Corporate IRS Audit Proceedures

In recent years, the IRS has shifted the focus of its audits to medium and large size corporations. Because of this increased scrutiny, it is our recommendation that you develop a strategy in the event your corporation is the subject of an IRS audit. Effective management of an IRS audit begins with pre-audit planning. This requires a review of substantive, procedural, and administrative issues that typically must be dealt with during a corporate audit. To assist you, we are providing you with the following checklist.

1. Pre-Audit Conference

Once the IRS indicates that your corporation will be the subject of an audit, we will request a pre-audit meeting with the IRS. This meeting will be used to discuss — and hopefully reach agreement concerning — key procedural and administrative matters with the IRS; determine the scope, depth, and time-frame of the audit; and establish lines of communications. One sought-after agreement concerns Information Document Requests (IDRs). We will ask the IRS to agree to discuss with us, on an informal basis, all IDRs before they are actually issued. This will give us the opportunity to voice objections to proposed IDRs that are irrelevant or overly broad. We will also make clear to the IRS that we expect all requests for information and documents to be in writing and that we will not be complying with oral requests. Following this meeting, we will write a letter to the IRS outlining each point of the pre-audit agreement.

2. Regular Communications With IRS

As the audit begins, we want to set up regular meetings with the audit manager. At these meetings, we can discuss how the audit is progressing and any problems that might arise. These regular meetings can be particularly useful where the audit includes a number of IRS personnel with different specialties.

We can arrange to schedule regular meetings at the beginning of the audit by meeting with the IRS’ person in charge. We can also ask for the names and identities (e.g., engineers, economists, attorneys, industry specialists) of all IRS personnel involved in the audit and for the name of that person's supervisor. There shouldn't be any problem making this request, once the revenue agent understands that we simply want to know who to go to when the agent is not available to answer our questions. This also puts the revenue agent on notice that, when necessary, we will go to the supervisor to settle any problems. Still, we will want to work directly with the revenue agent conducting the audit as much as possible, without involving the supervisor.

At this point, we will also decide which of your company's employees (if any) are to have direct communications with the IRS. We can limit the IRS’ ability to interview any employee. We will also want to meet with those employees who will be in contact with the IRS, to discuss likely questions that the IRS will ask them.

3. Company Records

Our first inquiry will be whether your company has an existing record retention agreement with the IRS for computerized records and, if so, whether the company is complying with the agreement. We will want to investigate and review whether the company has a written agreement pertaining to certain hard-copy documents.

Next, we will want to locate the records relevant to the audit and determine how to retrieve them. It is to our advantage to notify the IRS early on of any anticipated retrieval problems. We predict that at this point in time, we should be able to identify any missing or destroyed records and develop a strategy to deal with the missing information.

4. Information Document Requests

During an audit, the IRS can issue Information Document Requests (IDRs). We want to establish a procedure for handling IDRs including who should be served with IDRs and what is the response time. As IDRs are received, they should be documented, in writing, on the date received and how we responded. I want to make one point here: we will need copies of every document photocopied by or for the IRS. Accordingly, we will not give the IRS their own copy machine or permit them to bring their own copy machine on site. Instead we will make two copies — one for them, one for me — of all requested documents.

5. Time Frames

We will ask the IRS for a projected closing date of the audit. Our strongest weapon will be to control the statute of limitations. In most cases, we have found that it is to our clients’ advantage to make it clear at the outset that we are unlikely to extend the statute of limitations and that the IRS must treat the statute as a very real deadline. If the IRS does request an extension of the statute of limitations, we will evaluate the request at that time. From experience, it is unlikely that we will be recommending any extension of the statute; if we do recommend an extension, it will only be to extend the limitations period on a six-month basis. This gives us the maximum possible control during the audit.

6. Miscellaneous Matters

There are other issues which we need to address prior to an IRS audit. Is our power of attorney, to represent you, on file with the IRS? Were any informal agreements made during prior audits? Have any continuing issues been settled previously by IRS Appeals office? Have we secured your company's trade secrets? Will the IRS have access to sensitive financial information? Will the revenue agents be on site and, if so, in what facilities and how will the company provide access for phone service, fax machines, etc.?

We will want to review the results of prior IRS audits, to identify likely issues and to make note of any problems that should be addressed at the opening meeting. We can also identify key issues by reviewing the IRS’ own Industry Specialization Program and Market Segment Specialization Programs. Finally, we will analyze all likely issues and estimate our exposure in mapping our audit strategy.