Traditionally, the IRS subjects large corporate taxpayers to nearly continuous audits of their tax returns. In recent years however, IRS funding has been substantially reduced, making this strategy unsustainable. As a response, the agency is creating new approaches to how it audits businesses – and companies need to prepare.
As part of its new approach to auditing certain business segments, the IRS is focusing on specific high potential issues, moving its emphasis away from specific taxpayers. Up until now and moving forward, the IRS is focused on three main issues: inbound distributions, basket options and captive insurance. These are just the start, though, as the IRS is expected to implement additional campaigns that will bring less esoteric issues into the fold.
Most experts believe the IRS will approach these campaigns with its full force. Companies subject to these types of audits so far have had to endure constant documentation requests. As a result, these new audit approaches require a well-constructed defense against the IRS.
Here are five tactics that can be used to deal with the new IRS audit campaigns.
- Get ahead of a possible audit. Create internal procedures for documenting and preserving transactions, documents and data. Pay attention to details so you can maintain and preserve attorney-client and tax-practitioner privileges to protect and limit IRS access to data.
- Quick and nimble wins the day. By focusing on certain high-impact transactions, IRS audits are moving far faster than in the past. Preparation is key; however, because you need to be able to respond swiftly.
- Be clear with the facts. As audits come to a close, the IRS often gives taxpayers a write-up of the facts as examined. Taxpayers are then asked to either verify that they agree with those facts or dispute them. It is best to ensure you have a clear and coherent story so you can dispute their examination results if you do not agree with them.
- Get ready to state the record. The IRS is substantially increasing informal interviews of taxpayers and employees and recording them. Treat these interviews like they are depositions as anything you say or do can come back to bite you.
- Prepare for a show of strength. During the past several years, the IRS has been more aggressive and assertive in challenging attorney/accountant privilege claims. They are regularly issuing summonses to obtain documents in response to privilege claims. These summonses frequently result in standoffs that end up in court – which means even if you win, it can still be a costly process in terms of both time and money.
In the end, remember that the IRS is restructuring in response to shrinking resources and getting more aggressive as a result. The best way to protect yourself and your business is through preparation and strategic planning. Use the five steps above to be proactive and protect yourself against potentially intrusive IRS audits that ultimately can be extremely costly.