What NFL Negotiations teach us About IRS Negotiations

In an article from the Harvard Law School blog Program on Negotiation entitled “For NFL Players, a Win-Win Contract Only in Retrospect” there four valuable lessons that we can learn.

These are:

By taking revenue and breaking it up into three parts (television, local revenue and merchandising) with a ten year deal and then addressing the salary cap going forward, an agreement was reached in 2011. Looking at the agreement today it is clear this really was a win-win situation with the players receiving 55% of the television revenue and conceding a smaller percentage in the other two categories.

“Look for tradeoffs across issues.”   Good negotiators don’t look at the pie as fixed, but rather good negotiators look for ways to look at the pie differently.  By identifying the interests of both your side and other side it is possible to creatively look at the pie differently.

“Take a long term perspective.”   Often in today’s quarterly evaluation from the public entity perspective we tend to focus on immediate rewards.  Education and a longer term view in the private entity world tends to have much better results.  When evaluating alternatives keep timing of both risks and rewards in perspective.

“Sell the deal to your constituents.” Not only does the negotiation team need to fully understand the implications, but a proper promotion of the results to both side’s stakeholders needs to be planned and carried out.  If the deal is perceived as a win-lose rather than as a win-win then someone loses face.  By orchestrating the result with the proper reframing of the commentary it is possible for the negotiators to help both sides in promoting the final agreement effectively. 

When working issues with the IRS and my clients I found these same four practices pay off.   The IRS is all about “helping (taxpayers) understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.”  Taxpayers addressing complex issues that are gray in nature know that the IRS is interested in this as a basic premise.  Unfortunately, sometimes the issues can become personal and reasonableness and trust breakdown.  Continue to focus on good relationships first.  Build trust.  If there is trust and respect for one another the likelihood of success with this methodology is enhanced.  If trust and respect break down, it may be necessary to elevate in management or have the case go unagreed at the examination level and address the issue at Appeals.

 Knowing this let’s look at the four points above assuming good working relationships.

Consider taking a series of proposed adjustments by an IRS examination team and determining which are stronger and which are weaker arguments from each side’s perspective.  Also consider the magnitude of the issues.  What are the implications for the years under audit?  What are the implications for future years?  Is there an adjustment to the years under audit only or is there a change in a methodology going forward?

“Look for tradeoffs across issues.”  Some issues may be linked.  Others stand on their own.  Some issues such as research credit address an increase in qualified expenditures over a base period.  What will happen in future years?   Explore alternatives related to the various categories of qualified expenditures and differences geographically or within various divisions.  Maybe a trade off on a capitalization issue, a 263A determination, a 199 section determination or an international issue based on the facts could lead to an agreement.

“Take a long term perspective.”   Explore what the implications are going forward when working with international issues, research credit or a 199 issue.  Why?  Sometimes when reaching an agreement with examination on these types of issues today the methodology may be changed relative to future years that can lead to some interesting results.  The goal of the IRS is to improve voluntary compliance going forward.  This allows for additional creativity by the parties.

 “Sell the deal to your constituents.”  This can be to the IRS team, IRS specialists, IRS issue practice group participants or IRS management.   How this is articulated and presented is key.   The same is true for the taxpayer.  I have been part of a negotiation team at the IRS and with taxpayers and I have been a true neutral and mediated these types of agreements.  In various roles I have been asked to explain the results to senior management on the other side.   In one instance the VP of Tax had me on a conference call with the CFO after a mediation, because the mediated agreement was less than what the VP of Tax had indicated would result for the years under audit for a significant issue.  I presented long term benefits of the agreement relative to certainly going forward with closure, preliminary calculations for future years by the tax department, and a reduction in audit expenses in the future.

Keep in mind the IRS cannot propose various alternatives, but the taxpayer can.  Don’t be afraid to think outside the box when working with the IRS on issues.  Apply these similar techniques in other situations when involved with negotiations or a mediation.