Tax professionals dread receiving an information document request (IDR) from the IRS. Much of their angst is due to the fact that the IRS may be examining their work product. However, another part of their concern is that they might not fully understand their responsibility in responding to an IDR.
The IDR is prepared on IRS Form 4564, Information Document Request. Besides describing the documents requested, it informs the taxpayer and their professional when the information is due to the IRS, the contact information for the IRS representative requesting the information, and the method by which the IRS wants to receive it. Form 4564 is composed of three identical pages, the “Taxpayer’s File Copy,” the copy “To Be Returned by Taxpayer With Reply,” and the “Requester’s File Copy.”
The IRS’s authority to issue IDRs is found in Secs. 7601(a) and 7602. This authority grants the Service the right to request a vast amount of documentation. At times, the requested information may seem irrelevant or as if the IRS is going on a fishing expedition. Furthermore, the information requested may relate to a period prior to the one under exam. Nevertheless, it is commonplace to see such requests, and the IRS is authorized to make them. The law allows the IRS to “examine any books, papers, records, or other data which may be relevant or material to such inquiry” (Sec. 7602(a)(1), emphasis added). Generally, the Internal Revenue Manual (IRM) requires IDRs to focus on the issues being examined. Nevertheless, IDRs issued at the beginning of an examination to request basic books and records and general information about a taxpayer’s business are not required to state an issue (IRM §4.46.4.2(2)). While the scope of an exam can always change as the exam progresses, the initial IDR can generally provide the professional with a road map of where the exam is heading.
Responding to an IDR in a timely and accurate fashion is very important to the case’s outcome. Much care and review should be given to each response and to each document submitted to the IRS. It is a best practice to have an exact copy of everything turned over to the IRS, so that, ideally, when the examiner has questions (and they likely will), the tax professional and the IRS examiner can both be on the same page, literally and figuratively.
Tax professionals are often asked some form of the question “Do I have to give the IRS everything that the IDR is requesting?” One reason for this question may be that the information requested is voluminous or seemingly out of the scope of the issue being examined. If that is the case, a discussion with the examiner (and possibly their group manager, if necessary) may help refocus and reprioritize certain matters. Items included on an IDR may be subject to privilege, such as the attorney-client privilege or the Sec. 7525 federally authorized tax practitioner privilege, and submitting such a document to the IRS will likely waive the privilege.
What if, on the other hand, the professional is hesitant to give over a document because its contents may be damaging to the taxpayer? In that case, the professional should remember the basics of what an IDR is. It is just an information document request. A request is all it is, and at this stage of the exam you are not under any obligation to turn over the requested item. Even if you determine that you will not submit a certain document to the IRS, however, you must be truthful with your response. You cannot state that you cannot locate a document that you possess, for example. Rather, it must be clear that you have decided not to give over the document.
IDRs are not self-enforcing in and of themselves, and, as stated above, one is not legally required to respond to them (see IRM §4.46.4.7). As such, practitioners may decide that it is not in their client’s best interest to respond to all or part of the request and may only partially respond, if at all. However, the practitioner should not be fooled into thinking that this will end the exam and that they have outsmarted the system. First, it will likely raise the IRS’s antennae and alert the examiner to an issue that they may not have noticed otherwise.
Furthermore, the IRS has more sophisticated tools in its arsenal (see IRM §4.46.4.7.1). “Congress has given the IRS the power to issue an administrative summons in order to compel a taxpayer or a third party to produce the information — in the form of documents or testimony or both — for use in its investigation” (Cihlar et al., Department of Justice Tax Division, Summons Enforcement Manual (updated 2011)). This tool can even be used against third parties, such as the taxpayer’s financial institutions. While they are outside the scope of this article, the rules and requirements related to summonses and subpoenas are very technical.
Another frequently occurring issue is that an IDR may request documentation that does not currently exist, such as a reconciliation spreadsheet. In this situation, the taxpayer is not required to create such a document, and the IRS cannot even issue a summons to require that this be done (IRM §5.17.6.1.1(3)). If, however, the document does exist but is just not readily available, the tax professional should explain the situation to the examiner and request an extension of time to provide the item.
The tax professional’s response to an IDR has important ramifications for the duration of the exam. In many instances, this is the first substantial interaction the tax professional has with the examiner, and it establishes the tone of the dialogue between them. In addition, the materials provided or withheld from the response to the IDR may determine the next set of steps, and possibly the scope, of the audit. A thorough understanding of this topic can help tax professionals to ensure that their clients are best positioned for an exam. In addition, when questions arise, it is advisable to speak with an attorney who is well versed in this area.
Contributors
Seth Kossman, Esq., CPA, LL.M., is a shareholder in the tax group of Baker Donelson in Baltimore. Sarah Shannonhouse, CPA, is a manager—Tax Practice & Ethics with the AICPA. Kossman is a member of, and Shannonhouse is staff liaison to, the AICPA Tax Practice and Procedures Committee. For more information on this column, contact thetaxadviser@aicpa.org.