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Part 4. Examining Process

Chapter 10. Examination of Returns

Section 20. Requesting Audit, Tax Accrual, or Tax Reconciliation Workpapers

4.10.20  Requesting Audit, Tax Accrual, or Tax Reconciliation Workpapers

4.10.20.1  (07-12-2004)
Introduction

  1. In general. There are three types of workpapers typically publicly traded corporations and other large collectively owned entities:

    1. Audit workpapers,

    2. Tax accrual workpapers, and

    3. Tax reconciliation workpapers. See IRM 4.10.20.2 for a definition of these terms.

  2. The Service has different policies for seeking access to each of these types of documents. The different policies are set forth in IRM 4.10.20.3.

    Note:

    These provisions do not apply in cases being investigated by Criminal Investigation.

4.10.20.2  (07-12-2004)
Audit Workpapers, Tax Accrual Workpapers, and Tax Reconciliation Workpapers Defined

  1. Audit Workpapers Defined. These are workpapers created by or for the independent auditor. They are retained by the independent auditor and may be shared with the taxpayer. These workpapers include information about the procedures followed, the tests performed, the information obtained, and the conclusions reached pertinent to the independent auditor’s review of a taxpayer’s financial statements. Audit workpapers may include work programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents, and schedules or commentaries prepared or obtained by the auditor. These workpapers provide important support for the independent auditor’s opinion as to the fairness of the presentation of the financial statements, in conformity with generally accepted auditing standards and generally accepted accounting principles.

  2. Tax Accrual Workpapers Defined. The term "tax accrual workpapers" refers to those audit workpapers, whether prepared by the taxpayer, the taxpayer’s accountant, or the independent auditor, that relate to the tax reserve for current, deferred and potential or contingent tax liabilities, however classified or reported on audited financial statements, and to footnotes disclosing those tax reserves on audited financial statements. These workpapers reflect an estimate of a company’s tax liabilities and may also be referred to as the tax pool analysis, tax liability contingency analysis, tax cushion analysis, or tax contingency reserve analysis. The name given the workpapers by the taxpayer, the taxpayer’s accountant, or the independent auditor is not determinative.

    1. Tax accrual workpapers typically include determinations and related documentation of estimates of potential or contingent tax liabilities related to tax positions taken by the taxpayer on certain transactions. In addition, there may be an audit trail and/or complete explanation of the transactions. There may also be information on whether there was reliance on outside legal advice; an assessment of the taxpayer’s position and potential for sustention; references to promotional materials; and comments on unwritten agreements, confidentiality agreements, restitution agreements, contingency fees, expectations, and other material facts surrounding the transactions. The workpapers may include documents written by the taxpayer’s employees and officers describing or evaluating the tax strategies. The scope and quality of the workpapers will vary.

    2. The total amount of the reserve established on a company’s general ledger for all contingent tax liabilities of the company for a specific reporting period is not considered a part of the company’s tax accrual workpapers. An examiner may ask a taxpayer about the existence and the total amount of a reserve for all contingent tax liabilities as a matter of routine examination procedure, without a showing of unusual circumstances and without seeking executive approval for the request.

    3. A request to reveal the existence or amount of a tax reserve established for any specific known or unknown transaction, however, is the same as asking for a description of a portion of the contents of the tax accrual workpapers. Requests for a description of the contents of the tax accrual workpapers are covered by the same policy of restraint as requests for the actual documents that make up the tax accrual workpapers.

  3. Tax Reconciliation Workpapers Defined. Tax reconciliation workpapers are used in assembling and compiling financial data preparatory to placement on a tax return. These papers typically include final trial balances for each entity and a schedule of consolidating and adjusting entries. They include information used to trace financial information to the tax return. Any tax return preparation documents that reconcile net income per books or financial statements to taxable income are also tax reconciliation workpapers. Tax reconciliation workpapers do not become tax accrual workpapers when they are used in the preparation of tax accrual workpapers or are attached to tax accrual workpapers. Preexisting documents that a taxpayer, the taxpayer’s accountant, or the taxpayer’s independent auditor consults, refers to, or relies upon in making evaluations or decisions regarding the tax reserves or in performing an audit are not themselves considered tax accrual workpapers or audit workpapers, even though the taxpayer, the taxpayer’s accountant, or independent auditor may store such documents with the tax accrual workpapers or audit workpapers.

4.10.20.3  (07-12-2004)
Service Policy for Requesting Workpapers

  1. Tax Reconciliation Workpapers. Tax reconciliation workpapers should be requested as a routine matter at the beginning of an examination. Ordinarily, tax reconciliation workpapers are prepared and provided by the taxpayer. If these workpapers are unavailable from the taxpayer, access will be sought from the taxpayer’s accountants.

  2. Audit or Tax Accrual Workpapers. The general standard for requests for audit or tax accrual workpapers is the unusual circumstances standard. This standard applies to all requests for audit workpapers, requests for tax accrual workpapers that do not involve a listed transaction as defined in Treas. Reg. § 1.6011-4, and to any request for tax accrual workpapers involving a listed transaction for returns filed on or before February 28, 2000. For the standard for requests for tax accrual workpapers involving a listed transaction for returns filed after February 28, 2000, see IRM 4.10.20.3.2.

4.10.20.3.1  (07-12-2004)
Unusual Circumstances Standard

  1. In unusual circumstances (as defined in IRM 4.10.20.3.1(2)), the Service may request audit or tax accrual workpapers. Examiners should keep in mind that the taxpayer’s records are the primary source of factual data to support the tax return. Audit or tax accrual workpapers should normally be sought only when such factual data cannot be obtained from the taxpayer’s records or from available third parties, and then only as a collateral source for factual data. Audit or tax accrual workpapers should be requested with discretion and not as a matter of standard examining procedure. Such a request should generally be made first to the taxpayer, but may be directed to the taxpayer, the taxpayer’s accountant, the independent auditor, or all three, based on the Service’s determination as to the location of the workpapers sought. The request should be limited to the portion of the workpapers that is material and relevant to the examination. Whether an item is considered to be material is based upon the examiner’s judgment and an evaluation of the facts and circumstances of the case.

  2. Unusual circumstances for this purpose exist under the following conditions:

    1. A specific issue has been identified by the examiner for which there exists a need for additional facts;

    2. The examiner has sought from the taxpayer and available third parties all the facts known to them relating to the identified issue; and

    3. The examiner has sought a supplementary analysis (not necessarily contained in the workpapers) of facts relating to the identified issue and the examiner has performed a reconciliation of the taxpayer’s Schedule M-1 or M-3 as it pertains to the identified issue.

4.10.20.3.2  (07-12-2004)
Requests for Tax Accrual Workpapers Involving Listed Transactions

  1. Background. Although the Supreme Court recognized the Service’s right to obtain tax accrual workpapers in United States v. Arthur Young & Co., 465 U.S. 805 (1984), the Service announced that it would continue its policy of restraint and would not request tax accrual workpapers as a standard examination technique. Announcement 84-46, 1984-18 I.R.B. 18. In 2002, the Service modified its historical policy of restraint with respect to tax accrual workpapers. In general, the modified policy applies to returns filed by taxpayers claiming benefits from listed transactions. Announcement 2002-63, 2002-2 C.B. 72. A listed transaction is defined in Treas. Reg. § 1.6011-4, and subsection (b)(2) defines listed transactions to include substantially similar transactions. The policy governing requests for tax accrual workpapers varies according to when the tax return was filed.

4.10.20.3.2.1  (07-12-2004)
Returns Filed on or Before February 28, 2000

  1. The modified policy does not apply to examination of returns filed on or before February 28, 2000. See Announcement 2002-63 and Treas. Reg. § 1.6011-4(h).

4.10.20.3.2.2  (07-12-2004)
Returns filed after February 28, 2000, but before July 1, 2002

  1. The Service will, in appropriate circumstances, request tax accrual workpapers that pertain to a listed transaction for returns filed after February 28, 2000, and before July 1, 2002, if the taxpayer was required to disclose the listed transaction and failed to do so. In general, these requests with respect to undisclosed listed transactions will be limited to the tax accrual workpapers for the years under examination, but may also extend to other years that may be directly relevant to the years under examination, such as the earlier origination year of the transaction or any year(s) in which the taxpayer or its independent auditors might logically have reevaluated their initial determinations of the tax contingencies of the transaction.

    1. The term "appropriate circumstances" as used in this section refers to situations for which requests for tax accrual workpapers are justified. Circumstances when a request for tax accrual workpapers would not be appropriate would be rare. For example, it might be appropriate not to pursue workpapers if the taxpayer has fully conceded the issue, including penalties, and the parties have executed a specific matters closing agreement with respect to the issues conceded by the taxpayer. The general rule, however, is that examiners should request tax accrual workpapers in all cases for returns filed after February 28, 2000 and before July 1, 2002 if the taxpayer failed to disclose a listed transaction. If there is an exceptional situation where the requirements of Announcement 2002-63 are met and the examiner believes that it is not appropriate to pursue the tax accrual workpapers, approval not to request the workpapers is required. For LMSB cases, the approval of the Director, Field Operations, LMSB would be required. For SBSE cases, approval would be required by the Area Compliance Director, with the concurrence of the Director of Compliance Policy, SBSE.

    2. For purposes of this paragraph, the required disclosure may have been made on the return; pursuant to Announcement 2002-2, 2002-1 C.B. 304; or under Rev. Proc. 94-69, 1994-2 C.B. 804, if applicable.

    3. Treas. Reg. § 1.6011-4 requires that the taxpayer attach a disclosure statement to its return and send a copy of the disclosure statement to the Office of Tax Shelter Analysis (OTSA). If the taxpayer is known to have engaged in a listed transaction for a return filed in this time period and there was no attachment to the taxpayer’s return that disclosed such participation under Treas. Reg. § 1.6011-4, then the examiner should query the taxpayer or contact OTSA by email at otsa@irs.gov to determine whether the taxpayer substantially complied with the disclosure requirement in another manner. OTSA keeps a database of all disclosures it receives. Solely for purposes of this policy, a disclosure using Form 8275, 8275R, 8886, or a similar statement is considered adequate disclosure.

    4. Announcement 2002-2 allowed taxpayers a limited opportunity to disclose their participation in tax shelters in return for a waiver of the I.R.C. § 6662 penalty. All disclosures made under this announcement were filed with OTSA. Examiners may contact OTSA to verify whether the taxpayer made a disclosure under this announcement.

    5. Rev. Proc. 94-69 provides Coordinated Industry Case (CIC) taxpayers under audit with a mechanism for making an adequate disclosure. Examiners should examine any such disclosure to determine whether it is adequate.

4.10.20.3.2.3  (01-15-2005)
Returns filed on or after July 1, 2002

  1. If a listed transaction was properly disclosed on the return, in the manner prescribed by Treas. Reg. § 1.6011-4, the Service will routinely request tax accrual workpapers that pertain only to the listed transaction for the year under examination. In these circumstances, the Service may also request tax accrual workpapers pertaining to the disclosed listed transaction for a year(s) not under examination, if such workpapers may be directly relevant to the Service’s audit for the year under examination, such as those described in paragraph (iii).

  2. If, however, a listed transaction was not timely and properly disclosed in the manner described by Treas. Reg. § 1.6011-4, the Service will routinely request all tax accrual workpapers for the year under examination. In these circumstances, the Service may also request tax accrual workpapers for years not under examination, if such workpapers may be directly relevant to the Service’s audit of any known listed transactions for the years under examination.

  3. As a discretionary matter, all tax accrual workpapers for the year under examination will be requested if:

    1. The Service determines that the taxpayer claimed tax benefits from multiple listed transactions that were all properly disclosed; or

    2. In connection with the examination of a return claiming tax benefits from a single listed transaction that was disclosed, there are reported financial irregularities with respect to the taxpayer.

      Note:

      In either of these circumstances, the Service may also request tax accrual workpapers pertaining to the known listed transactions or the reported financial irregularities for years not under examination, if such workpapers may be directly relevant to the audit for the years under examination.

  4. The term "as a discretionary matter" as used in this section of the IRM denotes the exercise of prudence in executing policies. Wherever that term is used within this section of the IRM, the presumption is that the Service will request all tax accrual workpapers. There may be rare instances in which requesting all workpapers might not be appropriate. For example, if the taxpayer fully concedes all listed transactions, including penalties, and the parties have executed a specific matters closing agreement with respect to the issues conceded by the taxpayer then it may be appropriate not to seek all of the workpapers. If there is an exceptional situation where the examiner believes it is not appropriate to pursue all of the tax accrual workpapers, approval not to request all of the workpapers would be required. For LMSB cases, the approval of the Director, Field Operations, LMSB would be required. For SBSE cases, approval would be required by the Area Compliance Director, with the concurrence of the Director of Compliance Policy, SBSE.

  5. If a transaction becomes a listed transaction, within the definition in Treas. Reg. § 1.6011-4, subsequent to the filing of a tax return, tax accrual workpapers will be requested, so long as at the time of the request the transaction is a listed transaction. Some listing notices contain effective dates which also should be considered in determining whether a transaction is listed. The examiner should work with Field Counsel to make these determinations.

4.10.20.4  (07-12-2004)
Procedure for Requesting Audit and/or Tax Accrual Workpapers

  1. Information Document Requests (IDRs). Upon determining that a request for audit and/or tax accrual workpapers should be made, the examiner will prepare an IDR for the workpapers. The examiner should work with Field Counsel in preparing the IDR. Branch 3 of the Collection, Bankruptcy, and Summonses (CBS) Division in the Office of the Associate Chief Counsel (Procedure & Administration) is also available to provide assistance to Field Counsel on IDRs. Coordination with Counsel will be treated as a high priority matter by Counsel so as not to delay the examination.

    1. For a request under the unusual circumstances standard ( see IRM 4.10.20.3.1), any National Office Counsel review through the Office of the Associate Chief Counsel (Procedure & Administration) will, in general, be completed no later than fourteen days after coordination with P&A occurs.

    2. For a request involving a listed transaction, any National Office Counsel review through P&A will, in general, be completed no later than seven days after coordination with P&A occurs. Sample IDR language for requests involving listed transactions is available to the examiner at the OTSA website, http://lmsb.irs.gov/hq/pftg/otsa/index.asp.

  2. Any IDR for audit or tax accrual workpapers should request that, in the event a taxpayer or third party does not produce a document requested by the IDR, the taxpayer or third party should provide the examiner with a description of the document being withheld, including the number of pages contained in the document, and the specific reason why the document is not being provided in response to the IDR. If a document is not produced based on a claim of privilege, the taxpayer or third party should provide the examiner with a detailed privilege log. However, if the taxpayer or a third party served with an IDR fails to provide (or unreasonably delays providing) the requested descriptions of documents being withheld and/or the requested detailed privilege log for any privilege being claimed, the examiner should promptly issue an appropriate summons, as described in IRM 4.10.20.4.1 , Issuance of Summonses, requesting all withheld workpapers.

  3. Review or Approval. Before an IDR for these workpapers is issued, review or approval must occur.

    1. Requests under the Unusual Circumstances Standard. In LMSB cases, approval to issue an IDR under the unusual circumstances standard must be obtained from the Director, Field Operations, LMSB. In SBSE cases, approval for such requests must be obtained from the Area Compliance Director, with the concurrence of the Director of Compliance Policy, SBSE.

    2. Requests Involving Listed Transactions. The Team Manager in LMSB cases, or Group Manager in SBSE cases, must review any IDR requesting tax accrual workpapers involving listed transactions.

4.10.20.4.1  (07-12-2004)
Issuance of Summonses

  1. If a taxpayer or third party does not produce audit or tax accrual workpapers in response to an IDR, the examiner must determine whether to issue a summons. The standards and procedures will differ depending upon whether the request for workpapers was made under the unusual circumstances standard ( see IRM 4.10.20.3.1) or involved a listed transaction.

  2. Audit or Tax Accrual Workpapers under the Unusual Circumstances Standard.

    1. The examiner should make the decision whether to issue a summons based on all the facts and circumstances surrounding the case. If it is necessary to issue a summons to secure audit or tax accrual workpapers under the unusual circumstances standard, the examiner should ensure that the burden of compliance with the summons will not be unreasonably onerous. The summons should provide a specific and unambiguous description of the records demanded so that the summoned party can reasonably be expected to identify the exact records sought. The summons should also identify the particular taxpayer for which the documents are sought, the period covered, and the nature of the documents. Unless the examiner determines that all of the workpapers are material and relevant, the summons should identify and request only those documents relating to the specific matters under consideration. Finally, the summons should specify whether it seeks audit or tax accrual workpapers, or both.

    2. Approval. In LMSB cases, prior approval for the issuance of summonses for audit or tax accrual workpapers must be obtained from the Director, Field Operations, LMSB. In SBSE cases, prior approval for the issuance of such summonses must be obtained from the Area Compliance Director, with the concurrence of the Director of Compliance Policy, SBSE. In TEGE cases, approval for such requests must be obtained from the Director, EO Examinations; the Director, EP Examinations; or the Director, Government Entities.

    3. Prior to issuance, a summons for audit or tax accrual workpapers will be submitted to Field Counsel for review and comment, accompanied by a statement of applicable facts and circumstances. Field Counsel will coordinate review of the proposed summons with the Associate Chief Counsel (Procedure and Administration) and through the appropriate Division Counsel. Coordination with Counsel will be treated as a high priority matter by Counsel so as not to delay the examination. National Office Counsel review of the summons will, in general, be completed no later than fourteen days after coordination with P&A occurs.

    4. Counsel will review the summons to ensure that the summons is appropriately drafted and meets all legal requirements. The summons should be directed to the taxpayer, the taxpayer’s accountant, the independent auditor, or all three, based on a determination as to the location of the workpapers.

  3. Tax Accrual Workpapers Involving Listed Transactions

    1. The examiner must prepare a summons for workpapers that are not produced in response to an IDR.

    2. When the examiner prepares a summons for the workpapers, a statement of the facts and circumstances should also be prepared. The records sought must be described with reasonable certainty. The requirement of reasonable certainty will be satisfied if the description of the records is specific and unambiguous and the summoned party can reasonably be expected to identify the exact records sought. The summons must identify the particular taxpayer for which the documents are sought, the period the documents cover, and the nature of the documents.

    3. Executive Review. In LMSB cases, pre-issuance review of summonses for tax accrual workpapers must be obtained from the Director, Field Operations, LMSB. In SBSE cases, pre-issuance review of such summonses must be obtained from the Area Compliance Director, with the concurrence of the Director of Compliance Policy, SBSE.

    4. The examiner will work with Field Counsel to prepare the summons. Field Counsel will coordinate review of the summons through the appropriate Division Counsel and the Associate Chief Counsel (Procedure & Administration). Coordination with Counsel will be treated as a high priority matter by Counsel so as not to delay the examination. Any National Office Counsel review of the summons will, in general, be completed no later than seven days after coordination with P&A occurs.

    5. Counsel will review the summons to ensure that the summons is appropriately drafted and meets all legal requirements. The summons should be directed to the taxpayer, the taxpayer’s accountant, the independent auditor, or all three, based on a determination as to the location of the tax accrual workpapers.

4.10.20.4.2  (07-12-2004)
Enforcement of Summonses

  1. If the summoned party does not comply with the summons, the examiner will refer the matter to Counsel for enforcement of the summons, following consultation with the Director, Field Operations, LMSB, for LMSB cases, or, for SBSE cases, following consultation with the Area Compliance Director, with the concurrence of the Director of Compliance Policy, SBSE.

    1. For summonses involving listed transactions and requests for tax accrual workpapers, the summons enforcement letter will be approved by the Deputy Chief Counsel (Operations) after coordination with, and pre-review by, the responsible Division Counsel and the Associate Chief Counsel (Procedure & Administration).

    2. For all other summonses seeking tax accrual or other audit workpapers, any summons enforcement letter must be coordinated with, and prereviewed by, the responsible Division Counsel and the Associate Chief Counsel (Procedure & Administration).


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