The IRS's Large Business and International Division (LB&I) recently requested comments from large corporate taxpayers that rely on Revenue Procedure 94-69 to disclose potential tax adjustments at the start of an IRS examination.¹ Proper disclosure provides penalty protection and is common practice for taxpayers that have historically been subject to continuous audit. Given recent changes in how LB&I intends to audit large corporate taxpayers, LB&I is now considering revoking Rev. Proc. 94-69. Comments are due by October 19. 

Background and History

In general, accuracy-related penalties do not apply in the case of disclosures or adjustments reflected on an amended return that a taxpayer files before the IRS first contacts the taxpayer about an audit.² Under Rev. Proc. 94-69, taxpayers subject to the former Coordinated Examination Program (CEP) may, after an audit begins, show additional tax due or make disclosures to avoid accuracy-related penalties under sections 6662(b)(1) and (b)(2).³ Within fifteen days of receiving the IRS's first written information request, the taxpayer may provide a written statement that will be treated as a "qualified amended return."⁴ Although taxpayers generally must make such disclosures and adjustments before an audit begins to obtain penalty protection, the IRS has previously explained that the time of first contact for an audit is not an appropriate reference point for CEP taxpayers because the IRS examines all CEP returns.⁵

Rev. Proc. 94-69 continued to apply to taxpayers subject to continuous audits when the CEP was replaced by the Coordinated Industry Case (CIC) program in the early 2000s. And today it is routine practice for eligible taxpayers to make disclosures under Rev. Proc. 94-69 at the commencement of a new audit. Doing so avoids the cost and complexity of filing federal and sometimes multiple state amended returns.

In 2019, LB&I replaced the CIC program with the Large Corporate Compliance (LCC) program beginning with audits of the 2017 tax year.⁶ Unlike the prior programs, the LCC program is not premised on an assumption that all LCC taxpayers will be under continuous examination. Instead, LCC taxpayers are identified based on objective pointing criteria, such as gross assets and the number of operating entities included in the return.⁷ The returns of LCC taxpayers are then annually evaluated using advanced data analytics to identify the returns that have the highest risk and will be audited.⁸ LB&I has acknowledged that some LCC taxpayers may be subject to multiple consecutive audit cycles.⁹ Nevertheless, given the LCC program's stated goal of pivoting away from default continuous audits, LB&I has questioned the continued utility of Rev. Proc. 94-69.

Request for Comments 

In May 2019, LB&I announced transition rules that allowed Rev. Proc. 94-69 to apply to taxpayers then subject to audit under both the CIC program (for pre-2017 tax years) and the LCC program.¹⁰ However, LB&I has recently requested comments on the potential revocation of Rev. Proc. 94-69.¹¹ LB&I appears concerned that the procedures offered under Rev. Proc. 94-69 create a disparity among LB&I taxpayers—and between certain LB&I taxpayers and the general taxpayer population—because the vast majority of taxpayers may use only the qualified amended return process.¹² LB&I also suggested that the Revenue Procedure does not improve the accuracy or reliability of returns when they are filed.¹³

Implications and Potential for Action

If LB&I rescinds Rev. Proc. 94-69, large corporate taxpayers who have long utilized this procedure will have to consider other, less desirable options, such as filing one or more qualified amended returns (and the accompanying amended state returns). Affected taxpayers that would like to provide comments should do so by the October 19 deadline. Such taxpayers should also consider the practical steps they could take now regarding returns that have already been filed and may be subject to IRS examination in the future.

For more information, please contact:

James R. Gadwood, jgadwood@milchev.com, 202-626-1574

George A. Hani, ghani@milchev.com, 202-626-5953

Kevin L. Kenworthy, kkenworthy@milchev.com, 202-626-5848

Colin J. Handzo*

*Former Miller & Chevalier attorney

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¹Dep't of Treasury, IRS, IRS seeks comments on Revenue Procedure 94-69 (Aug. 19, 2020), ("Request for Comments").
²Treas. Reg. § 1.6664-2(c)(2)-(3); see also I.R.C. § 6662(d)(2)(B); Treas. Reg. §§ 1.6662-3(a), (c); 1.6662-4(a), (e)-(f).
³Rev. Proc. 94-69, 1994-2 C.B. 804, 804-05.
⁴Id. at 805-06.
⁵See, e.g., Rev. Proc. 85-26, 1985-1 C.B. 580, 580.
⁶See Douglas O'Donnell, Memorandum for All Large Business and International Division Employees: Interim Guidance on Implementation of the Large Corporate Compliance (LCC) Program (May 21, 2019), ("O'Donnell Memorandum").
⁷See id.
⁸See id.
⁹See Request for Comments.
¹⁰See id. (citing O'Donnell Memorandum).
¹¹Request for Comments.
¹²Id.
¹³Id.

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