IRS Exam Assumptions, Expectations, and Collaboration 2014 CFO/Tax Summit November 13th, 2014

IRS Circular 230 Required Notice--IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.

Agenda We take certain ideas of how our IRS exam will play out and have certain expectations on the people involved. But those ideas needs to be in check while the exam is underway, because sometimes it is not as always as expected. Understand how to manage the new IDR process to benefit your case. Why you need to develop a plan and milestones, that keeps all parties accountable to deadlines. What happens when the exam gets off script? How do you get it back on track?

Example of Expectations ISSUE: R&D Credits Spend time and consume valuable corporate resources capturing documentation on projects before return is filed Spend more time reviewing and improving documentation when it become apparent that IDR will be issued Expect the documentation to be sufficient Expect the IRS to assign experienced and qualified “experts” to the audit who will have time for the audit

Example of Expectation-Cont. Expect the IRS will review the information they requested in the IDR before jumping to doing “interviews” IRS Engineer receives documentation, but immediately requests interviews and says it is standard procedure Do you acquiesce and allow the interviews? What are your options, any?

Preferred R&D Credit Documents To interview or not to interview? Do the courts place more value on contemporaneous documentation or oral testimony? If there is a document showing or explaining the process of experimentation, why perform an interview on the same topic? Should interviews during exam only be used if the documentation is not sufficient? Engineer, agent, and consultant should give reason as to the necessity of such interviews.

IDR Process

Managing IDR process Establish regular discussion with your IRS team; suggest regular meetings Know your issue Limit IDR scope Educate the IRS via presentations and conversations Review and suggest wording changes to “draft” IDR Determine the amount of detail you provide in writing Establish working procedures with the IRS team leader You don’t want IDRs coming from multiple disciplines (exam agent, engineers, consultants, computer specialists, etc.) Have a response date in mind Plan ahead for problems and delays and make sure IRS commits in writing to review response by a given date Stick with the pre-agreed response time (30 days), never commit to a shorter time

Best practice for IDR process Keep certain IDRs in “draft” as long as possible IDRs in draft form do not start the clock and can help in preparing for time consuming IDRs Identify sources of information early and identify their schedule bottlenecks Prepare IDR log with timeline for response, dates, and sources Prepare internal factual memo on IRS conversations Send correspondence to agent with what was discussed and agreed Send in such a way to require IRS to respond in the affirmative

Staying on script and getting back on track

Keeping to the plan At the beginning of the exam, the IRS should follow its Quality Examination Plan (QEP) principles These include key milestone dates and typical response times to issues It is not within the QEP for the IRS to withhold any feedback to the taxpayer during review There should be periodic feedback on resolving the issues Request copy of Risk Analysis Worksheet which will indicate areas where IRS will focus audit Getting specialists involved from the IRS can deviate from the plan It is important to inform your agent if a specialist is not following the agreed upon plan

Getting back on track Periodic conversations with the agent and if necessary their manager If a specialist is assigned, remember that they have a manager too and different priorities Make the exam team aware of missing deadlines for both the taxpayer and the IRS Elevate further if necessary There are managers for the managers and don’t accept the reason, “well this is the way it has always been done”

Bryan Peterson Vice President of Tax