Streamlining the audit process responses of TEI members to LMSB survey questions: May 24, 2002.
1. In order to accelerate the examination process in relation to rollover issues (timing issues that affect multiple examination years), would you be willing to:
a. compute rollover issue adjustments and present them to the team for incorporation into the Revenue Agents Report,
b. amend your return for rollover issues, or
c. could you suggest more efficient ways of handling rollover issues? If so please explain.
Response #1: We find that the most expedient way to handle rollover issues is to compute the rollover issue adjustments and present them to the team for incorporation into the RAR. This is our current practice and it works well for us.
If you filed an amended return instead, there are issues such as:
i. More time may be required to prepare an amended tax return vs. computing the rollover adjustments. Why prepare an amended tax return when you know that the rollover adjustments are going to be incorporated into the following years' RAR? The amended return would most likely be meaningless because of the additional adjustments that the IRS may find upon audit of the following years.
ii. Expediency and efficiency would suffer.
Response #2: At the completion of each cycle, we prepare a spreadsheet showing the run-off of the rollover by year. This can be used by the team for each subsequent year until we catch up to the current filing year and incorporate the remaining agreed adjustments into the currently filed return. This minimizes the reconciliations in subsequent years and is appreciated by the team.
An amended return would create unnecessary work.
Response #3: I would choose a. I'm assuming that this refers to agreed issues that have a correlative impact in future years. We do not want to file an amended return.
Response #4: On our recent examinations, we have not considered a Form 5701 to be complete until the adjustment is computed through any rollover period. We learned the hard way that it is very inefficient to revisit these adjustments later. Unless the issues are very large, they become exam adjustments in future cycles (we are also very current on our exam). If there were several intervening years and the amount were material, we would amend the return.
Another idea (which we only succeeded in doing once) is to calculate the net present value of the adjustment and put it all into the earliest year.
a. We now compute rollover issue adjustments and present them to the team for incorporation into the Revenue Agents Report as part of the requested audit adjustments given to IRS at the start of an audit (for agreed audit adjustments only);
b. We do not want to amend the return for rollover issues. This is too formal a process for an administrative matter that is easily handled as part of the audit;
c. For agreed rollover items, subsequent year roll-out adjustments should be noted on the Form 5701, so that the taxpayer can incorporate them into subsequent tax returns, minimizing future audit adjustments.
Response #6: We work with the IRS in preparing a rollover schedule that we include in the RAR. We incorporate the adjustments into the return for rollover years as they are prepared. A primary benefit of the currency of our audit is that rollover adjustments are non-existent--as soon as an issue is identified, it is reflected accordingly in future returns.
Response #7: I agree with the previous comments that the most expedient way of handling rollover issues is to compute the rollover adjustments and give them to the IRS at the beginning of the audit for incorporation into the RAR. Many good reasons were previously given as to why amended returns are not the favored choice. The primary reason for avoiding amended returns is that amended federal returns require taxpayers to file amended state returns.
Many states will access penalties for the failure to file amended returns, while others will deny refunds because the failure to file amended returns causes statutes to expire for refund claims.
Response #8: To accelerate the examination process in relation to rollover issues, I would be willing to compute rollover issues adjustments and present them to the team for incorporation into the Revenue Agents Report. I do not want to file amended returns since this would require filing amended state tax returns, which would only need to be amended again for other issues raised on the federal examination of those years.
2. In order to accelerate the examination process in relation to recurring issues (technical issues that appear in multiple years), would you be willing to:
a. disclose recurring issues and compute the adjustments so the team could incorporate them into the Revenue Agents Report
b. amend your return for recurring issues, or
c. could you suggest more efficient ways of handling recurring issues? If so, please explain.
Response #1: Assuming that we intend to give the IRS the information for the recurring issues, I would again suggest that we disclose the recurring issues and compute the adjustment so that the team could incorporate the adjustments into the RAR for the same reasons mentioned in the Response #1 to question #1, above.
Response #2: In the 15-day disclosure period, we disclose the current cycle effect of all recurring issues. Again, putting this together while it is fresh from the just-completed cycle saves time.
Response #3: I would choose c. It's up to Examination to initiate a discussion of recurring issues. Examination occasionally decides not to pursue the issue in subsequent years. If Examination initiates the issue, the taxpayer, at its option, may be willing to participate in computing any agreed adjustments. Again, we do not want to file an amended return.
Response #4: If possible, we would revise these computations and show them on the 5701. Generally, these usually show up as "tax return errors" with the disclosures at the beginning of the next examination. As in Response #4 to question #1 above, if the amount were significant and there were intervening years, we would amend the returns.
a. Disclosure should not be imposed on the taxpayer. It is up to the agents to advise if they still intend to pursue issues raised in prior cycles. Yes, we would be willing to compute adjustments, but would expect reduced audit time. We don't want to free up time for the agents to explore elsewhere.
b. We do not want to amend the returns.
c. (i) Follow the Appeals treatment if the taxpayer so requests. Some of our recurring issues have been resolved at Appeals, but the Examination division disagrees with the treatment and audits the issue during every cycle. This places additional administrative burdens on both taxpayers and the IRS. (ii) Avoid extreme positions. Capitalizing internal salaries on recurring transactions is an example of an Examination position that we could not follow on a tax return (even if we wanted to) because employees do not track their time. (iii) For both recurring and non-recurring issues, Examination spends a lot of time writing and revising long Forms 5701, even for agreed issues. If the agent knows the issue is agreed, can't a more abbreviated write-up be used?
Response #6: As mentioned in Response #6 to question #1, we work with the IRS to prepare the rollover schedule. In the section 6662 disclosure statement that is required within 15 days of the audit opening, we include such rollover adjustments. In practice, we do not amend returns for items that are not significant; rather, we hold them aside for inclusion in the section 6662 disclosure statement. We believe that the most efficient way to handle recurring issues is to incorporate them onto your tax return as soon as you can and be as current as possible.
Response #7: See Response #7 to question #1.
Response #8: I would not compute any adjustments for technical issues.
3. Assuming that a subsequent cycle will not be examined or the taxpayer as yet to file a subsequent year return, what mechanism would the taxpayer suggest to provide the Service with assurance that these rollover and recurring issues will be dealt with as agreed upon during the examination, thus eliminating the need for an examination of these issues?
Response #1: The most logical answer is to enter into a closing agreement to ensure that result; that approach should ensure that the rollover issues will be dealt with as agreed upon during the examination.
Response #2: We are unable to comprehend a pass on a cycle, but the suggestion of a closing agreement seems right.
Response #3: A closing agreement might help, but still does not give Examination assurance that the adjustments actually hit the return. Due to changes in personnel, etc., the adjustments still might fall through the cracks.
Response #4: I have no experience with the concept of subsequent years not being examined, but I would assume that there would be a need for a closing agreement. Perhaps something could be designed to be less burdensome than the current closing agreement procedure.
Response #5: In my experience, neither the company nor the IRS has IRS reneged on the roll-out of a prior cycle agreement or the agreed treatment of a recurring item. For practical purposes, the IRS could conduct a very limited scope audit to pick up known adjustments or check the return to ensure the taxpayer incorporated rollover/recurring issue results into subsequent tax returns.
Response #6: Although not a "formal" resolution method, we use a Memorandum of Understanding (MOU) that is signed by the company and the Case Manager. Upon audit, we show evidence that we are honoring the MOU. By maintaining this level of integrity between the IRS examination team and the company, it continues to strengthen the relationship.
Response #7: I support the use of a closing agreement; however, I believe that closing agreements require IRS counsel involvement, which will drastically slow down the audit process unless improvements are made in this area.
Response #8: I'm not sure how the taxpayer can provide any assurance to the IRS that roll over and recurring issues will be dealt with as agreed upon during the examination. In the past, I have shown journal entries adjusting the general ledger accounts for the tax adjustments from prior cycles or adjustments to the fixed asset records. This proof has generally been accepted by the agent.
4. If the IRS indicated that it would conduct a limited, issue focused examination, what would you be willing to do to enhance the process? Examples may include, providing three-year comparative analysis of the Schedule M, enhanced disclosure of the significant issues on the return, or meaningful participation in the audit planning process.
Response #1: We would be willing to provide the multi-year comparative Schedule M analysis and provide meaningful audit planning participation.
Response #2: We would be willing to provide a comparative analysis, regular disclosure, expedited responses, and complete cooperation (including discussions with team members and specialists) during planning. We could also potentially use an issue resolution technique such as early referral.
Response #3: We would want a better understanding of what the IRS is willing to do before we could meaningfully respond to this question. If the IRS wants to do a limited-focused examination, it is up to the agency to identify the issues. Typically, the agency has sufficient history with a large case taxpayer to know what the major issues are (although see further comments in Response #3 to question #6 below). What I'd be willing to do to enhance the process would depend on what I get in return. For example, will the IRS agree to complete the audit by a certain date? Will it agree to limit IDRs to the focused issues, etc.? The IRS needs to tell us more about what it is willing to do (and the benefits thereof) before we can meaningfully answer this question.
Response #4: We have tried to encourage the IRS to design a more issue-focused examination. We do all that we can to participate in the planning process and provide presentations of the facts of all significant transactions. We also agree up front to a fairly demanding schedule to keep the examination from "issue-creep." Our success has, however, been limited. The IRS sometimes seems to view the factual presentations of large transactions as an opportunity to debate rather than a chance to understand the transaction.
An issue that we struggle with is that one transaction that the IRS views as being "too aggressive" suddenly makes all the other issues in an examination harder to settle--to the point that it taints normal transactions.
Response #5: We would welcome meaningful participation in the audit planning process and believe it would be helpful for IRS management to be explicit in describing what that means to local IRS teams. For example, it would be helpful in planning taxpayer resources to discuss with the agents what areas/divisions/issues they intend to review instead of looking at everything every time. For large taxpayers under constant audit, it would help reduce burden if the IRS could rotate areas of review so that not all business units must make time in their schedules to respond to IRS audit queries every cycle. Joint planning could also mean coordinating schedules for areas of review so that we don't ask for information from a business unit once, then return eight months later with follow-up questions.
As to enhanced disclosure, in the past we have provided a list of significant transactions that happened during the audit cycle, along with summaries of some of them, but that may not have sped up the audit. With disclosure requirements, I also worry that it could expose taxpayers to more problems if we failed to include some item that IRS subsequently determines to be significant. It would be better to have the agents give us a list of the 20 or so areas they intend to review and allow taxpayers to start gathering information so that we can be more responsive rather than leaving us in the dark until the IDR is issued.
Response #6: The key to success for a limited, issue-focused examination is meaningful participation in the audit planning process. Joint planning and execution is critical to understanding the issues, aligning resources, and reaching a mutual resolution. Planning is not a "beginning of the cycle" event, it is ongoing. It should be exercised in weekly meetings and quarterly milestone meetings until the cycle is closed.
A three-year comparative analysis of a Schedule M may not be useful based on the state of the economy or other variables. In comparing a timing item such as depreciation, if the company is investing in capital in a good year and cuts back in a bad year, what relevance would a comparison have in resolving an issue under audit?
Disclosure of significant items on the tax return is prudent, although the enhancement is subjective. I believe the IRS would still investigate non-disclosure or make an issue of the detail provided within the enhanced disclosure.
Response #7: I would be willing to provide a multi-year comparative schedule M analysis and participate in meaningful audit planning.
Response #8: I would participate in the audit planning process for a limited, issue- focused examination.
5. If you had the Forms 5701, Notice of Proposed Adjustment, for all of the issues, would you be willing to forgo receipt of a Revenue Agents Report if the case was totally unagreed? Would you have any concerns if Appeals provided the final computations upon completion of the Appeals proceeding?
Response #1: We would not want to forego an RAR for the following four reasons:
a. We would want to see the IRS formalize all of its findings in one report and not have the adjustments in multiple 5701s.
b. We would want to see the interplay of the adjustments with any other ramifications such as carryovers, carryover limitations, credit impact, etc.
c. We would like to see the final big picture results from all the adjustments.
d. There is more efficiency for the taxpayer in seeing all of the adjustments in one place with the IRS's final write-ups, positions, and explanations of audit adjustments.
Response #2: I agree with the prior comment that we would want a complete RAR. We do the tax computations for team review now to expedite the process. At the end of Appeals, we also submit the calculation for Appeals review since we would perform a check on the numbers anyway. Both teams are appreciative of our assistance.
Response #3: Forgoing an RAR would be okay if a 30-day letter is going to be issued. This seems to be happening anyway. In my last audit, I received no RAR, but simply a 30-day letter with the Forms 5701 attached as back-up.
I have no problem with Appeals doing the final computations.
Response #4: There would still be a need for some mechanism to tie the package of 5701s together--an issue inventory or something that assures agreement on the universe and some quality control. We have occasionally discovered technical issues relating to how the tax on the return is computed while trying to agree to the computation on the RAR.
On a threshold level, it is hard for me to imagine a totally unagreed examination. In our case there are always rollover, recurring items, and tax return errors that are disclosed at the beginning of the cycle.
Response #5: We would be willing to forgo receipt of a Revenue Agents Report if the case were totally unagreed. We would also have no concerns if Appeals provided the final computations.
Response #6: Forgoing the receipt of the Revenue Agents Report, Form 870 or 870-AD is not an option that we favor. These agreements are important. Form 870 is the usual waiver of restrictions on assessment, 870-AD is a special purpose waiver form used in the Appeals office. For example, the 870-AD agreement contains pledges against reopening the case (except for fraud, etc.). It provides finality to the taxpayer, which is a desired end state.
Like other taxpayers, we feel it is important to have all tax adjustments summarized and available in one place. This is also a concise document we provide with the amended state income tax returns required to be filed after an audit closes and eliminates the need to forward multiple NOPAs to the state tax authorities.
It is more desirable to have the examination team who is familiar with all audit adjustments prepare the computations. At our company, the Revenue Agents Report is reconciled to our internal system prior to being issued. Our rapport with the agents at the examination level allows both parties to agree on the RAR before issuance.
Response #7: I agree with previous comments that it is hard to imagine a totally unagreed examination. In any case, however, I still want to see the interplay of the adjustments running through the RAR.
Response #8: Even with an unagreed case for all issues, I would like a computation of the tax due in the Revenue Agents Report. I have no concerns if Appeals provides the final computations upon completing the Appeals process.
6. What are the existing barriers to taxpayers and the IRS working together to conduct limited, issue focused examinations? Please provide barriers that exist for both the IRS and you as a taxpayer. What are your suggestions for eliminating these barriers?
Response #1: The major barrier is that, because our company is a GS-14 case, the IRS is reluctant to forego a major audit even though budget/cycle time has decreased somewhat over the last two cycles. The IRS will likely want to scrutinize large taxpayers, particularly in the tax shelter atmosphere.
Response #2: Main barrier for taxpayers: We don't want to be in the position of having to confess issues to the IRS. Main barrier for IRS: The agency may know historically what the issues are, but how can it be sure it's picking up any brand new issues? To overcome these barriers, the IRS could develop a fact-based questionnaire/IDR to be given to the taxpayer at the beginning of the audit. Specific factual questions could be asked that are designed to surface transactions that might involve new tax issues.
Another challenge for taxpayers is staffing for the audit, especially if the IRS alternates between a full-scale audit and limited-scope audit. You may suddenly find yourself over-staffed for the limited audit. If the IRS goes back to a full-scale audit the next cycle, however, then you may suddenly be understaffed. Not knowing what to expect can wreak havoc on the ability to manage staffing for the audit.
Response #3: The issues I see are:
(a) Confidence that all important issues are :identified at the beginning of the examination.
(b) Concern that additional issues will be added to the list late in the cycle (especially if the IRS results are low).
(c) Trust issues.
Suggestions for resolving these issues include:
(a) There would have to be a huge amount of open communication.
(b) Perhaps a mediator should be on hand to deal with changes in scope or additions to the issue list.
Response #4: Taxpayers are concerned that even if they provide information in a way that saves IRS time, the IRS will dedicate the saved time to fishing for new issues. For the IRS, the barrier is a concern that an important issue may be missed.
(a) Use audit timelines and make both the IRS and taxpayer accountable for staying on track;
(b) Early in the audit, give the taxpayer a reasonable number of audit issues and add issues only if a significant item emerges;
(c) Authorize the IRS teams to not "do it all" every cycle. Agents seem to feel at risk if they don't review a long checklist of items every time, even for taxpayers that have been exhaustively reviewed in prior cycles.
Response #5: Because we have been a CEP taxpayer for many years, the audit has become more issue-focused. It is our experience that the IRS team and specialists work the issue together. The lack of management continuity between the groups tends to have one group vying against another for control. This is extremely disruptive and time-consuming for the taxpayer. A suggestion for eliminating this barrier is the designation of authority over all groups (domestic, international, economist, engineers, counsel, ISPs, financial products, etc.) to one position that is empowered to make decisions without being challenged or overturn. Currently, in the LMSB Communications, Media and Technology Industry Group, that position is the Director of Field Operations; this is too high in the organization to work issues in a time efficient and practical manner
Response #6: One barrier is a concern that additional issues would be added to the list late in the audit because of low IRS assessments.
Response #7: I believe the agents attempt to audit on an issue-focused approach. The barriers include the agents' general lack of understanding of how the business functions and the complexity of the tax law in some areas. Concerning the lack of business knowledge, it would be helpful if the agent in charge and the Case Manager did not rotate off the examination at the same time. Concerning the tax law complexity, it is just an issue we both must deal with and will not change until Congress addresses some of the issues with a true simplification bill.
7. What are the benefits to taxpayers and the IRS working together to conduct limited, issue focused examinations?
Response #1: The benefit is the effective use of limited resources on both sides, as well as the ability to improve currency, which, by itself, will expedite the audit process and further improve currency.
Response #2: Benefits to both are saving time and resources, not only at Examination, but at Appeals as well.
Response #3: The benefits are:
(a) Scheduling of resources: predictability of the timing for the examination for both the taxpayer and the IRS and the ability to put IRS resources where they are most productive.
(b) Record production: the taxpayer would know up front what the record retrieval burden will be.
Response #4: The benefits are the reduced burden on the IRS and taxpayer, more current audits, increased trust, and better future compliance because more issues sorted out and eliminated as audit disputes.
Response #5: The benefit is the ability to truly "focus" on the issue. Although we come close to experiencing an issue-focused examination, we are still burdened by the normal trappings of a full audit. It would be interesting to see what a limited, issued-focused examination would look like.
Response #6: I wonder whether the IRS would eliminate the involvement of the CAS group for this type of audit. If the team is concentrating on issues, would it abandon the idea of requesting G/L tapes? Such an approach would save time and also eliminate many IDR questions relating to why balances vary from year to year.
Response #7: I believe a significant amount of time can be saved.
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|Date:||May 1, 2002|
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