In this article from the Harvard Law School Program on Negotiation entitled Value Creation in Negotiation: Build on your differences in Integrative negotiations Katie Shock offers three major insights. Rewording the title, I am offering the following instead “How to Build Value into Negotiations with Multiple Issues”. In her article Katie Shock offer these three major insights:
1. Capitalize on differences
2. Ask questions and share information
3. Negotiate multiple issues simultaneously
All three insights are on point, but today I am going to focus on the third point and share an example that a client of mine had with the IRS.
When working with the IRS on an audit generally there are multiple issues. Some of the issues are straight forward and are easily agreed to by the taxpayer’s representative. Others are grayer in nature and may requirement judgment on each of the parties. Still others may or may not be issues, but could be explored by the IRS auditor, but at this point the auditor has not raised the issue. This may be the auditor’s way of presenting to the taxpayer’s representative that the auditor is not out for the last dollar on the examination, and wants to be reasonable, but is expecting the taxpayer to take corrective action on future returns. This may also be because the auditor does not realize the potential issue exists.
Assisting aclinets, all of these situations were in play. Clearly, the auditor asked for initial information through a series of Information Document Requests (IDRs) of my client. The auditor could have easily made several proposed adjustments on several issues, but declined to explore some of those issues further. Why? My client went out of his way to be upfront, honest, and straightforward on each issue raised. My client also indicated these were issues that he would take corrective actions on with future tax years. My client indicated that he would improve voluntary compliance in the future. My client also asked the IRS to follow the Large Business and International (LB&I) division directive on taxpayer interactions even though my client was not in LB&I (assets over $10 M) and was in another division of the IRS known as Small Business Self Employed (SBSE) (assets $10 M or less). The SBSE division has no guidance to its employees regarding IDR’s. When the agent was educated and considered the LB&I directive she was receptive towards using this on the audit. This helped alleviate many other potential concerns, because a framework was agreed to ahead of time to discuss preliminary IDRs and preliminary proposed adjustments up front before being issued.
As proposed adjustments accumulated, my client indicated that in some instances he preliminarily agreed with them and in other instances my client indicated he would consider them once all proposed adjustments had been received. Toward the end of the audit there were a dozen adjustments proposed of which he tentatively agreed to nine and the client wanted to further discuss three. For one of the three remaining issues the agent had involved a specialist that the agent thought should be dropped, but she was not sure how to do that since a specialist was involved.
This is where point three from above comes into play. I suggested to my client that my client propose that she discuss the specialist issue with her manager. She too believed the issue to be weak on the IRS’ part and that it was not necessarily material to the audit. My client suggested as a multiple issues settlement that the taxpayer:
1. Accept the nine issues tentatively agreed to previously
2. Accept the one issue the agent had suggested 60-40 and the client was at 80-20
3. Split the difference on the one issue the agent was at 70-30 and my client was at 50-50 to 60-40
4. The IRS drop the specialist issue
5. My client would take corrective actions on three areas going forward
By doing so the case could be agreed and closed within 30 days. Without an agreement with this proposal, the specialist would not complete his work for at least 90 days. The agent concurred with the client that the issue was strong for the taxpayer and would likely not be material relative to the entire audit.
She agreed to discuss this with her manager. The manager reviewed through all of the information associated with the adjustments, concurred that this taxpayer had been very cooperative and would make changes in the future to enhance voluntary compliance, that this specialist issue was an undue burden on the taxpayer, and in the end the agent and manager agreed to this reasonable proposal to close the audit out sooner.
It is important to develop a good relationship, listen to the other party, educate the other party, and negotiate multiple issues simultaneously as was the case here. It is also important to know when to and how to elevate to an appropriate party as was the case in this instance.
It is likely that this taxpayer will have the return screened about two years from now given this audit. As such the taxpayer will need to make the corrective actions agreed to in the follow up years. If this takes place the chances of an audit are reduced and if audited and the changes were made the scope of the audit would be likely reduced. Keep this in mind relative to carrying out longer term actions as well.
Michael Gregory, ASA, CVA, MBA is an expert in conflict resolution dedicated to making individuals, organizations, thought-leading entrepreneurs and executives more successful. Michael’s books, including his NEW BOOK Peaceful Resolutions: A 60-step illustrated guide to conflict resolution are available at this link. Free resources are available online at www.mikegreg.com. Check out the blog. Contact Mike directly at mg@mikegreg.com or call (651) 633-5311.