IRS Large Business Commissioner's Secrets to a Smooth Audit

What triggers an IRS audit?  

For multinationals, this question has intensified under the new administration.  

For compliance insights, Nikole Flax, IRS Commissioner of the Large Business and International Division, recently spoke at the Bloomberg Tax Leadership Forum.  

Among the many tips, Flax noted communication, cooperation, and transparency are critical — on both sides. This stance comes as the LB&I division is engaged in its own self-assessment.     

"We are always looking to improve case selection — picking the right cases and deselecting cases where we don’t see an issue — so we’re not using taxpayer time unnecessarily," Flax said.  

Two years into its launch, the IRS's Large Corporate Compliance Program, within LB&I, identifies large and complex corporate taxpayers through criteria such as gross assets and receipts. After identification, data analytics determines the likelihood of an audit, Flax said.  

"We use data strategies [for] identifying where we think there could be a risk of noncompliance," said Flax, citing instances where corporate refunds exceed $5 million, for example. 

Separately, the agency's longtime voluntary program, the Compliance Assurance Process, now includes "recalibrations," Flax said. With nearly 140 participants, the program has a "bridge phase" where low-risk entities can pause participation, so the IRS can shift resources elsewhere.  

For active participants, the CAP program helps strengthen compliance. But not all applicants are a fit. This is true of companies that engage in a "significant amount of transfer pricing," Flax said.  

What is the biggest challenge corporate tax departments are facing this year?

To further mitigate audit risk, multinationals can stay apprised of tax developments through LB&I's active campaigns.

"[They] will continue as part of the audit process," Flax said. However, as with the foreign tax credit campaign, they will likely remain broad in focus.  

"I'm not convinced it make[s] sense only to do a campaign looking at GILTI or BEAT," Flax said. "We should be looking at the entire international position."  

Some provisions might eventually warrant niche campaigns. But "it's still early on TCJA [Tax Cuts and Jobs Act] enforcement," Flax said. 

In the meantime, companies must also continue to assess tax modeling methods — a task compounded by the lack of a single approach. "We don't endorse any particular product for modeling," Flax said.  

However, tried-and-true approaches can simplify compliance. Low-cost tools like spreadsheets can minimize back and forth, while PDFs trigger "additional questions of how positions were arrived at," Flax said.  

Yet taxpayer administrative burdens are complicated by tax laws in flux. Speaking to this point, feedback need not be limited to official comment periods.  

"We do a lot of less formal engagement as well — we want to know [the] areas [that] need the most guidance," Flax said. 

More broadly, multinationals can always elevate concerns. "Sometimes there's a hesitancy because [of] concern what it might mean for the relationship with the exam team," Flax said.  

Respecting management chain of command can minimize issues.  

"Skipping levels is generally not productive — in most cases, we'll have to go back to that level that was skipped," Flax said.   

Looking ahead LB&I will strengthen focus on previously underexamined areas, such as pass-through entities and high-income individual cases. For multinationals, specifically, offshore activities and facility reporting scrutiny may intensify, particularly with budget increases.  

In the meantime, multinationals can minimize audit exposure — and shorten review time, should audit occur — through the trio of communication, cooperation, and transparency. And if they have not already done so, now might be a good time to brush up on those Excel skills.  

For more insights from the Bloomberg Tax Leadership Forum and to watch replays of the live event, visit: