LMSB-TEI Joint Audit Planning Process: October 2003.

Introduction (1)

Over the past year, representatives of the IRS Large and Mid-Size Business Division (LMSB) and Tax Executives Institute have worked together to develop a Joint Audit Planning Process to the mutual benefit of taxpayers and the government. The result of this joint effort is a Planning and Monitoring Tool that outlines the specific joint and individual responsibilities of the participants in the examination process. The process has been rolled out within LMSB and continues to be introduced to local TEI Chapters.

Reactions to the process within LMSB have been favorable. For example, one Team Coordinator has observed:

   In the past, the audit planning process was,
   more likely than not, a unilateral process that
   may not have always produced the most efficient
   audit plan and examination. Now under the Joint
   Audit Planning Process, audit planning will be a
   bi-lateral process with the taxpayer that should
   result in more efficient examinations. As in any
   bi-lateral process, however, the key to success
   will be getting the right people involved who
   will maintain accountability throughout the
   examination.

An International Territory Manager elaborated:

   The full implementation of the Joint Audit Planning
   Process is a requirement as LMSB and our
   taxpayers seek to conduct more efficient and
   timely examinations. The key word is "joint,"
   in that both parties not only must fully endorse
   this initiative but must ensure it is a reality in
   practice. My team manager and I recently concluded
   a meeting with a large CIC taxpayer and
   discussed every line item, one by one, included in
   the Joint Audit Planning and Monitoring Tool.
   Although a number of the practices were implemented
   in past cycles, the document served as a
   reminder for those practices previously utilized as
   well as new ones that should be implemented.
   Those present in our meeting were energized to
   take audit efficiency to another level in our new
   cycle. We will continue to use the Monitoring
   Tool throughout the process to ensure all best
   practices are fully considered and implemented
   when appropriate. We all agreed that openness
   and trust among us is vital as we seek to meet our
   closing goals. In my judgment, aggressive case
   closing goals will not and cannot be met if taxpayers
   and LMSB do not fully implement the Joint
   Audit Planning Process. We will ensure LMSB
   meets our end of the bargain and am confident
   that our taxpayer will as well.

Following completion of the project, a training video of TEI and LMSB representatives discussing the process was produced and distributed both throughout LMSB and to all TEI chapters. After viewing the video, a Team Coordinator--who worked with a taxpayer to use the concepts of Joint Audit Planning in identifying and developing potential issues--reported the following comment by a Vice President of Tax:

   If an issue has five facts that define a transaction,
   we believe it is in our best interest to provide those
   facts to the IRS in a timely manner so that we
   can agree to them. Then, any disagreement surrounding
   the issue would focus on the application
   of the tax law. The more current the years under
   examination and the shorter the exam cycle, the
   more cost effective it is for our company.

Changes in company personnel and difficulty in locating records for older years put the company at an extreme disadvantage. The Vice President of Tax concluded that working with the LMSB Audit Team to improve the IDR process through Joint Audit Planning would help limit the number of requests and reduce the time needed to perfect an issue. Both the taxpayer and the LMSB Audit Team recognize the more current the years under examination, the easier it is for the company to address issues raised by the IRS.

Paul O'Connor, chair of TEI's IRS Administrative Affairs Committee (which coordinated the Institute's involvement in the initiative), observed that the Joint Audit Planning Process "brings home the message that, though taxpayers and the IRS may sit on opposite sides of the table, they share an interest in ensuring that the resources expended in examining corporate tax returns are used efficiently and wisely." Mr. O'Connor calls the process "a win-win for all of us."

LMSB Executives, Territory Managers, and Team Managers have already made numerous internal and external presentations across the country. The feedback from those sessions suggests that the LMSB-TEI Joint Audit Planning Process Tool is being generally well received. Although use of the Joint Audit Planning and Monitoring Tool is discretionary, the leadership of both LMSB and TEI remain convinced that the job aid will benefit all parties by becoming the primary motivator to establish a pattern for joint accountability and commitment. Thus, it can help keep the examination moving and focus on audit efficiency to get current and stay that way. The tool integrates a set of rules that both sides agree to use and also maximizes communication between the taxpayer and the audit team. When everyone involved knows from the very beginning what is expected from one another in an issue-focused Joint Audit Planning Process, confusion and mistrust will be eliminated or at least minimized and the open communication will allow all members of the LMSB and Taxpayer team to achieve the agreed-upon goals for timely completing the examination.

The Planning and Monitoring Tool is reproduced on the following pages. The full report is available on TEI's website at www.tei.org.

LMSB/TEI Joint Audit Planning Process Team

LMSB Participants

Jack L. Schroeder, Director, Field Operations James P. Dever, Territory Manager Erwin D. Walker, Territory Manager Jeffrey A. Myers, Team Manager, Engineering Douglas Chong, Team Manager, Financial Products Larry H. Smoller, Senior Team Coordinator, NTEU

Tax Executives Institute Participants

Denise M. Lukowitz, Schneider National, Inc. Victoria D. McInnis, General Motors Corporation Christopher T. Riley, Archer-Daniels-Midland Co. Mark C. Silbiger, Lubrizol Corporation Robert E. Zysk, Northwestern Mutual Life Insurance Company Mary Lou Fahey, Tax Counsel, Tax Executives Institute

LMSB-TEI Joint Audit Planning Process

Large and Mid-Size Business Division
Joint Audit Planning Process
Planning & Monitoring Control

Taxpayer:       Exam Year(s):
Tax Manager:
Team Manager:   POA:

This document is intended to assist the IRS and the taxpayer to
efficiently plan and oversee their examination. This tool should
be used to both plan and monitor the audit process; it is applicable
to both Coordinated Industry (CIC) and Industry (IC) Cases.

Preliminary Meetings and Discussions                         Comments

1. The audit team should gather publicly available
   information (e.g., annual reports, SEC filings,
   taxpayer's web site, etc.) and current transcripts
   to reduce taxpayer burden.

2. After the audit team's initial review of the tax
   returns and related information, multiple preliminary
   meetings and other informal discussions (based upon
   taxpayer size, return complexity, and proposed staffing
   levels) should be held with the taxpayer regarding:

   a. prior cycle results, to determine if areas of review
      can be limited or eliminated
   b. timeframes for pre-audit and initial risk analyses
   c. the taxpayer's anticipated filing of claims
   d. potential industry/coordinated issues
   e. new audit initiatives and general administrative
      procedures (i.e., LIFE, IDR procedures, issue
      resolution strategies).
   f. whether the IRS or the taxpayer will prepare the
      schedule of rollover adjustments that results from
      the prior cycle.
   g. the audit team having access to the taxpayers e-mail
      system to facilitate the communication of IDRs, IDR
      responses, records, 5701s, etc.

3. The taxpayer and the audit team should advise each
   other of peak times, vacation plans, training, and
   other significant factors that may result in delays or
   increase burden.

4. The taxpayer should provide a meaningful orientation
   to the IRS audit team, including a general overview of
   business activities (particularly if there is a new
   team), financials, return results and known significant
   changes from the prior cycle.

5. The taxpayer should provide the audit team with a list
   of significant transactions for the cycle and any other
   information that is new and different from the previous
   cycle (acquisitions, dispositions, tax shelters,
   accounting method changes--Forms 3115).

6. In order to reduce the number of IDRs issued, the
   taxpayer should provide routine start-of-audit
   information (significant M-1s, access to general
   ledger, tax workpapers, etc.).

7. The taxpayer should provide financial information
   (such as the general ledger) in electronic format to
   allow the audit team to review information directly,
   reducing the number of IDRs issued.

8. The taxpayer should deliver a list of claims and
   requested audit adjustments (with all supporting
   documentation made readily available) to allow these
   items to be included in the audit plan.

9. Based upon the initial risk analyses and review of
   preliminary documents (i.e., annual statements, tax
   returns, historical files, etc.), the audit team should
   advise the taxpayer of potential examination
   areas/issues, and/or business units it plans to review.

Involvement of IRS Counsel, Specialists, Technical
Advisors                                                     Comments

1. The availability of appropriate IRS and taxpayer
   personnel should be discussed.

2. The IRS will notify the taxpayer if significant
   involvement by technical advisors, Office of
   Associate Chief Counsel and/or specialists is
   anticipated.

3. Arrangements should be made for specialists to meet
   with relevant taxpayer personnel to discuss areas to be
   reviewed prior to issuing IDRs.

4. When their assistance is needed, coordination with the
   Office of Associate Chief Counsel should be made as
   early as possible. Contact can be informal via
   telephone of e-mail, or formal, that is, through
   Technical Advice Memorandum (TAM), Technical
   Expedited Advice Memorandum (TEAM), or Reviewed Advice
   Memorandum (RAM).

5. Specialists, specialist managers and when appropriate,
   Counsel, will be invited to attend key issue meetings
   between the taxpayer and the IRS.

6. Attempts should be made to reach agreement on the
   facts, prior to the extensive involvement of a
   technical advisor.

7. The Computer Audit Specialist (CAS) should have advance
   access to the taxpayer's electronic data. This is
   usually accomplished at the end of the current cycle
   examination, three to six months prior to the start of
   the next cycle.

Scope of Audit                                               Comments

1. The audit team should consider and discuss the
   applicability or inapplicability of Limited Issue
   Focused Examination (LIFE).

2. The audit team will share a copy of the draft audit
   plan with the taxpayer and allow the taxpayer an
   opportunity to provide feedback prior to finalizing
   the plan.

3. New issues identified by the IRS during the audit
   process that are not in the audit plan should be
   discussed with the taxpayer prior to the commencement
   of extensive audit work.

4. The need for support audits and third party contacts
   should be considered early in the examination.

5. Materiality agreements should be considered when
   determining the scope of the examination (whether or
   not LIFE applies). Since each taxpayer and each year
   are unique, materiality thresholds should be set on a
   case-by-case, year-by-year basis.

6. The audit team will share subsequent risk analysis
   results (i.e., 50% or 75% risk analysis) with the
   taxpayer, indicating the scope, depth, and status of
   the audit with a view to reducing the number of issues
   (but with the understanding that the determination of
   which audit items to pursue rests with the IRS).

7. The audit team should consider the use of statistical
   sampling or alternative testing methods (e.g., mutually
   agreed upon judgment sampling) if records are
   voluminous.

8. The taxpayer should discuss or provide preliminary
   information on issues with the intent to narrow the
   scope of the audit and focus on the most significant
   issues.

9. The taxpayer should be informed that if issues are
   dropped or narrowed, additional issues will not
   routinely be substituted or added.

10. The taxpayer will be advised that the examination may
    be expanded if tax shelters, listed transactions or
    similar transactions are discovered during the course of
    the examination.

11. The audit team and taxpayer should jointly develop a
    plan to attain and maintain currency.

Audit Timeline/Monitoring Progress                           Comments

1. The taxpayer and audit team should jointly prepare an
   audit timeline with target milestone dates (i.e., exam
   plan completion date, 50% risk analysis review, last
   date for IDRs to be issued, last date for claims to be
   filed, last date for Forms 5701 to be issued, RAR
   issuance target date).

2. The taxpayer and the audit team should jointly plan the
   matching of audit issues to available taxpayer and
   examination team resources to avoid delays during the
   audit.

3. Microsoft Project or similar tool(s) should be used to
   establish and track timeline milestones and targets.

4. The IRS and taxpayer should sign an agreement and/or
   the audit plan setting joint commitments (i.e., audit
   timeframes, materiality, IDRs, 5701s, affirmative
   issues, etc.).

5. An understanding should be reached that impasses and
   significant concerns that cannot be resolved at the IRS
   team manager/taxpayer audit manager level will be
   immediately elevated to the next level, IRS territory
   manager/senior tax officer or equivalent.

6. An understanding should be reached that the team
   manager and the tax manager will jointly monitor the
   examination and determine who will attend the regular
   audit progress meetings, including meetings to address
   the following:

   * ongoing risk analysis
   * status of issues
   * status of IDRs
   * obstacles/anticipated delays and possible solutions,
     and
   * anticipated changes to the audit timeline.

7. An understanding should be reached to record all
   agreements and actions items (noting the responsible
   parties) to be completed at all IRS/taxpayer meetings
   to avoid delays and misunderstandings.

8. Feedback from audit participants should be collected at
   prescribed intervals, such as: the end of the planning
   phase, the 50% mark, and the end of the examination, to
   determine the quality as well as the quantity of
   progress and to suggest ways to make the on-going and
   following examination better.

Information Document Requests (IDRs)                         Comments

1. An understanding should be reached that all IDRs and
   responses will go through the IRS team coordinator or
   primary revenue agent.

2. An understanding should be reached that all IDRs and
   responses will go through the designated taxpayer
   representative.

3. Discussions should be held prior to IDR issuance,
   unless agreed otherwise. Consider:

   * The taxpayer should be informed of the intent of an
     IDR.
   * The purpose of the IDR should be stated on the IDR
     (i.e., identify the issue).

4. Prior to issuance of an IDR the Service and the
   taxpayer should meet to review the IDR for
   completeness. All IDRs should be entity specific unless
   agreed otherwise.

5. The taxpayer should be informed of any coordinated
   and/or industry issues under audit.

6. The audit team should reach an agreement with the
   taxpayer regarding a standard response time for IDRs,
   and an understanding that the taxpayer will advise the
   audit team as early as possible if additional time is
   needed.

7. The audit team should advise the taxpayer within an
   agreed timeframe, after receiving an IDR response,
   whether it considers the response complete and if
   additional information or action is required.

8. IDRs should be reviewed by the team coordinator or
   primary agent to insure that they are
   resolution-focused. (Do the questions asked "add value"
   to the identification or development of an issue?)

Issue Resolution/Notices of Proposed
Adjustments - Form 5701                                      Comments

1. All issues should be discussed with the taxpayer prior
   to issuance of Form 5701. Consider:

   * The need to reach agreement, of to agree to disagree,
     on the facts
   * The discussion of applicable area law
   * The identification of specific areas of contention or
     disagreement

2. Timeframes should be established with regards to the
   issuance and response to Form 5701.

3. An understanding should be reached with the taxpayer
   that Notices of Proposed Adjustment will be issued
   throughout the examination instead of at the end of the
   examination, to facilitate early issue resolution.

4. An understanding should be reached that when issues are
   agreed, the audit team will utilize abbreviated
   proposed adjustment write-ups (5701s).

5. An understanding should be reached that the taxpayer
   and the audit team will engage in an earnest effort
   to resolve all issues.

6. An understanding should be reached with the taxpayer
   that the audit team, within an agreed upon timeframe,
   will advise the taxpayer when an issue is closed.

7. An understanding should be reached regarding the audit
   team's intentions to inform the taxpayer as early as
   practical that it is considering penalties, and to
   afford the taxpayer the opportunity to address them.

Additional Comments

(1) This introduction was written by Jack L. Schroeder and James P. Dever of the Internal Revenue Service's Large and Mid-Size Business Division.