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Comments on LMSB's joint audit planning process.

June 25, 2009

In 2003, representatives from Tax Executives Institute and the IRS Large and Mid-Size Business Division developed a procedure to increase the taxpayer's involvement in the audit planning process. From this collaborative effort emerged the Joint Audit Planning Process that captured the concepts identified as being key to efficiently planning and conducting an examination. TEI representatives participated in the production of an LMSB training video on the new process, which was used extensively by the IRS and also distributed to TEI's U.S.-based chapters to use as a basis for chapter programs discussing the new process. LMSB recently approached TEI about updating the process (to include, for example, new procedures such as the Compliance Assurance Process). Preliminary comments were solicited from members of TEI's IRS Administrative Affairs Committee and were submitted to LMSB; they are reprinted below. The Institute will work with LMSB to refine the 2003 process, with a revised document expected to be rolled out to LMSB agents and TEI members later this year.

General Comments

* The Joint Audit Planning Process has made good progress over the last several years, but improvements are needed. Taxpayers often do not know about the process or are not invited to participate in it. With the massive hiring initiative the IRS is embarking on, it is even more critical that Team Managers and Revenue Agents learn about the process.

* Improvement is still needed with regard to joint audit planning. In my area, many agents know about the process but still refuse to involve the taxpayer.

* There should be a way to measure voluntary compliance, which will permit the IRS to allocate resources to abusive taxpayers.

* The joint plan relies on "transparency." When used by both the IRS and taxpayers, progress can be made.

* LMSB should formalize the shared expectations of the IRS and taxpayer teams, such as is reflected in the attached letter some members have received from HMRC.

* Joint training in the process should be held at the TEI chapter or regional level. In addition, the IRS should conduct training for its managers and senior staff in risk analysis, materiality, and the importance of pre-IDR meetings.

* A video should be made demonstrating the elements of the planning process. Prior to starting the current audit cycle, members found the 2003 DVD helpful.

* Perhaps TEI and LMSB could hold a joint webcast on the revised process.

Preliminary Meetings and Discussions

* The joint audit document provides that the audit plan should be given to the taxpayer at the opening conference or before any substantial work is performed. "Substantiality" should be defined and the audit plan should be provided as soon as possible. The planning tool should require that the audit plan be "provided at the Opening Conference or no later than 30 days after it."

* The audit plan should outline when travel to a taxpayer's facilities is appropriate; e.g., for audit of research tax credit or records located at a subsidiary's office in another state, etc. Travel to an overseas location should not be necessary as part of an audit because the records required to support any non-U.S. information on Form 1120 should normally be maintained in the United States.

* The use of the Competent Authority process is an effective tool that helps resolve transfer pricing disputes and avoid double taxation. A discussion of that program should be included in the Joint Audit Planning Process. In addition, the United States and Canada recently amended their tax treaty to include a binding arbitration provision. A discussion on binding arbitration should also be included in the opening conference. In describing the competent authority process, however, we must be careful that agents do not cede transfer pricing issues to the Competent Authority, rather than resolving the issues as part of the examination.

* At the opening conference, taxpayers and the IRS team should discuss any tiered or industry emerging issues, as well as the business overview and changes from the last audit cycle. The IRS should provide taxpayer with an orientation of the IRS organizational structure and the personnel who will be involved in the examination and issue development process.

* It is frustrating when agents do not release the audit plan until the audit is halfway completed, often under the guise that signature approvals are required for the plan. At that point, not much can be done. The plan should be completed within a certain timeframe of the opening conference.

* Up-front discussions about accommodations and internet access should be added to the IRS "planning and monitoring tool." In previous cycles, we could not give the IRS the kind of open access that met the agency's security needs because of our firewall issues.

Involvement of IRS Counsel, Specialists, and Technical Advisers

* There should be more transparency with respect to the IRS's use of counsel. If Counsel is involved with the audit, they should be available to discuss the issue with the taxpayer.

* The outgoing IRS team should brief the new IRS team on the taxpayer. It seems that once a team or specialist leaves, the taxpayer is expected to orient the new specialist; the IRS has some responsibility for bringing the new team up to speed. The use of issue specialists/ champions has eroded the independence and decision-making of the local agent. Taxpayers are often told the IRS team must request certain information "for the file" because of the specialist. The taxpayer should have access to the specialist to ensure that both parties are working from the same set of facts.

* Specialists must be involved at the beginning of the audit process. This has been stressed in the past, but continued emphasis is needed. Specialists continue to arrive late in the audit cycle with no recognition of the burden placed on the taxpayer.

* The IRS should not use outside contractors, rather the agency should add the necessary resources in-house (e.g., engineers, economists). Outside contractors may be motivated to raise unnecessary issues to demonstrate to the IRS that they are adding value by identifying additional audit issues. These issues will only create additional burdens for taxpayers that must be resolved with the IRS and will not necessarily lead to better tax compliance. If the IRS intends to use third party contractors, taxpayers should be notified as soon as possible.

* The LMSB program has done a good job with respect to training its personnel in the concept of materiality, but will we ever be able to get the employment tax auditors up to speed on risk assessment, etc.? They still perform the "ticking and tying" and do not focus on procedures that taxpayers have implemented to assure full compliance. The IRS team and taxpayer should work together to ensure the agent receives the information he/she needs in a timely fashion.

* The Planning and Monitoring Tool should include the following points:

* Taxpayer will be notified and given an opportunity to participate when Counsel is consulted, ensuring that any issue discussed is accurately described and Counsel understands the facts.

* If written advice is sought on an issue (e.g., a GLAM), the IRS will include taxpayer in drafting the request.

* Taxpayer will be notified before the IRS contacts a third party and given an opportunity to discuss the information being sought and to provide the requested information itself. If the meeting with the third party goes forward, taxpayer may attend the meeting.

* The IRS will use its summons power only as a last resort. Prior to issuing a summons, the IRS will give taxpayer notice and permit taxpayer to provide the requested information.

Scope of Audit

* The use of risk analysis should be mandatory because it permits the taxpayer to determine which issues are important to the IRS. It also provides an opportunity to discuss the issues, particularly when the cycle is a continuation of a prior one. Use of the process allows the taxpayer to engage the agent in understanding the issue and forces the agent to focus on the issues to be examined. If we receive an IDR for an issue not included in the risk analysis, we discuss it with the Team Manager and often may have the IDR withdrawn. The process holds both the taxpayer and the IRS accountable and allows both parties to effectively manage the timeline for the cycle. In addition, the risk analysis, along with the Memorandum of Understanding (MOU), permits the establishment of a good faith "materiality" level.

* Issue coordination should also address "timing issues." The IRS has limited resources, and, even with the amount of hiring and training the agency will do over the next two years, its resources will be even more constrained. Timing issues that resolve themselves within the cycle should not be pursued. In addition, if they spill over to subsequent years, then materiality should "trump" assertion. A discussion of tiered issues should be incorporated into the revised Joint Audit Planning Process, with a focus on the IRS's adhering to the spirit of the cooperative planning process. If an issue is designated a tiered issue, the local audit team loses control and has little or no authority to resolve the issue. The IRS's national issue management teams should, together with the taxpayer, develop a timetable for resolving the tiered issue consistent with the overall audit plan.

* The IRS team on our last audit was not trained in risk assessment or materiality and would not discuss the use of the joint audit planning process. More training is needed.

Audit Timeline/Monitoring Process

* The IRS should prepare a permanent file with respect to standard documentation that the taxpayer uses and was provided to the IRS in prior cycles. New teams often issue IDRs on standard procedures, documentation, etc., that were provided in prior audits. For example, the team should have a permanent file that includes the taxpayer's policies on fringe benefits, depreciation studies, general business policies, etc. We seem to get the same IDRs over and over for information that the team should have from a previous audit.

* Any taxpayer adjustments provided to the IRS should be acted upon within 30 days of when the adjustment was presented (by issuing a Form 5701). In prior audit cycles, the adjustments were not reviewed until the end of the audit cycle; if there were any questions, we encountered problems supplying information on an issue thought to be resolved.

Information Document Requests

* If all IDRs were created equal and required the same amount of time to complete, a fixed number of days for a response would be reasonable. That is not a reasonable assumption, however. Nor is it reasonable for the IRS team to issue 15 IDRs at once. The IRS should provide a draft and then the taxpayer and team should agree on the response time, taking into account other tax duties and responsibilities, such as quarter- or year-end support, or even return prep support. The IRS team is informed upfront about the times where we will not be as responsive. The experienced agents are generally fine with this arrangement, but newer ones need training. We have been fortunate because the experienced agents have generally counseled the new ones. With that said, we occasionally have this issue.

* The process should track the average number of days to respond to an IDR. The IRS team can then report that the taxpayer meets the response time on average and the exceptions can be dealt with.

* The process should require that a "pre-5701" in an IDR format be issued to make sure all issues are understood.

* IRS agents should be evaluated on the quality of the IDRs, not the quantity. Team Coordinators and Managers should be evaluated on how well they coordinated the issuance of IDRs--including approving IDRs before they are issued.

* The planning and monitoring tool requires that all IDRs--including those from specialists--should be reviewed by the Team Coordinator. In my experience, this does not happen.

* The Audit and Planning Tool should include the following:

* Each IDR should address one discrete issue to facilitate progress of the examination, unless the parties agree otherwise.

* If there are multiple IDRs issued at the same time, the Team Coordinator should prioritize the IDRs to facilitate continued progress of the audit.

* Once a response to an IDR is deemed complete, within an agreed upon time period the IRS will either issue another IDR, advise taxpayer that it intends to issue a Form 5701, or advise taxpayer that there will not be an adjustment and the issue is being dropped.

Issue Resolution/Notices of Proposed Adjustments

* The concept of timely issuing 5701s should be reinforced. It is not practicable to hold the documents until the end of the cycle. The taxpayer is likewise responsible for providing timely responses to the 5701s.

* The IRS should understand taxpayer's financial reporting requirements and the need for timely identification of potential issues.

* The IRS is reluctant to execute restricted extensions of the statute of limitations, but if a taxpayer must leave the statute open for all issues while an issue is considered by Appeals, many would rather pay the tax and file a refund claim to limit their exposure to the amount of the claim.

* The process should require that the taxpayer should be asked to participate in the TAM process.

* The IRS agents do not have an incentive to complete the audit in a timely fashion. In addition, 5701s should be issued as the issue arises and not saved until the end.
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Title Annotation:Large and Mid-Size Business Division
Publication:Tax Executive
Date:Jul 1, 2009
Previous Article:TEI supports adequate, focused funding for IRS.
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