Reading an article from the Harvard Law School Program on Negotiations entitled “Four Strategies for Making Concessions”, I thought of three recent cases where I have coached clients related to issues associated with IRS audits and thought I would share insights with you related to this article. The authors suggest:
- Label your concessions (clarify what was conceded, emphasize benefits to the other side, don’t give up and be reasonable – consider conceding slowly);
- Demand and define reciprocity (diplomatically - label the concession, tactfully request reciprocity, define specific reciprocity)
- Make contingent concessions (when trust is low make contingent concessions)
- Make concessions in installments (we prefer bad news all at once and good news in installments)
“Finally, making multiple, small concessions tells the other party that you are flexible and willing to listen to his needs. Each time you make a concession, you have the opportunity to label it and extract goodwill in return.”
Taking these ideas I want to apply them to several recent examples when I have coached others working with the IRS on examinations.
From the time the audit first begins develop a relationship with the agent on a personal front as well as a professional front. Make small talk and listen.
From the beginning I suggest using the Large Business and International (LB&I) directive on Information Document Requests (IDRs) with its 12 points regarding informal and formal interactions. I have found that agents in other divisions of the IRS are receptive to this directive as well. The IRS has been in 13 different divisions (stove pipes) since 2000 and don’t necessarily know what the other divisions are doing. Given this situation, I have asked clients that have worked with me to ask the IRS to use this approach from LB&I and in other divisions such as Small Business Self Employed where Estate and Gift Tax are located and the Tax Exempt and Governmental Entity Division. To date none have been denied the approach by any agent up. What have you got to lose?
Once you have a process in place for IDR’s discuss draft IDRs so that they can become final IDRs. Agree upon time frames and always under promise and over deliver. That is, be on time or sooner with all IDRs. Ask the agent to reciprocate with a similar time frame to respond to you. Ask the agent to indicate that either (1) the issue has been satisfied, (2) there is a follow up draft IDR that needs to be discussed or (3) the is a preliminary proposed adjustment being offered for discussion based on the results of the IDR. The agent should meet or respond before the time frame agreed to and if not should call you to let you know. Document this. Try to catch the agent doing things right. If the agent is not doing things right document this. To know how agents are evaluated see chapter 7, Using the IRS Evaluation Process to Your Advantage, from How to Work with the IRS. By working with the agent, being honest (not necessarily entirely transparent to avoid going down dead ends on the agent’ part), and helping the agent with the audit, you and the agent can both see the benefits to each other.
For example on a recent case the agent wanted to look at 12 individual months of credit card statements from 250 employees to see if expenses were appropriate. The taxpayer shared that they scrutinize these both at the managerial and the controller level, so these are very clean. However, if the agent wanted to sample these that would be fine. At the same time the taxpayer knew they had problems with four credit card accounts used by the owners of the firm. The agent opted to only look at the four credit card accounts used by the owners of the firm. These had lots of issues, but the agent only addressed the easy low hanging fruit, but put the taxpayer on notice to clean up the rest. This is a matter of promoting voluntary compliance going forward. The taxpayer agreed that going forward these would be addressed and not be included. The agent will document this in his work papers. Two years from now when this business is reviewed again the IRS, the agent or new agent will have these work papers. Given the work paper statements the agent or new agent will check these accounts and if there are no issues, this will help speed up the next audit. If there are issues, the agent may more than likely dig in and do a more thorough analysis on this and other accounts.
As the agent presents preliminary proposed adjustments on IDRs these should be reviewed. An intention may be presented to agree, to partially agree or to tentatively disagree. Of course the more there proposals there are for an intention to agree, waiting for the outcome of the entire audit, this helps with positive intentions by the party. Reasonable people can also disagree. By making concessions in installments this helps the parties move forward.
Once all of the preliminary proposed adjustments are ready for review, they should be reviewed as a whole. With many already tentatively agreed it is important to clarify and ensure accuracy before fully agreeing. With this positive reinforcement it is possible to move on to those that are partially agreed or unagreed to ensure each party understands the facts, law, analysis, emotion behind the issue, and interest of the parties for each issue. For example there can be timing issues, there can be documentation issues, computational issues and various other forms of issues. Discussing these regarding the year or years under audit and how they may be addressed in the future considering the taxpayer’s burden and the IRS’s need to improve voluntary compliance can go a long way towards a positive conclusion.
Each of the four points made above have been applied to an example based on three recent cases with the IRS. Learn from the practical application of this approach considering the author’s recommendations.
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 How to Work with the IRS, Second Edition, and his NEWEST BOOK now also available as an ebook, 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.