The "new" IRS audits.

• Author: Ely, Mark H.

Editor's note: Mr. Ely is former chair of the AICPA Tax Division's Relations with the IRS Committee. Messrs. Taylor, turner and Parker are members of the IRS Practice and Procedure Committee.

The IRS realizes that the "old way" of conducting its audits will be changed forever once it fully realizes two new endeavors--the National Research Program (NRP) and the Small Business/Self-Employed Division (SBSE) audit reengineering project. The NRP replaces the notorious Taxpayer Compliance Measurement Program (TCPM). To meet the demands of these new compliance methods, both practitioners and the Service will have to be ready to make changes.

Reengineering the Audit Process

The IRS had recognized that rapid improvements in work practices in the private sector were far ahead of its methods of auditing returns. 111 2001, it began an ambitious examination reingineering project to completely rethink, redesign and modernize how it conducts audits. This was not only a good idea, but also a necessity; the IRS had not undertaken such a course of action since the early 1950s, when it established the current procedures.

To evaluate the project's concepts, it initiated a pilot program in October 2002 in New York. Although the pilot was supposed to be completed in March 2003, it is still ongoing. When it is completed, the Service will analyze the results and make adjustments before the SBSE rolls it out nationally. The overhaul. With the help of Booz Allen Hamilton, the strategy and technology global consulting firm, the IRS initially analyzed the leading practices of over 200 organizations from the public and private sectors and determined that it needed to redesign four areas:

* Case management;

* Inventory control;

* Risk-based auditing; and

* Standardized practices.

It also discovered that the following processes required improvement:

* Examination planning;

* Standardization of policies and procedures;

* Communications with taxpayers;

* Preplanning for the examination; and

* Manager involvement.

This analysis led to "key concepts" that the IRS will incorporate into the "new" audit process:

1. Return classification: This will be coordinated at the national level; by the time a case is assigned to an examiner, the audit issues will already have been designated by the classification function (CF).

2. Examination scope: The CF will designate specifically the issues the examiner will have to audit.

3. Manager involvement: Managers will be proactive, getting...