Foreword to Corporate Tax Audit Survival by Cliff Jernigan
(foreword by Larry Langdon)

Readers Cliff Jernigan is very effective in sharing his cross-cultural experiences as a business executive working within the Internal Revenue Service as Senior Industry Advisor for the Large and Mid-Size Business Division (LMSB). In this book, Cliff brings his wisdom and advice to the corporate tax community.

Debbie Nolan and I recruited Cliff to his IRS role in April 2001, prior to LMSB’s first anniversary as an operating division. LMSB’s history, however, begins with the Revenue Act of 1998. In large measure, the activities of the LMSB reflect the vision of government service held by then-Commissioner Charles Rossotti and the Phase I and Phase II design teams, led by Bobby Scott, Debbie Nolan and David Robison.

I first met Commissioner Rossotti at the October 1998 OECD conference in Ottawa, Canada, where I was the business spokesman on the issue of taxation of electronic commerce. My next conversation with him occurred in early 1999 when he proposed that I join the IRS as the first Commissioner of the LMSB. This was an opportune time for me, since I was “retirement eligible” as an officer at Hewlett-Packard, and I had deployed my tax, export licensing, and customs team between Hewlett-Packard and Agilent as part of the Agilent spin-off.

I met Debbie Nolan in June 1999, and she was subsequently selected as Deputy Commissioner, LMSB. Debbie’s appointment marked the beginning of a very exciting business partnership in which I would provide the connection to the external world while she would focus on the internal IRS world. We decided that all of our direct reports would report jointly to the two of us, and we compared the “start up of LMSB” to a start-up business in Silicon Valley.

Selection of the “Team of 38”

On August 25, 1999, Bob Wenzel, Deputy Commissioner of the IRS, administered the oath of office to me at Hewlett-Packard corporate offices, and Bob, Debbie Nolan and I reviewed the appropriate 225 senior executives of the IRS to determine the viable candidates for the 31 career executive positions in LMSB. Debbie and I interviewed over 50 candidates, using “behavior interviewing techniques,” to determine the best-qualified. The six “critical pay” positions (five Senior Industry Advisors and the U.S. Competent Authority) to be hired outside the Service took longer to recruit.

Debbie and I also assisted in the recruitment of Linda Burke as Division Operating Counsel and Cindy Mattson as Deputy. Linda and Cindy were part of the Chief Counsel’s Office, but, for our operating purposes, they were part of our team, and they were included in all of our team meetings.

Role of Industry and Regional Directors

Before the restructuring of the IRS under the Revenue Act of 1998, the IRS was organized on the basis of four regional commissioners and district directors spread geographically across the country. Each of the district directors was, in large part, thoroughly independent with regard to district strategy vis à vis compliance initiatives.

Debbie and I made it very clear that we supported the move to take decision-making down to the appropriate level in field operations. This new structure allowed industry directors to develop strategy for audit coverage and issue resolution on an industry-by-industry basis. At this time, technical advisors were brought in as nationwide coordinators — a move that was to improve tax administration.

Stand-Up of LMSB — June 4, 2000

From an administrative standpoint, the reassignment of all of the cases from a regional structure to one that related more closely to industry required systemic changes and a great deal of coordination. Ultimately, we discovered that it was impossible to assign all of the cases to the particular industry director who had line authority over the case. Accordingly, it was necessary to have a series of cross assignments with the understanding that the industry director could intervene to insure uniform resolution of similar issues in an industry.

Town Hall Meetings

Communicating the role structure and methods of operation, both internally and externally, represented a major challenge. We met this challenge with a series of 18 internal town hall meetings. Over 60% of the LMSB employees met with the new executive team to hear the regional goals and objectives. We also held similar meetings with the external stakeholders. With the help of the Tax Executives Institute (TEI), the American Institute for Certified Public Accountants (AICPA), and the American Bar Association (ABA), these meetings were well received and helped to facilitate the change in management process that was so important for the new organization.

Leadership Meetings

In order to ensure alignment and effective communication, two sets of meetings were established for managers and executives in LMSB. The entire management core, down through territory managers, met for several days annually to hear about current developments and to discuss new compliance initiatives and audit philosophy. In addition, we found that it was important to assemble the LMSB executive “Team of 38” on a semi-annual or quarterly basis to discuss evolving issues. To focus our efforts, we developed detailed strategic initiatives on globalization, issue management, human capital, and corporate tax shelters.

Strategic Initiatives

Globalization

It was clear that the LMSB taxpayers were becoming increasingly global in their operations as U.S.-based companies expanded internationally and foreign-based companies increased investment in the U.S. Carol Dunahoo and Bobby Scott led the efforts to increase globalization training for the executive team at Emory University, and this training cascaded into increased global business education programs for LMSB executives, managers and employees.

Issue Management

Issue management was expected to have the largest long-term impact on the operations of LMSB taxpayers because the opportunity to resolve tax controversies earlier in the dispute resolution process offered major potential savings to both taxpayers and the government.

Several initiatives became the cornerstone of the issue management strategy. These included the pre-filing agreements, the Industry Issue Resolution process, the Limited Issue Focused Examinations program, the Comprehensive Case Resolution process, and the Fast Track Appeals Settlement process. Each of these initiatives is discussed in this book, and all except Comprehensive Case Resolution have had varying degrees of success.

Human Capital

As we examined the demographics of the LMSB work force, we realized that almost 50% of our employees would be eligible for retirement within a few years. This meant that we had a major recruiting challenge on our hands that could not be met with the existing IRS workforce.

Jim O’Malley organized a team to attack this problem, actively recruiting external hires at the grade 13 level. We were pleased to be able to refresh our workforce from a large number of highly experienced and skilled external candidates. Jim also increased the use of remote and computer-based education, allowing a whole series of courses beyond traditional classroom offerings to be made available to the LMSB managers and revenue agents.

Abusive Corporate Tax Shelters

Those of us who came to the IRS from the outside, as well as a cadre of revenue agents who had encountered abusive corporate tax shelters, were determined to move quickly on abuses in the use of corporate tax shelters. Within the Office of Pre-Filing and Technical Guidance, we established the Office of Tax Shelter Analysis. This team, headed by David Harris, analyzed information from the field as well as the disclosures filed at the Service Centers, and worked with the Chief Counsel’s Office to focus on the challenge. Their efforts resulted in the publication of a list of abusive corporate tax shelters and the drafting of disclosure initiatives.

The most effective disclosure initiative required taxpayers to disclose all of the documents in connection with abusive transactions, including the names of the promoters and their promotional materials. This enabled the IRS to commence promoter audits through which further information was obtained, allowing additional transactions and a large inventory of abusive transactions to be listed. A number of settlement initiatives were put in place, and LMSB worked closely with the Chief Counsel’s Office and Treasury to develop a settlement and litigation strategy.

Liaison Activities

External Stakeholders

A number of groups, including TEI, AICPA, and ABA, helped in the formation of LMSB by providing input to the design teams and advising on certain strategic issues.

Other Operating Divisions and Chief Counsel’s Office

In order to coordinate activities across the operating divisions, division commissioners and deputies would meet once a month to talk through issues of coordination, mutual interest and teamwork. This enabled us to better leverage the limited resources within the IRS under the Chief Counsel’s office. Richard Skilling and B. John Williams of this office were very supportive of LMSB’s efforts in the areas of published guidance and delivering support to field people, particularly with regard to the curtailment of abusive corporate tax shelters. The linkages between LMSB and the various associate offices of Chief Counsel’s Office and the Treasury were facilitated by Linda Burke and Cindy Mattson, as well as by Jerry Reese and Frank Ng, who first headed up the Office of Pre-Filing and Technical Guidance.

Treasury and Department of Justice

The Chief Counsel’s Office and Treasury established the guidance plan. The operating commissioners provided input, making sure there was good administrative coordination. Key regulation projects that helped rationalize issues in the field included the INDOPCO regulations and the revision of the R&D regulations. Pam Olson and Eric Solomon of the Treasury Department were very helpful, and Treasury supported the request for assistance in developing a list of transactions and disclosure regulations for the abusive tax shelter area. Our colleagues at Justice were very supportive, pursuing summons authority in areas such as promoter audits and helping us develop an effective litigation strategy.

The Large and Mid-Size Business Division has been in operation for over five years. The new compliance and enforcement initiatives have been implemented, yet many corporate taxpayers have not experienced efficient, effective and balanced tax administration. Cliff’s book is a primer on how many more taxpayers can be involved in a better way of dealing with LMSB and the IRS generally.