Internal Revenue Service and Tax Executives Institute large case audit program best practices.

• Author: Brock, Robert W.

Executive Summary

The Illinois District of the Internal Revenue Service and the Chicago Chapter of Tax Executives Institute have taken an in-depth look at the Coordinated Examination Program as it exists in the Illinois District. The goal was to identify the Best Practices that both the IRS and the Taxpayer community were utilizing in conducting successful large case examinations in the District.

The IRS Team, under the direction of District Director Robert Brock, was composed of Larry Barzyk, CEP Branch Chief; Frank Rodjius, CEP Case Manager; Howard Martin, International Manager; Mark Janus, Engineering Manager; and, Jack Aurora, Industry Economist. The TEI Team under the direction of Chicago Chapter President Reginald G. Young, Jr. of The Quaker Oats Company was composed of Kurt Meier of Morton International, Inc.; Theodore D. Novak of Tribune Company; Jack L. Simmons of R.R. Donnelly & Sons Company; and Paul J. Schaffhausen of McDonald's Corporation. The combined large case audit experience of both teams is more than anyone cared to compile.

The resulting work is divided into six sections, covering the phases of most large case audits. The common thread that runs throughout each of these sections is the commitment by both sides to develop and to work in an environment of professional respect and ongoing communication. There is no "silver bullet" or "magic pill" contained in these pages. What is here is a compilation of some of the best ideas that have been utilized by Tax Directors and Case Managers on the audits of some of the largest corporations in America. Some readers on both sides of the audit process may view these suggestions as fantasy world instead of real world. Trust us! These are proven techniques that work and will result in a more efficient and less time consuming audit -- an important consideration for both sides in an era of constrained resources.

Each taxpayer is unique and both sides must use maximum flexibility to select the best approach to solve audit problems. These techniques were developed to solve real problems on real audits and resulted from the willingness of both sides to take a risk and try something new. The next step is yours. Try implementing some or all of these approaches on your next audit. Better yet, try something that we haven't thought of!

Robert W. Brock District Director-Illinois District

Reginald G. Young, Jr. President-TEI Chicago Chapter

1. Cooperative Effort & Professional Conduct

   Introduction: The audit process is inherently adversarial. This can often create barriers to open communication, resulting in delays and wasted effort unless both sides work at building a strong, professional working relationship. Both the taxpayer and the IRS have a common goal of completing the audit in a fair, timely, and efficient manner. Accomplishment of this common goal requires open communication, trust, and professional conduct between the audit teams on both sides.

   Here are some suggested action items that can help to build the relationship to achieve the common goals:

   Orientation Meeting: At some point early in the audit, ideally during "Step 1" of the Planning Process, it can be helpful to hold an orientation meeting. This is especially appropriate when a new examination team is assigned to a taxpayer's audit. This is an informal meeting, separate and apart from the Opening Conference, and may actually take place prior to the formal Opening Conference. At the orientation meeting, both sides should introduce the members of their audit teams and clearly define the responsibilities of each team member.

   The taxpayer should provide a brief overview of the industry, the company's structure, financial performance, accounting records and other information that would facilitate the audit process. The IRS should have analyzed the historical and planning files prior to the orientation meeting and should be prepared to discuss the examination's intended areas of emphasis identified to date.

   Planning Process: Open communication and a joint planning effort by the parties are essential elements of the professional conduct of the audit. This helps in building cooperation between two organizations with adversarial, but often overlapping, roles.

   The taxpayer should be invited to attend one or more of the examination planning meetings. The agenda should include an open discussion of potential issues and compliance checks that can be expected to arise during the audit. This will enable both parties to plan the necessary resources that will be required to conduct the audit efficiently. The examination team and the taxpayer should discuss the type and scope of issues requiring specialists. Taxpayer input can be very useful in the identification of specialists' areas and also in building the cooperative effort needed to conduct a good audit. The specialists and their managers should be involved in the planning of the audit and should be present at the Opening Conference where schedules permit.

   If the taxpayer is expected to have any potential Coordinated Issues, the Industry Specialist should be invited by the Case Manager to discuss them with the taxpayer.

   The taxpayer should alert the examination team to all post-return adjustments that will effect the years under audit. Claims for refund or carrybacks to the audit years should also be discussed.

   The examination team should complete the Audit Plan in a timely manner and a full copy of the plan must be given to the taxpayer when requested. Any changes to the audit plan should be discussed with the taxpayer.

   Best Practice: Schedule a follow-up meeting to go over the Audit Plan once the taxpayer has had a chance to review it.

   Work Papers: Complete workpapers can help in the decision-making process of the examination team and avoid unnecessary IDRs. The taxpayer should provide the Schedule M workpapers and other basic tax return information to the examination team at the beginning of the audit. The examination team should completely review the workpapers before issuing any IDRs to determine whether the information being requested is already contained in the workpapers.

   New Issues: Significant new issues that arise during the audit should be discussed with the taxpayer as soon as they are identified and prior to any extensive audit work.

   Issue Resolution: Issues that can be resolved should be resolved as quickly as possible. When an issue cannot be resolved, the parties should agree to disagree and move on with the audit.

   Personality Conflicts: Personality conflicts should be identified and addressed as soon as possible in a professional manner. If the...