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New IRS initiative - compliance assurance process (real-time audit).

Over the past year, the IRS's Large and Mid-Size Business Division (LMSB) has been working on improving the traditional audit process by reducing examination cycle time the time from the return filing to the close of the examination. The average cycle time for LMSB taxpayers is 60 months. This long period potentially presents the IRS with significant problems, including a delay in identifying emerging issues.

In mid-2004, the LMSB unveiled a new approach to compliance audits, which, ideally, will shorten cycle time. Known as the compliance assurance process (CAP), a pilot is scheduled for 2005 returns. It will encompass approximately 20-25 corporate volunteers and center initially on publicly traded companies.

While many details still need to be worked out, CAP's objective is to assist taxpayers in settling issues before filing a return, by conducting "real time" audits. That will essentially eliminate the need for post-filing examinations.These audits are expected to (1) address issues throughout the year, (2) potentially reduce prolonged litigation and (3) increase audit currency.

How CAP Works

The IRS will assign an account coordinator to the taxpayer, to be the single point of contact for all tax matters. Throughout the tax year, the coordinator will work with the taxpayer to understand the taxpayer's business and identify and resolve compliance issues arising from transactions that materially affect income tax liability. Once the taxpayer determines how it will report a transaction for tax purposes, the IRS review the proposed treatment and determine whether it is appropriate. All audit issues will require completion of Form 5701, Notice of Proposed Adjustments. If the IRS and the taxpayer reach an agreement, both will execute Form 906, Closing Agreement. If they cannot agree, Fast Track Settlement will be available to the taxpayer; see IR 2003-44.

Under CAP, the taxpayer's and the Service's roles and responsibilities are documented using a memorandum of understanding (MOU). The MOU discusses why open and honest communication is important to the program's success. The two parties will jointly plan the scope of the CAP review and consider materiality thresholds, to determine the issues to be reviewed, including, but not limited to, permanent, short-term and long-term adjustments. However, the IRS will ultimately decide which items to audit.

Notwithstanding the materiality thresholds and issue identification procedures, it will also conduct a compliance review of tax shelters, listed transactions, fraudulent items and any other issues identified by its directives. Further, the MOU discusses taxpayer disclosures, the Service's method of requesting information and alternative dispute resolution options for unagreed issues.

A CAP audit will be concluded one of three ways:

1. "Acceptance Letter," issued prior to filing a return. This letter indicates that the IRS will accept the return as filed, the parties have executed Form 906 for all agreed issues and the parties expect to have limited future contact regarding the return.

2. "Qualified Acceptance Letter," issued prior willing the return. This letter indicates that the Service will conduct a limited post-filing examination of unresolved CAP issues, and that all agreed issues have an executed Form 906.

3. An "Adverse Acceptance Letter," issued at any time. This letter results in the case being withdrawn from CAP and transferred to a regular audit program. This can happen for several reasons, including (1) not adhering to Information Document Request (IDR) response times, not responding to IDRs or providing incomplete IDR responses; (2) not engaging in meaningful or good-faith issue resolution discussions; (3) failing to thoroughly disclose prior, concurrent and ongoing transactions; (4) failing to disclose a tax shelter or listed transaction; and (5) not adhering to any other MOU commitment(s).

The IRS does not expect CAP to compromise current audit standards. Taxpayers will not forfeit any rights under the program and can appeal un-agreed issues.

Conclusion

The IRS does not plan to extend the volunteer offer to additional taxpayers for the 2005 pilot year. If the CAP pilot is successful, the program has the potential to change the audit process dramatically, by reducing taxpayers' and the Service's time and cost, while delivering tax certainty earlier.

Editor's note: Mr. Ely is the former chair of the AICPA Tax Division's IRS Practice and Procedures Committee. Ms. Michnay and Mr. Dougherty are members of that Committee.

FROM JAMES A. DOUGHERTY, DIRECTOR, AND SHARLENE M. SYLVIA, MANAGER., TAX CONTROVERSY SERVICES, DELOITTE TAX LLP, WASHINGTON DC
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Author:Sylvia, Sharlene M.
Publication:The Tax Adviser
Date:Jan 1, 2005
Words:718
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