Streamlining the audit process responses of TEI members to LMSB survey questions: May 24, 2002.

On May 24, 2002, the Institute provided the Internal Revenue Service with the following responses to a recent survey by the Large and Mid-Sized Business Division on ways in which to streamline the audit process. The responses were primarily provided by members of the Institute's IRS Administrative Affairs Committee, whose chair is David L. Bernard of the Kimberly-Clark Corporation.

1. In order to accelerate the examination process in relation to rollover issues (timing issues that affect multiple examination years), would you be willing to:

   a. compute rollover issue adjustments and present them to the team for incorporation into the Revenue Agents Report,

   b. amend your return for rollover issues, or

   c. could you suggest more efficient ways of handling rollover issues? If so please explain.

   Response #1: We find that the most expedient way to handle rollover issues is to compute the rollover issue adjustments and present them to the team for incorporation into the RAR. This is our current practice and it works well for us.

   If you filed an amended return instead, there are issues such as:

   i. More time may be required to prepare an amended tax return vs. computing the rollover adjustments. Why prepare an amended tax return when you know that the rollover adjustments are going to be incorporated into the following years' RAR? The amended return would most likely be meaningless because of the additional adjustments that the IRS may find upon audit of the following years.

   ii. Expediency and efficiency would suffer.

   Response #2: At the completion of each cycle, we prepare a spreadsheet showing the run-off of the rollover by year. This can be used by the team for each subsequent year until we catch up to the current filing year and incorporate the remaining agreed adjustments into the currently filed return. This minimizes the reconciliations in subsequent years and is appreciated by the team.

   An amended return would create unnecessary work.

   Response #3: I would choose a. I'm assuming that this refers to agreed issues that have a correlative impact in future years. We do not want to file an amended return.

   Response #4: On our recent examinations, we have not considered a Form 5701 to be complete until the adjustment is computed through any rollover period. We learned the hard way that it is very inefficient to revisit these adjustments later. Unless the issues are very large, they become exam adjustments in future cycles (we are also very current on our exam). If there were several intervening years and the amount were material, we would amend the return.

   Another idea (which we only succeeded in doing once) is to calculate the net present value of the adjustment and put it all into the earliest year.

   Response #5:

   a. We now compute rollover issue adjustments and present them to the team for incorporation into the Revenue Agents Report as part of the requested audit adjustments given to IRS at the start of an audit (for agreed audit adjustments only);

   b. We do not want to amend the return for rollover issues. This is too formal a process for an administrative matter that is easily handled as part of the audit;

   c. For agreed rollover items, subsequent year roll-out adjustments should be noted on the Form 5701, so that the taxpayer can incorporate them into subsequent tax returns, minimizing future audit adjustments.

   Response #6: We work with the IRS in preparing a rollover schedule that we include in the RAR. We incorporate the adjustments into the return for rollover years as they are prepared. A primary benefit of the currency of our audit is that rollover adjustments are non-existent--as soon as an issue is identified, it is reflected accordingly in future returns.

   Response #7: I agree with the previous comments that the most expedient way of handling rollover issues is to compute the rollover adjustments and give them to the IRS at the beginning of the audit for incorporation into the RAR. Many good reasons were previously given as to why amended returns are not the favored choice. The primary reason for avoiding amended returns is that amended federal returns require taxpayers to file amended state returns.

   Many states will access penalties for the failure to file amended returns, while others will deny refunds because the failure to file amended returns causes statutes to expire for refund claims.

   Response #8: To accelerate the examination process in relation to rollover issues, I would be willing to compute rollover issues adjustments and present them to the team for incorporation into the Revenue Agents Report. I do not want to file amended returns since this would require filing amended state tax returns, which would only need to be amended again for other issues raised on the federal examination of those years.

2. In order to accelerate the examination process in relation to recurring issues (technical issues that appear in multiple years), would you be willing to:

   a. disclose recurring issues and compute the adjustments so the team could incorporate them into the Revenue Agents Report

   b. amend your return for recurring issues, or

   c. could you suggest more efficient ways of handling recurring issues? If so, please explain.

   Response #1: Assuming that we intend to give the IRS the information for the recurring issues, I would again suggest that we disclose the recurring issues and compute the adjustment so that the team could incorporate the adjustments into the RAR for the same reasons mentioned in the Response #1 to question #1, above.

   ...