Joint audit planning process.

Individuals from the IRS's Large and Mid-Size Business Division and members of the Tax Executives Institute (TEI) recently teamed up to create a new joint audit planning process. (Although TEI members and staff participated in the project, this is not an official TEI position.) This process combines many of the best practices occurring in audits today. The goals are to provide a consistent approach to audit planning and an issue-focused plan to encourage efficiency and accountability. The process has six parts: (1) preliminary meetings and discussions; (2) involvement of IRS counsel, specialists and technical advisors; (3) audit scope; (4) audit timeline/monitoring progress; (5) information document requests (IDRs); and (6) issue resolution/ Notices of Proposed Adjustment (NOPAs). Each part is detailed below.

Preliminary Meetings and Discussions

As part of the new process, the examination team will have several preliminary meetings with the taxpayer to learn about the latter's business, begin identifying areas of potential risk and establish audit timelines. In the timeline discussion, the taxpayer should address any concerns as to times during the year when it will not be able to dedicate its resources to the examination (e.g., filing season).This will prove to be crucial once the taxpayer and the IRS agree on response times for IDRs and NOPAs.

Involvement of IRS Counsel/ Specialists/Technical Advisers

Specialists will be involved earlier in the process; they will be part of audit planning and will be able to offer input as to the audit's scope and depth. At the initial meetings, the examination team will alert the taxpayer as to the specialists who will be involved in the audit and their roles and responsibilities. Specialists will meet with the taxpayer before issuing IDRs to ensure that they are clear and the information being requested is appropriate. In some cases, IRS Counsel may need to assist in risk analysis or provide technical advice.

Audit Scope

In determining the examination's scope, the audit team will perform a risk analysis to prioritize the issues to be examined; it will establish materiality thresholds to further limit scope. The team and specialist managers, the audit team and the taxpayer will all be involved in determining the examination's scope and depth. The risk analysis should be a continuous process revised based on the examination's findings. As part of the joint audit planning process, the IRS encourages the use of the Limited Issue Focused Examination process (a streamlined, focused examination that uses a risk-based approach to limit an examination's scope).

Once the audit scope is established, it will be documented along with other pertinent agreements in the audit plan. The draft audit plan will be shared with the taxpayer for input prior to finalizing. If possible, the IRS should provide the taxpayer the final audit plan for signature on the date of the opening conference. If not available at the opening conference, the audit plan will be provided before any substantial testing. If new issues are added to the scope after the audit plan, the IRS will discuss them with the taxpayer before any extensive audit work is performed.

In addition to limiting the audit's scope, the joint audit planning process also addresses the audit's depth. The examination team will use statistical sampling or alternative methods to limit testing on particular issues, reducing the burden on both the taxpayer and the IRS.

Audit Timeline/Monitoring Progress

The audit team and the taxpayer will set timelines throughout the examination (e.g., the completion date and the last date for issuing IDRs, filing claims and issuing NOPAs). The audit team and the IRS should sign agreements for these commitments and include them as part of the audit plan's "pertinent agreements" section. The new process also encourages management's involvement and elevation of issues to the next level (e.g., territory manager) if issues cannot be resolved between the taxpayer and the audit team or team manager. Communication is the key to monitoring the examination.

IDRs

IDRs are a main component of an IRS audit; thus, it is beneficial to coordinate agreements with the IRS early in the process. One IRS employee should issue all IDRs to one taxpayer contact; this will allow the IRS and the taxpayer to track IDRs and prevent the taxpayer from being issued numerous requests with similar response deadlines. All IDRs will be discussed before issuance, allowing the taxpayer to understand the IRS's intent as to the request and notify it if other information would be more appropriate. To encourage efficiency, the IRS and the taxpayer should enter into agreements outlining the taxpayer's response time to IDRs, as well as the IRS's response to the taxpayer's information.

Issue Resolution/NOPAs

The joint audit planning process encourages the examination team to discuss all issues before issuing a NOPA. The IRS should issue NOPAs throughout the examination as testing is completed. Timeframes will be established for the issuance and response to NOPAs. Because the examination team should be discussing the issues all along, the IRS does not predict that taxpayers will need a long response time to reply.

The program also encourages the use of alternative dispute resolution techniques (e.g., pre-filing agreements, fast-track settlement and mediation) to resolve issues at the earliest stage possible. The IRS has recently focused on pre-filing initiatives; however, in the future, there will probably be an increased focus on resolution tools that resolve issues for multiple taxpayers and extend beyond one year.

Conclusion

The joint audit planning process is a culmination of the best practices occurring in audits today. It encourages greater taxpayer involvement and teamwork to achieve earlier issue resolution and greater consistency in all audits. This process should benefit both sides, by reducing audit time and costs.

Editor's note: Messrs. Ely and Dougherty are former chairs of the AICPA Tax Division's Tax Practice and Procedures Committee. Mr. Van Deveer is the current Committee chair. Mr. Davis is a member of the AICPA Tax Division's Tax Practice Responsibilities Committee.

FROM JAMES DOUGHERTY, DIRECTOR, AND RONA HUMMEL, MANAGER, TAX CONTROVERSY, DELOITTE & TOUCHE LLP, WASHINGTON DC

Mark H. Ely, J. D., CPA Partner

Washington National Tax KPMG LLP Washington, DC