The last two weeks I offered ideas on the Top Strategies for Negotiation Part One and Part Two. This article is one of a series of five articles over the past five months. The focus of this article is entirely with the IRS on a technical issue. Having worked for the IRS for 28 years at all levels from specialist to executive, having brought mediation and mediation training to the IRS Large Business and International Division and trained some 2,500 employees in the techniques, having been involved with over 2,500 mediations from boards of directors with fortune 100 companies on billion dollar issues, to the IRS on valuation issues or issues on research credit from thousands of dollars to a billion dollars, I wanted to offer you some insights on how to negotiate with the IRS on examination on these types of issues. Similar techniques can be used at Appeals and with IRS Counsel, but the emphasis there is on hazards of litigation. There is a different emphasis on examination that focuses on factual development. This commentary will introduce you to factual issues and negotiations on examination where issues are discussed and may be resolved factually.
Begin with the end in mind
Know how the IRS writes a report. An IRS report includes facts, law, taxpayer position, IRS position, and a conclusion. The IRS agent begins with the end in mind and from the beginning works on writing up a report that looks like this. What can you do to help the IRS agent, specialist, valuer, or appraiser (agent)?
Develop a good working relationship if at all possible. Know who you are working with and their manager. Ask for email addresses, names, and phone numbers. This includes both the agent and agent manager and the specialist and their manager if there are specialists assigned to the case. This may include an appraiser, engineer, valuer, and their engineering manager. Why? You want to research them on Google, LinkedIn, Facebook, and other sources. You want to network with your sources and find all you can about each of them. You want to work with them to develop an honest, trusting, working relationship based on similar interests at work and outside of work. Relationships matter and, in this case, you want to go out of your way to demonstrate that you are reasonable, authentic, and genuinely want to work together for a timely closure. This will allow you to know and apply one of the five most common negotiation styles on negotiation.
Information Document Requests (IDR’s)
You will receive a request for information. Ask the IRS agent to please follow the Internal Revenue Manual (IRM) 184.108.40.206.1 (09-23-2021) on General IDR Procedures and look to Exhibit 4.46.4-1 for requirements for issuing an IDR. This is the manual section for the Large Business and International Division (assets over $10 M), but when brought up to other agents my experience is that they are open to taking this approach. It has several distinct advantages including some of the following points to be completed by the agent:
- Discuss the issue related to the IDR with the taxpayer.
- Discuss how the information requested is related to the issue under consideration and why it is necessary.
- After this consultation with the taxpayer, determine what information will ultimately be requested in the IDR.
- 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. Once this initial IDR has been issued, subsequent IDRs must state an issue to be in compliance with this requirement.
- Only one issue should be addressed on each IDR.
- Utilize numbers or letters on the IDR for clarity.
- Ensure that the IDR is written using clear and concise language.
- Ensure that the IDR is customized to the taxpayer or industry.
- Provide a draft of the IDR and discuss its contents with the taxpayer. Generally, this process should be completed within 10 business days.
- After this discussion is complete, determine a reasonable timeframe for a response to the IDR with the taxpayer.
- If agreement on a response date cannot be reached, the examiner or specialist will set a reasonable response date for the IDR.
- When determining the response date, ensure that the examiner or specialist commits to a date by which the IDR response will be reviewed, and a response provided to the taxpayer on whether the information received satisfies the IDR. Note this date on the IDR issued to the taxpayer.
As the audit progresses should there be any preliminary proposed adjustments ask that they be attached to an IDR instead of a Proposed Adjustment form. Proposed Adjustments once officially presented starts a clock ticking with specific time frames for actions. You can avoid that by having discussions around preliminary proposed adjustments attached to an IDR. When these have been thoroughly vented, they may be presented as official Proposed Adjustments.
On exam everything is factual. For that reason, always be honest. Never, lie, but you do not have to expound on your answer and provide everything you know. Use your common sense. Answer the question asked, not what you think should have been asked. Sometimes you want to point out the ramification of a question being asked to point out the burden associated with the request to restructure the request to something not as obtrusive.
Discussions with the IRS on issues
Know the facts, know the issues, know the emotion around the issue, and understand interests. Carry out this analysis both from your perspective and what you perceive to be the IRS perspective. Keep in mind if working with various parties at the IRS. Most of the time they do not have a uniform position. Each person has their own perspective. Understanding the emotion and managing your emotions around various issues can be key to resolution. Recognize that some issues may be far more important than others.
When presenting a factual issue come prepared with five alternatives in your tool box. These alternatives are:
- Your position computation and why.
- Their position computation and why.
- Three positions in between these two extremes with your largest outlier being your Best Alternative To a Negotiated Agreement (BATNA) so that you work together to work towards an agreed upon factually developed number.
Interests by the IRS
The IRS agent would prefer to have an agreed case. An agreed case has an abbreviated report and is much easier to close out of the group. The agent and manager are evaluated on closures. That is, they are not evaluated on dollars or dollars per hour. They are evaluated on how many cases they close with different codes based on how large the asset size is by taxpayer. Work with the IRS to identify their interests in your issues and the case in general.
Develop a positive working relationship. Work the IDR system constructively with the agent. Be positive, professional, and timely with all of your actions. Document the same regarding the agent. Keep good records, this could come in handy in some instances. Be gentle on the people and tough on the issues. Focus on interests. Behind every position is at least one interest and interest hold the seeds of to a solution. If the case is unagreed, do not be afraid to take it up with management. If the issue is still unagreed disagree well. You will be off to Appeals. Good luck. Come back to me with any questions or concerns. Let me know what you think.
About the author
Mike Gregory is a professional speaker, an author, and a mediator. You may contact Mike directly at email@example.com and at (651) 633-5311. Mike has written 12 books (and co-authored two others) including his latest book, The Collaboration Effect: Overcoming Your Conflicts, and The Servant Manager, Business Valuations and the IRS, and Peaceful Resolutions that you may find helpful. [Michael Gregory, ASA, CVA, MBA, Qualified Mediator with the Minnesota Supreme Court]