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Precautions to be taken in the pre-audit phase

Table of Contents

    The most important part of any pre-audit strategy is due diligence, which typically means identifying potential examination and litigation risks in actual and planned transactions. Steps to this include: 1) evaluating the merits of uncertain positions in light of current law; 2) identifying and weighing any legal authority supporting uncertain positions; 3) quantifying the tax exposure underlying the fact pattern; 4) assessing related tax reserves and additional exposures; 5) identifying probable audit approaches (i.e. scope of audit, likelihood of issues to be raised, litigation and taxing positions of the taxing authority, and appeals coordinated issues); and 6) setting reasonable goals surrounding positions in the examination (i.e. possible settlement parameters and issues of information gathering and disclosure).

    In addition to the requisite due diligence, a comprehensive plan should be in place to facilitate the multi-faceted examination process. This means that taxpayer personnel should: 1) review procedures for collecting and maintaining pertinent records; 2) anticipate summonses and formal document requests; 3) timely review documents and analyze their implications for issue resolution; and 4) come up with options for the application of alternative dispute resolution (ADR) programs. However, more than anything, the key to success is to do the auditor’s work for them by being prepared and upfront.


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