Communicating with the IRS during the conduct of the audit.

I. INTRODUCTION

Both Tax Executives Institute and the Internal Revenue Service have shown concern about various aspects of the Coordinated Examination Program, pursuant to which the largest 1,700 corporations are subject to continual examination by the IRS.(1) How well large corporations communicate with the IRS during the conduct of an audit has been an area of mutual concern. The process of communication includes (1) planning for the audit, (2) establishing procedures for gathering information requested by agents, (3) providing the requested information to the agents, (4) addressing issues raised upon audit, and (5) resolving those issues either during the audit or upon appeal. An important part of the process is the role played by the case manager, the team coordinator, specialists, and other IRS personnel.

This article analyzes the results of a survey of the Fortune 500 companies, focusing primarily on communications issues related to the planning for and conduct of the audit. Since a significant number of communication problems arise during the appeals process, several aspects of the appeals process are also discussed.

II. METHODOLOGY

Information for this study was obtained by means of a questionnaire mailed to the senior tax person at the Fortune 500 companies. The cover letter requested that the senior tax person forward the questionnaire to the person in the company having primary direct responsibility for IRS examinations. In order to obtain the insight necessary to develop a meaningful questionnaire, meetings were held with tax executives from six large corporations in Ohio. In addition, seven tax executives from large corporations located across the country were interviewed via telephone. Based upon the information obtained in the interviews, a draft of the questionnaire was developed and circulated to the aforementioned executives. The survey instrument was then revised based on their comments.

The final questionnaire was mailed to tax executives at 494 companies (the Fortune 500 companies for which an appropriate respondent could be determined) during the summer of 1992. The first mailing was followed by a second request. There were 128 responses to the first request and 54 to the second request. The overall response rate was 36.8 percent. Questionnaires were numbered to facilitate the mailing of second requests. Confidentiality of responses was strictly observed.

All but four of the respondents provided information about the IRS region in which they were located. Table 1 shows the number of responses by IRS region. Not all respondents answered each question, but most responded to nearly all of the questions. Finally, comments were solicited from the respondents regarding a number of the areas addressed in the study.

These comments are reflected in this article, when they provide additional insight.

In developing the questionnaire, it became evident that there had to be a way for respondents to know which audit was being referred to in the questions. This was necessary since most large companies are under continuous examination; as soon as one audit cycle is completed, another is begun. The previous audit cycle or cycles, however, may still be in Appeals. Therefore, for most questions the respondent was requested to answer for the current examination(2) and then again for the most recently completed examination (completed except that the appeals process or litigation is ongoing).

In the following discussion, some of the concerns and remarks of those interviewed in the process of the development of the questionnaire are also reported. Their observations provide a framework for analysis of the survey's results.

III. AUDIT PLANNING

The responding executives thought planning for the audit before the audit began was an important step toward avoiding communication problems. Several believed involvement of the IRS at this stage was critical to successful communication.

                            Table 1
Number of Respondents by IRS Region
IRS Region       Number
North Atlantic    34
Mid-Atlantic      34
Southeast          8
Midwest           47
Central           14
Southwest         19
Western           22
Total            178

Preexamination conferences were held in nearly all instances -- approximately 93 percent of both the current and the recently completed examinations. Table 2 shows who was present at the preexamination conferences for the current and recently completed examinations. Branch managers, specialist managers, and specialists have apparently become more involved with taxpayers in the planning phase of the examination. District counsel's involvement in the planning process, although growing, remains small compared with that of other IRS personnel.

Table 2

IRS Personnel Present at Preexamination Conference

                            Recently               Current
                     Completed Examination    Examination
                     Number  Percentage      Number  Percentage
Branch Manager        113      31.9           110       48.2
Case Manager          149      97.3           144       98.6
Team Coordinator      147      97.3           143       98.6

District/Regional

Counsel               100       5.0           100        6.0
Specialist Manager    117      38.5           119       54.6
Specialist            115      43.5           111       48.6

For the current examination, a timetable for completion of the audit was agreed to in approximately 76 percent of the 135 current examination cases for which it was not too early to answer. In contrast, a timetable was agreed to in only 61 percent of the 152 recently completed examination cases for which respondents replied.

Table 3 shows the number of respondents by IRS region reporting whether the scope of the examination was made clear in the planning stages of the audit. Overall, the scope of the examination was made clear in 38.7 percent of the cases for the most recently completed examination and in 36.0 percent of the cases for the current examination. The scope of the examination was made clear for some parts of the audit in 43.9 percent of the cases for the most recently completed examination and in 48.5 percent of the cases for the current examination. Respondents were asked whether IRS and company personnel formed teams to do preexamination planning. This was done in only 11 out of 160 cases for the most recently completed examination and in only 9 of the 133 current examination cases.

Post-closing conferences to discuss communication problems were held in 63.5 percent of 170 recently completed examinations. Forty respondents provided some comments about their experiences with such conferences. Seven reported that the post-closing conference was not a very productive meeting, and three said the conferences worked well. Other comments dealt with the focus of the meetings. Most meetings dealt with the timeless of responses to Information Document Requests (IDRs), so-called problem agents, or ways to improve the next examination cycle.

IV. CONDUCT OF THE EXAM

A. Involvement of Case Manager

Involvement of the case manager in the technical side of the examination as contrasted with managing the scheduling and administrative side of the audit work should have a positive effect on issue resolution. Regardless of whether the case manager was substantively involved in the technical side, the case manager's involvement in the examination should facilitate the resolution of issues. Several questions were asked in order to determine the effect of the case manager. [TABULAR DATA OMITTED]

Respondents said the case manager was involved in the technical side of the most recently completed examination in one-third of the 147 cases reported. Interestingly, 18 respondents did not know whether the case manager was involved. The case manager was involved in approximately 36 percent of the 97 current examinations for which it was not too early for respondents to report. Another 55 current examination respondents replied that it was too early to answer. For those answering yes or no to the question, the percentage answering yes by IRS region is shown in Table 4. [TABULAR DATA OMITTED]

The case manager's involvement in the examination was either rarely or never helpful in resolving issues in more than 64 percent of the 153 recently completed examinations and in more than 60 percent of current examinations for which it was not too early to tell. These results are summarized in Table 5. The percentage answering always or often to whether the case manager was helpful in resolving issues is presented by IRS region in Table 6.

Eighty-six respondents provided some comment on why the case manager was not helpful in resolving issues. Thirty reported that the case manager was too "pro IRS" and not receptive to doing anything other than supporting agent positions. Nine stated that the case manager was reluctant to override or disagree with specialists. Another seven reported that the case manager was not used in resolving issues. The remaining commented on the good relationship with the team coordinator, the lack of the case manager's technical ability, the case manager's unwillingness to make decisions regarding large issues, and turnover of case managers.

Table 7 shows the extent to which the case manager's helpfulness in resolving issues related to the case manager's helpfulness in resolving issues related to the case manager's involvement in the technical side of the examination, with there appearing to be a relationship between issue resolution and the involvement of the case manager in the technical side of the examination. Approximately 57 percent of the respondents who reported that the case manager was either always or often helpful in issue resolution for the most recently completed examination also reported that the case manager had been involved in the technical side of the audit. [TABULAR DATA OMITTED]

For the current examination, nearly 67 percent of those who reported that the case manager was helpful stated that the case manager had been involved in the technical side of the examination. In contrast, the case manager was involved in the technical side of the audit in only 17 percent of the most recently completed examinations for which the case manager was reported to be either rarely or never helpful in resolving issues. The case manager was involved in the technical side in approximately 30 percent of the current examinations in which the case manager was either rarely or never helpful in issue resolution.

B. Team Coordinator

If the team coordinator spends sufficient time coordinating the audit and supervising agents as contrasted with being a working auditor, then the team coordinator's involvement should facilitate issue resolution where an impasse is reached with agents. Respondents were asked whether the team coordinator spent sufficient time coordinating the examination and supervising agents. Table 8 shows that 43.7 percent of 153 respondents for the most recently completed examination either agreed or strongly agreed that sufficient time was spent. For the current examination, 49.2 percent of 118 respondents for which it was not too early to answer either agreed or strongly agreed that the team coordinator spent sufficient time on these tasks. Twenty-nine additional respondents stated that for the current examination it was too early to answer. Thus, more than half of the respondents were either uncertain or believed the team coordinator did not spend sufficient time coordinating and supervising.

Table 9 provides the percentage of respondents who either agreed or strongly agreed that the team coordinator paid sufficient attention to these aspects of

the job by IRS region.

Respondents were asked whether the team coordinator's involvement helped to resolve issues where an impasse was reached with agents. Table 10 shows that approximately one-half of the respondents believed that the team coordinator was either always or often helpful in resolving conflicts. The responses were about the same for both the most recently completed examination and the current examination. [TABULAR DATA OMITTED]

There were 57 respondents, however, who reported that it was too early to respond for the current examination.

Seventy respondents commented on why the team coordinator was not always helpful in resolving conflicts. Seventeen suggested that the team coordinator refused to take a leadership role and override agents, which the respondents characterized as an excessively "pro-IRS" attitude. Another 16 said the team coordinator was reluctant to override specialists. They noted that in some cases the team coordinator apparently did not feel qualified and that specialists often operated independently of the team coordinator. Twelve said the team coordinator was essentially a working auditor and that the conflict was over his or her issues. Other comments noted reliance on the National Office on certain issues, personality conflicts, and deference to case managers in resolving issues. Several made positive comments to the effect that the team coordinator was quite helpful owing to the relationship that had been established.

The percentage of respondents reporting that the team coordinator was either always or often helpful in resolving disputes is provided by IRS region in Table 11.

Table 12 shows the extent to which the team coordinator was helpful in resolving conflicts by whether the team coordinator spent sufficient time coordinating and supervising agents. The results suggest that the team coordinator was more helpful in those cases where the respondents believed the coordinator spent sufficient time on this part of the job.

More than 78 percent of 143 respondents for the most recently completed examination believed that the team coordinator was experienced in coordinating large case audits. [TABULAR DATA OMITTED]

Another 14 said that they did not know. Approximately 83 percent of the 132 respondents reported that for the current examination the team coordinator was experienced in coordinating large case examinations, and there were another 19 who noted it was too early to answer.

C. Information Gathering

Respondents were asked if their companies conducted presentations or meetings in order to inform agents about various topics. Many companies did not make presentations to agents. The presentations that were conducted, however, were more often about the company's accounting systems and certain transactions. Table 13 provides a summary of the responses. The responses were similar regardless of whether it was the current examination or the most recently completed audit.

Most companies -- 78.5 percent and 77.4 percent for the current and most recently completed examinations, respectively -- obtained a written commitment from the IRS that identified and limited the company personnel to whom the IRS could speak during the examination. Respondents said the agreements were being followed in approximately 96 percent of the examinations.

Respondents were asked whether they discussed complex issues with the IRS before IDRs were issued. Several of the executives interviewed thought doing so might reduce the number of IDRs issued and avoid communication problems.

Approximately 44 percent of the 120 respondents for the current examination, for which it was not too early to answer, reported that they either rarely or never discussed complex issues upfront. Almost 52 percent of the 157 respondents for the most recently completed examination reported that they either rarely or never discussed issues upfront. [TABULAR DATA OMITTED]

Twenty-seven respondents provided comments on why they did or did not discuss issues before IDRs were issued. Some said that it was poor strategy, that IDRs are requests for information not statements of position, or that they would discuss issues only after the IRS had identified them. Others commented that the IRS was not interested in doing so. Several noted that there are definite advantages to discussing issues upfront. By discussing complex issues, the questions are often answered; IDRs are not needed and in-depth investigation by the IRS is avoided. Some respondents said such discussions were held with a view toward limiting the scope of the audit. Several noted that goodwill was engendered by the practice, and it helped to minimize controversy.

Turn-around time for IDRs was set and agreed to in approximately 82 percent of the 142 current examinations. For the most recently completed examination, the percentage was somewhat lower. Turn-around time was agreed to in 73 percent of 158 reported cases.

Companies were able to respond within the agreed-upon turn-around time either always or often in 83 percent of the 106 current examination cases. (Twenty respondents commented that it was too early to answer.) Almost 79 percent of the 127 respondents for the most recently completed examination replied that they either always or often were able to respond within the agreed time.

Twenty respondents commented on their ability to respond within the agreed time. Some noted that staff cuts and workload constraints adversely affected the ability to meet the times set. Shifts in IRS priorities caused some IDRs to be late. Some said the requests were too voluminous or too general, or that unrealistic turn-around times had been set. Several noted that volume and quality of requests were disproportionate to the issues involved. Only one respondent commented that procrastination by the taxpayer is an effective strategy. [TABULAR DATA OMITTED]

Respondents were asked whether IDRs were specific enough. Approximately 91 percent of the 129 current examination respondents for which it was not too early to report and 89 percent of the 159 respondents for the most recently completed examination replied that IDRs were either always or often specific enough. Approximately 67 percent of 126 current examination respondents and 71 percent of 149 respondents for the most recently completed examination reported, however, that the IRS either rarely or never limited questions to one per IDR.

Respondents reported that IDRs were generally clear and understandable. Almost 94 percent of the 132 respondents for the current examinations reported that IDRs were either always or often clear and understandable. Approximately 92 percent of the respondents for 157 recently completed examinations replied that IDRs were either always or often clear and understandable.

D. Use Of Specialists

Most of the executives interviewed expressed some concern about the involvement of specialists in the examination. Computer audit specialists, engineers, and international specialists were the most frequently encountered specialists for both the current and the most recently completed examinations. Approximately 93 percent of the 122 current examination respondents and 93 percent of the 156 respondents for the most recently completed examination reported that the appropriate specialists had been assigned to the examination.

Table 14 shows the extent to which specialists coordinated their activities with the rest of the audit team. For the most part, respondents thought that coordination was better for the current examination than the most recently completed examination. Computer audit specialists, engineers, and international specialists appear to have done the best job of coordinating their activities with the rest of the audit team. Inventory, excise tax, employment tax, and employee plan specialists appear to have done a poorer job of coordinating their activities. [TABULAR DATA OMITTED]

Engineers were either always or often trained for the types of issues encountered in the audit in only 63 percent of the 92 current examinations and 62.9 percent of 132 recently completed examinations. Table 15 shows the percentage of engineers that were either always or often appropriately trained by IRS region. [TABULAR DATA OMITTED]

Respondents were asked whether specialist managers were helpful in resolving issues when an impasse was reached with the specialist agent. In only 12 percent of the 50 current examinations for which it was not too early to answer and 15.5 percent of the 103 most recently completed examinations for which the question was applicable were specialist managers considered either always or often helpful in resolving disputes. Twenty-two respondents commented about the role of the specialist manager. Sixteen remarked that the specialist manager always supported the specialist agent. This was attributed to lack of authority to settle, the specialist manager's appearing to serve only as an administrator, and the specialist manager's not taking the time to familiarize himself with the issues. Six said the specialist manager was not actively involved with taxpayers.

Thirty-five current examination respondents and 49 respondents for the most recently completed examination reported that industry specialists were involved in their examinations. Approximately 96 percent of 26 current examination respondents and 94 percent of 48 respondents for the most recently completed examination reported that the industry specialist manager was either rarely or never helpful in resolving issues when an impasse was reached with industry specialists. Respondents commented that industry specialists were seldom interested in resolving issues, were difficult to deal with, took a litigating posture, raised coordinated issues that could only be settled through Appeals, and did not have the industry knowledge they believed they had. Several respondents noted, however, that industry specialists were helpful in defining genuine issues.

The executives interviewed expressed concern over whether computer audit specialists had access to the company's management information systems (MIS) personnel without tax department personnel present. The apprehension expressed was not so much that additional issues might be raised but that the computer specialist would needlessly tie up company personnel and computer time performing tasks that would prove to be unproductive. In addition, there was concern for computer security in general. For the current examination, 53.5 percent of the 127 respondents said that the computer audit specialist either rarely or never had access to MIS personnel without tax department personnel present. (There were 21 respondents who reported that it was too early to answer.) Similarly, 53.2 percent of the 154 respondents for the most recently completed audit replied that the computer audit specialist either rarely or never had such access to MIS personnel. [TABULAR DATA OMITTED]

Another concern of the executives was the physical location of the computer audit specialist during the examination. Most of those interviewed thought it was more efficient for the specialist to be physically housed with the rest of the audit team. It also made sense from the standpoint of exercising control over access to MIS personnel and general computer security. Approximately 77 percent of the 129 current examination respondents and 73 percent of the 153 recently completed examination respondents reported that computer audit specialists were either always or often physically housed with the rest of the audit team.

Respondents were asked to comment on their company's experience with computer audit specialists. Remarks were made by 123 and 113 respondents for the most recently completed examination and current examination, respectively. Table 16 provides a summary of the comments. Approximately one-third of the comments for both the recently completed examination and the current examination were positive. Approximately 26 and 23 percent respectively were negative. The balance of the comments were essentially neutral.

Several of the executives noted during interviews that the IRS rarely used statistical sampling on their examinations. The under-utilization of statistical sampling appears to be quite common. Approximately 71 percent of the 148 respondents for the most recently completed examination pointed out that the IRS either rarely or never used of statistical sampling on their audits. Respondents for the current examination reported a slight increase in the use of statistical sampling. For the current examination, approximately 65 percent of the 95 respondents for which it was not too early to report said the IRS either rarely or never used statistical sampling. The percentage reporting that statistical sampling was either rarely or never used by IRS region is provided in Table 17.

IV. APPEALS PROCESS AND INVOLVEMENT OF NATIONAL OFFICE

A. Involvement Of Counsel In The Examination

Several of the executives noted that IRS District Counsel personnel have become more involved in examinations. They expressed the view that this involvement could have a negative effect on issue resolution.

Table 18 shows the percentage of respondents reporting that IRS Counsel was involved during the examination stage of the audit, and reveals a slight trend toward greater involvement by Counsel in more cases. Hence, a greater percentage of current examination respondents than recently completed examination respondents reported that IRS Counsel was involved in the examination stage of the audit. [TABULAR DATA OMITTED]

Sixty-eight-respondents commented on the role taken by IRS Counsel and its effect. In most cases, Counsel's role was to advise agents regarding issues, review agent submissions and proposed adjustments, and tell agents the type and scope of information needed. In several cases, however, Counsel's involvement resulted in the issuance of a summons.

Thirty-nine of the 68 either did not know the consequence of Counsel's involvement on issue resolution or thought it had little effect. Twenty-nine respondents, however, believed the involvement of Counsel either prolonged the audit or caused the agents to take a litigating posture. Only 6 believed Counsel's involvement had a positive effect, by either helping agents define the issue or by prompting agents to drop insupportable or weak issues.

Those respondents reporting that IRS Counsel was involved were asked whether they were allowed to speak directly with IRS Counsel. Approximately 82 percent of 39 current examination respondents and 82.5 percent of 57 respondents for the most recently completed examination replied that they either rarely or never were allowed to speak directly with IRS Counsel.

B. Technical Advice

Respondents were also asked whether technical advice from the National Office was requested during the course of the audit. Only 13.2 percent of the 91 current examination respondents reported that technical advice had been requested. There were 55 respondents that said it was too early to answer. Technical advice was requested in almost 24 percent of the 143 recently completed examinations for which respondents answered the question.

Agents have gone to National Office informally for advice on technical matters in nearly 57 percent of the 88 current examinations for which it was not too early to answer. (Sixty respondents said it was too early to answer.) Agents have gone to National Office informally in almost 65 percent of the 117 recently completed examinations for which respondents were able to reply. In addition, there were 47 respondents for the most recently completed examination who replied that they did not know.

In a majority of those cases in which agents had sought informal technical assistance from the National Office, the agents shared the question and National Office answer with the taxpayer. Almost 71 percent of the 48 current examinations and 72 percent of 72 recently completed examination respondents said the information was shared.

C. Coordinated Issues

During the interviews, several of the executives remarked that it has become quite common for the IRS to raise coordinated issues--issues on which a taxpayer-favorable resolution cannot be reached absent approval. The respondents believed this practice tended to have a negative effect on issue resolution in general. Coordinated issues were raised during the examination in almost 61 percent of the 89 current examinations and during the appeals process in only 3 of the 34 current examinations for which it was not too early to answer. By comparison, coordinated issues were raised during the examination in 57 percent of 149 most recently completed examinations and during the appeals stage in 11 of the 90 cases for which it was not too early to reply.

D. Materials Prepared For Appeals By The IRS

Several of the executives interviewed were concerned that agents do not sufficiently develop either the facts or the issues in terms of law before going forward to Appeals. Respondents were asked whether materials prepared by the examination team on issues that went to Appeals were sufficiently developed in terms of the facts. Almost 88 percent of the 33 current examinations for which it was not too early to reply reported that the materials were either always or often sufficiently developed factually. There were 108 respondents that said either that it was too early to report or that the question was not applicable. Approximately 70 percent of 106 respondents for the most recently completed examination answered that the materials were either always or often sufficiently developed in terms of facts. Another 50 respondents either did not know or said that the question was not applicable.

Approximately 81 percent of 37 respondents for the current examination reported that the taxpayer and the IRS either always or often agreed to the facts before proceeding to Appeals. There were another 105 respondents who were not able to answer the question. Almost 70 percent of 113 respondents for the most recently completed examination answered that the taxpayer and the IRS either always or often agreed to all the facts before proceeding to Appeals. Another 49 replied that either they did not know or the question was not applicable.

Respondents were asked whether the materials prepared by the examination team on issues that had gone forward to Appeals were sufficiently developed in terms of the law. Approximately 71 percent of 24 current examination respondents replied that issues were either often or always sufficiently developed in terms of the law. There were 119 respondents for whom either it was too early to answer or the case did not go forward to Appeals. Approximately 62 percent of 105 respondents for the most recently completed examination replied that issues were either often or always sufficiently developed in terms of law. Another 55 replied that either they did not know or that the question was not applicable.

Several respondents commented on why the issues had not been sufficiently developed in terms of law: (1) agents either ignored law contrary to their positions or interpreted the law very narrowly; (2) the examination team appeared to simply take direction on policy issues; (3) the agents' research was incomplete; (4) the IRS lacked understanding of tax law and the industry; and (5) the agents did not appear to be trained in legal concepts.

V. CONCLUSION

The survey results suggest that there are a number of communication issues that tax executives need to discuss with the IRS. The IRS cannot take corrective action unless it recognizes that the problems exist. Some of the problem areas might not be perceived by the IRS as problems. Although there are many areas of concern identified in this article, the following are the most significant:

* The roles played by the case manager and the team coordinator need to be examined. It appears that case managers need to become more familiar with the technical aspects of the examination. On the other hand, it appears that team coordinators need to spend more time coordinating and supervising as contrasted with being working auditors. Both, in the opinion of many tax executives, need to adopt a more open attitude.

* For the most part, appropriate specialists were assigned to the examination. The IRS needs, however, to make sure specialists coordinate their activities with the rest of the audit team. Some specialists did a good job of this; others did not.

* One-third of engineers were not appropriately trained for the types of issues encountered in examinations. The IRS should review the assignment of engineers.

* The role of the specialist manager needs to be reviewed. They were clearly not perceived as being very helpful in issue resolution.

* Statistical sampling appears to be under-utilized in the opinion of many tax executives. Its role in the examination process needs to be reviewed.

* The IRS should monitor those cases in which Counsel is involved in the examination phase of the audit. This was a concern of many and appears to have a negative impact from the perspective of tax executives.

(1) Internal Revenue Service, FY 1990 Quality Peer Review Oversight Committee: Report on the Coordinated Examination Program (June 1990); Internal Revenue Service, FY 1991 Quality Peer Review Oversight Committee: Report on the Coordinated Examination Program (November 1991); McCormally, Timothy J., Reflecting on the Large Case Program, 42 The Tax Executive 221 (July-August 1990); Tax Executives Institute, Comments on CEP-QIP: Proposals for Changes to Coordinated Examination Program (April 9, 1990), submitted to the IRS on June 8, 1990.

(2) References to the current examination are to the current examination in those cases where it was not too early for the respondent to answer.