Executives, as necessary, to reinforce consistent treatment of similarly situated taxpayers with respect to specific issues

Q13.  What is Appeals’ role?

A13.  When the Compliance Strategy Council (CSC) -designates an issue as Tier I or Tier II, notice shall be provided to the Appeals Division.  Appeals will designate a contact person, the Appeals Technical Guidance Coordinator (TCG), to represent Appeals henceforth with respect to the issue. The TCG will serve on the Issue Management Team (IMT) and ensure the issue is coordinated appropriately and as necessary in Appeals.

The TGC can:

• provide insight to the IMT on factual scenarios for the issue and the legal issues raised by taxpayers and their representatives;
• assess proposed tax positions in terms of administration and application; and
• draft Appeals Settlement Guidelines (ASG) or an Appeals Settlement Position (ASP) that reflect the hazards of litigation.

Appeals’ role on the IMT is circumscribed by the ex-parte provisions of Revenue Procedure 2000-43 and the mandate for independence. As a result Appeals staff will not participate in:

• case development;
• decisions on issue examination;
• identification of cases for litigation.

The IMT, working with the TCG, should ensure that the issue is properly coordinated with the Office of Appeals.  Possibilities include:

• Coordinated Issue Paper
• Appeals Emerging Issue
• Appeals Coordinated Issue

IMTs will generally be disbanded when guidance is issued and cases in examination no longer pose a significant compliance challenge. Issue experts in Appeals, LB&I and Counsel may continue supporting the field with issue-related questions after the IMT is disbanded.

Q14.  What is Counsel’s role?

A14.  There may be one or more Counsel team members from each category described below.   Each category has a different purpose.

• The Counsel Issue Owner is an LB&I Area Counsel, who may in turn delegate responsibility for the issue to a Deputy Area Counsel or Associate Area Counsel.   The Counsel Issue Owner advises the Issue Owner Executive (IOE) and Issue Champion on the issue and provides executive-level coordination of the issue with Counsel.
• In addition to the Counsel Issue Owner, there will be an LB&I Counsel representative assigned to the IMT.  This person will generally be an Industry or Issue Counsel with expertise on the issue who can assist in the identification of cases and provide expertise related to the factual scenarios of the issue, the legal issues raised by taxpayers, and the appropriate application of legal positions.  The LB&I Counsel representative will participate in the drafting of direction on the issue to the field, as well as the identification of potential cases for litigation designation.  This representative will be assigned by the LB&I Division Counsel and/or Counsel Issue Owner in consultation with the IOE and/or the Issue Champion.
• Finally, a representative from National Office Chief Counsel will be assign to the IMT to provide support to the team until the direction is drafted and issued to the Field.  This representative will be an attorney assigned by the Associate Chief Counsel with subject matter jurisdiction over the issue in consultation with the LB&I Division Counsel, the Counsel Issue Owner, the IOE, and/or the Issue champion.  The representative will assist by providing legal expertise on the issue and will serve as a liaison between the IMT and National Office Chief Counsel to facilitate effective and prompt communication and feedback between the IMT and the Associate offices, and will also participate in the drafting of the direction to the field on the issue.

Q15.  Are all Tier I Issues mandatory for examination?  

A15.  Tier I includes two categories of issues: Recognized abusive and listed transactions, including tax shelters, and other high-risk compliance issues. Recognized abusive and listed transactions are considered mandatory work and must be addressed whenever they are present in a case or return. 

Other Tier I high-risk compliance issues are not always treated as mandatory work.  It is not LB&I policy to unilaterally examine every Tier I Compliance Issue.  Direction on those issues must be tailored to the specific issue and circumstances.  Examiners should always consider Tier I issues as part of every examination.  Each of the Tier I issues is unique and each requires different treatment streams and approaches. 

While emerging issues and certain mature issues require strict coordination, there is no “one size fits all” strategy.  Risk factors for scope of inventory include adjustment potential, materiality, impact on future years, appeals and litigation implications, and resources.

Q16.  Does a Revenue Agent have any latitude to settle tiered issues?

A16.  Revenue Agents may resolve issues based on individual facts and circumstances, to be determined on a case-by-case basis.  However, Revenue Agents may not settle issues, because settlement authority is the jurisdiction of Appeals.

Revenue Agents are provided guidance in working and completing the issue.  There is no “one size fits all” strategy.  The disposition or resolution of each Tier I issue must be in accordance with the Issue Owner Executive’s (IOE’s)  guidance for that issue. The IOE is responsible for ensuring the disposition or resolution of Tier II issues, so as not to hinder LB&I's broader direction and/or guidance.  The Line Authority Industry Executive retains unilateral decision making authority, including ultimate disposition and resolution, over Tier III issues. Teams working Tier III issues should use available direction, guidance and/or Audit Technique Guidelines in the development and resolution of the issue to ensure consistency throughout LB&I.

Q17.  What if the taxpayer offers a settlement to the team?  For example, what if the taxpayer comes in with a proposal to resolve the issue that is not in full agreement with the Form 5701?  Does this proposal again have to be presented to the IMT?

A17.  Whether the proposal to resolve a Tier I issue needs to be presented to the IMT will depend upon many variables.  For example, the level of issue “maturity”; whether Counsel has provided published guidance on the issue; whether the issue been designated for litigation; or whether the issue is being considered for litigation in a different case.

Consistent treatment among taxpayers is paramount to the Issue Tiering program.  If the issue is tiered, but not listed, published guidance for the issue should be consulted and followed.  The appropriate Technical Advisor should be contacted with any unresolved questions.

On the other hand, if the issue is listed, examiners must consult with and secure the concurrence of the Technical Advisor, Issue Specialist, and/or Counsel before going forward with any resolution other than full concession of the issue by the taxpayer.  No proposals should be accepted without the concurrence of the IOE. 

Q18.  What is the timeline for resolution and response from an Issue Management Team?

A18.  In August, 2007, LMSB published a new IRM section ( IRM 4.51.6) that provides for two tracks or timelines for addressing a tiered issue and providing direction to the field.   Factors such as the complexity of the issue and whether an established legal position exists will determine which track is appropriate for an Issue Management Team (IMT) to follow. Issue Owner Executives (IOEs) have the flexibility to change tracks or modify actions in response to changes in compliance risk or as facts are developed that indicate a different approach should be used.

• Track A:  The goal under this track is to provide direction to the field on an issue within 120 days.  The types of issues worked using this process will generally have established legal positions and/or be factual issues.
• Track B:  Track B is used when the IOE recognizes that the type of direction needed on an issue will require more than 120 days to develop.  The goal under this track is to provide direction to the field as quickly as possible.  The types of issues that will be managed under this track are more complex transactions, which will require more development and legal analysis than those issues that fall under Track A.  In these situations, a stepped approach will be used by the IMT, requiring the issuance of interim administrative guidance to the field on the issue within 120 days.

Q19. When do tiered issues get removed from a tiered platform…either going from different levels of importance or dropped from the tiering process altogether?

A19.  Tiered Issues are never removed from the issue tiering structure or demoted from one risk tier to another. Instead, at the discretion of the Compliance Strategy Council, an issue may be moved from “active status” to “monitoring status”  within a particular risk tier. (See IRM 4.51.5 - Issue Tiering and Control of Tiered Issues – for definitions of “active status” and “monitoring status.”)

An issue will be considered eligible for monitoring status when the IMT has:

• Identified the universe of returns that are likely to contain the issue;
• Provided the necessary direction to the Field;
• Issued appropriate procedural guidance and legal position;
• Developed a resolution strategy;
• Determined that there is no need to continue the heightened level of oversight. 

LB&I's official Tiered Issues listings will continue to reflect all active Tier I, II and III issues, and in addition will show those that have been placed in monitoring status.

While issues in monitoring status may no longer require the focused attention of an Issue Management Team, they still need to be managed in accordance with established guidance whenever they appear on a tax return

Q20.  What are the procedures for nominating issues for the Issue Tiering process?

A20.  Refer to IRM 4.51.5.3 - Process of Identifying and Ranking Industry Issues for a complete discussion on how compliance issues are identified and ranked. 

Q21.  How and when will the tiered issues lists change or are they considered relatively static?  How will taxpayers be notified of changes?

A21.  The lists will change when new issues are added to a tier, or issues are moved to Monitoring Status.  Taxpayers will be notified of adjustments to the lists via irs.gov.

Q22. How is Issue Tiering process different from the Compliance Initiative Project (CIP) process?

A22.  The CIP process provides procedures for conducting tests of high risk compliance issues.  If the CIP results identify a significant compliance issue, the issue may be tiered based on how prevalent it is across industry lines and the level of compliance risk it presents. Management direction and resource deployment would then be focused on those issues with the greatest risk.