The IRS, in a new program, is boldly trying to change the inherent nature of audits. Although it only applies to its Large and Mid-Size Business Division, which serves taxpayers with assets in excess of $10 million, it represents a marked departure from how audits have been previously performed.
Under the program, which is called the Limited Issue Focused Examination or LIFE for short, the IRS and taxpayers can agree to limit the issues that will be covered by the audit and not raise controversies below a certain dollar threshold.
IRS's stated aim is to create "an atmosphere where the examination process is less difficult, less time-consuming, less expensive and less contentious for all involved." It sure sounds good.
The agency's determination of who qualifies for the LIFE process occurs after its normal initial risk analysis and planning process. LIFE imposes special obligations on taxpayers and the IRS to ensure full disclosure, cooperation, and to accelerate the process. It is voluntary and is governed by a formal memorandum of understanding.
What I really like about the program is that both sides benefit. The Service gets to audit the major issues with a cooperative taxpayer who is assured that the IRS isn't going to put them through an extensive, and seemingly, endless fishing expedition looking for additional tax liability.
If there is a problem, I don't see it in the details of the program, which of course, can be fine-tuned over time. The one problem I do see is simply whether the IRS and taxpayers' representatives can change their mindset and be a little less adversarial and stop manipulating the process--by the representative employing a delaying mechanism or the IRS using a continuing threat stance.
In order for LIFE to be successful, the proponents must play within the letter and spirit of the rules that govern it. This will require both a comfort and trust by both in the audit process and with each other.
I hope I am not looking for too much in asking that everyone play nice.
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