A recent memo from the IRS's Large Business and International (LB&I) Division indicates an intention to resolve audits efficiently and provide taxpayers with opportunities to quickly settle and resolve issues.
The division's assistant deputy commissioner compliance integration issued a memo to all LB&I employees, dated July 23, 2025 indicating that LB&I will move towards a more efficient and current examination for taxpayers in its division.1 The LB&I Memo proposes three modifications to existing policies and practices to be implemented in 2025 and 2026.
1. Elimination of the AOF IDR Process
The Acknowledgement of Facts (AOF) process will be eliminated starting in 2026. Until the end of the year, the IRS exam team (Exam) will offer the AOF process as an option for the taxpayer to elect or decline.
Background on the AOF process
The AOF Information Document Request (IDR) is intended to provide taxpayers with an opportunity to agree to relevant undisputed facts. It is generally issued near the end of the audit. For the IRS to take the time to draft such an IDR indicates that Notices of Proposed Adjustment (NOPAs) will likely be issued. In most cases, the AOF IDR is used to populate the facts section of such NOPAs. The NOPA or even draft NOPA will already present the facts spun in a manner most favorable to the government. Seemingly, if a taxpayer disagrees with certain facts in the NOPA, then they will likely disagree with such facts as presented in the AOF IDR.
Additionally, responding to AOF IDRs add little value to taxpayers and can create problems if the taxpayer decides to pursue an issue with the IRS Independent Office of Appeals (Appeals). Facts not raised in an AOF IDR that are later raised in Appeals may result in the case being sent back to Exam for further factual development. Also, taxpayers often decline to respond to AOF IDRs because Exam cannot issue summons to compel responses.
We generally agree that the AOF IDR process often unnecessarily extends an audit. Thus, eliminating the AOF IDR process will help resolve audits more efficiently.
2. Accelerated Issue Resolution
The LB&I Memo indicates a desire for increased use of the accelerated issue resolution (AIR) process. The AIR process allows Exam to apply resolution of the same or similar positions over multiple tax periods. The LB&I Memo clarifies that the AIR program is applicable to large corporate compliance cases, even though Rev. Proc. 94-67 (the authority for using AIR) uses a legacy term, Coordinated Examination Program.
Background on the AIR process
A request for an AIR agreement is submitted by the taxpayer to Exam, and must contain a written statement of all issues, facts, law, and analysis relating to the request. Chief counsel review is ultimately required for a request for AIR to be executed. AIR is typically granted where:
- There appears to be an advantage in having the issues permanently and conclusively closed for the years covered by the AIR agreement, or the taxpayer shows good and sufficient reasons for desiring a closing agreement and it is determined that the United States will sustain no disadvantage through consummation of such an agreement; and
- The law is properly applied to the facts without taking into account the hazards of litigation or the provisions of Delegation Order No. 236.2
The AIR process should be a consideration for taxpayers that have issues impacting other filed years likely to be audited. The IRS generally takes the approach that each year stands on its own. Reaching a favorable resolution with an Exam team in the current cycle does not guarantee a similar resolution in later cycles. The Exam personnel may change, or IRS management may change viewpoints. Thus, the AIR process could be used to provide more certainty for later years.
Note that for non-filed years, a taxpayer must request a Pre-Filing Agreement.
3. Coordination of FTS Denials and Consideration of Applicable Issues
Additional review is now required to deny a taxpayer’s request for fast track settlement (FTS) of issues. The LB&I Memo encourages Exam to use FTS to resolve issues and cases early in the process.3 All senior directors must apprise the LB&I deputy commissioner of a proposed FTS denial.
Background on FTS
FTS is an accelerated issue resolution program designed to be completed in 60 days. FTS involves Appeals stepping in as a mediator to help resolve issues between Exam and taxpayers. In FTS, Appeals can look to the hazards of litigation and settle an issue. Taxpayers still have the opportunity to protest issues to appeals after Exam and can terminate or withdraw from FTS.
Issues must be fully developed before FTS begins and is most appropriately used when:
- All issues are raised, and the examination process is nearly complete;
- All claims are timely filed and examined;
- Issues are fully developed;
- Taxpayer has stated its position in writing; and
- Unagreed issues are limited in number.
Not all cases are suitable for FTS, in particular cases with numerous issues. Cases not eligible for Appeals also are not eligible for FTS such as cases challenging the constitutionality of the code or validity of a regulation.
It will be interesting to see whether the LB&I Memo increases the number of cases settled through FTS. From 2013 to 2022 only 0.3% of cases closed in Appeals utilized an alternative dispute resolution (ADR) program such as FTS. Prior to the LB&I Memo, for FTS to succeed normally required a willingness from both Exam and taxpayers. In a common scenario, Exam may not have the authority to resolve an issue. FTS provided Exam with a process to use Appeals’ settlement authority to settle the case. Exam and the taxpayer essentially already had an agreement in place before approaching Appeals in FTS. Unfortunately, most cases are unagreed when going to Appeals. The LB&I Memo is one step in the right direction of encouraging Exam to better utilize ADR programs such as FTS.
Footnotes
1 LB&I is responsible for tax administration activities for domestic and foreign businesses with a United States tax reporting requirement and assets equal to or exceeding $10 million as well as the Global High Wealth and International Individual Compliance programs.
2 Delegated Order 236 provides that no settlement shall be effected unless all of the following factors are present in the tax year currently under Examination jurisdiction: (a) the facts surrounding a transaction or taxable event in the tax period under examination are substantially the same as the facts in the settled period, (b) the legal authority relating to such issue must have remained unchanged, (c) the underlying issue must have been settled by Appeals independently of other issues (e.g. no trading of issues) in the settled tax period, and (d) the issue must have been settled in Appeals with respect to the same taxpayer (including consolidated and unconsolidated subsidiaries) or another taxpayer who was directly involved in the transaction or taxable event in the settled tax period.
3 The LB&I Memo replaces and supersedes a prior memo issued in February 2025 that also encouraged Exam to use FTS to resolve issues and cases early in the process.
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