When you think of negotiations, do you think about the IRS? With all of the negatives on TV about the big bad IRS it is important to realize they are people with a job to do, and they are indeed people. As with any organization there can be zealots that are over the top. Depending on your experiences you may have met one, and that person may have set your bias on the IRS. However, the vast majority of IRS examiners are reasonable people. if you are open to resolving issues with the IRS, here are two key elements to consider. Before proceeding, reflect and remember your ethical principles and values to be true to yourself. If what you want to do is do the right thing, do what it takes and have closure these ideas can help you with the IRS. Let’s look at token concessions first.

Token concessions

In most negotiations there are a host of issues in the mix. The same is true for most IRS negotiations. Let’s take a look at a business valuation issue with the IRS. On a business valuation issue there is the position of the taxpayer business valuer and the position of the IRS related to a difference in value. This difference in valuation results in a dollar amount of tax owed. However, what makes up that number? Some key likely elements could be cash flow, discount rate, and various discounts. Understanding where the IRS is coming from on whatever their concerns are is key. What should you do? First, try to develop a connecting relationship.

Relationships and actively listening

Develop a repour. Do some research up front and learn all you can to build a connecting relationship with the IRS agent and business valuer if there is one. This cannot hurt and can only help. Find a way for you to connect with that person(s). This may relate to education, locations lived, family, children, grandchildren, pets, hobbies or something similar. The key is to develop a repour so that each party looks at each other as being human. Many taxpayers do not take the time for this critical step, but it matters in most cases. Next listen.

Listen to the IRS agent (who is not a business valuer) and/or if there is a business valuer on the case. Actively listen with open ended questions. Don’t judge. Don’t argue. Instead really try to understand the issues involved. Take what is stated by the IRS and reflect on it. Try to summarize and paraphrase with empathy. Do this even better than how the IRS representative stated it to you. Make sure you demonstrate an open mind and listen to understand where the IRS is coming from.

An example

For example, on valuation case say the IRS is focused on adjusting the discount rate applied to the cash flow and a discount for lack of marketability associated with a minority interest in a privately held company. These are the two major issues. Associated with each are a series of assumptions and multiple approaches. How might you proceed? After developing a connecting relationship and really listening, explore the two technical issues. Conduct a sensitivity analysis on each. What assumptions went into each of the two areas? How might a small change in a variable or with a methodology impact either of these two areas?

 Explore assumptions and approaches for the discount rate

A discount rate may be developed via several methods. Each method has a series of assumptions and steps. Explore both the assumptions and steps and see if a potential concession on an element may have minimal impact, yet offer a concession point to the IRS. For example, with the development of a discount rate the very first variable is the risk-free rate of capital. Was a historical bench mark used such as a 10-year or 20-year bond, or was a normalized risk-free rate from a published source used? Why? Could this be an area of discussion and offer a potential concession? Could something else associated with the development of the discount rate such as public company risk premium, a size premium, an industry and/or company specific premium or something else be considered? Why or why not?

Explore all of the elements that went into determining the discount rate and consider a small change in that area.

Explore assumptions and methodologies for the discount for lack of marketability

The discount for lack of marketability may have used several methods such as restricted stock studies, Pre-IPO studies, the Pluris data set and methodology, the Stout data set and methodology, application of the Mandelbaum factors etc. The point is, listen to the IRS concerns and work with them. For example, Pre-IPO studies have not done well with the U.S. Tax Court in a half dozen tax court decisions. The IRS knows this too. If this was one of the methods chosen and there is on IPO in the near future for this entity, consider dropping that approach. By conceding that method this may help with working to resolve the issue. How did you learn this? You asked? You asked the IRS what were they most concerned about regarding the methods or approaches taken. It is very important that you ask enough questions to see where the IRS is coming from.

Keys to token concessions

What are the keys to a token concession after developing a connecting relationship?

• Actively listen to understand concerns to figure out what they want        
• Conduct a sensitivity analysis on the area of concern to determine what could potentially be conceded.
• Explain any strings attached or concessions. Ideally building good will rather than a particular concession may work much better.

Counteroffers

The first offer in a negotiation is the anchor. When the offer is presented, resist the urge to provide a counteroffer immediately. Instead reflect and consider both their and your interests. Consider your Best Alternative to a Negotiated Agreement (BATNA). Consider more than one counteroffer. With the example above there may be a plan to present alternatives with each of the two areas of concerns presented. Various combinations of concessions could be associated with the discount rate and the discount for lack of marketability.

Explore the methods in some detail rationally. Remember the IRS has been underfunded relative to training. Be there to help educate and provide the sources and rationale. Don’t push. Rather supply the strong rationale and give the IRS a golden bridge to retreat and reflect so that no one loses face. By actually providing not only the citation for the source, but a copy of the source material this can really help. After supplying a copy of the source, ask to go over it with the IRS technical personnel to ensure understanding. Don’t assume.

Summary

The big picture in counter offers relates to the other side understanding where you are coming from and why. This brief article has focused on token offers, connecting relationships, listening actively, educating judiciously, and providing counteroffers that make sense. The more transparent you can be on the “why” the better. By building trust and working with the IRS rather than fighting against the IRS typically results in less pain, resources, energy and time being expended on an audit.

To learn more about token concessions and counteroffers in other venues here are two articles from the Harvard Program on Negotiations for your consideration. One address token concession and the other addresses counteroffers. The commentary above presents an example of each with the IRS business valuation arena for consideration.

About the author

Mike is a mediator/negotiator/facilitator and professional speaker that addresses business valuation issues with the IRS and other issues for clients as a conflict resolution expert. You may contact Mike directly at mg@mikegreg.com and at (651) 633-5311. Mike has written 11 books including, 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]