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IRS to broaden circumstances for requesting audit workpapers. (tax info).

Evaluating the balance sheet tax liability account and the income statement provision for taxes is an important part of any audit. Workpapers supporting this evaluation often contain sensitive information about contingent or potential liability for transactions whose tax treatment may not be self-evident. Although these "tax accrual workpapers" could provide a laundry list of items to challenge, the IRS has had a formal voluntary restraint program in place since 1981 under which audit workpapers are treated as the last place to turn for taxpayer business information. This restraint arose out of the IRS's recognition that, without unfettered communication between auditor and client, information contained in tax accrual workpapers could result in less reliable audited accounts.

Recently, the IRS announced (Announcement 2002-63) a change in policy which will allow agents more access to these workpapers when an audit client has undertaken a transaction which the Service believes constitutes a tax shelter. For returns filed after June 30, 2002, that include a "listed transaction," the IRS will request the tax accrual workpapers pertaining to that transaction. A listed transaction is one that (1) the IRS has cited in published guidance as a tax avoidance transaction; or (2) is "substantially similar" to a published tax avoidance transaction.

The IRS will generally request the tax accrual workpapers under the following circumstances:

(1) If a listed transaction was properly disclosed to the IRS, the Service will routinely request only those workpapers pertaining to the listed transaction.

(2) If an undisclosed transaction is discovered, the Service will routinely request all tax accrual workpapers.

(3) If a return involves multiple listed transactions, then the Service will, subject to its own discretion, request all tax accrual workpapers.

(4) To the extent a taxpayer has reported "financial accounting irregularities" (restatements, for example), the IRS will, subject to its own discretion, request all tax accrual workpapers--even if the listed transaction was disclosed.

(5) If a return filed prior to July 1, 2002, involved an undisclosed listed transaction, the IRS may request the tax accrual workpapers pertaining to that transaction.

The Supreme Court, in the 1984 United States v. Arthur Young case, upheld the IRS's right to obtain tax accrual workpapers under the Service's summons authority. Although the IRS has traditionally exercised restraint in using this authority, it is relaxing this restraint to address what it sees as a need to curb tax avoidance transactions. The AICPA has already had one meeting with top IRS officials on the new policy, is planning a second, and will closely monitor IRS requests for tax accrual workpapers.
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Publication:CPA Letter
Geographic Code:1USA
Date:Sep 1, 2002
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