Improving the process for conducting the international segment of an IRS audit.

• Author: Kyle, R. Douglas

Improving the Process for Conducting the International Segment of an IRS Audit

At a pre-audit meeting, the Internal Revenue Service and Weyerhaeuser Company focused on the international audit process and agreed on improvements that should significantly reduce staff time for both. This article summarizes the process by which the improvements were developed, agreed to, and implemented.

BACKGROUND

The international portion of Weyerhaeuser Company's 1983 to 1985 U.S. tax audit took several months longer than the domestic examination to complete. This delayed closing the overall audit and had Weyerhaeuser management and IRS officials alike asking "why?" Although the International Examiner was based in San Francisco and the domestic examination conducted from Seattle, there was no inherent reason for the international segment to take so long. There was one unagreed technical issue, but this was identified early in the examination and did not appear to be the principal cause of delay. Much of the examination consisted of documentation of foreign tax credits and earnings and profits, and reviewing the technical aspects of Subpart F computations. The review of foreign source income, section 861 expense allocations, and DISC and FSC commissions was fairly routine.

Before completion of the audit, the IRS notified Weyerhaeuser that it was planning to assign an additional international examiner (IE) to Weyerhaeuser's next audit cycle. The new IE would be from Seattle and work under the supervision of a more senior IE from San Francisco. In conjunction with the pre-audit planning for the new audit, Weyerhaeuser and the IRS agreed to explore ideas for improving and expediting the international audit process.

In preparation for the meeting, Weyerhaeuser thoroughly reviewed the previous audit, including the scope of the examination, the time needed to gather information and respond, and the level of adjustments proposed. Most of what the company learned came as no surprise. But there were some revelations.

Weyerhaeuser knew that it was taking longer to prepare and respond to Information Document Requests (IDRs) than it would like, but was not sure why. On average, the company was responding in 129 days, whereas it generally considers 60 days to be a reasonable target. Two primary causes surfaced for the delay:

* The company was spending enormous amounts of

time documenting small withholding taxes on royalties

and other relatively small foreign tax credits.

The IRS and Weyerhaeuser agreed they both

were responsible for the disproportionate amount

of time spent on de minimis adjustments. Although

the IRS had requested documentation of

all foreign tax receipts, the company wanted all

adjustments made when the receipts were presented.

* Many of the IDRs were issued during the peak of

Weyerhaeuser's tax accrual...