RSM Resources

When the owner of a music licensing company facedan Internal Revenue Service audit, she was determined to save consulting feesby representing herself. But her sense of entitlement for running personaltravel and entertainment expenses through her company only emboldened theauditors, who were considering civil and criminal fraud penalties against her.The owner ultimately asked for help from her financial advisor, who negotiateda settlement.

"Her costs were $150,000 to $175,000 asopposed to more than $1 million," says her advisor, Daniel Franchetti, amanaging director with RSM McGladrey’s tax practice. "It took a lot ofeffort. I think some of the issues could have been eliminated from thebeginning."

You may think you can handle an IRS audit on yourown, but you could quickly find yourself in over your head. Franchetti andother professionals recommend involving an external tax advisor, lawyer orother representative who can help navigate the complexities of the auditprocess from the beginning. In many instances, the IRS and tax executives alsorecommend that large and midsized companies follow the Joint Audit PlanningProcess, which outlines steps toward mutually successful audits based oncommunication, trust and openness.

General guidelines for a smooth audit
There’s no one-size-fits-all approach topreparing for an IRS audit. Generally, the larger the company, the more complexthe audit. Franchetti and other advisors say the following tips can help ensureyou build a smooth relationship with the IRS:

Inform your tax advisor of the audit as soon asyou receive the notice. The more preparedyou are for an IRS meeting, the better it is likely to proceed. IRS auditorsseem favorably inclined toward companies that have all the requestedinformation in an organized fashion.

Invite your tax advisor to the initial IRSinterview. At the outset of an audit, anadvisor can help clarify what issues the IRS is likely to raise and determinewhich resources you’ll need to follow the audit process. Include your advisorin your initial meeting with auditors and on any IRS walk-through tour of youroperations.

Keep your advisor in the loop. An advisor does not necessarily need to participatedirectly in every step of the audit process. But be sure to have your advisorreview all IRS document requests and your responses. An advisor can help ensureyou provide the appropriate documentation without raising red flags.

Be responsive. Furnish the auditors the information they request in atimely manner. Help keep the audit focused and efficient by providing only therequested information.

Treat IRS officials professionally. Resist the temptation to view an audit as a declaration ofwar on your business. You’re professional, and so are the auditors. Treateveryone respectfully, and chances are the process will go more smoothly.

Keep things in perspective. Just because the IRS is conducting an audit doesn’t meanyou or your business has done anything wrong. Don’t be intimidated — the IRSaudits companies all the time.

Joint Audit Planning Process: A framework forcooperation
The IRS’s Large and Mid-Size Business(LMSB) Division recently created the Joint Audit Planning Process with the TaxExecutives Institute, Inc. (TEI), an association of accountants, attorneys andother business professionals responsible for conducting the tax affairs oftheir companies. In doing so, the IRS signaled it wants to work cooperatively,not adversarially, with audited companies. While some of the steps may applyonly to larger companies and complex audits, the process lays the foundationfor constructive working relationships between the auditors and the audited. Atax advisor and IRS officials can help you determine which steps from theprocess your company should take.

"The Joint Audit Planning Process brings homethe message that, even though taxpayers and the IRS sit on opposite sides ofthe table, they share an interest in ensuring that the resources expended inexamining corporate tax returns are used efficiently and wisely," TimothyJ. McCormally, TEI executive director, said in statements at congressional andother forums. "The initiative also underscores the continuing merit incollaborative efforts."

The objectives of the Joint Audit Planning Processinclude enhancing collaboration between corporate taxpayers and IRS personnel,and empowering IRS agents to resolve issues and settle cases more quickly andefficiently. It outlines both the individual and joint responsibilities of allparticipants — the taxpayer, IRS team manager, audit team, specialists andcounsel — focusing time and resources on the most important areas to speedaudit resolution. A planning and monitoring tool identifies key areas forefficiently planning and conducting an examination, and lists the steps ataxpayer and audit team can take to enhance the quality and timeliness ofexaminations.

Following are some specific actions the JointAudit Planning Process specifies to minimize conflict, increase cooperation,and enhance the quality and timeliness of audits:

• At the start of the examination, the taxpayer and IRS officials should meet to exchange information critical to preparing a high-quality risk analysis. They should also use this preliminary meeting to discuss administrative matters and set the examination timeline.
• Generally, the IRS should request taxpayer documents only after both parties have discussed the request and the best way to fulfill it. By working together at every stage of the examination, all parties can help reduce audit and cycle time.
• IRS officials and the taxpayer should candidly discuss potential issues and required compliance checks early in the planning phase, so the taxpayer can make the necessary resources available when needed and present pertinent information to the examination team during preliminary meetings.
• The taxpayer can help reduce examination time by providing a meaningful company orientation to the audit team during preliminary meetings. In addition to addressing such topics as organizational structure, industry operating philosophies, and procedures and accounting records, the orientation could include brief meetings with key operating, accounting and tax personnel as well as facility tours.
• The use of IRS specialists is an integral part of the examination process. Once specialists are assigned, the taxpayer, specialist managers, team manager and team coordinator should hold preliminary meetings to discuss the development of the specialists’ portion of the audit plan. It is critical the IRS and taxpayer coordinate their schedules early in the planning process so the responsible company personnel will be available to secure the information when the specialists request it. Also, all parties should meet their commitments to each other in terms of providing information, requesting follow-up information and holding scheduled meetings.
• The taxpayer should provide the audit team with a book-to-tax reconciliation at the earliest possible stage of the examination. This will reduce the number of document requests, limit use of the taxpayer’s computer system, and save time for both the IRS and the taxpayer.
• The IRS and taxpayer should agree to make every effort to resolve issues at the examination level, taking advantage of issue-management guidelines when appropriate. Before starting extensive audit work, IRS officials and the taxpayer should discuss any new issues they identify during the audit process that are not in the audit plan.

After successfully completing the initial steps ofthe Joint Audit Planning Process, the IRS furnishes a draft audit plan to thetaxpayer for review. The IRS should finalize the audit plan beforecompleting any substantial examination work. If the taxpayer has any concernsor questions at this stage, changes or corrections should be made to the draft.The taxpayer receives the final plan on the date of the formal openingconference.

Both the taxpayer and IRS typically share a common goal: completing theexamination as efficiently as possible. The Joint Audit Planning Processplanning and monitoring tool may provide a roadmap to achieve this goal. Anoutside advisor can help taxpayers determine how best to work with the IRS tomake the audit as smooth and painless as possible.