IRS prepares new exam process for large businesses in challenging audit environment
Starting May 1, 2016, the IRS will utilize a new exam process in its Large Business and International (LB&I) Division. The exam process is the outgrowth of a multi-year review and revamp of the division’s approach to issue-focused examinations. At the same time, a new analysis by a public interest group reports a decline in overall business audits.
The LB&I Division serves corporations, subchapter S corporations, and partnerships with assets greater than $10 million. These businesses deal with complicated issues involving tax law and accounting principles. As a result, audits are complex.
The new LB&I examination process encompasses three phases:
The planning phase of the examination process determines the scope of the audit, the IRS explained. Issues selected for examination should have the broadest impact on compliance regardless of the size or type of entity. During the execution phase, the IRS and the taxpayer will develop the facts of the exam. The goal of the resolution phase is to reach agreement if possible on the tax treatment of each issue examined.
As part of the revamp of the exam process, the IRS and the taxpayer will look at all appropriate issue resolution strategies. Both sides must consider Fast Track Settlement, a program which aims to resolve issues as early as possible during an exam.
At the conclusion of the resolution phase, the IRS and the taxpayer will perform a joint critique of the exam process and recommend improvements. Among the items the parties should address is the future tax treatment of agreed issues to eliminate carryover and recurring adjustments, the IRS explained.
According to the Transactional Records Access Clearinghouse (TRAC), Syracuse University, the IRS completed 6,831 audits of large corporations in FY 2015, compared to 9,825 audits of large corporations in FY 2010. In FY 2015, the IRS completed 1,786 audits of large S corps, compared to 1,977 audits of large S corps in FY 2010. In FY 2015, the IRS completed 305 audits of large foreign corporations, compared to 244 audits of large foreign corporations in FY 2010.
During the first five months of FY 2016, TRAC reported that the number of business audits conducted by LB&I is running 22 percent lower compared to the same time in FY 2015. The number of audits of large foreign corporations and large S corps also has declined compared to the same period last year.
Note. The IRS’s own statistics also reflect a decline in audit coverage of large businesses. Large corporation returns experienced a drop in audit coverage, from 12.23 percent in FY 2014 to 11.15 percent in FY 2015. However, the audit coverage rate for partnership returns grew from 0.43 percent in FY 2014 to 0.51 percent in FY 2015. The audit coverage rate for S corporation returns rose from 0.36 percent in FY 2014 to 0.40 percent in FY 2015.
IRS Publication 5125, the LB&I Examination Process
IRS Auditing of Big Corporations Plummets, TRAC, March 15, 2016