In March 2007, the Internal Revenue Service (IRS) released information regarding its new Industry Issue Focus (IIF) program for large and mid-size corporate taxpayers. Under the program, the IRS identifies compliance issues and then prioritizes them based on how prevalent they are across industry lines and the level of compliance risk they present. Since that time, the IRS has made available considerable information relating to so-called Tier I and Tier II compliance issues. A previous McDermott On the Subject discussing Tier I and II compliance issues is available here.
Considerable mystery remains, however, around so-called Tier III issues. The IRS generally has described Tier III issues as industry specific issues that should be considered by examination teams when conducting their risk analysis and be resolved using existing guidance and procedures. To date, the IRS has not publicly released a list of such issues.
McDermott Will & Emery has obtained an IRS document dated December 2007 entitled “Tier III Issues: Quick Reference Guide.” The Quick Reference Guide lists Tier III compliance issues in the Communications, Technology, & Media Division; the Natural Resources & Construction Division; and the Retailers, Food, Pharmaceuticals, & Healthcare Division. The Financial Services Division and the Heavy Manufacturing & Transportation Division currently do not have any identified Tier III issues.
The Quick Reference Guide also provides a description of each issue, which in some instances is quite cursory, but in other instances contains a slightly more detailed discussion of the current IRS position, including references to relevant authorities. Although the Guide states that technical advisors have been assigned for each Tier III issue, only some technical advisors are identified in the Guide. Instead the Guide notes that a list of the technical advisors, as well as many audit technique guides, reference materials and training materials, are available on the IRS large and mid-size business website (which is not accessible by the public).
For the full list of Tier III issues identified in the Guide, click here.
Because the IRS has not yet officially released this list of Tier III issues, it is quite likely that the IRS will refine the list over time. In the meantime, it remains to be seen what effect the Tier III label will have on taxpayers’ ability to resolve issues at the IRS exam and appeals levels. Although an issue identified as a Tier III issue may or may not carry the same stigma that appears to have attached to many of the issues identified as Tier I or Tier II issues, companies should be aware that the IRS is likely to focus more on all of these issues and be prepared in their responses and approach to the IRS.