Simpler ‘Life’ for Some Business Taxpayers
4, 2002, the IRS announced an accelerated examination process
for selected business taxpayers with assets exceeding $10
million. The Limited Issue Focused Examination (LIFE) is a
simpler, streamlined method that restricts the scope of examination
to mutually agreed-upon material issues. The process formally
incorporates the best practices developed by the IRS in its
attempts to be more efficient, customer friendly, and professional
in its compliance efforts.
new audit process is designed to substantially reduce time,
expense, and disagreements by focusing on important issues
and permitting the IRS to direct its resources to higher-risk
areas. Additionally, LIFE provides consistent and fair taxpayer
treatment, encourages open communications with the IRS,
and increases cooperation with the examining team.
is available to selected taxpayers. All large and medium-size
businesses facing IRS scrutiny may seek participation in
LIFE; approval is not always granted. Some LIFE features
are incorporated into the audit process even when a taxpayer
is not selected.
from the LIFE program are taxpayers with a significant number
of material issues outstanding during the audit; taxpayers
that have been uncooperative in the past and shown little
or no inclination to change their behavior; and “game-playing”
taxpayers, fraudulent taxpayers, and participants in abusive
IRS audit team will conduct a comprehensive risk analysis
to identify the range of issues that need to be resolved.
In close consultation with IRS specialists and a team manager,
the audit team will determine the material issues that pose
the greatest compliance risk. If the taxpayer is an appropriate
candidate for LIFE, the range of issues uncovered during
the comprehensive risk analysis and the material issues
to be addressed and resolved during the audit will be presented.
Both parties will discuss and negotiate the selected issue
materiality thresholds for the examination, and prepare
for their resolution.
parts of the new audit approach include determining the
issues to be examined and setting the materiality thresholds.
There are no common materiality thresholds for taxpayers.
As a general rule, lower materiality thresholds apply to
permanent or recurring items and higher thresholds apply
to items affecting longer periods of time.
IRS will not establish common materiality thresholds for
industries or businesses, and a threshold established for
one tax year may not be valid the following year. The IRS
will usually agree to identical thresholds covering multiple
tax years under examination except when an acquisition substantially
increases the taxpayer’s size.
cannot benefit from materiality thresholds if the examination
indicates fraud, abusive tax shelters, or activities contrary
to public policy. Nor will a threshold apply when a taxpayer
has a recurring problem or a problematic policy, such as
erroneously expensing all acquisitions of machinery and
equipment when purchased. In such a case, the taxpayer must
furnish information on all acquisitions of machinery and
equipment by all entities for all tax years under audit.
are well advised to request a waiver of certain traditional
audit procedures, including income probes and inventory
analysis, in order to streamline the process. Taxpayer requests
not withstanding, the IRS will not grant waivers from examining
prior, subsequent, or related tax returns.
the selection of the issues to be examined and the determination
of their materiality are not unilateral but are subject
to negotiation, taxpayers should participate in preliminary
discussions to determine the scope of the examination.
of understanding is executed by the taxpayer and the manager
of the audit team. The memorandum sets forth and controls
all important aspects of the audit and specifies the responsibilities
of each party. It binds both parties to act in good faith
and work diligently toward a timely completion of the examination.
Both parties agree to abandon all claims and affirmative
defenses below the materiality thresholds and to participate
in alternative dispute resolution tools such as fast track
appeals, accelerated issue resolution agreements, and early
principal promises made by the audit team in the memorandum
of understanding are as follows:
The scope of the audit will not be expanded without approval
from the team manager.
At the earliest opportunity, the IRS team will furnish
the taxpayer with a list of specific accounts, transactions,
and Schedule M items that are expected to be examined.
Information Document Requests (IDR) will not be sent without
prior discussion with the taxpayer.
Notice of Proposed Adjustment (NOPA) will not be issued
without meaningful discussions of the facts and the technical
positions adopted by both parties.
return, the taxpayer promises to do the following:
Brief the audit team regarding the industry, company structure,
financial performance, accounting records, significant
events or transactions, and workpapers and supporting
documents for selected accounts or transactions, as specified
by the IRS;
the audit team with schedules and computations covering
all agreed-upon rollover and recurring adjustments from
previously examined years;
Change a previously established materiality threshold
that was found to be invalid by the audit team;
File all claims and affirmative defenses with supporting
documentation by mutually agreed-upon dates;
to any IDR within the agreed response time; and
the scope of the examination to include any previously
nondisclosed abusive tax shelter or listed transaction
discovered during the course of the audit.
the memorandum of understanding is executed, LIFE may be
terminated only for significant or repeated failures to
comply with the terms of the agreement. In the event of
termination, the IRS will revert to the traditional, broad-based
seeks to avoid the adversarial approach often encountered
in IRS examinations and to utilize best-practices methods
for resolving issues with taxpayers. The new policy views
audits as necessary business transactions that may be conducted
without unnecessary acrimony, cost, or delay when both parties
are committed to mutual respect, good faith, and fair dealing.
LIFE presumes that audited taxpayers are willing to cooperate
and participate in a businesslike manner, and is the most
recent and welcome example of the IRS’ major culture
Monippallil, JD, CPA, is a professor and director
of the accountancy program at Eastern Illinois University,