New IRS initiative - compliance assurance process (real-time audit).

• Author: Dougherty, James A.

Over the past year, the IRS's Large and Mid-Size Business Division (LMSB) has been working on improving the traditional audit process by reducing examination cycle time the time from the return filing to the close of the examination. The average cycle time for LMSB taxpayers is 60 months. This long period potentially presents the IRS with significant problems, including a delay in identifying emerging issues.

In mid-2004, the LMSB unveiled a new approach to compliance audits, which, ideally, will shorten cycle time. Known as the compliance assurance process (CAP), a pilot is scheduled for 2005 returns. It will encompass approximately 20-25 corporate volunteers and center initially on publicly traded companies.

While many details still need to be worked out, CAP's objective is to assist taxpayers in settling issues before filing a return, by conducting "real time" audits. That will essentially eliminate the need for post-filing examinations.These audits are expected to (1) address issues throughout the year, (2) potentially reduce prolonged litigation and (3) increase audit currency.

How CAP Works

The IRS will assign an account coordinator to the taxpayer, to be the single point of contact for all tax matters. Throughout the tax year, the coordinator will work with the taxpayer to understand the taxpayer's business and identify and resolve compliance issues arising from transactions that materially affect income tax liability. Once the taxpayer determines how it will report a transaction for tax purposes, the IRS review the proposed treatment and determine whether it is appropriate. All audit issues will require completion of Form 5701, Notice of Proposed Adjustments. If the IRS and the taxpayer reach an agreement, both will execute Form 906, Closing Agreement. If they cannot agree, Fast Track Settlement will be available to the taxpayer; see IR 2003-44.

Under CAP, the taxpayer's and the Service's roles and responsibilities are documented using a memorandum of understanding (MOU). The MOU discusses why open and honest communication is important to the program's success. The two parties will jointly plan the scope of the CAP review and consider materiality thresholds, to determine the issues to be reviewed, including, but not limited to, permanent, short-term and long-term adjustments. However, the IRS will ultimately decide which items to audit.

Notwithstanding the materiality thresholds and issue identification procedures, it will also...