Want to limit the scope of a tax examination and gain more control over the audit process? Here’s how.
The Internal Revenue Service has long provided corporate taxpayers the opportunity to streamline examinations, through its Quality Examination Process, designed to improve communication and transparency between the IRS and corporate taxpayers. The focus of the program essentially puts the IRS and corporate taxpayers on equal footing for ensuring that a tax examination runs smoothly, and allows the taxpayer greater involvement in the audit process. But companies have typically struggled to navigate the particular aspects of the program.
Brazzil
In November, Bob Brazzil director in the tax controversy group for Deloitte, provided insight into the process and suggestions for participating in the QEP during a Webcast hosted by BNA Software.
One of the “most important” aspects of the program, said Brazzil, is that it gives corporate taxpayers a clearer understanding of what to expect from an agent during a tax examination. “I think it’s important to understand when your agent goes off script,” he said. If that does occur, taxpayers now have greater control over what course the audit takes.
Brazzil reviewed the three key phases of the QEP initiative and offered some tips on gaining more control over an IRS audit.
Planning Phase. Part of the planning process involves the pre-audit in which the IRS agents will be doing a very thorough computer search of publicly available information on the company. In anticipation of that first meeting with auditors and managers, it’s a good idea to conduct a self-assessment on the company to see what exists in the public domain, and to be prepared for what issues might arise, advised Brazzil.
Know what to expect during the preliminary meetings, as well: Roles and expectations will be discussed, as well as rules of engagement, which lay out when and how to escalate an issue up the chain of command, such as with area or territory managers. “It’s always best to have that conversation before you have a heated dispute in front of you,” said Brazzil.
Taxpayers who intend to file claims based on studies conducted during the audit period should also share that information up front. “Agents are trying to avoid any surprises,” he said.
Know what to expect during the preliminary meetings: “It’s always best to have that conversation before you have a heated dispute in front of you.”
—Bob Brazzil,
Director in Tax Controversy Group,
Deloitte
Execution Phase. When it comes to the examination, the IRS stresses the importance of sharing audit plans. Historically, taxpayers have had to request this information. The QEP program, however, encourages IRS auditors to reveal risk analyses plans and areas where they expect to conduct statistical sampling.
IRS auditors are also encouraged to mention when a previously audited issue has been dropped. Often times, the IRS will make an individual document request (IDR), obtain the information from the company, and then never address the issue with the taxpayer, said Brazzil. “This program clearly states to the agent that they are expected to let you know when they drop an issue that is no longer of concern to them,” he said.
IRS agents are also encouraged to notify taxpayers of the type of information they might request in the course of the audit. Upfront notification provides taxpayers with the flexibility to find common ground with IRS agents before an IDR is written. It gives them the opportunity to convince the Service that the information may not be helpful or may be too difficult to compile.
The QEP program also provides a system for the IRS and taxpayer to come to an agreement on a realistic time frame for responding to an IDR. It shouldn’t just be the IRS agent unilaterally giving an IDR deadline of a few days. Depending upon the location of the resources, for example, a few days may not be a reasonable amount of time. The negotiation process is important and taxpayers should take advantage of it, stressed Brazzil.
Resolution. “Issue resolution shouldn’t occur at the end of the examination,” said Brazzil. Rather, efforts to come to a resolution should be something that takes place throughout the course of the process by both the IRS and taxpayer in order to identify issues that may arise, and to find the right tool for resolving them. Furthermore, if an IRS auditor intends to attach a penalty to an IRS adjustment, “you should know that at the very beginning,” said Brazzil.
WORKING THE QEP
Some advice from the Internal Revenue Service on the Quality Examination Process:
Pre-exam Analysis:
The exam team gathers and reviews all pertinent information about
the taxpayer that is available publicly and within the Service. The
team considers prior tax settlements and/or determinations as
it prepares a preliminary compliance risk analysis and identifies
potential issues for examination.
Initial Planning Meeting:
The exam team holds an initial planning meeting with the taxpayer.
Discussion topics may include, but are not limited to, a review
of the preliminary risk analysis; the anticipated exam process for
the issues identified, along with timeframes and key milestones;
the importance of transparency and openness during the exam
process; roles and responsibilities of team members, the taxpayer
and its representatives; and the potential involvement of specialists,
technical advisors and Counsel.
During the initial meeting, the team and taxpayer discuss possible
contingencies resulting from new developments during the exam
and/or changes to the exam plan. They review the information
document request (IDR) management process; dispute resolution
options, such as the Appeals Fast Track Settlement process; LMSB’s
Rules of Engagement, to be used when elevating problems; ground
rules for the frequency of meetings and transmission of information;
staffing and resource availability; and logistics (i.e., building access,
exam team work space, telephone and internet access, information/
data security, secure messaging, office security, etc.).
Subsequent Planning Meetings:
During the initial meeting or as needed through subsequent
planning meetings, the exam team and taxpayer discuss prior audit
cycle or exam results, if applicable; materiality thresholds relating to
identification and selection of examination issues; other potential
compliance issues and required compliance checks; affirmative issues
and/or claims the taxpayer expects to file; strategies the parties will
use for resolving compliance issues; and the use of a mid-cycle risk
analysis, if warranted.
Taxpayer Orientation:
During the initial meeting or as soon as possible thereafter, the
taxpayer provides a comprehensive orientation of its business
operations to the exam team. The orientation includes overviews
of the taxpayer’s business activities, record keeping and financial
statement preparation, operational structure, key functions and
an organization chart. The taxpayer explains how it prepares its
tax returns, discusses all large or unusual events that occurred in
the years under examination, and, if applicable, reviews significant
events and/or changes from prior cycles/years.
Exchange of Additional Transactional and Financial
Information:
During the initial meeting or shortly thereafter, the taxpayer provides
the exam team with relevant business and financial information
regarding acquisitions, dispositions, accounting method changes,
tax shelters, book-to-tax reconciliations, and all other pertinent
information.
Finalizing the Exam Plan:
The exam team uses all the information gathered to develop and
finalize an examination plan that specifies the issues to be examined,
timeframes, personnel required, processes to be followed, and
respective responsibilities. Representatives for both the IRS
and the taxpayer sign the examination plan acknowledging their
understanding of the plan and commitment to achieving the
milestone and timeline dates.
Source
IRS Quality Examination Process.
Most agents and managers would much rather write up a dispute item themselves, rather than having a mediator, said Brazzil. Alternative dispute resolutions, however, are a high priority with the IRS. The IRS typically resolves its disputes either with fast-track settlements or early referral to appeal boards. The goal of fast-track settlements is to eliminate the appeals process, by keeping the case within the jurisdiction of the IRS Division of Large and Mid-Sized Businesses.
Case Study: Brunswick Corporation
Madeline Schneider, director of federal tax audits and planning at Brunswick Corporation, a global manufacturer of marine, recreation, and fitness products, shared her experience with the QEP program. “We have a good relationship with the IRS team and generally reach agreement at the exam level,” she said. “However, from time to time we do have issues that have gone to appeals and even litigation.”
Schneider
Most recently, Brunswick faced a large tax case that spanned back 16 years. As tax and appeals courts considered the resolution of the case, the company was unable to settle subsequent IRS audits.
When the matter was finally resolved in 2005, the IRS hit Brunswick with four simultaneous Revenue Agent Reports (RARs)—changes to an assessment of an IRS examination. “As you can imagine, this was a major undertaking to review all the RARs,” said Schneider. Preparing them involved a collaborative effort with IRS agents over a period of several months.
During the execution phase, Schneider said the review of the RARs was further complicated by the fact that, because the audits spanned back so many years, neither she nor the IRS examination team assigned to prepare the RARs were involved at the time of the audits.
To make the process easier, Schneider turned to BNA Corporate Tax Analyzer to help prepare the calculations. The tool allowed her to merge the IRS agents’ computations on adjustments with her own computations to compare potential differences. “The advantage to this for me is that I’m now in control of the document as opposed to reactively reviewing a large binder of computations that the IRS has handed over to me,” she said.
Having the ability to compare the reports resulted in the discovery of more than 100 discrepancies between the IRS agents’ calculations and her own. The QEP program allowed her the flexibility to work with the IRS to resolve those differences. Having the ability to correct those errors, said Schneider, “resulted in a significant decrease in tax for Brunswick.”
Overall, the QEP program, if used in the right way, enables companies much greater flexibility in working with the IRS and coming to a resolution of an audit that works in the best interest of everybody.
No comments yet