IRS Aims to Soup Up Audits

Finance executives should seize the chance to display their integrity and ''come clean on a few warts,'' says one expert.
Ilan MochariMarch 3, 2004

The Internal Revenue Service is expediting its process for auditing corporate taxpayers, cutting the three-year examination time to 18 months by promoting electronic filing, narrowing the scope of its checkups, and encouraging its agents to initiate prefiling discussions about touchy issues. “Taxpayers told us they wanted more certainty and timeliness about whether we’ll challenge them,” says Deborah M. Nolan, commissioner of the Large and Mid-Size Business Division.

Does that mean more audits? Yes, but that’s not all, according to Larry R. Langdon, a tax partner at Mayer, Brown, Rowe & Maw LLP in Palo Alto, Calif. Langdon worries that some IRS agents, under pressure to resolve cases quickly, might give up too easily on a sticky audit, funneling it to tax court rather than working a few more months to reach a settlement. If that happens, he notes, any reduction in audit cycles will be offset by subsequent legal-system delays.

The IRS’s new approach emphasizes open lines of communication between taxpayers and auditors. Both the boiled-down “LIFE” (Limited Issue Focus Examination) audit and any so-called prefiling agreements require companies to admit, and sign off on, their potential areas of infraction. CFOs, says Langdon, should seize the chance to display their integrity. “Coming clean on a few warts will make most IRS officials act more reasonably with you,” he says.

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Langdon’s mix of faith and skepticism is echoed by Tax Executives Institute Inc. “Everyone supports the concept of a faster process and better communication,” says Timothy McCormally, TEI’s executive director. “The question is, will it work, and what are the unintended consequences?”

One consequence might be that IRS audits become less thorough and more error prone. Nolan downplays that possibility, stressing that the agency can make process improvements without sacrificing accuracy if it does a good enough job in preaching a kind of preventive medicine: getting corporations to admit and address their problems before they reach an auditable level of severity.

Richard Kadet, a consulting CFO with The Brenner Group consultancy, in Cupertino, Calif., was pleased to learn about the changes. “The longer an audit takes, the more key people leave the company or forget things. It becomes harder to get at the truth of what happened,” he says. “Anything the IRS does to speed up audits is a good thing.”

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