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Best Practice Advice for Managing the IRS Examination Process
Preparing and organising the required documentation for Internal Revenue Service (IRS) examinations has the potential to overwhelm tax department resources. In order to efficiently manage IRS audits, it is important to understand some basic guidelines for the administration of examinations. Taxand US highlights key considerations about the IRS examination process, as well as best practices that may help taxpayers better manage IRS audits.
The IRS is authorised by statute to conduct examinations, therefore it is important for multinationals to have an examination plan. A crucial aspect of this is a reliable timeline whereby mutually agreeable and specific milestones, such as dates for Information Document Requests ("IDRs"), last dates for claims and the issuance of Notice of Proposed Adjustments, are provided to ensure accountability and ground rules for the structure of the audit. Multinationals should also take into consideration the audit scope, which can be benefically reduced by the inclusion of matters such as materially threshold agreements or by applying prior exam results.
Revenue agents have limited ability to settle issues, however they can resolve disputed issues of fact. During audit negotiations, a taxpayer may be able to persuade the revenue agent that IRS positions on similar issues support the position taken by the taxpayer. Taxpayers also have the option to elevate an issue with technical advisors if they feel field specialists are not being reasonable. The IRS Appeals process, which is separated from the IRS examination team by ex parte rules, offers another opportunity to resolve issues based on an analysis of the "hazards of litigation".
Multinationals should be prepared for auditors to focus on the UTP schedule (reporting uncertain tax positions), which are submitted prior to the examination process, and therefore should have a 'game plan' to address potential issues. It is highly recommended that taxpayers be familiar with IRS guidance and periodic meetings with the exam team should be established. It is important to establish and maintain a good working relationship with the revenue agent, however, while cooperation is certainly recommended, taxpayers should not cooperate to the point that it becomes a detriment.