Are you prepared for an FET audit?

From an NTEA member We have received notice that the Internal Revenue Service (IRS) will be conducting an examination of our 720 tax returns. Do you have any tips on how we should prepare for the audit? These examinations tend to be relatively informal, and the examining agents tend to have a lot of discretion in determining the scope of the audit and whether any tax assessment will be made. Therefore, different audit strategies may be more or less effective, depending on the agent. However, in general, the following is recommended: Try to establish a cooperative, non-adversarial relationship with the examining agent. If the company is consulting with legal counsel (which is strongly recommend), it often makes sense, at least in the beginning, to keep the lawyers in the background. Designate a single company representative to be the primary communicator with the IRS examining agent. The designated representative should be knowledgeable about the subject equipment and excise tax matters. This will help ensure that the agent receives accurate information and that there are no communication breakdowns between the company and the agent. Have the information requested by the IRS agent ready and waiting. This will expedite the process, which is likely the outcome desired by both the company and the agent, and will go a long way toward establishing the cooperative relationship identified in the first item in this list. Do not provide information not requested by the IRS agent. Extraneous information creates additional work for the IRS agent. More importantly, volunteering nonresponsive information could lengthen the amount of time needed for the examination, broaden the scope of the examination and confuse the agent, none of which is good for the company. The agent knows why he/she is at the company and the information he/she wants to review. Let the agent do his/her job and complete the examination as efficiently as possible. Prior to the examination, assemble any IRS rulings or technical information that supports the company’s tax position. The agent examining the company’s returns may be responsible for several different excise taxes, so a particular agent may have varying degrees of experience with Section 4051 tax. If the agent has initial concerns over the tax treatment of one or more of the business’s transactions, the company will want to have supporting documentation ready to provide. (But, as noted in the fourth item in this list, it is generally not recommended to volunteer such information unless the examining agent raises specific concerns regarding the company’s tax treatment.) An examining agent will be more likely to have an open mind at the beginning of the process than at the end, when the agent already has formed a conclusion about the correct tax treatment for a type of transaction. If the company receives an assessment, it needs to know its rights. Taxpayers have the right to appeal a tax assessment, but there are certain procedures that must be followed in order to appeal. If the company has not done so already, it should consider obtaining legal advice at this point. The appeals process generally has a greater focus on legal and technical issues than at the examination level. This is because appeals officers must consider the “hazards of litigation” (i.e., the likelihood the IRS will lose in court in a refund action). This means the appeals officer is much more likely to negotiate a settlement rather than conclude the examining agent was either 100% right or wrong. For example, if the appeals officer thinks there is a 60–40% chance of losing in a court case for a refund action, the officer likely will offer to settle for an amount approaching 60% of the assessment.

Are you prepared for an FET audit?

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