IRS issues interim guidance to streamline LB&I audit procedures and promote alternative settlement programs

On July 25, 2025, the IRS Large Business & International (LB&I) Division published an Interim Guidance Memorandum (Control Number: LB&I-04-0725-0008)¹ implementing changes for LB&I audit procedures, which take effect August 1, 2025. The IRS guidance says the changes are meant to streamline large audits, promote efficiency and collaboration with taxpayers, and reduce IRS staffing burdens.

The guidance specifically addresses three aspects of current LB&I examination procedures: (i) the removal of the Acknowledgement of Facts (AOF) from the audit process, (ii) the revision and implementation of procedural rules to enhance participation in the Fast Track Settlement (FTS) program, and (iii) clarification regarding the applicability of Accelerated Issue Resolution (AIR) to Large Corporate Compliance (LCC) cases. These changes to LB&I audits, as outlined in the guidance, will take effect on August 1, 2025.

This alert summarizes the key points and implications from the changes to the LB&I audit procedures, with a focus on information pertinent to large business and corporate taxpayers that may be subject to LB&I examinations.

1. Elimination of the Acknowledgment of Facts (AOF) IDR Process

The interim guidance provides that LB&I will phase out the use of the AOF Information Document Request (IDR) in audits, making it optional from August 1 to December 31, 2025. After this five-month transition period, the AOF will be eliminated entirely in 2026.

a. Background on the AOF

The AOF IDR was formally introduced in 2016 as part of the LB&I Examination Process (LEP) outlined in IRS Publication 5125.² Its purpose was to promote transparency and collaboration between the IRS and taxpayer by ensuring that all relevant facts—both favorable and unfavorable—were mutually understood and documented before the issuance of a Notice of Proposed Adjustment (NOPA).³ The AOF was intended to reduce the likelihood of new factual disputes arising during the Appeals process, which could delay resolution or require the case to be returned to Exam for further development.⁴

In practice, the AOF is typically issued as the final IDR on a particular issue and includes a draft Form 886-A with a factual narrative. It asks taxpayers to either agree with the facts, provide additional facts, or identify disputed facts. In 2018, the IRS updated the pro forma AOF IDR to include a fourth option—“Other, please explain”—to give taxpayers more flexibility in responding.⁵

However, the AOF process has been a source of tension between taxpayers and the IRS. Taxpayers and practitioners have criticized the AOF in its current iteration as burdensome, duplicative, and sometimes adversarial.⁶ Specific concerns cited include:

• The AOF often lacks a clear description of the legal issue, making it difficult for taxpayers to know what facts are relevant for purposes of a response.⁷
• The AOF routinely presents a one-sided view of the facts, including only the facts Exam may deem relevant to their view on the issue, while omitting facts relevant and supportive of the taxpayer’s position.⁸
• Some AOFs include legal conclusions disguised as factual assertions, whereby Exam uses the AOF “as an advocacy piece to get the taxpayer to accept [Exam’s] legal theory.”⁹ Thus, taxpayers may fear that agreeing to the AOF could be misconstrued as their agreement with the IRS’s legal position.

In 2024, the IRS Advisory Council (IRSAC) recommended evaluating the need for the AOF, while also considering reforms to improve the process, such as better training for exam teams and more collaboration with the taxpayer in drafting of factual narratives.¹⁰ There is no indication any attempt was made to reform the AOF process, before issuing the recent interim guidance that eliminates the AOF altogether.

b. Rationale for Eliminating the AOF

Instead of reforming the AOF process, the July 2025 interim guidance eliminates it entirely. While offering no supporting data, the guidance claims that “the AOF process adds time but little value to the exam process” and “taxpayers often decline to respond to the AOF, which may extend the exam without producing meaningful engagement or collaboration at that stage.”¹¹ Consequently, the interim guidance eliminates the AOF in hopes it will streamline examinations by removing a perceived ineffective phase of the audit.

c. Key Takeaways

• From August 1 to December 31, 2025, LB&I will make AOF “optional,” allowing taxpayers to elect to receive an AOF IDR. Taxpayers must affirmatively elect to opt in to receive an AOF during this transition period by notifying the LB&I exam team.
• Effective January 1, 2026, the AOF process will be permanently discontinued.
• During the transition period, LB&I will collect feedback from internal and external stakeholders to inform their implementation of the AOF’s removal going forward in 2026.

Eversheds Sutherland Observation: The AOF was established to improve audits by permitting taxpayers to comment on disputed facts prior to referral to IRS Appeals, thereby aiming to facilitate more effective post-audit resolution. Elimination of the AOF during the examination phase may restrict taxpayers’ ability to address factual disagreements at the audit stage, which could increase the complexity of the subsequent Appeals process. Taxpayers currently under audit may consider opting to receive the AOF IDR during the transition period from August 1 to December 31, 2025. After the AOF is eliminated, taxpayers should be diligent in documenting communications with Exam and providing clear, thoughtful explanations of relevant facts during the audit.

2. Enhanced Procedures for Managing Fast Track Settlements (FTS)

The July 2025 interim guidance also revises procedures for the Fast Track Settlement (FTS) program, a voluntary alternative dispute resolution (ADR) process designed to resolve tax disputes at the examination stage with the assistance of an IRS Appeals mediator.

a. Background on the FTS Program

FTS was first introduced as a pilot program in 2001 and formally established for LB&I taxpayers in 2003 through Revenue Procedure 2003-40.¹² The program allows taxpayers and IRS Exam to resolve factual and legal disputes with the help of an Appeals official acting as a neutral facilitator.¹³ FTS was established to expedite dispute resolutions, reduce litigation, and improve taxpayer satisfaction in the audit process.¹⁴

Participation in FTS is strictly voluntary. It requires mutual consent from both the taxpayer and the IRS. Neither party can compel the other to participate, and both must agree to engage in the process in good faith.¹⁵ This principle is foundational to the program’s design, as a voluntary resolution tool best suited for issues where both parties demonstrate a willingness to consider alternative resolution options.¹⁶

b. FTS’s Underutilization and Barriers to Entry

Despite its intended benefits, FTS has historically been underutilized. A 2023 Government Accountability Office (GAO) report found that ADR usage in audits—including FTS—declined by 65-percent between fiscal years 2013 and 2022.¹⁷ Contributing factors cited include eligibility constraints, inconsistent approval processes, lack of awareness, and perceived reluctance by IRS Exam to engage in good-faith negotiations.¹⁸

FTS’s procedural eligibility requirements have frequently been identified as limiting taxpayer access.¹⁹ One significant concern was the IRS’s previous policy of rejecting FTS applications for entire cases if any single issue was considered ineligible for FTS.²⁰ This “all-or-nothing” approach resulted in the exclusion of otherwise qualifying issues from the program, thereby diminishing its effectiveness and discouraging taxpayer participation. This barrier was explicitly addressed in the February 2025 pilot program, which revised the eligibility criteria to allow FTS to be applied to one or more issues in a case, even if other issues were ineligible.²¹

The July 2025 interim guidance makes this change permanent, thereby expanding access to FTS and aligning the program more closely with its original intent of promoting early and efficient resolution of discrete tax disputes.

Another persistent challenge has been the IRS’s reluctance to approve taxpayer applications for FTS, even when the issues were fully developed and otherwise eligible. Although the 2023 GAO report found that ADR usage—including FTS—declined by 65-percent between 2013 and 2022, the report notes the IRS’s lack of sufficient data to explain or justify the high rate of decline in ADR usage.²²

Additionally, focus group participants cited in the GAO report described IRS Exam personnel as unwilling to engage in FTS in good faith, with some taxpayers perceiving that IRS staff offered FTS merely to “tick the box” that ADR was offered, without a genuine intent to compromise.²³

This perception, coupled with inconsistent and unclear FTS approval practices, likely contributed to an erosion of trust and awareness of the FTS, as IRS officials acknowledged that taxpayer demand for FTS waned over time.²⁴

c. 2025 Enhancements to FTS

To address these concerns, the July 2025 interim guidance builds on the February 2025 pilot program and incorporates changes from Announcement 2025-6.²⁵ Notable enhancements include:

• Written concurrence from the Director of Field Operations (DFO) is now required for any FTS denial.²⁶
• Senior IRS executives must be notified before informing taxpayers of a denial.²⁷
• Coordination is required between issue and case managers, especially in Joint Committee (JC) cases.²⁸
• Reaffirmation that FTS remains voluntary, and participation in the program does not prohibit or prejudice a taxpayer’s ability to advance the issues to IRS Appeals if a settlement is not reached through FTS.²⁹

These enhancements are designed to increase transparency, reduce unwarranted denials, and encourage broader use of FTS by ensuring that taxpayer applications are evaluated fairly and consistently.

d. Key Takeaways

• FTS remains a voluntary program that requires mutual assent from both the taxpayer and the IRS.
• New procedural safeguards aim to reduce arbitrary denials, promote transparency, and establish consistent guidelines for access to FTS, including the following:
  • Proposed FTS denials must now receive written concurrence from the appropriate Director of Field Operations (DFO).
  • Coordination between different IRS issue managers and specialty areas is mandated.
  • Senior IRS executives must be notified before taxpayers are informed of an FTS denial.
• The IRS maintains that FTS is best suited for taxpayers open to compromise; however, if FTS is unsuccessful, taxpayers may still pursue dispute resolution through the traditional IRS Appeals route.
• The July 2025 interim guidance replaces and supersedes the earlier FTS pilot program guidance issued in February 2025.

Eversheds Sutherland Observation: Taxpayers are encouraged to consider FTS and other alternative resolution methods early in the examination process, particularly for issues that may become contentious. Engaging with FTS at an early stage may expedite dispute resolution and mitigate compliance costs. Taxpayers should also evaluate and be prepared to demonstrate their FTS eligibility, in accordance with these updated guidelines aimed at encouraging taxpayer admission and participation in FTS.

 

3. Expanded Use of Accelerated Issue Resolution (AIR) for LCC Cases.

The July 2025 interim guidance also expressly provides that Accelerated Issue Resolution (AIR) is applicable to Large Corporate Compliance (LCC) cases.³⁰ AIR, as set forth in Revenue Procedure 94-67, is an established dispute resolution mechanism that allows the IRS and taxpayers to resolve recurring tax issues efficiently. AIR applies specifically to situations where similar issues have been thoroughly examined and resolved in prior tax periods and can be effectively leveraged to achieve consistent resolutions in subsequent filed returns.

a. Clarifying a Prior Ambiguity

Prior to this guidance, there was ambiguity as to whether AIR was applicable to LCC cases. This was due to the AIR’s governing procedure (Rev. Proc. 94-67) referencing an outdated program, the Coordinated Examination Program (CEP), which caused confusion about AIR's applicability to the current LCC framework, and in turn, its underutilization in LCC cases.³¹

The July 2025 interim guidance, however, explicitly clarifies that AIR does indeed apply to LCC cases, removing any prior uncertainty.³² The guidance does not modify the AIR procedures; rather, it provides clarity by confirming that AIR is available and applicable to LCC examinations.

b. Key Takeaways

• Corporate taxpayers should evaluate and leverage AIR for recurring examination issues to potentially reduce examination durations and administrative burdens.
• Active consideration and strategic use of AIR can enhance tax certainty and avoid prolonged examination disputes on resolved eligible issues through prior audits.

Questions or Comments:

The IRS interim guidance memorandum provides for public comments, which may be submitted to the LB&I Policy Office via email (LBI.Policy.Feedback@irs.gov) through December 31, 2025.

_________

If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.

_{1. IRS, Interim Guidance Memorandum (IGM) from Ronald H. Hodge II, Assistant Deputy Comm’r, Compliance Integration, LB&I Div., to All LB&I Employees (July 23, 2025) (Control No. LB&I-04-0725-0008). (hereinafter, “IRS IGM LB&I-04-0725-0008”).}

_{2. IRS Pub. 5125, Large Business & International Examination Process (May 1, 2016).}

_{3. Id.}

_{4. George A. Hani, Exam Responding Strategically to the Acknowledgment of Facts IDR, J. Tax Prac. & Proc., Dec. 2018–Jan. 2019, at 1-2.}

_{5. See Internal Revenue Manual (I.R.M.) 4.46.4, Exhibit 4.46.4-3.}

_{6. See IRS Advisory Council, Public Report, at 28 (Nov. 2017), https://www.irs.gov/pub/irs-prior/p5316--2017.pdf (“In some cases, the AOF process has proven problematic. . . “); see also George A. Hani, Exam Responding Strategically to the Acknowledgment of Facts IDR, J. Tax Prac. & Proc., Dec. 2018–Jan. 2019, at 1 (noting that two years after implementing the AOF, it “continues to cause consternation among taxpayers and practitioners alike.”).}

_{7. IRS Advisory Council, Public Report, at 28 (Nov. 2017).}

_{8. Id. (explaining that the AOF should “Include all relevant facts. . . . We understand that the process allows the taxpayer to present additional facts for inclusion or to separately state disputed facts, but not all taxpayers understand they have those options.”).}

_{9. Id.}

_{10. IRS Advisory Council, Public Report, at 142-43, 145-46, 318 (Nov. 2024), https://www.irs.gov/pub/irs-pdf/p5316.pdf}

_{11. IRS IGM LB&I-04-0725-0008, at 2.}

_{12. Rev. Proc. 2003-40, 2003-1 C.B. 1044 (June 3, 2003); see also Announcement 2001-67, 2001-2 C.B. 544.}

_{13. Id.}

_{14. Id.}

_{15. Id. at 3 (Section 4. Application Process).}

_{16. IRS IGM LB&I-04-0725-0008, attach. 3, at 2.}

_{17. U.S. Gov’t Accountability Off., GAO-23-105552. Tax Enforcement: IRS Could Better Manage Alternative Dispute Resolution Programs to Maximize Benefits, at 10 (May 2023) (hereinafter, “GAO-23-105552”).}

_{18. Id. at 13.}

_{19. Id. at 16.}

_{20. See IRS, IR-2025-14, IRS initiates Fast Track Settlement pilot programs in effort to make Alternative Dispute Resolution faster and easier (Jan. 15, 2025), https://www.irs.gov/newsroom/irs-initiates-fast-track-settlement-pilot-programs-in-effort-to-make-alternative-dispute-resolution-faster-and-easier}

_{21. IRS, Interim Guidance Memorandum (IGM) from Ronald H. Hodge II, Assistant Deputy Comm’r, Interim Guidance for LB&I Pilot Program Changes to Fast Track settlement (FTS) (Feb. 20, 2025) (Control No. LB&I-04-0225-0002), https://www.irs.gov/pub/foia/ig/lmsb/lbi-04-0225-0002-public.pdf (hereinafter, “IRS IGM LB&I-04-0225-0002”).}

_{22. GAO-23-10552, at 12 (“IRS officials said that neither SB/SE nor other IRS divisions have more recent data to confirm this or any other reason for the decline”).}

_{23. Id. at 13.}

_{24. Id. at 10.}

_{25. See IRS, Announcement 2025-6, Fast Track Settlement Pilot Program (2025) https://www.irs.gov/pub/irs-drop/a-25-06.pdf}

_{26. IRS IGM LB&I-04-0725-0008, attach 3, at 4.}

_{27. Id.}

_{28. Id., attach 3, at 6-8.}

_{29. Id., attach 3, at 1 (“If FTS is unsuccessful, the taxpayer will be offered the opportunity to pursue resolution through traditional Appeals.”)}

_{30. Id. at 3.}

_{31. Id.}

_{32. Id.}