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Large Business Examination Program.

The newly formed IRS Large & Mid-Size Business (LMSB) operating division is intended to deal with corporations, S corporations and partnerships with assets of more than $5 million. It also extends coverage to the largest corporate taxpayers that are included in the Coordinated Examination Program (CEP).

Prior to the current reorganization, the Service had implemented the Large Business Examination (LBE) program. The LBE program is based on CEP and appears to have migrated into LMSB, although it is not clear at this time that it will still be referred to as the LBE program.

The CEP involves procedures and techniques used by the IRS in the examination of approximately 1,500 of the largest U.S. corporations. CEP generally refers to companies with total assets in excess of $250 million. The program is considered highly successful in that it generates large amounts of revenue, ensures that the largest companies are examined on a continuing basis and applies auditing techniques that strive for consistency of treatment of taxpayers with similar issues. CEP also provides the Service with an excellent training vehicle, allowing less experienced revenue agents to work as audit team members.

Under the LBE program, many of the CEP procedures and techniques are being applied in the examination of companies with total assets in the $50 to $250 million range that are deemed to warrant team audits. Some of the CEP procedures that are being used include:

* Audit teams that may include specialists, such as international examiners, engineers, financial product specialists, employment tax examiners, etc.

* Multiple-year examinations.

* Opening conferences.

* Audit workplans.

* Use of Information Document Requests (IDRs).

* Issuance of Form 5701, Notice of Proposed Adjustments.

Selection for examination under the LBE program will probably involve a lengthy and time-consuming process that will place extraordinary demands on a taxpayer. Many of the companies currently being examined under the LBE program have never been examined before.

Some of the problems encountered in LBE audits currently in process include:

* Inclusion in the examination cycle of tax return years nearing expiration of the normal statute of limitations (SOL) (commonly referred to as "old years" in IRS parlance). In these instances, one of the first actions taken by the lead examiner involves the request for an extension of the SOL for the "old year."

* Simultaneous audit of all years included in the examination. Normally, an examiner will complete the audit of an earlier year before determining if a subsequent-year examination is warranted.

* IDRs issued for similar return deduction items for all years under audit. Generally, if an examiner is satisfied with the documentation/ correctness of a return item for one year, he will accept the item as reflected on the return in subsequent years.

* A large number of IDRs being issued due to a lack of coordination among audit team members.

It is apparent that, once a company is selected for a team audit under the LBE program, it must devote substantial time and resources to bring about the resolution of the examination. It is extremely important that the taxpayer take control of the audit from the outset, and manage it to achieve a prompt and satisfactory resolution of any issues that may be raised.


Editor's note: Mr. Ely is the immediate past chair of the AICPA Tax Division's Relations with the IRS Committee. Messrs. VanDeveer and Corbet, and Mdmes. Barnes, Hyde and Gervie, are committee members.

Mark H. Ely, J.D., CPA Partner Washington National Tax KPMG LLP Washington, CD
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Title Annotation:IRS program
Author:Ely, Mark H.
Publication:The Tax Adviser
Geographic Code:1USA
Date:Oct 1, 2000
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