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Involving the taxpayer in the audit planning process: a cooperative effort of the Cincinnati and Cleveland Chapters of the Tax Executives Institute and the Ohio District of the Internal Revenue Service.

Editor's Note: The following report was prepared by a joint Tax Fxecutives Institute (Cincinnati Chapter)-luternal Revenue Service Task Force in Ohio, and has been agreed to by C. Ashley Bullard, IRS District Director (Ohio District), Peter J. Feichtner, III, President of TEI's Cincinnati Chapter, and Harry E. Jackson, President of TEI's Cleveland Chapter, on behalf of their respective organizations. The task force worked for nine months to identify and set forth opportunities for developing a more cooperative relationship between taxpayers and the Internal Revenue Service in designing and implementing the plan for tax return examinations. The IRS employees who served on the task force were Jim Harmon, Chuck Landry, and Jim Ruwe; the TEI members who served on the task force were George Fraley, Cliff Fuerst, and Alan Todryk.

Executive Summary

During the past three years, the IRS has placed a great deal of emphasis on the concept of involving the taxpayer in the audit planning process. However, both the IRS and taxpayers have struggled with the specifics of how that involvement could best be accomplished.

Recognizing that improving on the involvement of taxpayers in the audit planning process would be beneficial to both the taxpayer and the IRS, the Cincinnati Chapter of Tax Executives Institute and the Ohio District of the Internal Revenue Service formed a joint task force in early 1996 to develop recommendations for increasing the audit planning involvement of taxpayers.

The completed report was shared in draft form with the Cleveland TEI Chapter's TEI/IRS Liaison Committee. The input of that group was requested and received and is reflected in the final report. The Boards of Directors of both the Cincinnati and Cleveland Chapters of TEI, as well as the District Director of the IRS Ohio District, have given their approval to the final task force report.

The task force members agreed that preparation of a report setting forth a variety of options to which both the IRS and the taxpayer could subscribe in the audit planning stages could be a valuable resource for both parties in enhancing taxpayer involvement. It was recognized that each taxpayer/IRS relationship is different, and accordingly the options presented in this report would be adopted in varying degrees for any individual case. However, the greater the agreement between the taxpayer and the IRS on which options will be implemented for any given audit cycle, the greater the taxpayer's involvement will be in the planning process. This enhanced involvement should result in a better utilization of resources, reduced examination cycle time, resolution of more issues at the examination level, and more meaningful post-audit critiques.

The task force has made recommendations in seven specific areas. Under each area are options that both the taxpayer and the IRS examination team can choose to embrace for any given audit cycle. The options listed for each area should be discussed at the beginning of the audit process and a decision reached on which options will be included in the audit plan. The seven areas are, as follows:

* Communication, Trust, and Openness is the foundation of a successful audit working relationship.

* The IDR Process contains guidelines for issuing and responding to information document requests (IDRs) in a way designed to improve the process.

* Materiality Agreements can be an opportunity to gain efficiency in the audit process.

* The Opening Conference provides an opportunity to plan for the best utilization of taxpayer and IRS resources.

* Monitoring the Audit is key in making certain that the process is working as intended by both parties and allows for taking corrective action in the event the plan has gone off track.

* Handling Proposed Adjustment Notices sets forth what each party can expect from the other in dealing with issues that arise during the course of the audit.

* The Post-Examination Critique establishes areas for review and evaluation at the end of the audit process with an eye toward making improvements in subsequent cycles.

The task force believes that the greater the level of cooperation that exists between the taxpayer and the IRS in establishing the audit plan, the greater the benefit that will be derived in streamlining the overall audit process. Accordingly, the task force strongly encourages implementation of as many of the suggested elements as possible.

Examples of how the various elements may be effected are contained in the appendix and are an integral part of this report.

Overview

In today's world, both the Internal Revenue Service and Corporate Tax Departments face increasing pressure to optimize the utilization of resources in the tax audit process. It is recognized that developing a solid working relationship between the IRS and taxpayer can be a major factor in streamlining the audit process. A key element in this process is the development of the audit plan. Whenever possible, the development of the audit plan should be a joint IRS/taxpayer effort. That effort should lead to an audit plan that (1) sets forth mutually agreed goals and objectives to which both parties will commit; (2) increases the awareness and consideration of workload conflicts and priorities; and (3) optimizes the use of resources resulting in clearly defined roles and accountability, reduced examination cycle time, resolution of issues at the examination level, and more meaningful post-audit critiques.

Mission Statement

It is the purpose of the Task Force on Improving the Involvement of the Taxpayer in the Audit Planning Process to:

* Prepare a report (endorsed by both IRS management and TEI members) setting forth a variety of options to which both the taxpayer and the IRS could agree in developing the audit plan. It is expected that the extent to which the options are utilized will vary from case to case depending upon the willingness of both the taxpayer and the examination team to implement the various provisions.

* Provide standardized procedures to which the taxpayer and the IRS could agree to implement into the audit process starting with the initial contact and ending at the post examination critique and to resolve all issues at the lowest possible level.

Although the options presented in this document are intended for CEP taxpayers, the approaches outlined in this report are encouraged for use in non-CEP cases where appropriate.

Communication, Trust, and Openness

This is an extremely important part of the audit process. Each side must respect the professionalism of the other. Each side has a job to do, and the audit will go much smoother if each side works toward a successful completion. If the IRS and the taxpayer do not work together, both audit time and cycle time are extended and the case fails to become current, thus placing more burden on both sides. While the audit process is inherently adversarial to a degree, both sides have a common interest in completing the audit timely, efficiently, and fairly. Specific actions that can be taken are, as follows:

* The IRS and taxpayer should hold a very frank discussion of the potential issues and compliance checks very early in the planning phase so that taxpayer can plan for the necessary resources it will need, can arrange for company experts to be present at the necessary times, and can present information that the IRS should know before beginning the examination. The taxpayer will inform the IRS about potential affirmative issues and/or claims that might be filed for the years under audit.

* The taxpayer can significantly help reduce examination time by providing a meaningful orientation for new audit teams. The IRS can contribute to the orientation process by thoroughly reviewing planning files prior to coming on site.

* Such orientations can include presentations at

planning meetings on such topics as organizational

structure, degree of centralization, industry

operating philosophy and procedures, accounting

records, and other information that would

facilitate the examination.

* The orientations can also include brief meetings

with key operating, accounting, or tax personnel

with whom the audit team will deal and/or facility

and plant tours.

* Another method would be for the taxpayer to

provide to the audit team the same company videos,

handbooks, and other information provided to new

hires.

* The use of IRS specialists is of concern to both the IRS and the taxpayer. These specialists include Computer Audit Specialists, Engineers, Pension Plan Examiners, International Examiners, Exempt Organization Examiners, Excise Tax Examiners, Employment Tax Examiners, Financial Products Examiners, and Economists. The following steps should be taken:

* The IRS and the taxpayer should discuss which

specialists are needed before the examination is

even started, if possible, so that the specialists

can be requested and be prepared to start their

examination in a timely manner. Although the

IRS will make the final decision on which specialists

are assigned, taxpayer input can be very useful.

Once it is determined which specialists will

be assigned:

* The taxpayer, specialist manager, specialist, and

case manager are encouraged to meet and develop

the audit specialist plan where there is a significant

portion of time to be spent by the specialist.

* It is critical that the IRS and taxpayer coordinate

their schedules very early in the planning process

so that the taxpayer can make available the company

personnel from whom the specialists need to

secure information during the time that the

specialists will be on site.

* It is likewise very important that the taxpayer

personnel, the specialist manager, case manager,

and the specialists meet their commitments to

each other in terms of providing information,

requesting follow-up information and holding

scheduled meetings.

* Where possible and desirable from an audit

efficiency standpoint, the taxpayer is encouraged to

designate, for the specialists, a point of contact

that may be outside the tax department.

* When ISP issue areas are identified and where practical and appropriate, discussions between the taxpayer and ISP personnel are encouraged.

* The IRS will initiate an audit plan and include input from the taxpayer. The draft plan will be furnished to the taxpayer for review following the planning conferences. Any taxpayer concerns or questions should be answered and any changes or corrections made based on taxpayer input. The taxpayer should then be provided the corrected final plan for concurrence and signature.

* 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 extensive audit work.

* The taxpayer should alert the IRS to any potential claims or amended returns during the planning process so that effective planning can take place.

* The taxpayer should provide the audit team with a book to tax return reconciliation in the form of a "crossreferencing" or conversion code workpaper or disk (if available) at the time that the team coordinator or computer audit specialist (CAS) first comes on site. This will reduce CAS time and require less use of taxpayer's computer system while allowing the audit team to focus on real issues of concern.

* Both the IRS and taxpayer should agree that they will make every effort to resolve issues at the examination level.

* Serious personality conflicts should be identified and addressed as early in the audit as possible. Alternatives should be considered.

* To facilitate communications, it is encouraged that the audit team be located within the same building as the tax department.

Information Document Request Process

The information document request (IDR) process is critical to the success of the examination because of the resource demands it places on both parties. This is the fact finding portion of the examination where the IRS issues IDRs to clarify data on the return, request additional information regarding transactions or procedures, and/or obtain answers to questions on specific issues. If IDRs are prepared and issued efficiently, it will lessen the burden on both the taxpayer and the IRS.

It is critical that the IDRs be clear, concise and communicate the precise nature and substance of the information requested and that they are responded to in a timely manner. The following specific actions can be taken:

* At the close of the prior audit cycle, the IRS and the taxpayer should agree on what information will be made available at or before the start of the next examination and whether an IDR will be issued by the IRS.

* Standardized workpapers (to include from cycle to cycle and across all entities) should be used to the extent possible since once the audit team becomes familiar with such workpapers, fewer IDRs should be necessary.

* Workpapers should be prepared by the taxpayer with the expectation that they will be reviewed by the IRS. They should contain all the relevant facts relating to the transaction and be clear to someone unfamiliar with those facts.

* An index to the workpapers that were used to prepare the tax return should be provided to the IRS at the start of the examination, if available.

* The IRS should identify any standard workpapers they use and make those formats available to the taxpayer to follow. The taxpayer can then assist in the streamlining of the audit process by using such workpapers.

* Where feasible the IDR content should be limited to one issue area.

* Audit areas should be discussed prior to the issuance of any IDRs. The IRS should explain the reason for requesting the information if it is not clear. This will also provide the taxpayer an opportunity to suggest alternative approaches to securing the desired information.

* The scope of the IDR should also be discussed at that time so that the IRS will have an understanding of the volume of records that it is requesting. The "any and all" type of requests should be avoided if at all possible.

* The IRS and the taxpayer need to agree upon reasonable response times for IDRs during the planning process. A flexible response time needs to be established that considers the difficulty the taxpayer will encounter in securing the information. It is very important that the taxpayer promptly inform the IRS that an IDR is unclear, inappropriate, or cannot be responded to for any reason. The taxpayer should make every effort to respond timely with a full and complete response.

* The IRS and the taxpayer need to agree upon the scope of the IDRs and consider ways in which the IRS can assist the taxpayer in responding.

* The IRS and the taxpayer should agree on the sequencing of the issuance of IDRs in order to avoid the taxpayer's peak work times to the extent possible. This is also critical at the start of the examination when the audit team may have a large number of IDRs to submit. Agreement should be reached in regard to the issuance of such IDRs if the taxpayer does not desire to have such a large number issued at one time.

* Both the taxpayer and the IRS should maintain IDR logs. These logs should be periodically shared to ensure that both sides agree upon which IDRs have been answered. The team coordinator should maintain the log for all team members and specialists and IDRs should be submitted through him or her.

* The team coordinator should review all IDRs for clarity and completeness before they are given to the taxpayer. It is important for the team coordinator to know and understand what information is being requested, to be in a position to eliminate duplicate requests for the same information, and to ensure that the request is within the agreed upon audit scope.

* The IRS has a responsibility to let the taxpayer know whether its response to the IDR is satisfactory. The IRS should also timely request additional information if the information received was not sufficient to reach a conclusion concerning the issue.

Materiality Agreements

Materiality agreements have not been used extensively by the Coordinated Examination Program teams in the past. However, this area can produce a win/win situation for both the IRS and the taxpayer because the efficiency of the examination can be improved. The IRS will not be spending unproductive time on small adjustments and the taxpayer can free up valuable resources to be used elsewhere on the audit or other projects. A side benefit would be a reduction in the audit cycle time, which should lead to more current examinations. Specific actions that can be taken are, as follows:

* The IRS and the taxpayer should discuss possible areas for materiality agreements during the initial planning meeting.

* During this same meeting, it should be determined if there will be any exceptions to the materiality agreement.

* The taxpayer should advise the IRS team of any materiality standards that it used to prepare the tax return and should secure tentative IRS approval of the standard.

* The IRS and the taxpayer should review areas that have produced audit adjustments in prior cycles and where there has not been any change in current operations for possible agreement to similar adjustments without the expenditure of significant audit time.

* The IRS and the taxpayer should also look at areas of disagreement to see if they can jointly arrive at a solution that will satisfy both parties.

* It is encouraged that for complex tax computations, recurring in nature, a reasonable estimate may be used for the revenue agent's report with the understanding that a precise computation will be made and incorporate into all subsequently filed tax returns. For example, the IRS and taxpayer agree to approximate a LIFO adjustment using an agreed upon "short-cut" method rather than requiring the taxpayer to go through a very lengthy and time-consuming recalculation for years in which returns have already been filed. Any necessary corrections would be made on the next filed return.

The Opening Conference

The formal opening conference should be the culmination of prior informal meetings/discussions between the IRS and the taxpayer. The purpose of the meetings and opening conference is to plan in a cooperative manner how to best use both parties' resources. Because the examination of most CEP taxpayers is an almost continuous process, these meetings/discussions with respect to a new audit are typically addressed first during the prior audit cycle.

The main purpose of the formal opening conference is to have the authorized employees of the taxpayer and the IRS summarize agreements on coordination and accommodations and to discuss the scope and depth of the examination. Some of the items that should be covered at the formal conference include:

* The timing of the examination and critical path to completion including a proposed completion date and benchmarks to determine any benefits obtained from the joint planning process.

* A review of the benefits of joint planning including actual improvements obtained during prior cycles where the joint planning concept was utilized.

* Frequency of periodic status meetings.

* Establishment of ground rules covering such items as who will make document copies, when will documents be returned to taxpayer, etc.

* Determination of the flow of communications (i.e., IDRs and responses, NPAs and responses, etc.)

* Identification and introduction of personnel (taxpayer and IRS) who will be involved in the examination and their roles and responsibilities.

* Confirmation of accommodations for the audit team such as office space, desks, file cabinets, telephones, computer terminals, etc.

* Formal notification of the audit start for purposes of Rev. Proc. 94-69.

* Assurance that the participation of the taxpayer in the planning process does not include identifying potential audit adjustments beyond those provided under Rev. Proc. 94-69.

* Discuss and confirm information relative to the taxpayer obtained as a result of the pre-contact analysis by the audit team.

* Obtain access to the information assembled as part of any pre-work efforts of the taxpayer.

* Agree that all efforts will be made to resolve factual differences on unagreed issues.

* Agree to seek early resolution of issues through various means available.

* Agree to other pertinent matters such as the status of issues carried over from prior examinations, the need for support, or collateral examinations, plant and other facility tours, etc.

Monitoring the Audit

Audit Plan Review Conferences. A well-developed audit plan that has been jointly crafted by the IRS and the taxpayer will contain a number of measurements based on a timeline for monitoring progress as the audit proceeds. Such measurements could include for example, response times for IDRs, estimated target dates for completing the review of various audit areas, beginning and ending dates for the efforts of each audit specialist, and time frames for issuing follow-up IDRs. For the measurement process to be meaningful, it is vital at the outset that the IRS and the taxpayer agree to a plan for monitoring progress.

Suggested Elements Include:

* Setting dates at the opening conference, or at the time the audit plan has been completed, for the taxpayer and the IRS to review the progress of the plan.

* Ongoing development of action steps to remedy any deficiencies in the measured criteria.

* Recognition that the audit plan is a "flexible" plan of action and, accordingly, both the taxpayer and the IRS must be open to changes, including both expansion and contraction of the audit plan as events develop.

Ongoing Review Meetings. In addition to the review meetings suggested above, it is important that the taxpayer and the IRS establish a pattern for regular, more frequent meetings to monitor day-to-day progress of the examination. Participants at these meetings would normally include the IRS team coordinator and the taxpayer representative responsible for the audit process. Such meetings should include:

* A review of closed issues, open IDRs with projected completion dates, and potential follow-up IDRs.

* A review of the priorities of the IRS in terms of which open IDRs should receive more immediate attention by the taxpayer.

* A sharing by the IRS of new IDRs they anticipate issuing within the next 30 days.

* A review and discussion of any NPAs that are being contemplated.

* A sharing by the taxpayer of any new claims and affirmative issues that are anticipated.

* An agreed cutoff date for filing such claims and whether the items will be included in the current cycle or dealt with after the cycle is closed can be established.

* A discussion of any concerns by either party about items affecting the overall audit progress.

Handling Proposed Adjustment Notices

This process involves the formal notice to the taxpayer that the IRS believes that an adjustment to the tax return is warranted. The issuance of an NPA should not come as a surprise to the taxpayer since the issue should have been the subject of much discussion concerning interpretation of the facts and application of the law. It is extremely important that each side understand the position of the other. Specific actions that can be taken are, as follows:

* During the pre-examination conference, the IRS and the taxpayer should agree on a reasonable response time and when NPAs will be issued.

* During the same conference, the IRS and the taxpayer should agree on any special desires by the taxpayer that will help it in responding.

* The case manager should review and sign all NPAs before they are issued to the taxpayer.

* If the taxpayer does not agree with the NPA, it should respond in writing to the IRS, explaining the reason for the disagreement. If after reviewing the taxpayer's response there is still disagreement, the issue should be discussed at the next scheduled meeting or a special meeting held to discuss the issue.

* If the issue is still unagreed after a meeting, consideration could be given to Early Referral to Appeals. Considerations would be the size of the issue, likelihood of agreement at the examination level, stage of the examination, and the availability of taxpayer resources.

Post-Examination Critique

The Post-Examination Critique can be a valuable tool for both the IRS and the taxpayer in determining how to improve upon the process for future cycles. At the conclusion of the cycle, the taxpayer and the IRS should arrange for a meeting that will allow for open discussion of the audit process that was followed and determine the opportunities for future improvement. The agenda for this meeting should be jointly developed by representatives of the taxpayer and the IRS. The following are the minimum suggested topics that should be included on the agenda.

* Review of the IDR Process

* Did the requests and responses flow smoothly?

* Was the IDR process handled in a timely manner, both

from the perspective of the taxpayer and the IRS?

* Were IDRs and responses complete and understandable?

* Was there discussion about the information being

requested before the IDR was issued?

* Were there sufficient IDR status meetings?

* Was the taxpayer informed when work on a questioned

issue was completed?

* How can the process be improved upon during the next

cycle?

* Review of the Notice of Proposed Adjustment Process

* Were the NPAs communicated effectively?

* Were the issues discussed before the NPA was

issued?

* Were the facts related with the issue set forth and

agreed by the taxpayer and the IRS?

* How can the process be improved upon during the

next cycle?

* Review of Time-Consuming/Unproductive Issues

* Were there areas audited that were not material?

* Were there areas that were too time-consuming or

unproductive IRS mandated issues?

* Are there opportunities for establishing materiality

thresholds for future cycles?

* Review of the Timing of the Audit Cycle

* How did the timing of the audit cycle fit with the

taxpayer's workload cycle?

* Could the IRS submit some audit needs prior to the next

audit start date?

* How were the efforts of specialists managed?

* Could the Computer Audit Specialist be available to

complete certain pre-work items prior to the next formal

audit start date?

* Communications, Trust, and Openness

* Was there a candid discussion early in the audit cycle of

potential issues and compliance checks the audit team

planned to explore?

* If the audit team was new, did the taxpayer conduct a

meaningful orientation?

* Was a joint discussion held concerning the use of and

timing for audits by various specialists?

* Was the audit plan developed with input from the

taxpayer, and was a copy furnished to the taxpayer

together with necessary explanations of any concerns or

questions?

* Were any new issues that were identified during the

course of the audit discussed with the taxpayer prior to

any significant degree of work being done?

* Did the taxpayer alert the IRS to any potential claims or

amended returns during the planning process (or as soon

thereafter as practicable)?

* Did the taxpayer provide appropriate data to allow the

audit team to move conveniently from the trial balance to

the tax return line items?

* Were the taxpayer's workpapers sufficiently

standardized so that the examiners were able to follow

the taxpayer's process in preparing the tax return?

* Future Audit Cycles

* To reduce taxpayer burden and expedite future

examinations a discussion can be held that would identify

substantiation expectations for specific issues.

* At the closing conference, it is encouraged that

improvements to methodologies for dealing with

recurring, carryover items be discussed.

Appendix: Examples for Implementing the Task Force Recommendations

Communication, Trust, and Openness

* Example: The IRS is planning a compliance check on the personal use of company cars. During the planning meeting, Taxpayer advises IRS that it only has a few company cars and these are garaged on company premises except when someone has an appointment away from the office first thing in the morning. The IRS decides not to pursue this compliance check.

* Example: The IRS plans to examine capital losses. The company has an investment manager who manages its investments. Taxpayer and the IRS agree early in the examination on when the investment manager will be made available to discuss the investments with the IRS engineer.

* Example: During the first meeting, the IRS and Taxpayer agree on which approaches would be the most effective means of providing the best orientation to the audit team based on its personnel. Whether meetings, furnishing of company literature, introduction to accounting personnel, and/or plant tours provide the best orientation depends on the audit team's experience and knowledge of the industry.

* Example: Taxpayer has decided to file a claim relating to the R&E credit. The examination is just beginning and Taxpayer has just started to gather the necessary information to document the claim. Taxpayer advises the IRS that the claim will be filed in about eight months. Time is then allocated in the audit plan for examining the claim.

* Example: An IRS team member and a member of the tax department have a personality conflict that has the potential to delay completion of the examination if allowed to continue. The IRS could consider replacing the team member if another experienced person is available. Another solution might be to have the tax director and/or team coordinator attend all meetings between the two to ensure that they accomplish the desired purpose and stay on track. All other alternatives should also be considered.

Information Document Request Process

* Example: The examination of the 1992 and 1993 returns was completed in April 1996. The audit of the 1994 and 1995 returns is scheduled to begin in October 1996. At the closing conference in April, the IRS and Taxpayer agree that Taxpayer will provide the IRS with agreed upon initial records by August 31 so that the IRS can review them prior to arrival on site in October. The IRS provides Taxpayer with an IDR requesting the records.

* Example: Without an agreement, Taxpayer accumulates the records they know that the IRS requests at the start of each examination and presents them to the audit team upon their arrival on site to start the next examination. No IDR is issued. Such items might include the company's organization chart, information showing the percent of ownership of all subsidiaries, annual reports, audited financial statements, applicable accounting policy manuals, logistics for the audit team's review of corporate minutes, copies of corporate tax returns to include any amendments or carry backs, copies of partnership tax returns and/or K-1's, G/L, and A/P data files used in preparing the tax return, and other unique items to the company or industry.

* Example: Taxpayer agrees to provide the IRS with the use of a computer and software so the computer audit specialist can obtain data comparable with Taxpayer's system. This should lessen the CAS time and also result in less use of Taxpayer's computer by the CAS.

* Example: The IRS and Taxpayer agree on the software packages that will be used for certain data and spreadsheet files to ensure that it can be readily understood and utilized by the IRS.

* Example: The IRS provides Taxpayer with an example of the format in which certain information is needed. Taxpayer provides the information in the requested format.

* Example: The IRS schedules a meeting with Taxpayer. The IRS provides Taxpayer with several tentative IDRs. The reason for the request, information needed and scope are discussed. Taxpayer requests any needed clarification and makes suggestions for improving the IDRs. After the meeting, the IRS revises the IDRs and issues them to Taxpayer.

* Example: Periodically, the tax director and team coordinator or specialist meet to discuss the audit areas. The audit team discusses the IDRs that it plans to issue in the near future. The tax director provides input to the team on what information is available and what industry terminology should be used in the IDR so that the proper records are obtained. The audit team then prepares the IDRs and issues them to Taxpayer.

* Example: Taxpayer and the IRS agree that within five days following the issuance of the IDR, Taxpayer will inform the IRS of how long it will take to secure information, with explanations for any that will exceed 30 days. The response date will then be entered on all copies of the IDRs.

* Example: Taxpayer and the IRS agree that Taxpayer will notify the IRS within an agreed-upon five days that an IDR is unclear or cannot be answered, and will explain the problem or concern.

* Example: The IRS and Taxpayer agree that each IDR will be limited to one tax issue and one organization. They further agree that this may be altered if Taxpayer requests that information to be answered by a certain individual be placed on one IDR.

* Example: The IRS and Taxpayer agree that the IRS will state at the start of each IDR the date that it was discussed with the Taxpayer and will note at the start of each follow-up IDR, "This IDR is a follow-up for information requested in IDR#--."

* Example: The team coordinator provides the tax director with a copy of his/her IDR log on a monthly basis. The tax director compares it with his/her log to identify any discrepancies. They then hold a meeting to discuss the responses and identify any problems. Taxpayer should explain any overdue unanswered IDRs and the IRS should prioritize the unanswered IDRs based on the likelihood of needing to issue follow-up requests for information.

* Example: The IRS and Taxpayer agree that the IRS will notify Taxpayer within 10-15 work days after receipt whether the information submitted in response to an IDR is satisfactory. They also agree that if follow-up information is needed, it will be requested within 30-50 days. To assist the IRS in meeting this commitment, Taxpayer agrees not to hold IDR responses and dump them on the audit team in bulk. All IDRs, when completed, should be returned to the team coordinator as soon as practical.

Materiality Agreements

Expense accounts, liabilities, Schedule M's, software capitalization and cutoffs for audit adjustments are possible areas for materiality agreements, whereas permanent adjustments and illegal payments such as fines/penalties are clearly not.

* Example: Taxpayer has a policy of not making any Schedule M adjustments of under $100.

* Example: Taxpayer has a policy of not capitalizing items with an individual cost of less than $1000.

* Example: Taxpayer's travel and entertainment expenses were examined by the IRS for the years 1991 and 1992. Appropriate adjustments were made and agreed. Taxpayer agrees to institute new procedures to improve compliance in 1995, since the 1993 and 1994 returns have already been filed. The IRS and Taxpayer agree to an adjustment for the 1993 and 1994 years by using the same disallowance percentage that was determined for the 1991 and 1992 years.

* Example: The IRS and Taxpayer agree to issue additional instructions to company personnel who are making decisions regarding a particular issue. The instructions are jointly developed. The IRS agrees to audit this issue by determining if the new instructions are being followed. If so, this audit area will be accepted.

Opening Conference

* Example: At the opening conference, benchmarks for the tentative time frames for work by various specialists could be established. Thus, it might be agreed that the engineer would start his/her audit in the fourth month and complete his/her report by the end of the tenth month of the audit cycle.

Monitoring the Audit

It is recommended that quarterly review meetings be held that include a review of the specific measurements that were agreed at the start of the audit. Attendance at this meeting should include the IRS case manager and senior management of Taxpayer.

* Example: The IRS and Taxpayer agree that the tax director and team coordinator will jointly prepare the agenda a week prior to the meeting. The IRS and Taxpayer will rotate responsibility for preparing the minutes of the meetings. A draft of the minutes will be furnished to the other party for comments and corrections within seven days of the meeting. The minutes will then be finalized with any differences clearly noted.

Notice of Proposed Adjustment Process

* Example: Taxpayer will notify the IRS of any disagreement with the facts within 20 days and will return the NPA within 60 days. Taxpayer will indicate agreement, disagreement or deferral for further study. NPAs will be issued as soon as the examination of that particular issue is concluded.

* Example: The IRS and Taxpayer agree that the IRS will identify the applicable IDRs on the NPA and will list its contentions at the start of the narrative.
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