CALDERWOOD & HARKNESS LLP ATTORNEYS AT LAW
PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the individuals identified below and should not be disclosed, distributed, or reproduced without the prior written consent of Calderwood & Harkness LLP.
MEMORANDUM
TO: Leonard Cross, Responsible Partner Sylvia Hartwell, Billing Partner Garrett Simmons, Lead Associate
FROM: Leila Nazari, Working Associate
DATE: August 8, 2022
RE: IRS Information Document Request (IDR) Enforcement Procedures — Strategies for Managing Overbroad or Burdensome IDRs
MATTER: Penterra Pharmaceuticals Corp. — IRS Transfer Pricing Examination Defense (Matter No. 1018-00009)
TAX YEARS AT ISSUE: 2017, 2018, 2019, 2020
IRS EXAM TEAM: LB&I-NE-TP-2022-00641
TAXPAYER EIN: 22-3741856
CLASSIFICATION: Privileged and Confidential — Attorney-Client Privilege / Work Product Doctrine
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I. Executive Summary
The purpose of this memorandum is to provide the engagement team with a comprehensive analysis of the Internal Revenue Service ("IRS") procedures governing the issuance, enforcement, and escalation of Information Document Requests ("IDRs"), and to recommend practical strategies for managing overbroad or unduly burdensome IDRs in the context of the ongoing Large Business and International ("LB&I") division examination of Penterra Pharmaceuticals Corp. ("PPC" or the "Taxpayer").
The IRS examination was opened on May 16, 2022, pursuant to Letter 2205-A, and is being conducted by the LB&I Northeast Transfer Pricing Practice under Supervisory Revenue Agent (Team Manager) Gerald Meskill and Lead Revenue Agent Patricia Dunleavy. The examination covers PPC's transfer pricing methodology for its cost-sharing arrangement ("CSA") and intercompany royalty arrangements with Penterra Biopharma International DAC ("PBI"), an Irish-resident subsidiary, for tax years ("TY") 2017 through 2020. Given the complexity of the intellectual property structure, the number of intercompany transactions at issue, and the anticipated volume of documentation involved, IDR management will be a critical component of the overall examination defense strategy throughout the engagement.
Based on a preliminary assessment of the examination scope and the typical trajectory of LB&I transfer pricing examinations of this size and complexity, we anticipate that approximately forty-seven (47) IDRs will be issued between June 2022 and September 2023. The effective management of these IDRs — including the timely negotiation of scope, the assertion and preservation of applicable privileges, and the avoidance of enforcement escalation — must be implemented from the outset of the examination.
PPC's authorized representatives under IRS Form 2848, Powers of Attorney and Declaration of Representative, filed with the IRS on June 8, 2022, are Leonard Cross, Sylvia Hartwell, Garrett Simmons, and Leila Nazari, all of Calderwood & Harkness LLP.
An additional consideration warrants emphasis at the outset of this memorandum. Whitmore Valuation Group LLC ("Whitmore") has been retained under a Kovel arrangement (Kovel letter dated June 20, 2022, internal reference 1018-00009-KV) to assist the engagement team in preparing economic analyses in connection with the examination defense. The principal economists engaged under the Kovel arrangement are Dr. Helena Vasquez and Dr. Rohan Chakrabarti. Certain IDRs issued by the examination team may implicate privileged communications and work product related to the economic analysis being prepared by Dr. Vasquez and Dr. Chakrabarti under the direction of Calderwood & Harkness. The privilege protocols established in the Privilege Protocol Memorandum dated June 10, 2022 must be carefully observed in connection with all IDR responses to ensure that no privileged materials are inadvertently disclosed to the IRS examination team.
This memorandum is organized as follows: Section II provides an overview of the IDR process, including the statutory and regulatory framework, the nature of an IDR, the LB&I IDR enforcement escalation process, and the distinction between IDRs and administrative summonses. Section III addresses practical strategies for responding to IDRs, including negotiating scope and deadlines, managing overbroad or burdensome requests, requesting extensions of time, and handling privilege assertions. Section IV provides a detailed analysis of each step of the IDR enforcement escalation process and the practical considerations specific to the PPC examination. Section V addresses special considerations that arise in the context of transfer pricing examinations, including IRS economist-driven IDRs and international document production issues. Section VI sets forth a risk assessment and a series of specific recommendations for the engagement team. The appendices include key statutory and IRM citations, a proposed IDR response workflow diagram, and a key contacts table for IDR response coordination.
II. Overview of the IDR Process
A. Statutory and Regulatory Authority
The IRS's authority to request information during an examination derives from several statutory and regulatory sources, which together establish both the scope of the IRS's investigative powers and the limitations on those powers.
Internal Revenue Code § 7602 — Authority to Examine Books and Witnesses. Section 7602(a) of the Internal Revenue Code of 1986, as amended ("IRC" or the "Code"), provides the IRS with broad authority to examine any books, papers, records, or other data that may be relevant or material to ascertaining the correctness of any return, determining the liability of any person for any internal revenue tax, or collecting any such liability. The statute authorizes the IRS to summon the person liable for tax, or any person having possession, custody, or control of relevant materials, to appear and produce such materials and to give testimony under oath. Section 7602 is the foundational provision underpinning all IRS examination activity, including the issuance of IDRs and, when necessary, administrative summonses.
Internal Revenue Code § 7605(b) — Restrictions on Unnecessary Examinations. Section 7605(b) provides a restraint on the IRS's examination authority by prohibiting unnecessary examinations or investigations. Specifically, the statute provides that no taxpayer shall be subjected to unnecessary examination or investigations, and that only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary. While this provision is primarily invoked in the context of repeated or duplicative examinations, it is relevant to IDR management because it establishes the principle that the IRS's information-gathering authority is not unlimited and must be exercised within reasonable bounds.
Internal Revenue Manual Part 4 — Examining Process. The IRS Internal Revenue Manual ("IRM") provides extensive guidance on the procedures and protocols that IRS examination personnel are required to follow. Part 4 of the IRM addresses the examining process generally, and the following sections are of particular relevance to IDR management in the context of the PPC examination:
• IRM 4.46 — LB&I Examination Process. This section of the IRM sets forth the procedures specific to examinations conducted by the LB&I division, including the process for planning and conducting examinations of large and complex taxpayers such as PPC.
• IRM 4.46.4 — Information Document Requests. This section provides the specific procedural guidance governing the issuance, content, response timelines, and enforcement of IDRs in the LB&I examination context. It establishes the framework for IDR negotiations between the IRS examination team and the taxpayer's representative, including the expectation that IDR scope and deadlines will be discussed before the IDR is finalized.
LB&I Directive — IDR Enforcement Process. LB&I has issued a formal directive establishing the IDR enforcement process applicable to LB&I examinations. The most current version of this directive (referenced herein as the "LB&I IDR Enforcement Process Directive") sets forth the three-step escalation framework that the IRS must follow before resorting to compulsory process (summons). This directive is a key document for understanding the procedural protections available to taxpayers in the IDR process and for developing strategies to avoid enforcement escalation.
B. Nature of an IDR
An IDR is an informal administrative request issued by an IRS Revenue Agent during the course of an examination. It is important to understand, at the outset, that an IDR does not carry the force of law. Unlike an administrative summons issued under IRC § 7602, an IDR is not a legally compulsory instrument. The taxpayer is not legally required to comply with an IDR in the same manner as with a summons, and failure to respond to an IDR does not, standing alone, expose the taxpayer to judicial sanctions. However, as discussed in detail below, failure to respond to IDRs can trigger the IRS's enforcement escalation process, ultimately leading to the issuance of a summons, which does carry legal compulsion.
The IRS uses Form 4564 (Information Document Request) as the standard form for issuing IDRs. Form 4564 identifies the taxpayer, the tax years under examination, the specific information or documents requested, and the date by which the response is due. Each IDR is assigned a sequential number for tracking purposes.
IDRs may request a wide range of information, including:
• Documents (contracts, agreements, correspondence, financial statements, board minutes, memoranda, reports, etc.);
• Data (financial data, operational data, employee rosters, transactional databases, etc.);
• Explanations of specific items reported on the taxpayer's return or in the taxpayer's books and records;
• The taxpayer's positions on specific issues, including the factual and legal bases for those positions.
The taxpayer is generally expected to respond to each IDR within the timeframe established in the IDR itself. Response deadlines are typically set at fifteen (15) to thirty (30) calendar days from the date of issuance, depending on the scope and complexity of the request. However, it is critical to note that these timeframes are negotiable. The IRM encourages Revenue Agents and taxpayer representatives to discuss and agree upon reasonable response deadlines before the IDR is finalized, and the IRS examination team's willingness to negotiate deadlines is a factor that the engagement team should leverage throughout the examination.
C. The LB&I IDR Enforcement Process
The LB&I division has adopted a formalized IDR enforcement process that establishes a structured escalation framework that the IRS must follow before it may seek compulsory process in the form of an administrative summons. This enforcement process is designed to provide the taxpayer with multiple opportunities to respond to an IDR before the IRS resorts to the summons power. Understanding this escalation framework is essential for effective IDR management, because each step in the process carries increasing consequences for the taxpayer's relationship with the examination team and the overall examination posture.
The enforcement process consists of three sequential steps, each of which must be completed before the IRS may proceed to the next:
Step 1: Delinquency Notice
The first step in the enforcement process is the issuance of a Delinquency Notice. A Delinquency Notice is triggered when a taxpayer fails to respond to an IDR by the agreed-upon response deadline. The Delinquency Notice is issued by the Revenue Agent assigned to the examination — in this case, Lead Revenue Agent Patricia Dunleavy. The Notice informs the taxpayer that the IDR response is overdue and sets a new response deadline, typically fifteen (15) calendar days from the date of the Delinquency Notice.
The IRM requires that the Revenue Agent document the issuance of the Delinquency Notice in the examination case file and that the Notice be issued in writing. The Revenue Agent is expected to have made at least one good-faith effort to contact the taxpayer's representative before issuing the Delinquency Notice to determine the reason for the delay and to explore whether an extension is warranted. However, in practice, Delinquency Notices are sometimes issued without prior communication, particularly in examinations with high IDR volume.
The Delinquency Notice does not create any legal compulsion. It remains an administrative communication. However, it initiates the formal enforcement track and signals to the examination team that the taxpayer's responsiveness is becoming an issue. Receipt of a Delinquency Notice should be treated as a serious matter by the engagement team.
Step 2: Pre-Summons Letter
The second step in the enforcement process is the issuance of a Pre-Summons Letter. This step is triggered when the taxpayer fails to respond to the Delinquency Notice by the new deadline set in that Notice. The Pre-Summons Letter is issued by the Team Manager — in this case, Supervisory Revenue Agent Gerald Meskill — rather than by the Revenue Agent. This escalation in the issuing authority reflects the increased seriousness of the non-compliance.
The Pre-Summons Letter provides the taxpayer with a final opportunity to respond to the outstanding IDR. It sets a final response deadline, typically ten (10) calendar days from the date of the letter. The Pre-Summons Letter explicitly warns the taxpayer that failure to respond by the stated deadline will result in the issuance of an administrative summons under IRC § 7602.
The issuance of a Pre-Summons Letter is a significant escalation point in the IDR enforcement process. It indicates that the IRS examination team has determined that the taxpayer's non-responsiveness warrants formal escalation, and it places the examination on a trajectory toward compulsory process. Avoiding the issuance of Pre-Summons Letters should be a primary objective of the engagement team throughout the PPC examination. Once a Pre-Summons Letter has been issued, it becomes a permanent part of the administrative examination file. The existence of Pre-Summons Letters in the administrative file may affect the IRS's perception of the taxpayer's level of cooperation and may, in certain circumstances, be referenced in subsequent proceedings, including IRS Appeals and potential litigation.
The IRM requires approval from the Team Manager before a Pre-Summons Letter is issued. The Team Manager must review the circumstances of the non-compliance, the examination team's prior efforts to obtain the taxpayer's cooperation, and the relevance and materiality of the requested information before authorizing the issuance of the letter.
Step 3: Summons Under IRC § 7602
The third and final step in the enforcement process is the issuance of an administrative summons under IRC § 7602. This step is triggered when the taxpayer does not respond to the Pre-Summons Letter by the deadline stated in that letter. The summons is a legally compulsory instrument, enforceable through the federal courts, and represents a fundamental change in the nature of the IRS's information request.
Issuance of an administrative summons in the LB&I context requires approval from the Territory Manager, which is one level of management above the Team Manager. This additional layer of approval reflects the seriousness of the summons power and ensures that senior management has reviewed the circumstances before compulsory process is invoked.
A detailed discussion of the summons process, taxpayer rights, and enforcement procedures is provided in Section IV.C below.
D. Distinction Between IDRs and Summonses
It is essential that the engagement team maintain a clear understanding of the distinction between an IDR and an administrative summons, as the legal consequences of each are fundamentally different.
IDR. An IDR is an informal administrative request. It does not carry the force of law. There is no judicial enforcement mechanism for an IDR. A taxpayer's failure to respond to an IDR cannot, standing alone, result in contempt sanctions, monetary penalties, or other judicial consequences. The IRS's remedy for non-compliance with an IDR is to escalate through the enforcement process described above and, ultimately, to issue a summons.
Summons (IRC § 7602). An administrative summons issued under IRC § 7602 is a compulsory instrument. It requires the summoned person to appear at a designated time and place and to produce specified books, papers, records, or other data, and/or to provide testimony under oath. A summons is enforceable through the United States District Court under IRC § 7604. If a taxpayer fails to comply with a summons, the IRS may petition the District Court for an order compelling compliance. Failure to comply with a court order enforcing a summons may result in a finding of contempt, which can carry sanctions including fines and, in extreme cases, incarceration.
Issuance of a summons in the LB&I context requires approval from the Territory Manager, which provides an additional layer of supervisory review beyond the Team Manager approval required for the Pre-Summons Letter.
The Powell Standard. When the IRS seeks judicial enforcement of a summons, the court applies the standard established by the United States Supreme Court in United States v. Powell, 379 U.S. 48 (1964). Under the Powell standard, the IRS must demonstrate that:
1. The investigation is being conducted for a legitimate purpose;
2. The inquiry, and the information sought, may be relevant to that purpose;
3. The information sought is not already within the IRS's possession; and
4. The administrative steps required by the Internal Revenue Code have been followed.
If the IRS establishes a prima facie case under Powell, the burden shifts to the taxpayer to show that the summons was issued for an improper purpose, such as harassment, or to challenge specific aspects of the IRS's showing. The Powell standard is generally regarded as setting a relatively low bar for IRS enforcement, reflecting the broad scope of the IRS's investigative authority. However, a taxpayer may raise substantive objections in a summons enforcement proceeding, including arguments that the information sought is not relevant, that the request is overbroad or unduly burdensome, or that the requested materials are protected by privilege.
Motions to Quash. In the case of third-party summonses (i.e., summonses issued to a party other than the taxpayer under examination), IRC § 7609 provides the taxpayer with the right to receive notice of the summons and to file a motion to quash in the appropriate United States District Court. In the case of summonses issued directly to the taxpayer, the taxpayer may raise objections in the context of a summons enforcement proceeding initiated by the IRS under IRC § 7604, or may seek to intervene in such proceedings. The procedural posture of summons challenges is fact-specific and will be addressed in a separate memorandum if and when the IRS escalates to summonsing in the PPC examination.
III. Strategies for Responding to IDRs
A. Establishing a Cooperative Relationship with the Exam Team
A foundational element of effective IDR management is the establishment and maintenance of a constructive working relationship with the IRS examination team. While the examination is, by its nature, an adversarial process in which the interests of the taxpayer and the IRS may diverge, the day-to-day mechanics of the examination — including IDR negotiations, document production, and scheduling — benefit significantly from a cooperative and professional relationship between the parties.
In the PPC examination, the primary IRS contacts for IDR purposes are Lead Revenue Agent Patricia Dunleavy, who is the examining agent with day-to-day responsibility for issuing IDRs and reviewing responses, and Team Manager Gerald Meskill, who provides supervisory oversight and is the first level of escalation for scope disputes and enforcement actions. Additionally, the examination team includes IRS Economist Dr. Alan Washburne, who is assigned to the Transfer Pricing Practice and will be responsible for conducting the IRS's independent economic analysis, and IRS Chief Counsel Attorney-Advisor Franklin Rosario, who will provide legal advice to the examination team on substantive transfer pricing and procedural issues.
The engagement team should prioritize early establishment of clear communication protocols and designated points of contact. Garrett Simmons will serve as the primary IDR response coordinator and the primary point of contact for communications with Lead Revenue Agent Dunleavy regarding IDR matters. This centralization of communications through a single point of contact will ensure consistency and prevent miscommunication, and will allow the engagement team to maintain a comprehensive record of all interactions with the examination team.
Proactive engagement with the examination team offers several practical benefits. First, a cooperative posture can prevent unnecessary escalation of IDR disputes to the enforcement process. Revenue Agents are more likely to grant extensions and accommodate scope modifications when they perceive the taxpayer's representatives as cooperative and responsive. Second, a constructive relationship facilitates the negotiation of reasonable IDR scopes and deadlines, which reduces the burden on the engagement team and the client. Third, a positive working relationship may improve the overall tone of the examination and create opportunities for informal resolution of issues before they ripen into formal disputes.
We note that the opening conference for the PPC examination was held on June 28, 2022, and was attended by Leonard Cross and Garrett Simmons of Calderwood & Harkness, Marcus Whitfield (Vice President, Global Tax) of PPC, and Team Manager Meskill and Lead Revenue Agent Dunleavy from the IRS examination team. During the opening conference, the examination scope and anticipated IDR scheduling were discussed. This initial interaction set a professional and collegial tone for the examination, and the engagement team should continue to cultivate that dynamic throughout the IDR process.
B. Negotiating IDR Scope and Deadlines
One of the most important and often underutilized tools available to a taxpayer in the IDR process is the right to negotiate the scope, specificity, and response deadline of each IDR before it is finalized and formally issued. The IRM and the LB&I IDR Enforcement Process Directive both contemplate and encourage pre-issuance discussions between the Revenue Agent and the taxpayer's representative to ensure that IDRs are appropriately tailored and that response deadlines are realistic.
The engagement team should implement the following strategies with respect to IDR scope and deadline negotiations:
Pre-Issuance Conferences. For each substantive IDR, Simmons should request a pre-issuance conference with Revenue Agent Dunleavy to discuss the scope and relevance of the proposed request before the IDR is finalized. During the pre-issuance conference, Simmons should seek to understand the purpose and relevance of the requested information, identify any portions of the proposed IDR that are overly broad, vague, or beyond the scope of the examination issues, and negotiate appropriate narrowing or clarification of the request. The pre-issuance conference also provides an opportunity to agree upon a realistic response deadline that accounts for the time necessary to collect, review, and produce responsive materials.
Phased or Rolling Production Schedules. For particularly voluminous or complex IDR requests, Simmons should propose a phased or rolling production schedule under which the responsive documents are produced in discrete tranches over an agreed-upon period, rather than in a single production on a single deadline. This approach reduces the administrative burden on the engagement team and the client, while demonstrating cooperation and forward progress to the examination team.
Realistic Deadline Negotiation. Response deadlines should be negotiated to account for the complexity of the transfer pricing documentation involved in this examination. The CSA documentation, platform contribution transaction ("PCT") valuation workpapers, PBI functional analysis data, intercompany agreement files, and other materials central to this examination are voluminous and technically complex. Simmons should negotiate deadlines that reflect the actual time needed to locate, collect, review for privilege, and produce responsive materials. In general, the standard fifteen (15) to thirty (30) day response window may be appropriate for straightforward requests, but IDRs involving complex economic data, voluminous document sets, or materials maintained by foreign affiliates (PBI in Dublin, Penterra Manufacturing International Ltd. ("PMI") in Cork) will require longer response periods.
Disaggregation of Multi-Topic IDRs. Where the IRS examination team issues a single IDR that covers multiple distinct topics or categories of information, Simmons should request that the IDR be broken into separate, focused IDRs, each covering a single topic. This approach provides several advantages: it allows the engagement team to respond to narrower, more manageable requests; it enables separate tracking of each topic in the IDR tracker; and it prevents a single delay on one category of information from holding up the response to the entire IDR.
C. Managing Overbroad or Burdensome IDRs
Despite the IRM's encouragement of reasonable and focused IDR requests, it is common in LB&I transfer pricing examinations for Revenue Agents — and particularly IRS economists — to issue IDRs that are overbroad in scope or unduly burdensome in their requirements. The engagement team should be prepared to identify and manage such IDRs through a combination of negotiation, written objection, and, where necessary, escalation.
Identifying Overbroad IDRs
An IDR may be characterized as overbroad when it:
• Is not limited to the relevant time periods under examination (i.e., requests information for periods beyond TY 2017–2020);
• Is not limited to the relevant entities (i.e., requests information about PPC subsidiaries or affiliates not involved in the intercompany transactions at issue);
• Is not limited to the relevant subject matter (i.e., requests information about business operations, products, or transactions that are not relevant to the transfer pricing issues under examination);
• Uses sweeping language such as "all documents" or "all communications relating to" a broadly defined subject without appropriate specificity or limitations;
• Extends to categories of information that are not reasonably related to the examination issues, such as general corporate governance materials not related to the intercompany transactions.
Identifying Unduly Burdensome IDRs
An IDR may be characterized as unduly burdensome when it:
• Requires the expenditure of effort and resources that are disproportionate to the probative value of the information sought;
• Requests information in formats not maintained by the taxpayer in the ordinary course of business, requiring the creation of new compilations, summaries, or analyses;
• Requires the creation of new analyses, reports, or documents that do not already exist, rather than the production of existing documents and data;
• Imposes unreasonable deadlines given the volume, complexity, or location of the responsive materials;
• Requests cumulative or duplicative information that has already been provided in response to prior IDRs.
Response Strategies. When the engagement team identifies an IDR that is overbroad or unduly burdensome, the following response strategies should be employed, in escalating order of formality:
1. Written Objection. The first and most important step is to draft a formal written letter to the Revenue Agent (with a copy to the Team Manager) articulating specific objections to the IDR. The objection letter should identify the specific portions of the IDR that are overbroad or unduly burdensome, explain the grounds for the objection with specificity (i.e., why the requested information is not relevant, why the scope extends beyond the examination issues, or why the burden of compliance is disproportionate to the probative value of the information), and propose narrowed alternatives that would provide the examination team with the information it legitimately needs without imposing unreasonable burdens on the taxpayer. The objection letter should be drafted in a professional and cooperative tone that demonstrates the taxpayer's willingness to provide relevant information while protecting its rights.
As an illustrative example, we anticipate that certain IDRs issued later in the examination may be overly broad in scope. Our planned approach is exemplified by the anticipated objection to IDR No. 26, for which a Letter to IRS — Objection to Scope of IDR No. 26 will be prepared (anticipated date of February 15, 2023), requesting narrowing of the request on the grounds that the IDR as drafted is overly broad and unduly burdensome. This letter will serve as a template for future scope objections, with appropriate modifications for each specific IDR.
2. Partial Compliance with Explanation. Where an IDR contains both reasonably scoped portions and portions that are objectionable, the engagement team should respond to the portions of the IDR that are reasonably scoped while simultaneously identifying the portions to which the taxpayer objects and the specific grounds for those objections. This approach demonstrates cooperation, ensures that the examination team receives the information to which it is entitled, and preserves the taxpayer's objections to the overbroad portions. Partial compliance responses should be accompanied by a cover letter that clearly identifies which portions of the IDR have been responded to and which are subject to objection.
3. Request for Clarification. In some cases, an IDR may be ambiguous or unclear rather than affirmatively overbroad. In such cases, Simmons should contact Revenue Agent Dunleavy to request clarification of the relevance and necessity of specific categories of information requested. The clarification discussion should be documented in writing (either through a confirming email or a follow-up letter) to ensure that the examination record reflects the taxpayer's good-faith efforts to understand and respond to the IDR.
4. Escalation to Team Manager. If the Revenue Agent insists on maintaining an overbroad or unduly burdensome IDR request after the taxpayer has raised objections and proposed alternatives, Simmons or Cross should request the involvement of Team Manager Meskill to resolve the scope dispute before the IDR is finalized. IRM procedures contemplate the Team Manager's role in resolving disputes between the Revenue Agent and the taxpayer's representative, and escalation to the Team Manager should not be viewed as an adversarial step but rather as the appropriate procedural mechanism for resolving good-faith disagreements about IDR scope.
5. Escalation Through LB&I Management Channels. In certain circumstances, if the Team Manager is unable or unwilling to resolve a scope dispute, the taxpayer may escalate the dispute through higher levels of LB&I management. While this level of escalation is rarely necessary and should be reserved for exceptional circumstances, the engagement team should be aware that this option exists and should document all lower-level efforts to resolve the dispute before pursuing management escalation.
D. Requesting Extensions of Time
The taxpayer's right to request extensions of IDR response deadlines is an essential tool for managing the pace and volume of IDR responses during the examination. Extensions of time are routinely requested and granted in LB&I examinations, and the IRS's own policies discourage Revenue Agents from denying extension requests without good cause.
Best Practices for Extension Requests. Extension requests should always be submitted in writing, whether by formal letter or email, and should provide specific reasons for the request. Legitimate grounds for extension requests include:
• The volume of responsive documents and the time necessary to collect, review, and produce them;
• The need to coordinate document collection with foreign affiliates, such as PBI in Dublin and PMI in Cork, which requires additional lead time due to time zone differences, cross-border logistics, and the involvement of foreign counsel;
• The need to consult with foreign tax advisors, including Thornbury & Keogh in Dublin, to ensure that document production complies with both IRS requirements and Irish legal and regulatory requirements (including GDPR);
• The need to conduct a thorough privilege review of responsive documents before production, particularly where the responsive documents may include materials subject to attorney-client privilege or the work product doctrine;
• Competing demands on the client's internal resources, particularly where multiple IDR responses are due simultaneously;
• Technical difficulties in extracting or compiling responsive data from the client's systems.
As an illustrative example of our planned approach, a Letter to IRS — Request for Extension of Time to Respond to IDR No. 14 will be prepared requesting a thirty (30) day extension to the response deadline for IDR No. 14, which is expected to concern intercompany service fees. The extension request will cite the need to compile service fee documentation from multiple PPC business units and to coordinate with PBI in Dublin to obtain corresponding records.
Caution Regarding Multiple Extensions. While extensions are generally available, the engagement team should be aware that multiple extension requests on the same IDR may trigger the enforcement process. If the IRS perceives that the taxpayer is using extension requests as a dilatory tactic to avoid responding to an IDR, the Revenue Agent may decline to grant further extensions and proceed to the Delinquency Notice stage of the enforcement process. Accordingly, extension requests should be genuine, well-documented, and accompanied by evidence of good-faith progress toward completing the response.
E. Privilege Assertions and Privilege Logs
Certain IDR responses will require the withholding of documents on the grounds of attorney-client privilege or the attorney work product doctrine. The assertion of privilege in the IDR context requires careful attention to procedural requirements and substantive legal standards, as the IRS has historically taken aggressive positions challenging taxpayer privilege claims in the examination setting.
Privilege Withholding and Logging Requirements
When documents are withheld from an IDR response on privilege grounds, the taxpayer must withhold the documents with specificity and produce a privilege log identifying each withheld document or communication. The privilege log should include, at a minimum, the following information for each entry:
• The date of the document or communication;
• The author or sender;
• All recipients (including cc: and bcc: recipients);
• A general description of the document or communication sufficient to identify its nature and subject matter without revealing privileged content;
• The specific privilege basis asserted (e.g., attorney-client privilege, work product doctrine, or both).
The Privilege Log is maintained as a running document for all IDR responses throughout the examination. Simmons and Nazari will be responsible for reviewing documents collected for IDR responses and identifying those that should be withheld on privilege grounds. All privilege determinations should be reviewed by Cross or Hartwell before the privilege log is finalized and provided to the IRS examination team.
The Kovel Arrangement with Whitmore Valuation Group
The Kovel arrangement with Whitmore Valuation Group LLC (Kovel letter dated June 20, 2022, internal reference 1018-00009-KV) extends the protection of the attorney-client privilege to communications between Calderwood & Harkness attorneys and Whitmore economists (Dr. Vasquez and Dr. Chakrabarti) that are made for the purpose of rendering legal advice to PPC. Under the Kovel doctrine, as established in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), the attorney-client privilege extends to communications with non-lawyer agents retained by counsel to assist in the provision of legal advice, where those communications are necessary for the attorney to understand the client's situation and to provide informed legal counsel.
In the context of the PPC examination, the Kovel arrangement protects the economic analyses, memoranda, draft reports, and communications prepared by Dr. Vasquez and Dr. Chakrabarti under the direction of Calderwood & Harkness in connection with the transfer pricing examination defense. These materials are being prepared to assist Calderwood & Harkness in providing legal advice to PPC regarding the defense of its transfer pricing positions and are therefore protected by the attorney-client privilege as Kovel-covered communications.
Distinction Between Kovel-Privileged and Non-Privileged Materials
It is critical that the engagement team maintain a clear distinction between two categories of economic work product:
(a) Whitmore Valuation Group's work under the Kovel arrangement (privileged). All work performed by Dr. Vasquez and Dr. Chakrabarti under the direction of Calderwood & Harkness, pursuant to the Kovel letter dated June 20, 2022, is protected by the attorney-client privilege. This includes all communications between Whitmore personnel and Calderwood & Harkness attorneys, all draft and final reports prepared by Whitmore at Calderwood & Harkness's direction, and all underlying data compilations and analyses prepared by Whitmore in connection with the examination defense.
(b) Crestfield & Associates' original transfer pricing documentation work (not privileged). The transfer pricing documentation and workpapers originally prepared by Crestfield & Associates LLP — specifically by Susan Lam and Martin Ogilvy — are not protected by the attorney-client privilege. These materials constitute the work product of accountants and auditors, not of attorneys, and were prepared in the ordinary course of tax compliance, not for the purpose of providing legal advice. The Crestfield materials were already produced to the IRS examination team in response to IDR No. 4, and no privilege claim has been or should be asserted with respect to these materials.
The engagement team must ensure that the boundary between Kovel-privileged Whitmore materials and non-privileged Crestfield materials is strictly maintained at all times. Any inadvertent commingling of privileged and non-privileged materials, or any inadvertent disclosure of Kovel-privileged communications, could jeopardize the privilege claim and expose the Whitmore defense analyses to IRS review.
Privilege Protocol Memorandum
All privilege determinations in connection with IDR responses must be made in accordance with the Privilege Protocol Memorandum dated June 10, 2022. That memorandum establishes the specific procedures to be followed for privilege review, logging, and assertion, including the chain of review and the required approvals for privilege determinations. The engagement team should consult the Privilege Protocol Memorandum regularly and contact Cross or Hartwell with any questions regarding the application of privilege to specific documents or communications.
IRS Positions on Privilege
The IRS, through its Office of Chief Counsel, has historically taken aggressive positions regarding the scope of attorney-client privilege and work product protection in the examination context. The engagement team should be aware of the following key considerations:
• The IRS has challenged Kovel arrangements on the grounds that the non-lawyer agent's work was not genuinely necessary for the provision of legal advice or that the communications were not primarily for the purpose of obtaining legal advice.
• Dual-purpose documents — i.e., documents prepared for both a legal purpose and a business or tax compliance purpose — may not be protected by the attorney-client privilege if the primary purpose of the document was not to obtain or provide legal advice. The IRS has aggressively argued that documents prepared primarily for tax compliance or business purposes are not privileged, even if they were also shared with counsel for purposes of obtaining legal advice.
• The IRS has also taken the position that the work product doctrine, while applicable to materials prepared in anticipation of litigation, does not extend to materials prepared in anticipation of an IRS examination (as opposed to litigation in court). While the case law on this point is not uniform, the engagement team should be aware that the IRS may challenge work product claims for materials prepared before the examination has progressed to the point where litigation is reasonably anticipated.
Tax Practitioner Privilege (IRC § 7525)
IRC § 7525 provides a limited privilege for confidential communications between a taxpayer and a "federally authorized tax practitioner" (i.e., an attorney, CPA, enrolled agent, or enrolled actuary) with respect to tax advice. However, the scope of this privilege is narrower than the attorney-client privilege in several important respects:
• The privilege under § 7525 does not apply to written communications in connection with the promotion of, or participation in, any tax shelter (as defined in IRC § 6662(d)(2)(C)(ii)).
• The privilege does not protect communications related to the preparation of tax returns.
• The privilege applies only in non-criminal tax matters before the IRS and in non-criminal tax proceedings in federal court.
• The privilege does not extend to communications with accountants or other practitioners who are not "federally authorized tax practitioners" as defined in the statute.
Given the limitations of the § 7525 privilege, the engagement team should rely primarily on the attorney-client privilege and the work product doctrine, rather than on § 7525, as the basis for privilege assertions in IDR responses.
IV. IDR Enforcement Escalation — Detailed Analysis
This section provides a more detailed analysis of each step in the LB&I IDR enforcement escalation process, along with practical considerations specific to the PPC examination.
A. Step 1: Delinquency Notice
As described in Section II.C above, the Delinquency Notice is the first formal step in the IDR enforcement process. It is triggered when a taxpayer fails to respond to an IDR by the agreed-upon response deadline.
Issuance. The Delinquency Notice is issued by the Revenue Agent — in this case, Lead Revenue Agent Patricia Dunleavy. The IRM provides that the Revenue Agent should issue the Delinquency Notice promptly after the IDR response deadline has passed without a response or a communication from the taxpayer explaining the delay.
Content. The Delinquency Notice identifies the specific IDR that is overdue, notes the original response deadline, and sets a new response deadline, typically fifteen (15) calendar days from the date of the Notice.
Legal Effect. The Delinquency Notice does not create any legal compulsion. It is an administrative communication that serves as a formal warning that the taxpayer's IDR response is overdue and that the enforcement process has been initiated. However, receipt of a Delinquency Notice should be treated as a serious matter by the engagement team, as it signals to the examination team that the taxpayer's responsiveness has become an issue and it initiates a trajectory toward more consequential enforcement actions.
Taxpayer Response Options. Even at the Delinquency Notice stage, the taxpayer retains the ability to negotiate with the examination team. Upon receipt of a Delinquency Notice, Simmons should promptly contact Revenue Agent Dunleavy to discuss the reasons for the delay and to negotiate, where appropriate, either an extension of the new deadline or a narrowing of the IDR scope that would permit a more timely response. The taxpayer should also provide a substantive response, even if partial, to demonstrate good faith and progress.
Documentation. All Delinquency Notices received should be logged in the IDR Tracker with the date received, the new deadline, and the engagement team's planned response. All communications with the examination team regarding Delinquency Notices should be documented in writing and maintained in the examination file.
B. Step 2: Pre-Summons Letter
The Pre-Summons Letter is the second step in the enforcement process and represents a significant escalation from the Delinquency Notice.
Issuance. The Pre-Summons Letter is triggered when the taxpayer fails to respond to the Delinquency Notice by the new deadline set in that Notice. The Pre-Summons Letter is issued by the Team Manager — Supervisory Revenue Agent Gerald Meskill — rather than by the Revenue Agent. This elevation in the issuing authority underscores the seriousness of the escalation.
Content. The Pre-Summons Letter identifies the overdue IDR, references the prior Delinquency Notice and its unmet deadline, and provides a final response deadline, typically ten (10) calendar days from the date of the letter. The Pre-Summons Letter explicitly warns that failure to respond by the stated deadline will result in the issuance of an administrative summons under IRC § 7602.
Required Approvals. The IRM requires that the Team Manager review and approve the issuance of the Pre-Summons Letter. This review includes an assessment of the circumstances of the non-compliance, the examination team's prior efforts to secure the taxpayer's cooperation, and the relevance and materiality of the requested information. The Team Manager's approval requirement is a procedural safeguard that ensures a level of supervisory oversight before the enforcement process advances to its most consequential stage.
Significance. The issuance of a Pre-Summons Letter is a watershed event in the IDR enforcement process. Once a Pre-Summons Letter has been issued, it becomes a permanent part of the administrative examination file. It may affect the IRS's perception of the taxpayer's level of cooperation, which can have implications beyond the immediate IDR at issue — including the tone of the overall examination, the IRS's willingness to accommodate the taxpayer on other matters, and the posture of the case in any subsequent IRS Appeals proceeding. Avoiding the issuance of Pre-Summons Letters should be a primary objective of the engagement team throughout the PPC examination.
C. Step 3: Summons Under IRC § 7602
If the taxpayer does not respond to the Pre-Summons Letter by the deadline stated in that letter, the IRS may proceed to issue an administrative summons under IRC § 7602. The summons represents a fundamental shift from administrative request to legal compulsion.
Approval Requirements. In the LB&I context, issuance of an administrative summons requires approval from the Territory Manager, which is one management level above the Team Manager. This additional layer of approval ensures that senior LB&I management has reviewed the circumstances and determined that the summons is warranted.
Form and Service. The summons is issued on IRS Form 2039 (Summons) or Form 2039-A (Summons — Attachment). The summons identifies the taxpayer, the tax years under examination, the specific books, papers, records, or data to be produced, and the time, date, and place at which the summoned person is required to appear and produce the specified materials. The summons may also require the summoned person to provide testimony under oath.
A summons is served personally or by certified mail on the summoned party. In the case of a summons directed to the taxpayer (as opposed to a third-party summons), the summons is served on the taxpayer or its authorized representative.
Taxpayer Rights Upon Receipt of Summons. Upon receipt of an administrative summons, the taxpayer has several important rights:
• Right to counsel. The taxpayer has the right to be represented by counsel at the summons proceeding (i.e., the appearance at which the summoned materials are to be produced and/or testimony is to be provided).
• Right to assert privilege. The taxpayer may assert applicable privileges at the summons proceeding, including the Fifth Amendment privilege against self-incrimination (in the case of an individual), the attorney-client privilege, and the work product doctrine. Privilege assertions must be made on a document-by-document basis with sufficient specificity.
• Right to challenge relevance. The taxpayer may challenge the relevance of the information sought by the summons to the examination at issue.
• Right to seek judicial relief. The taxpayer may seek judicial relief from an improperly issued or overbroad summons. In the case of a third-party summons, the taxpayer may file a motion to quash under IRC § 7609. In the case of a summons directed to the taxpayer, the taxpayer may raise objections in the context of an enforcement proceeding initiated by the IRS under IRC § 7604, or may seek to intervene in such a proceeding.
IRS Enforcement of Summons. If the taxpayer does not comply with the summons, the IRS must petition the United States District Court under IRC § 7604 to obtain an order enforcing the summons. The IRS cannot self-enforce a summons; judicial intervention is required. In the enforcement proceeding, the court applies the Powell standard discussed in Section II.D above. If the court determines that the Powell requirements are met and that the taxpayer has not established a defense to enforcement (such as privilege, overbreadth, or improper purpose), the court will issue an order compelling compliance.
Penalties for Non-Compliance. Failure to comply with a court order enforcing a summons may result in a finding of contempt of court, which can carry sanctions including monetary fines and, in cases of willful non-compliance, incarceration. These consequences underscore the importance of avoiding the summons stage of the enforcement process through proactive IDR management.
D. Practical Considerations for the PPC Examination
Given the scale, complexity, and anticipated duration of the PPC transfer pricing examination, the practical implications of the IDR enforcement process warrant careful attention.
Examination Scope and Complexity. The PPC examination covers TY 2017 through 2020 and involves a range of complex intercompany transactions, including:
• The cost-sharing arrangement between PPC and PBI, including the platform contribution transaction and the allocation of intangible development costs;
• The intercompany royalty arrangements between PPC and PBI concerning legacy intellectual property;
• The cost-plus manufacturing agreement between PBI and PMI (Penterra Manufacturing International Ltd., Cork), under which PMI manufactures pharmaceutical products on a cost-plus 8% basis;
• Intercompany service fees charged among PPC, PBI, and other affiliates;
• The overall transfer pricing structure involving multiple foreign affiliates, including PBI (Dublin), PMI (Cork), and Penterra Holdings Ltd. ("PHL").
IRS Examination Team Composition. The IRS examination team is well-resourced and includes, in addition to Team Manager Meskill and Lead Revenue Agent Dunleavy, IRS Economist Dr. Alan Washburne of the IRS Transfer Pricing Practice and IRS Chief Counsel Attorney-Advisor Franklin Rosario. The presence of an IRS economist and a Chief Counsel attorney on the examination team indicates that the IRS is treating this examination as a high-priority matter and that the IDRs issued by the examination team are likely to be comprehensive, technically sophisticated, and aggressively scoped.
Anticipated IDR Targets. Based on the examination scope and the composition of the IRS examination team, we anticipate that the examination team will issue comprehensive IDRs targeting the following categories of information:
(a) CSA documentation and PCT valuation, including all contemporaneous documentation, the methodology for determining platform contribution transaction payments, and the allocation of intangible development costs;
(b) PBI's functions, assets, and risks, including detailed functional analyses, organizational charts, employee descriptions, and evidence of PBI's operational activities in Dublin;
(c) PBI's economic substance and development, enhancement, maintenance, protection, and exploitation ("DEMPE") functions, which are likely to be a central focus of the IRS's challenge to the transfer pricing structure;
(d) Legacy IP royalty comparables, including the comparable uncontrolled transaction ("CUT") analysis and the comparable license agreements relied upon to establish the 4.5% royalty rate;
(e) Intercompany agreements, including the CSA, the royalty agreement, the PMI cost-plus manufacturing agreement, and all intercompany service agreements;
(f) PBI board minutes and corporate governance documents, which may be sought to assess the extent to which PBI exercises independent decision-making authority;
(g) PBI personnel data, including employee headcount, qualifications, roles, and compensation, to assess PBI's functional substance;
(h) Irish Revenue filings, including corporate tax returns and any Knowledge Development box ("KDB") claims filed by PBI with the Irish Revenue Commissioners, which the IRS may view as relevant to the allocation of IP income.
Document Preservation. A document preservation notice was issued on June 6, 2022, directing PPC and its subsidiaries (including PBI and PMI) to preserve all documents and electronic records potentially relevant to the IRS examination. Compliance with the document preservation notice is essential to ensure that the engagement team can respond fully and accurately to IDR requests and to avoid any allegations of spoliation.
Coordination with Third Parties. Effective IDR response coordination will require close collaboration with several third parties:
• Crestfield & Associates LLP (Martin Ogilvy, Susan Lam): Crestfield prepared PPC's original transfer pricing documentation and workpapers for TY 2017–2020. These materials have already been partially produced (IDR No. 4) and will be central to the examination. Coordination with Crestfield is necessary for access to return data, workpapers, and supporting schedules. Crestfield's work product is not privileged.
• Thornbury & Keogh (Ciarán Thornbury): Thornbury & Keogh serves as PPC's Irish counsel and is responsible for coordinating the production of PBI and PMI records maintained in Ireland. Coordination with Thornbury is necessary to ensure compliance with both IRS requirements and Irish legal and regulatory requirements, including GDPR.
• Time Zone and Logistics Considerations: The engagement team should account for the time zone difference between the eastern United States and Ireland (typically 5 hours) and the logistical challenges of gathering documents from PBI's office in Dublin (4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4) and PMI's facility in Cork (Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29). These logistical factors should be cited in extension requests where IDR responses require Irish-sourced documents.
V. Special Considerations for Transfer Pricing Examinations
A. Transfer Pricing-Specific IDR Patterns
LB&I transfer pricing examinations typically follow a predictable IDR pattern that reflects the sequential stages of the IRS's examination methodology. Understanding this pattern allows the engagement team to anticipate IDR requests, prepare responsive materials in advance, and manage the pace of document production proactively.