The IRS has many challenges and some real opportunities in FY 2023 (October 1, 2022 to September 30, 2023) with the Inflation Reduction Act signed into law August 18, 2022. That law includes as part of the Act $80 billion and potentially 87,000 additional employees to the IRS over the next 10 years. A question arises as to what that means for the Engineering Program where IRS business valuers are located. This article takes a look at this question and provides some insights and recommendations for those working in this area. This includes business valuers, accountants, attorneys, and others that may have issues related to fair market value with the Internal Revenue Code
Why is the valuation area called the Engineering Program?
In 1913 with the 16th Amendment to the Constitution Congress ratified and established Congress’s right to impose a federal income tax of February 9, 1913[i]. Congress wasted no time with the first income tax return for a period from March 1, 1913 to December 31, 1913 due on March 1, 2014.[ii] That four page income tax return (including instructions) included deductions for among various categories:
“Amount representing a reasonable allowance for the exhaustion, wear, and tear of property arising out of its use or employment in the business, not to exceed, in the case of mines, 5 per cent of the gross value at the mine of the output for the year for which the computation is made, but no deduction shall be made for any amount of expense of restoring property or making good the exhaustion thereof, for which an allowance is or has been made.”[iii]
In today’s world elements in this commentary includes depreciation, depletion, and other expenses. The accountants at the IRS realized that the skill sets needed in these areas were outside of accounting. With that the IRS Engineering Program was established. Today this included all kinds of engineers, real property appraisers, business valuers, foresters, geologists, and others.
What about today?
The IRS is currently trying to hire 120 new hires in FY 2023 for the engineering program.
Fourteen have been specifically identified as financial analysts. These are business valuers being hired from outside of the IRS. The IRS also offers all of their engineering program employees the opportunity to take the NACVA business valuation course and to have the opportunity to work on business valuation issues. Last fall the IRS trained 79 employees in business valuation through the NACVA course. The IRS also hires valuation analysts. These are internal IRS employees from the accounting side that want to be trained in business valuation and focus in this area.
The Director of Engineering indicated in September that the IRS had 250 employees. Adding 120 employees in 2023 would increase their numbers to 370 without attrition. Of these approximately 200 (120 +79) will have less than 3 years’ experience. The IRS Engineering Program has about 30 analysts and managers as front line managers, territory managers (middle managers), and at the executive level. The IRS Engineering Program also has about a dozen support personnel. This would indicate approximately 328 (370-42) employees without attrition. Quite a few employees at the IRS are retirement eligible (about 50%). The Engineering Program may quite well have significant attrition given the new hires over the next two years. An estimate may be 50 leaving the IRS. That would leave approximately 278 (328-50) employees. With about 200 newer hires that leaves about 80 experienced technical employees. This means
about 30% of the technical employees will have more than 3 years of experience and about 70% will have 3 years of experience or less at the end of FY 2023.
What does this mean for you as a business valuer?
How to work with the IRS now
Write your report so that an estate and gift attorney or so that an IRS agent can follow and fully understand your report by reading through the narrative or reading your exhibits and charts. This will help you avoid a more detailed audit by an IRS business valuer. Should you be asked to assist with an audit and the IRS assign a financial analyst, valuation specialist, or engineer to the case with your appraisal how should you proceed?
Historically you have been taught not to advocate for your client, but to advocate for your position. In theory this is fine. In practical application, you should slow down, de-escalate yourself, approach the situation with a positive attitude and be there to help. Don’t simply state that something is in your report should a question arise. Rather take the time to further provide the source. For example, copy the source out of the text, or explain the original data source, various filters applied and what you ended up with as a result of your assumptions. Assume the IRS employee does not have access to the same information as you. Do not be arrogant. Do be humble and no matter what stay pleasant, professional, and helpful. You want to build trust. Know how to negotiate with the IRS.
The IRS agent and business valuer have a job to do. Go out of your way to listen. Answer the question asked, not the question you believe the auditors should have asked. Always be honest and transparent with what you have done and why. If you made a mistake admit it and work with the IRS to resolve the issue.
Realize that the IRS mission is to “Provide America’s taxpayer top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.” Some may believe their role is bring in money to the Treasury via adjustments or to apply methods based on their preferred methodology. If you can work this out with the IRS business valuer great. If not, you may work with your client to reach out to their engineering manager. Keep in mind that the ultimate decision maker on the case is the agent or estate tax attorney’s manager. You may not be involved in the final decision making. Often after you and the IRS business valuer (with or without their manager) have met the ultimate client’s representative (CPA or attorney) may have additional discussions without you there. These discussions may be with the agent or estate tax attorney and/or with their manager.
Keep a positive attitude. Be there to help. Be transparent. Think what you knew when you started in this profession and your first reports. Compare that to the quality of your reports today. Keep that in mind when you are working with the IRS today. Be humble and work collaboratively with the IRS representative. Good Luck.