The Internal Revenue Service has launched a new examination process called the Limited Issue Focused Examination (LIFE). The new process is available to businesses with assets in excess of $10 million and revolves around a formal agreement called the Memorandum of Understanding (MOU) that is created and agreed to by both the taxpayer and the IRS.
The MOU includes an agreement to limit the examination to amounts over a particular dollar threshold. The threshold is arrived at on a case-by-case basis and is determined after an analysis of input by both the taxpayer and the IRS specialists assigned to the case. The MOU also sets out the scope of issues under examination and the time span during which the examination will occur.
When a MOU is in place, the participating taxpayer agrees to provide the IRS with computations and workpapers that document and explain the issues under examination. Both the IRS and the taxpayer agree to not raise issues about amounts under the designated materiality threshold, unless there is an assumption of fraud, a tax shelter issue, a coordinated issue, or an issue that runs contrary to public policy.
It is hoped that the LIFE program will provide an examination process that is easier, less time-consuming, less expensive, and less contentious than previous examination methods.