part4-99
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In general. There are three types of workpapers typically publicly traded
corporations and other large collectively owned entities:-
Audit workpapers,
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Tax accrual workpapers, and
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Tax reconciliation workpapers. See IRM 4.10.20.2
for a definition of these terms.
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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.
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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. -
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.-
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. -
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. -
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.
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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.
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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. -
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.
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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. -
Unusual circumstances for this purpose exist under the following conditions:
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A specific issue has been identified by the examiner for which there exists
a need for additional facts; -
The examiner has sought from the taxpayer and available third parties
all the facts known to them relating to the identified issue; and -
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.
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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.
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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).
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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.-
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. -
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. -
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. -
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. -
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.
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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). -
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. -
As a discretionary matter, all tax accrual workpapers for the year under
examination will be requested if:-
The Service determines that the taxpayer claimed tax benefits from multiple
listed transactions that were all properly disclosed; or -
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.
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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. -
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.
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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.-
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. -
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.
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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. -
Review or Approval. Before an IDR for these workpapers is issued, review
or approval must occur.-
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. -
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.
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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. -
Audit or Tax Accrual Workpapers under the Unusual Circumstances Standard.
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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. -
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. -
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. -
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.
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Tax Accrual Workpapers Involving Listed Transactions
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The examiner must prepare a summons for workpapers that are not produced
in response to an IDR. -
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. -
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. -
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. -
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.
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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.-
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). -
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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