Audit plans.

• Author: Ely, Mark H.
• Position: IRS field audits

No matter how large or small, every company subject to a field audit should devote time to working with the IRS Compliance Team in developing, a joint audit plan. The key to every successful audit is effective management of the audit process. A successful audit means no surprises. An effective audit plan reduces this and improves the efficiency of the audit and cycle time. By recognizing that every eventuality cannot be anticipated, the audit plan should be flexible enough to accommodate alterations as the audit proceeds.

Sec. 7602 provides that the IRS may examine all records, including those not directly used to prepare the return, that may be "relevant or material" to the investigation into the correctness of the tax return. The basic data retention requirements can be found in Sec. 6001. Regs. Sec. 1.6001-1 requires that taxpayers retain sufficient records to establish the correctness of any income tax liability. Rev. Rul. 71-20 and Rev. Proc. 98-25 further define what records taxpayers must keep when they maintain the records on machine-sensitive data media or on an automatic data processing system. Failure to clearly identify and retain records that support items on the tax return could lead to the imposition of various penalties. Moreover, if the taxpayer fails to comply with the minimum recordkeeping requirements, the IRS could issue a Notice of Inadequate Records pursuant to Regs. Sec. 1.6001-1(d). In addition, penalties can also include, among other things, Sec. 6662 accuracy-related penalties and Sec. 7203 willful-failure criminal penalties.

The only way for a taxpayer to fully understand and circumscribe the scope of an audit is through an audit plan. The concept of an audit plan can be traced to the Service's Examination Technique Guideline Handbook, which is included in the Internal Revenue Manual. The Manual, in chapter(s) 4200, et al. ,discusses various planning and examination techniques for IRS agents' use during an audit examination. The taxpayer's understanding of these and other of the Service's audit procedures, together with an audit plan, can simplify the audit process.

An audit plan begins with the taxpayer's designation of an individual as the focal point for contact with the IRS examination team. The individual (or individuals) could be a company employee or a third-party representative. Third-party representative(s) are required to obtain a power of attorney prior to discussions with the Service by filing Form...