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In an experiment by neuroscientists participants were given $10 dollars and were told they needed to share the amount with another party. If the other party accepted the offer they could keep the difference. This resulted in some interesting findings that were found to tie directly into negotiations. The commentary that follows could be used in any negotiation including those with the IRS and in other venues where one party seems to have an upper hand.
In an article expanding on the experiment presented above it turns out that if the other party deems the offer as fair, various parts of the brain lit up and the risk of acceptance is very high. Say the offer was for $4 of the $10. On the other hand if the other party views the offer as being very unfair (say the offer was for $1) then various parts of the brain lit up consistent with conflict, disgust, and contempt.
So what are the practical implications of this in a negotiation say with the IRS? Say you have a business valuation that states the company is worth $10 million and an IRS estate tax attorney believes the company is worth $15 million. With a 40% estate tax rate that would mean the taxpayer would need to pay $2 million (($15 – 10)*.0.40 ) more in tax. After meeting with the IRS estate tax attorney, developing a relationship, listening to his or her concerns and upon a review of the facts and law it appears a “reasonable person” might believe the company is worth $12 million. A case could be made that the company is actually worth less than $12 million and perhaps even a refund would be appropriate to the taxpayer. What should you do? It depends. How strong is the relationship? What is the probability of an acceptance by the IRS to your offer of $12 million or something less? What are the ramifications of the offer not being accepted?
Learning from the neuroscientists, if we want an amenable agreement with the IRS, and timely closure is important, then the $12 million offer resulting in $800 thousand ((12 – 10)*0.40) in additional tax may make sense. It is important to develop a series of alternatives, determine the impacts of the alternatives and evaluate those impacts to make a proposal that will not be received negatively, and yet represent your interests. Once you have developed the alternatives, apply a probability to each. So how do you determine what might be “reasonable”?
Taking another lesson from neuroscience David Rock presents the SCARF model which stands for Status, Certainty, Autonomy, Relatedness and Fairness. The more equal each of the SCARF components is to each of the parties the stronger the relationship. Conversely the greater the disparity the weaker the relationship. This point is that we need to develop a good working relationship with the other party. If we do and the offer presented is deemed to be fair the probability of success is greatly enhanced.
With the IRS stretched thin, more cases are geographically dispersed from the taxpayer location resulting in less face to face interactions. If the case is unagreed on exam and proceeds to Appeals, the Appeals division is beginning to experiment with virtual Appeals. This can allow for a virtual face to face option without physically being in the same location. If it is not possible to physically be in the same location this may be the next best alternative. IRS exam does not have this as an alternative. So what do you do?
If the dollar amounts are significant as in this case it may very well make sense for the taxpayer’s attorney and team (business valuer if an amenable personality and disclosure witness[i]) to meet face to face with the exam team and if necessary with the Appeals officer. Having acted as a disclosure witness on numerous occasions given my experience at the IRS, I have found that by not being an advocate and instead by providing background and education to the IRS, this helps develop a positive relationship and enhance the probability of success. By developing a positive professional relationship with the IRS representative(s) it may be possible to develop a meeting of the minds relative to the issue. Take these lesson from neuroscience and the IRS to your next negotiation and you may be surprised at the results.
Michael Gregory, NSA, ASA, CVA, MBA, Qualified Mediator with the Minnesota Supreme Court is an international speaker that helps organizations resolve conflict and negotiate winning solutions. On point resources are available online at www.mikegreg.com and check out the blog. Mike may be contacted directly at firstname.lastname@example.org or at (651) 633-5311.
[i] Internal Revenue Manual 220.127.116.11.4.2.1 (04-20-2010) Witness and Revenue Procedure 68-29 https://www.irs.gov/irm/part4/irm_04-011-055.html
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, NSA, MBA, Qualified Mediator with the Minnesota Supreme Court]