The IRS announced the implementation of the Quality Examination Process (QEP), “a systematic approach for engaging and involving Large and Mid-Size Business (LMSB) taxpayers in the tax examination process, from the earliest planning stages through resolution of all issues,” replacing IRS’s Audit Planning Process, and the LMSB Guide for Quality Examinations in Internal Revenue Manual § 4.46 is being updated to reflect this change. In the Pub, IRS explains that the examination can generally be divided into 3 phases: planning, execution, and resolution.
- Pre-exam analysis. The exam team gathers and reviews information about the taxpayer that is available publicly and within IRS.
- Initial planning meeting. The exam team holds an initial planning meeting with the taxpayer, reviewing the preliminary risk analysis and the anticipated exam process for the issues identified.
- Subsequent planning meetings. The exam team and the taxpayer discuss prior audit cycle or exam results, materiality thresholds relating to identification and selection of examination issues, other potential compliance issues and required compliance checks, affirmative issues and/or claims the taxpayer expects to file, strategies the parties will use for resolving compliance issues, and the use of a mid-cycle risk analysis.
- Taxpayer orientation. The taxpayer provides the exam team with a comprehensive orientation of its business operations. IRS’s Quality Examination Reference Guide says this taxpayer information should include:
- A general overview of business activities.
- A list of significant transactions for the current examination and any other information that is new and/or different from previous examination(s) (e.g., acquisitions, dispositions, tax shelters, accounting method changes – Forms 3115, etc.).
- Access to general ledgers; a complete audit trail from these ledgers and financial statements to taxable income; identification and full description of all significant Schedule M-3 book/tax differences and the requisite supporting documentation; breakdown of all general ledger accounts aggregated in Schedule M-3, and reconciliation of Schedule M-3 items to disaggregated general ledger accounts; and any other tax reconciliation work papers and/or other workpapers in accordance with the Service Policy outlined in IRM 188.8.131.52 (Requesting Audit, Tax Accrual, or Tax Reconciliation Workpapers).
- Financial information (such as the general ledger) in electronic format.
- List of known and anticipated claims and requested audit adjustments (with all supporting documentation made readily available) to ensure that these items are included in the audit plan.
- Exchange of additional transactional and financial information. The taxpayer provides the exam team with business and financial information on acquisitions, dispositions, accounting method changes, tax shelters, book-to-tax reconciliations, etc.
- Finalizing the exam plan. The exam team develops and finalizes an examination plan that specifies the issues to be examined, time frames, personnel required, processes to be followed, and the respective responsibilities.
The execution phase includes:
- Changes to the exam scope. The exam team keeps the taxpayer aware of any potential scope and/or depth changes.
- Ongoing monitoring. The exam team and the taxpayer regularly review their progress towards achieving the agreed upon milestones.
- Discussion of issues. Once the examination of a compliance issue begins, the exam team explains to the taxpayer why the issue was selected for examination.
- Information Document Requests (IDR). The exam team and the taxpayer reach agreement on the procedures for administering IDRs (e.g., notification, IDR content, time frames for IDR responses, etc.).
The resolution phase includes:
- Confirming the facts. Before issuance of a Form 5701, Notice of Proposed Adjustment, the taxpayer and the exam team discuss the issues under the proposed adjustment. The taxpayer confirms the facts and clarifies its position.
- Engaging specialists and experts. If appropriate, the exam team engages specialists (e.g., economists, engineers, and financial products experts), technical advisors, counsel and/or other experts.
- Issue resolution strategies. The exam teams encourage the use of appropriate issue resolution strategies (i.e., Fast Track, Rules of Engagement, Early Referrals to Appeals, etc.) while exams are in progress.
- Other issues. The exam teams discuss with taxpayers any potential identified issues that may warrant settlement initiative treatment.
- Determining areas of agreement. The exam teams memorialize the final determinations of issues (i.e., agreed, unagreed, no change).
- Next/final steps. The exam teams inform taxpayers of next steps in the examination process up through resolution of remaining issues, issuance of the final report and exam case closing.
The IRS also noted that LMSB “Quality Examination Process Reference Guide” (a tool for LMSB revenue agents and exam teams) is available. See http://www.irs.gov/businesses/article/0,,id=224139,00.html.