IRS Announces Significant Changes to Audit Process

The Large Business & International or LB&I division of the IRS recently announced significant changes to the way its IRS auditors gather information from taxpayers. These announcements were made by directives issued by the LB&I Commissioner to all LB&I agents, which makes it mandatory for IRS agents to follow the directives.

Reasons for The Changes On IRS Audits

These changes are intended to remedy situations where the IRS agent and the taxpayer are not communicating effectively, which results in the IRS audit being prolonged or closed prematurely with unfavorable and unsupportable adjustments. Thus, the changes encourage an open dialogue between IRS agents and taxpayers.

The IRS will still issue written IDRs to request information from the taxpayer. However, the directive says that the IRS agent must:

• Discuss the issue to which the IDR relates with the taxpayer;
• Discuss the relationship of the information requested to the issue under consideration and explain why the information is necessary;
• Ensure that the IDR clearly indicates the issue under consideration and that the IDR only requests information relevant to the stated issue;
• Prepare one IDR for each issue;
• Ensure that the IDR is customized to the taxpayer or the taxpayer’s industry;
• Provide a draft of the IDR and discuss its contents with the taxpayer;
• Determine a reasonable timeframe for the taxpayer to provide a response to the IDR, based on consultation with the taxpayer; and
• Determine a date by which the examiner or specialist will review and provide a response to the taxpayer as to whether the information received satisfies the IDR.

The directives also clarify that IDRs issued at the beginning of the audit that request the taxpayer’s books and records or general information about the taxpayer’s business are not subject to the above-requirements. Also, the directives clarify that the above-requirements will not apply where taxpayers who refuse to provide info without a summons (i.e, in the case of a friendly summons).

The directive also describes how the IRS will enforce IDRs. Specifically, the directives explain that the IRS will follow these steps:

• Issue a Delinquency Notice;
• Issue a Pre-Summons Letter; and
• Issue a Summons.

The Delinquency Notice – What Is It ?

The delinquency notice is new. It is basically a letter to the taxpayer explaining that the IDR was not responded to timely. The pre-summons letter is not new, but prior to the directives, IRS agents were not necessarily obliged to issue pre-summons letter. IRS agents would often skip the letter and simply issue the summons.

While these directives only apply to IRS agents who work for LB&I (the IRS’s LB&I division audits corporations, subchapter S corporations, and partnerships with assets greater than $10 million), LB&I’s policies are also generally adopted or followed by the Small Business/Self-Employed Division of the IRS (which audits most taxpayers who are not large enough to be audited by LB&I). Thus, these rules will influence how all IRS audits are conducted in the future.