Tax Reconciliation Workpapers Tax reconciliation workpapers are used in assembling and compiling financial data in preparation for placement on a tax return. These workpapers 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.

Tax Accrual Workpapers 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.

Audit Workpapers 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.

The table below lists commonly used acronyms and their definitions:

In unusual circumstances (as defined in paragraph (2) below), 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. This 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:

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 IRB 18). In 2002, the Service modified its 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 26 CFR 1.6011-4, and subsection (b)(2) defines listed transactions to include substantially similar transactions. The policy governing requests for tax accrual workpapers involving listed transactions varies according to when the tax return was filed.

If a listed transaction was properly disclosed on the return, in the manner prescribed by 26 CFR 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 (4).

If, however, a listed transaction was not timely and properly disclosed in the manner described by 26 CFR 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 year(s) under examination.

As a discretionary matter, all tax accrual workpapers for the year under examination will be requested if:

The term "as a discretionary matter" as used in this section of the IRM denotes the exercise of prudence in executing policies. Wherever this 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 the issues, including penalties, pertaining to all listed transactions and the parties have executed a Form 906, Closing Agreement on Final Determination Covering Specific Matters, with respect to the issues conceded by the taxpayer, then it may be appropriate not to seek all of the tax accrual 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 LB&I cases, the approval by the Director, Field Operations, LB&I is required. For SB/SE cases, approval by the Area Compliance Director, with the concurrence of the Director of Compliance Policy, SB/SE is required. For TE/GE cases, approval by the Director, EO Examinations; the Director, EP Examinations; or the Director, Government Entities is required.

If a transaction becomes a listed transaction, within the definition in 26 CFR 1.6011-4, subsequent to the filing of a tax return, the 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 should also be considered in determining whether a transaction is listed. The examiner should work with Field Counsel to make these determinations.

The standards and procedures for issuing a summons 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 (see IRM 4.10.20.3.2).

If the summoned party does not comply with the summons, the examiner will refer the matter to Counsel for enforcement of the summons, following a consultation with the Director, Field Operations, LB&I, for LB&I cases; or, for SB/SE cases, following a consultation with the Area Compliance Director, with the concurrence of the Director of Compliance Policy, SB/SE; or for TE/GE cases, following consultation with the Director, EO Examinations; the Director, EP Examinations; or the Director, Government Entities.