Stephen Camm considers a United States initiative to tackle long running and costly tax disputes and discusses whether such a system would work in the United Kingdom: Article in the April 2002 issue of Tax Adviser. Stephen Camm is a Director in PricewaterhouseCoopers’ Tax Investigations business. US initiative
The start of 2002 has brought the welcome news that the Internal Revenue Service (IRS) is acknowledging the problems of long-running disputes with the launch of a one-year pilot scheme offering alternatives to speed up the process. The initiative, the Large and Mid-sized Business Division Fast-track Dispute Resolution Pilot Programme, is a joint effort between the Large and Mid-size Business Division (LMBS) and the Appeals Office. It represents a chance for corporate taxpayers to cut the time it takes to resolve disputes with the IRS, without affecting their existing appeal rights.
Appeals Office staff will be used as mediators in a fast track process that seeks to resolve disagreements within 120 days – in the process reducing costs and time for both government and taxpayer.
The company and the LMBS officials will have the option to choose between two alternatives:
- to have the issue resolved by mediation, where Appeals officials facilitate communication and resolve factual issues; and
· to opt for a process where Appeals officials set out a settlement recommendation.
With both approaches the company and the LMBS must agree to the settlement.
Currently disputes with the IRS can take two years or more to settle, under a system where a taxpayer’s audit and appeal occur sequentially. Minimum requirements for inclusion in the programme are not onerous; the pilot will be available to large and mid-sized businesses that have at least one year under enquiry and one issue under dispute. Selected cases will be those where the company, the LMBS and Appeals officials unanimously agree that it will be of benefit.
Like so many things American, the scheme may find its way to the United Kindom (UK) before too long. But is this pilot a workable answer to a long-running problem facing UK companies? It may be easier to answer this question by imagining how a similar pilot might work here.
Perhaps the Large Business Office and the General Commissioners would run the scheme, with the latter acting as mediators in an attempt to resolve disputes within four months. This close co-operation between the Large Business Office and the General Commissioners would need to be carefully presented if it were not to add to fears that already exist in less informed quarters, that the General Commissioners are somehow joined to the Inland Revenue, rather than an independent organisation. Whilst the mediation process would not affect a taxpayer’s existing appeal rights, would the appeal be heard by the same General Commissioners who had taken part in the mediation process and who were well acquainted with the facts? How would both parties to the appeal feel about that? If different Commissioners, new to the issue, were to be involved then would an opportunity for cost saving not slip away? It could be that a beefed up Adjudicators Office might take this role rather than General Commissioners, but as it is staffed largely with ex-Revenue officials it might face the same uninformed scepticism about its objectivity. The fact is that neither of these two bodies is particularly suited or well placed to take on the role of mediator.
Under the scheme the company and the Revenue would have the option to choose between two alternative approaches. Unfortunately neither communication/fact facilitation nor settlement recommendation is likely to bring the process to a conclusion, as no settlement can be forced upon either party.
Are there useful precedents that might inform us as to the pilot scheme’s likely success? Try to recall the Revenue’s much publicised Faster Working initiative. A discouraging precedent, this was a failed attempt to use the momentum generated by the change to Self Assessment to introduce a speeded-up enquiry system for selected cases. It was a sensible suggestion that did not work largely because set-in-their-ways Revenue Inspectors generally felt pressured by the concept and taxpayers saw little advantage to it for them. The scheme has now been quietly dumped.
A pilot along the lines of the American scheme may be attractive as a means of faster dispute resolution, but isn’t the reality the paradox that by adding a third party with no power to enforce a demanding timetable, extra time could be added instead? Rather than facilitate communication, the danger is that it will be further complicated, particularly in the early days when everyone is unfamiliar with the programme.
The IRS suggests that currently disputes can take two years or more to settle. Lots of companies struggle to bring their affairs up to date. The worst example that I have encountered was a quoted group that had over 500 unresolved issues, going back to the 1980s, and spread over 50 companies, some of which it no longer owned. I suggest that two things are needed to deal with situations like this, and that there is more merit in these than advancing the American pilot scheme:
- a greater commercial awareness and pragmatism on the part of the Revenue; and
· a willingness on the part of the taxpayer to devote resources exclusively to the problem issues for an intensive period.
Let’s look more closely at each of these points.
Greater commercial awareness and pragmatism from the Revenue is a common plea from companies that face page after page of questions from their inspector asking for information without regard to the time and cost needed to produce it. In the worst cases companies complain that the information, even if it were to be provided, would be irrelevant to determining its tax liabilities. But in fairness the Revenue is eager to build up its commercial awareness, as the recently published report Review of links with business demonstrates, and will usually be prepared to reshape its information requests if the company approaches it with sensible alternatives. Often the inspector simply needs reminding of some of the commercial realities and will be prepared to be flexible, particularly if persuaded that he is dealing with a company trying hard to be tax compliant. Where enquiries have focused on one disputed issue then a degree of pragmatism by the Revenue in reaching a settlement could help them achieve quicker cost efficiency. Through increased coverage, facilitated by quicker resolutions, the Revenue stands to increase rather than decrease overall yield and create better working relationships with taxpaying companies.
If a change of approach by the Revenue were to be matched by companies’ willingness to devote resources exclusively to an intensive exercise aimed at clearing up any compliance backlog, we might begin to see a real improvement in the compliance position across corporate Britain. With an up-to-date compliance position every company will undoubtedly benefit from:
· certainty into signing off future CTSA returns;
· the release of tax provisions;
· (if relevant) floatation in the best possible compliance position;
· long term compliance cost saving, e.g. by no longer having to track down old records; improved relationship with the Revenue; and the freedom to archive records.
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April 2002 by