Begin an Audit with the IRS with Collaboration

Man in suit pointing at clear screen where the button he is pointing at says audit

When you think of collaboration quite likely the IRS does not come to mind. Rather when you hear the term IRS you are not thinking of working together. Instead the thought of an IRS audit likely brings forth thoughts of anxiety, I don’t have time for this, why me and now what? With that in mind I thought explaining some basic tips after receiving an audit letter from the IRS may help. Especially as these tips relate to The Collaboration Effect. After all the IRS are people too.

 

Listening and the IRS

 

At one point early in my career I took a course in listening to enhance my skills. The instructor came up with a list of 10 words or phrases to never use in a general conversation for example when meeting someone new or at a party. Number one on the list was “IRS”. Why, it is a conversation stopper and the term brings forth images that are unpleasant. I get it. However, having worked there for 28 years at all levels of management, I also know they have a job to do.

Treating them with respect and working with an IRS examiner is key to working towards closure.

 

What to do when you receive “that letter” from the IRS?

 

The IRS does not want an audit to be traumatic either. Here are some educational materials from the IRS                that you may find helpful. They answer questions like: Why am I am being selected? How am I notified? How will the IRS conduct my audit? And many more questions.

The important thing to remember is that the IRS will only notify you by mail.

When you receive a letter from the IRS indicating you will be audited, don’t ignore it. Don’t just throw it away. That will not stop the audit. Rather read it. Do what it says.

The audit letter for individuals will have your specific tax information identified, explain what information is requested, what to expect, who may come to the examination, and what will happen.

The audit letter for corporations are more complex. Often a “package audit” is sent to the taxpayer requesting a meeting and certain information to be provided at that meeting. For example, here are the requirements for a package audit for a tax exempt entity from the IRS Internal Revenue Manual. The IRS has 14 divisions and each has its own procedures. For most corporate audits the divisions involved are the Small Business Self Employed (SBSE) division for entities with assets of $10 million or less and the Large Business and International (LB&I) division for entities with assets over $10 million. Each has its own procedures and culture.

 

Requests for information

 

The IRS uses an Information Document Request (IDR) form 4564 to request information. In the LB&I division they have a 12-step process for the application of form 4564 as outlined in this memorandum. By comparison SBSE has no specific guidance. As a matter of policy if an audit letter is received from an SBSE agent it may very well be a good idea to bring the LB&I memorandum to the attention of the SBSE agent at your first meeting. In my own personal experience, no SBSE agent including the agents in the Estate and Gift (E&G) tax program has ever turned down this suggestion when presented up front. Why is this a good suggestion?

In SBSE the agents often request information. They receive that information. They propose an adjustment to the taxpayer. The taxpayer can accept the adjustment and pay it or go forward unagreed to the appeals division. That is one efficient approach by the IRS, but the taxpayer may wonder what just happened. Why couldn’t I explain more to the IRS?

By comparison,

in the Large Business and International (LB&I ) division the directive in part requires several additional steps to ensure good communication.

For example:

  1. Discuss the issue related to the IDR with the taxpayer.
  2. Discuss how the information requested is related to the issue under consideration and why it is necessary.
  3. After this consultation with the taxpayer, determine what information will ultimately be requested in the IDR.
  4. Ensure the IDR clearly states the issue that is being considered and that the IDR only requests information relevant to the stated issue. An IDR issued at the beginning of an examination that requests basic books and records and general information about a taxpayer’s business is not subject to this requirement 4. Once this initial IDR has been issued, subsequent IDRs must state an issue in compliance with this requirement 4.
  5. Prepare one IDR for each issue.
  6. Utilize numbers or letters on the IDR for clarity.
  7. Ensure that the IDR is written using clear and concise language.
  8. Ensure that the IDR is customized to the taxpayer or industry
  9. Provide a draft of the IDR and discuss its contents with the taxpayer. Generally, this process should be completed within 10 business days (KEEP IN MIND THIS IS NEGOTIABLE)
  10. After this discussion is complete, determine with the taxpayer a reasonable timeframe for a response to the IDR.
  11. If agreement on a response date cannot be reached, the examiner or specialist will set a reasonable response date for the IDR.
  12. When determining the response date, ensure that the examiner or specialist commits to a date by which the IDR will be reviewed and a response provided to the taxpayer on whether the information received satisfies the IDR. Note this date on the IDR

By using this approach this significantly increases communication, clarity, trust and understanding. This also process provides for better relationships as informal conversation learning about each other further enhances engagement.

Make use of The Collaboration Effect® from the very beginning to initiate a good connecting relationship by learning all you can about the IRS agent on social media and networking, listening actively to ensure understanding and then educating judiciously to help the IRS agent to work towards closure.

 

How to apply The Collaboration Effect®

 

Apply The Collaboration Effect®.  From the very beginning when you receive the written IRS notification letter of an audit,

be positive, professional and calm the fire.

When you know who is working the case at the IRS learn all you can about the person to try and build a connecting relationship. Once you have the name and contact information of the agent and the agent’s manager, learn all you can about them on social media or with your contacts. When you first meet with the agent ask if you can share information about each other to help develop trust. You have nothing to lose. Try to find areas where you can relate to each other. For example, education, growing up, location, hobbies, interests, backgrounds, etc. When the IRS person speaks really listen. Be more focused on being interested than being interesting. Ask lots of questions. Don’t argue. Determine where he or she is coming from and why. Really try to understand. Summarize what you heard them say even better than they said it themselves.

Once you have fully listened to the IRS representative, work with the IRS person to educate judiciously in a way that makes sense to them. Don’t make assumptions. Go through processes step by step. Take the time to make sure you are being understood. Ask questions to make sure there is an understanding on what you are saying. This will help you build bridges to negotiate closure.

There you have it. This is how to begin an audit with the IRS. Good luck. If I can help simply give me a call.

 

About the author

 

Mike is a professional speaker, mediator/negotiator that helps clients resolve issues and be more productive as a conflict resolution expert with the IRS and others. Is conflict blocking your results? You may contact Mike directly at mg@mikegreg.com and at (651) 633-5311. Mike has written 11 books including, The Servant Manager, Business Valuations and the IRS, and Peaceful Resolutions that you may find helpful. [Michael Gregory, ASA, CVA, NSA, MBA, Qualified Mediator with the Minnesota Supreme Court]