Proposed IRS generally accepted auditing standards for the Coordinated Examination Program.

• Position: Tax Executives Institute IRS Administrative Committee and Executive Committee

On February 3, 1994, Tax Executives Institute filed the following comments with the Internal Revenue Service on the IRS's draft Generally Accepted Auditing Standards for the Coordinated Examination Program. The IRS's draft proposes the adoption of standards in the following areas: Team Standards: (1) Professional Judgment, (2) Objectivity / Integrity, and (3) Training and Qualifications; Fieldwork Standards: (4) Planning, (5) Monitoring, (6) Examination Techniques, and (7) Issue Development; Documentation Standards: (8) Workpapers, (9) Reports, and (10) Post-Examination Techniques.

The Institutes's comments, which took the form of a letter from TEl President Ralph J. Weiland to Albert F. Gee, Executive Assistant to the Assistant Regional Commissioner (Examination), were developed following a review of the draft standards by the IRS Administrative Affairs Committee, whose chair is Robert D. Adams of the Halliburton Company. The following TEl members contributed to the Institute's comments: Joseph A. Cottonaro of Hershey Foods Corporation; Patrick J. Ellingsworth of Atlantic Richfield Company; Herbert L. Herman of Coltec Industries, Inc.; Sheldon A. Kimel of Brunswick Corporation; Louis J. Manetti of Bell & Howell Company; Patrick J. O'Brien of Sears Roebuck & Company; Charles W. Rau. of MCI Communications; Thomas B. Rogers of Apple Computer; G. Clark Van Bogart of Burlington Resources; and Harold N. Weber of General Motors Corporation. Anyone wishing to receive a copy of the draft standards to which the Institute| comments were directed should send a written request to TEl Headquarters.

On behalf of Tax Executives Institute, I am pleased to submit the following comments on the Internal Revenue Service's draft "Generally Accepted Auditing Standards for the Coordinated Examination Program." (The draft the Institute reviewed was dated September 30, 1993.) TEI appreciates the opportunity to review the draft standards, as well as the chance to meet on December 14, 1993, with you and other members of your task force. We regret the delay in submitting our comments, but the holidays and the press of other business made an earlier response impossible.

The Institute's comments were developed following a review of the draft standards by a large number of TEI members. Specifically, the draft standards were circulated to members of the Institute's IRS Administrative Affairs Committee and Executive Committee, as well as to other interested members of the Institute. The comments below represent a synthesis of the comments received. In addition, we have noted several typographical errors in the draft standards. Rather than detail those comments in this letter, we enclose a marked-up copy of the draft standards, on which we have marked our proposed changes.

General Comments

TEI is pleased that the Internal Revenue Service has undertaken to adopt uniform auditing standards for the Coordinated Examination Program. We believe the draft standards mark a very creditable step in the development process and are confident that the standards will contribute to more efficient and effective audits. We also believe, however, that the standards need to be crystallized in order to meaningfully affect actual examinations.

TEI has been a strong supporter of the IRS's recent changes to the CEP program, and has been especially excited by the steps the IRS has taken to involve the taxpayer in the CEP planning process. In our view, the key to more efficient CEP examinations is more frequent, more open, and more complete communication between the CEP team and the taxpayer. For this reason, we believe that the standards should emphasize the need for communication between the audit team and the taxpayer, both during the time the audit plan is prepared and during the examination itself. We appreciate that the task force wants to limit the total number of auditing standards, but nevertheless suggest that consideration be given to including a separate standard on communication (perhaps under "Fieldwork Standards"). In developing the Communication Standard, the task force could refer to planning, monitoring, issue development, and communicating during the actual conduct of field work. In addition, the Documentation Standards could be revised to address the sharing of information and documents between the taxpayer and CEP team members.

Moreover, we believe that the standards should reflect a recognition that, with staffing constraints on both taxpayers and the IRS, an examination can be completed promptly and efficiently only by establishing and following an agreed plan. For taxpayers, the same personnel may be responsible for the tax compliance, planning, audit, and appeals functions. Advance scheduling and knowledge of the timing and scope of information requests will greatly enhance tax department personnel's ability to serve all the tax functions and to provide timely responses to the CEP team. We recommend also that the IRS focus its requests on major or questionable areas. Delays and attendant problems can be minimized where the taxpayer is intimately involved in the planning process. The IRS, too, is more likely to be thorough and professional in its identification and analysis of possible tax adjustments if the CEP team has a clear conception of the schedule and scope of the audit, as well as clear auditing standards. Finally, detailed planning should enable both the IRS and the taxpayer to develop a greater variety of techniques for handling requests and issues expeditiously.

Professional Judgment

1. Professional judgment may be the most important quality of a good Case Manager or team member, and yet it is probably the hardest quality to describe in detail, to measure, to teach, and to instill. Nevertheless, we believe it would be helpful for teams members to be formally evaluated on their professional judgment as part of their regular performance reviews. (They might even be requested to evaluate themselves, since self-examination will likely make team members more sensitive to the need to exercise professional judgment.) Finally, we recommend that the Case Manager be expressly charged with causing the team to maintain a professional working relationship with the taxpayer.

2. The flush language of Paragraph 1 states that "[t]he team may decide against examination of a very large item because risk analysis indicates minimal tax potential," and Paragraph 1B states that "[s]ound professional judgment should be used in determining the scope, depth, procedures and methodology for the examination." TEI commends the task force for including these items in the draft standard. The Case Manager should exert leadership to prevent agents from pursuing areas that could have a minor effect on revenues (even if the agent's position were wholly sustained) but that may take considerable time and resources to develop. At the same time, TEI believes the auditing standards should...