For those that follow this blog or subscribe to my monthly newsletter (4,200), you know that I offer information related to conflict resolution, neuroscience and leadership, and tax issues of interest. Over the last 9 months I have been involved with several cases with the IRS that have ended in success and I wanted to share with you some key points in each. I am using a hypothetical example
In this case the client knew they potentially had a several million dollar tax issue with the IRS were just selected for audit and they were looking for assistance. I was engaged by a law firm representing the client to assist with this matter. The taxpayer wanted to do the right thing relative to working with the IRS, minimize the tax impact and make changes going forward.
From the very beginning, I worked with the taxpayer’s point person on the audit to develop a very positive good working relationship with the IRS agent. We researched her on social media and made other inquiries to learn more about her before responding to her. We reviewed the Large Business and International Division memorandum on Information Document Requests (IDR’s) and wanted to make sure that protocol was used with all IDRs. Key points here were:
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.
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.
This was critical. We discussed all proposed IDR’s, how to respond, what information to supply, how to supply it (organized) and when to supply it. In all instances the taxpayer knew how long it would take to respond and always under promised and over delivered. That is they responded faster than the agreed to date (usually two weeks). The taxpayer also asked that the agent respond within two weeks and the agent agreed to this stating it her audit plan. Throughout the audit the taxpayer always made the time frame. The agent missed a few and these were documented in case needed for discussion with the manager, but this was not necessary.
Understand that an agent can only be late once during an annual rating period with all cases in inventory to be fully successfully rated on two performance aspects associated with two of the five job elements associated with an annual review. If this had become an issue, the taxpayer was prepared to ask for a meeting with the agent and her supervisor, but this was not needed. In my book How to Work with the IRS, Second edition, chapter 7 (Using the IRS Evaluation Process to Your Advantage)on how IRS employees are rated was added so that you could work with the IRS agent and reinforce good work and note when employees were not following proper protocol on how they are rated in case a meeting was necessary with the manager to address concerns on the case.
In my experience about 5% of IRS employees are on an opportunity period for poor performance and 10% are working with the Employee Assistance Program regarding some personal matters that require counselling at any given time. These employees may not be as focused on their work under these circumstances. This can negatively impact your audit.
In these cases I worked with the client to honestly answer questions agreed to in writing based on the draft IDR discussions that led to final IDR’s submitted to the client. The taxpayer worked very hard to develop a very positive working environment with the agent always engaging in small talk and discussing personal situations relating to each to further enhance trust and understanding. The responses were not necessarily totally transparent, so as not to give rise to other issues or concerns, but were always honestly answered.
As proposed adjustments came forward these too were reviewed very carefully and responses were carefully crafted again using the logic of being honest in all responses. The responses were carefully crafted to address the agents concerns, and to minimize current and future risks from the perspective of the taxpayer. This was very important. By being strategic in the way responses were crafted this minimized other potential concerns or misunderstandings.
Trust was critical between the parties. The taxpayer could clearly state to the IRS that some areas of inquiry had little or no potential and this was true. This was tested by the agent and found to be true. This minimized the time that could have been wasted on the audit and allowed the audit to continue up to the planned completion date. Given the work done by the taxpayer with the agent, the cases actually closed two months earlier than anticipated with the original agent’s audit plan.
Keys to success were
· developing an initial good working relationship with the agent and ensuring a good understanding of what was being requested and what would be provided by when;
· listening effectively to ensure good honest communication;
· educating the agent on areas of interest and pointing out areas that truly were dead ends and letting the agent sample the area with a judgment sample to verify honesty;
· working effectively with the agent to address areas of adjustment and tentatively agreeing to adjustments, but holding out until all adjustments were provided by the agent to discuss all of them at one time;
· having an honesty discussion on all proposed adjustment to resolve the case in its entirety.
Michael Gregory, ASA, CVA, MBA is an expert in conflict resolution dedicated to making 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 http://mikegreg.com/books. Free resources are available online at www.mikegreg.com. Check out the blog. Contact Mike directly at email@example.com or call (651) 633-5311.
About the author
Mike Gregory is a professional speaker, an author, and a mediator. You may contact Mike directly at firstname.lastname@example.org 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, NSA, MBA, Qualified Mediator with the Minnesota Supreme Court]