Involving the taxpayer in the audit planning process: a cooperative effort of the Cincinnati and Cleveland Chapters of the Tax Executives Institute and the Ohio District of the Internal Revenue Service.

Editor's Note: The following report was prepared by a joint Tax Fxecutives Institute (Cincinnati Chapter)-luternal Revenue Service Task Force in Ohio, and has been agreed to by C. Ashley Bullard, IRS District Director (Ohio District), Peter J. Feichtner, III, President of TEI's Cincinnati Chapter, and Harry E. Jackson, President of TEI's Cleveland Chapter, on behalf of their respective organizations. The task force worked for nine months to identify and set forth opportunities for developing a more cooperative relationship between taxpayers and the Internal Revenue Service in designing and implementing the plan for tax return examinations. The IRS employees who served on the task force were Jim Harmon, Chuck Landry, and Jim Ruwe; the TEI members who served on the task force were George Fraley, Cliff Fuerst, and Alan Todryk.

Executive Summary

During the past three years, the IRS has placed a great deal of emphasis on the concept of involving the taxpayer in the audit planning process. However, both the IRS and taxpayers have struggled with the specifics of how that involvement could best be accomplished.

Recognizing that improving on the involvement of taxpayers in the audit planning process would be beneficial to both the taxpayer and the IRS, the Cincinnati Chapter of Tax Executives Institute and the Ohio District of the Internal Revenue Service formed a joint task force in early 1996 to develop recommendations for increasing the audit planning involvement of taxpayers.

The completed report was shared in draft form with the Cleveland TEI Chapter's TEI/IRS Liaison Committee. The input of that group was requested and received and is reflected in the final report. The Boards of Directors of both the Cincinnati and Cleveland Chapters of TEI, as well as the District Director of the IRS Ohio District, have given their approval to the final task force report.

The task force members agreed that preparation of a report setting forth a variety of options to which both the IRS and the taxpayer could subscribe in the audit planning stages could be a valuable resource for both parties in enhancing taxpayer involvement. It was recognized that each taxpayer/IRS relationship is different, and accordingly the options presented in this report would be adopted in varying degrees for any individual case. However, the greater the agreement between the taxpayer and the IRS on which options will be implemented for any given audit cycle, the greater the taxpayer's involvement will be in the planning process. This enhanced involvement should result in a better utilization of resources, reduced examination cycle time, resolution of more issues at the examination level, and more meaningful post-audit critiques.

The task force has made recommendations in seven specific areas. Under each area are options that both the taxpayer and the IRS examination team can choose to embrace for any given audit cycle. The options listed for each area should be discussed at the beginning of the audit process and a decision reached on which options will be included in the audit plan. The seven areas are, as follows:

* Communication, Trust, and Openness is the foundation of a successful audit working relationship.

* The IDR Process contains guidelines for issuing and responding to information document requests (IDRs) in a way designed to improve the process.

* Materiality Agreements can be an opportunity to gain efficiency in the audit process.

* The Opening Conference provides an opportunity to plan for the best utilization of taxpayer and IRS resources.

* Monitoring the Audit is key in making certain that the process is working as intended by both parties and allows for taking corrective action in the event the plan has gone off track.

* Handling Proposed Adjustment Notices sets forth what each party can expect from the other in dealing with issues that arise during the course of the audit.

* The Post-Examination Critique establishes areas for review and evaluation at the end of the audit process with an eye toward making improvements in subsequent cycles.

The task force believes that the greater the level of cooperation that exists between the taxpayer and the IRS in establishing the audit plan, the greater the benefit that will be derived in streamlining the overall audit process. Accordingly, the task force strongly encourages implementation of as many of the suggested elements as possible.

Examples of how the various elements may be effected are contained in the appendix and are an integral part of this report.

Overview

In today's world, both the Internal Revenue Service and Corporate Tax Departments face increasing pressure to optimize the utilization of resources in the tax audit process. It is recognized that developing a solid working relationship between the IRS and taxpayer can be a major factor in streamlining the audit process. A key element in this process is the development of the audit plan. Whenever possible, the development of the audit plan should be a joint IRS/taxpayer effort. That effort should lead to an audit plan that (1) sets forth mutually agreed goals and objectives to which both parties will commit; (2) increases the awareness and consideration of workload conflicts and priorities; and (3) optimizes the use of resources resulting in clearly defined roles and accountability, reduced examination cycle time, resolution of issues at the examination level, and more meaningful post-audit critiques.

Mission Statement

It is the purpose of the Task Force on Improving the Involvement of the Taxpayer in the Audit Planning Process to:

* Prepare a report (endorsed by both IRS management and TEI members) setting forth a variety of options to which both the taxpayer and the IRS could agree in developing the audit plan. It is expected that the extent to which the options are utilized will vary from case to case depending upon the willingness of both the taxpayer and the examination team to implement the various provisions.

* Provide standardized procedures to which the taxpayer and the IRS could agree to implement into the audit process starting with the initial contact and ending at the post examination critique and to resolve all issues at the lowest possible level.

Although the options presented in this document are intended for CEP taxpayers, the approaches outlined in this report are encouraged for use in non-CEP cases where appropriate.

Communication, Trust, and Openness

This is an extremely important part of the audit process. Each side must respect the professionalism of the other. Each side has a job to do, and the audit will go much smoother if each side works toward a successful completion. If the IRS and the taxpayer do not work together, both audit time and cycle time are extended and the case fails to become current, thus placing more burden on both sides. While the audit process is inherently adversarial to a degree, both sides have a common interest in completing the audit timely, efficiently, and fairly. Specific actions that can be taken are, as follows:

* The IRS and taxpayer should hold a very frank discussion of the potential issues and compliance checks very early in the planning phase so that taxpayer can plan for the necessary resources it will need, can arrange for company experts to be present at the necessary times, and can present information that the IRS should know before beginning the examination. The taxpayer will inform the IRS about potential affirmative issues and/or claims that might be filed for the years under audit.

* The taxpayer can significantly help reduce examination time by providing a meaningful orientation for new audit teams. The IRS can contribute to the orientation process by thoroughly reviewing planning files prior to coming on site.

* Such orientations can include presentations at

planning meetings on such topics as organizational

structure, degree of centralization, industry

operating philosophy and procedures, accounting

records, and other information that would

facilitate the examination.

* The orientations can also include brief meetings

with key operating, accounting, or tax personnel

with whom the audit team will deal and/or facility

and plant tours.

* Another method would be for the taxpayer to

provide to the audit team the same company videos,

handbooks, and other information provided to new

hires.

* The use of IRS specialists...