Alcoa tax department QIP team: a quality application in the tax function.

• Author: Minnis, Perry A.

Alcoa Tax Department QIP Team: A Quality Application in the Tax Function

The Aluminum Company of America (Alcoa), like most corporations with assets over $250 million, is currently audited by the Internal Revenue Service (IRS) under the Coordinated Examination Program - a 24- to 27-month audit cycle during which IRS agents examine the consolidated income tax returns of two or three years. This article summarizes the efforts thus far of a Quality Improvement (QIP) team to use Alcoa's "Eight Step Quality Improvement Process" to shorten the time it takes the Tax Department to respond during the audit to the requests of IRS agents for more information about a particular topic or transaction.

BACKGROUND

Alcoa is the world's largest aluminum company. It employs 61,000 people worldwide and had consolidated assets in 1989 of $11.6 billion. The company's main business is fabricating aluminum products.

Alcoa has always spent considerable time and money complying with the tax laws of federal, state, and local governments, both in this country and abroad. However, the continual flood of new tax legislation (four major tax bills enacted by Congress in recent years) presented a challenge to Alcoa's tax managers. Could they change and improve an already complex tax compliance effort without increasing available resources? To meet this challenge, the Tax Department used the Alcoa Eight Step Quality Improvement Process - a rigorous methodology designed to solve problems that limit performance and to increase customer satisfaction.

In the latter part of the 1960s, the IRS developed the large-case corporate audit and audit planning program. This program, commonly referred to as the "Coordinated Examination Program (CEP)," uses large-case audit techniques with respect to the audit of most corporations with assets of over $250 million. Normally, between 24 to 27 months is allocated to complete an audit cycle covering the examination of two to three years' consolidated income tax returns. Alcoa is currently audited by the IRS under the Coordinated Examination Plan.

Once an audit begins, IRS agents issue Information Document Requests (IDRs) which represent written requests for information relative to areas being reviewed by any agent. Alcoa has found it advantageous to designate one person in the tax department to handle all direct communications with the agent(s) and to be present when other Alcoa employees are communicating with them. This procedure assures the company that the agent is receiving consistent factual information and that a record of all information being provided to the IRS is filed in a central location.

IRS administrative procedures normally require a response to an IDR within 30 days of its receipt. The remainder of this article focuses on the efforts of a Tax Department QIP team to develop an acceptable action plan, using Alcoa's Eight Step Quality Improvement Process, that will assist the tax audit manager in complying with the 30-day requirement.

The selection of this opportunity for improvement is unique in that although customer satisfaction is the ultimate goal of most quality endeavors, the IRS is not usually thought of as the typical customer a business seeks to please. Indeed, even within Alcoa the identification of the IRS as a customer of the tax department has been the subject of some debate. There were those who argued that the corporation itself, on whose behalf the Tax Department works with the IRS, was the real customer. Rather than take either side of the debate perhaps it is better to think of this situation as one that is common in many business environments.

The Tax Department has conflicting requirements. It has a business requirement placed upon it by the parent corporation to use as few resources as possible to accomplish its departmental mission of ensuring Alcoa's full compliance with all tax statutes. And it has a customer requirement placed upon it by the recipient (the...