IRS to broaden circumstances for requesting audit workpapers.

• Position: Tax info

Evaluating the balance sheet tax liability account and the income statement provision for taxes is an important part of any audit. Workpapers supporting this evaluation often contain sensitive information about contingent or potential liability for transactions whose tax treatment may not be self-evident. Although these "tax accrual workpapers" could provide a laundry list of items to challenge, the IRS has had a formal voluntary restraint program in place since 1981 under which audit workpapers are treated as the last place to turn for taxpayer business information. This restraint arose out of the IRS's recognition that, without unfettered communication between auditor and client, information contained in tax accrual workpapers could result in less reliable audited accounts.

Recently, the IRS announced (Announcement 2002-63) a change in policy which will allow agents more access to these workpapers when an audit client has undertaken a transaction which the Service believes constitutes a tax shelter. For returns filed after June 30, 2002, that include a "listed transaction," the IRS will request the tax accrual workpapers pertaining to that transaction. A listed transaction is one that (1) the IRS has cited in published guidance as a tax avoidance transaction; or (2) is "substantially similar" to a published tax avoidance transaction.

The IRS will generally request the tax accrual workpapers under the following circumstances:

(1) If a listed transaction was properly disclosed to the IRS, the Service will routinely request...