Corporate Tax Audit Survival — Sample Chapter

Chapter 4: I am the CTM SIA from the POD San Jose. I am from Mars

Most individuals who move from the private sector to the public sector have an agenda they want to accomplish during their public term. I was no different.

Prior to my term with the IRS, I spent over 20 years engaging members of the U.S. Congress and their staffs on a variety of tax and other policy issues. I noticed that most of them came to Washington with clear personal agendas.

Some felt that government was too intrusive, and they wanted to lessen its impact on our lives. Others felt just the opposite. Some came to further a social cause. Some came to help create high-paying U.S. jobs and increase U.S. competitiveness around the world. Some wanted to make government processes run more efficiently.

I hoped to pursue four main agenda items:

1. Improve relations between industry and the IRS.
2. Reduce the audit time and cost burden for industry and the IRS.
3. Help U.S. industry become more competitive.
4. Introduce private industry efficiency to the IRS.

Throughout the remaining chapters of this book, I will make observations and reflections relating to this agenda. With respect to items 1 and 2, I believe I was part of a success story. I found the going a little harder for items 3 and 4.

The title of this chapter: “I am the CTM SIA from the San Jose POD—I am from Mars,” summarizes how ill-prepared I was to join the IRS.

Even though I had years of experience dealing with the U.S. Congress and various regulatory agencies, including the U.S. Department of the Treasury and the IRS, I had always engaged them as an industry representative. To change sides was to enter a whole new world.

My first 30 days on the job were a challenge. I was met with suspicion, and I had trouble with government acronyms, Big Brother warnings, and an unfamiliar environment.

Spy/Traitor/Disbelief

When I showed up for work my first day at my San Jose office, I was met by a very nice group of IRS employees. I could tell they wondered what a corporate person was doing in their midst. They were friendly, but in a decidedly reserved way. I sensed some of them thought of me as a corporate spy.

I was joining the Service as the highest ranking IRS employee in the San Jose region. The person designated as the Commissioner’s Representative for my building gave me a pass to be able to enter into the secured office areas. I saw file cabinets full of confidential corporate taxpayer information. For someone who had spent most of his career opposing the IRS, it seemed strange being here. I felt like the fox that was being asked to guard the hen house.

Just a few miles away, my former corporate tax colleagues were talking about me, wondering if I had become a traitor among them. Would I be turning over the secrets of the corporate community? Would I be someone they would want to talk to again? Frankly, I had been out of the corporate tax department world for several years at this time and was hardly in a position to give away corporate tax department secrets. Nonetheless, the tax community was concerned.

Closer to home, my neighbors were in shocked disbelief. The IRS is not popular in my hometown. They could not believe I had joined an agency so disliked. Many of my friends became uneasy when I told them I had joined the IRS. Because of this universal response, I would generally refrain from telling neighbors and others that I was with the IRS. If asked, I would say I was with the Treasury Department on an assignment to improve government efficiency. This story had a positive ring with them. I later learned that many IRS agents tell their neighbors and social acquaintances the same story.

Acronymphobia

The IRS is an agency that thrives on the use of acronyms. In fact, acronyms flourish to their greatest heights at the Large and Mid-Size Business Division (LMSB) headquarters in the Mint Building in Washington D.C., where “Mintspeak” crops up in every discussion.

In one of my first meetings, I sat among several IRS career employees in the Mint Building. The discussion leader started by saying that we were meeting on the “ABC issue for the DEF area of the GHI problem.” I raised my hand and said, “Excuse me, would you mind telling me what the ‘ABC issue for the DEF area of the GHI problem’ is?” The leader courteously explained the three acronyms to me while the others in the room squirmed in their chairs. I thanked him.

The leader went on. “The GHI problem has a connection to the JKL and MNO and PQR problems, which we need to solve PDQ.” I raised my hand again and said, “Excuse me, would you mind telling me what ‘JKL’ and ‘MNO’ and ‘PDQ’ stand for? And what is ‘PDQ’?” The leader explained the acronyms, and the old-timers rolled their eyes.

I looked at my watch and realized I had taken up about a quarter of the time scheduled for the meeting.

The leader went on to talk about “STUV” and “WXYZ” issues, but I did not raise my hand again. I might as well have been from Mars. A few days later, though, I was able to turn the tables during introductions at another IRS group meeting. When my turn came, I introduced myself as the “CTM SIA from the San Jose POD.”

Everyone in the room knew that “CTM” stood for Communications, Technology and Media. They also knew that “POD” stood for post of duty (a military term frequently used in the IRS). However, they did not know what “SIA” stood for.

They were perplexed. Here was an acronym that they could not decipher. I explained that “SIA” stood for Senior Industry Advisor. They were relieved. They could now add a new acronym to their list.

Debbie Nolan, then Deputy Commissioner of LMSB and now Commissioner, gave a speech at an LMSB managers’ meeting during my first few months on the job. When it was over she approached me and asked me how I liked the speech. She was grinning.

I replied that I thought it was her usual great speech.

She asked, “Did you notice anything different?”

“I’m not sure,” I responded.

She told me that she had avoided all acronyms because she wanted to be certain that I understood her message.

I appreciated her efforts to go beyond “Mintspeak” in her remarks.

While I have learned the meanings of many IRS acronyms, some still leave me in the dark. But I am not alone. Others, too, are overwhelmed by the prospect of sitting through entire meetings that might as well be conducted in a foreign language.

Big Brother

When I first engaged the IRS voice messaging system, I was stunned by the message: “Welcome to the IRS voice messaging system. Unauthorized use of this facility could result in civil and criminal penalties.” After this admonition, I was almost afraid to use the IRS phone system.

A few days later I received an email message warning me that I could be disciplined if I did not pay my government credit card bill on time. I thought, “Am I working with a bunch of deadbeats?”

Shortly thereafter I received a sternly-worded message telling me there would be severe consequences, including possible termination of employment, if I incurred estimated tax payment penalties for underpayment of estimated taxes or if I made a mistake on my federal income tax return. I thought, “Am I working with a bunch of tax cheats?”

I considered the references to late payments of credit card bills and tax filing penalties.

Why would IRS employees be receiving these messages? Was I not working with some of the most honorable people in America?

I concluded that the messages were ill-advised and would never have been sent by management in the private sector. Messages like these can only breed hurt feelings and damage morale. To me, the messages are insulting, and I believe the practice should be eliminated.

The System

One of my first IRS assignments was to co-manage a project associated with updating the corporate tax return filing system.

Together with another LMSB executive, I met with a group of IRS employees who had been detailed to a design team for this purpose. An outside consulting firm had been hired to assist the IRS team.

The design team and outside consultant had been discussing options for several weeks. Every wall of the meeting room was plastered with large sheets of paper listing the pros and cons of the project. I asked if they had arrived at any conclusions, and they said they had gotten so mired down in the project details that they were having trouble making any recommendations.

The group asked us to review a report that they were writing to management. We suggested they compose an executive summary to the document in order to help crystallize their thinking. They went back to work and returned with a ten-page executive summary for a 50-page report. Furthermore, the report contained no conclusions. They simply had not been able to identify the major issues.

My associate and I helped them to synthesize their findings into a three-page executive summary, a process that helped them see where the project was going.

Sadly, this design team exercise was typical of my experience with many Service projects. A lot of smart people are expending a tremendous amount of effort without resolving the problems to which they have been assigned. I think the problem is due to a lack of strong leadership during the design team process. Most of the process seems to be consensual, and the attempt to achieve consensus makes it difficult to maintain focus on the end result.

I have one final observation from my first 30 days at the IRS. I had been asked to participate in a team exercise with the other Senior Industry Advisors dealing with an international problem. We all traveled to Washington for a two and one-half day meeting. Facilitators are commonly used in the IRS to help lead discussions, and one had been brought in from the Midwest to help us organize our thoughts.

The meeting might have been concluded in about a day, but because it was scheduled to last two and one-half days, we all had to stay for the entire time. I believe that often too little attention is given to the dollar value of the time that is wasted by requiring meetings to last longer than necessary.

After my first 30 days I became more comfortable with the IRS way of doing things. In truth, my background with industry, especially the 22 years I spent with the very entrepreneurial and free-spirited high-technology sector, never permitted me to be fully at ease with many IRS practices.

I am From Mars

Because of my experiences in the private sector, I sometimes had difficulty fitting into the IRS fabric.

One example of this involved the high-profile debate about whether stock options should be expensed for financial statement purposes. This issue was extraordinarily intense during the 2003-2004 time period, with the Financial Accounting Standards Board (FASB) arguing that stock options should be reflected as an expense on the financial statements while industry argued that they should be reflected as an item on the balance sheet. Most employees in the high-technology sector agreed that they should be reflected as an item on the balance sheet, and I strongly supported the high-technology position.

This topic has no bearing on the filing of a corporate tax return. For tax return purposes, stock option exercises usually are treated as an income tax expense.

My colleagues in the IRS often would argue about this issue over lunch or at other meetings. Almost universally they would take the position that stock options should be treated as an expense for financial statement purposes. I would counter that, in all of my experiences in the high-technology area, it was better not to make this change. They would smile at me (some would glare) as if I did not know what I was talking about. It would have been a futile exercise to try to persuade them otherwise. I would have been like the lone Republican in the House of Representatives trying to persuade the 434 Democrats in that body that they were wrong on an issue. Conversations like these made it clear to me that I might as well be from Mars.

Another time, I was engaged in a discussion about depreciation of telecommunication equipment. It seemed apparent to me that the equipment at issue was similar to high-technology equipment that, by statute, has a depreciation period of five years. At this point, telecommunication equipment was not clearly covered by statute, and the IRS contention was that the equipment had a ten-year life.

I argued that depreciation is merely a timing issue, meaning that it is just a cash flow issue for the government and does not result in lost taxes. On the other hand, the benefit of faster cash flow through faster depreciation means a lot to capital-intensive telecommunications companies.

I also felt that a ten-year life was not competitive relative to depreciation programs for telecommunications companies in other countries. My IRS colleagues had the power to help U.S. international competitiveness if they would agree to five-year depreciation.

They paid lip-service to me but finally chose to apply the ten-year life. Clearly they had decided that I was from some other planet.

While I may indeed have come from Mars, I believe that some of my thinking, and my deportment, may have had an influence on the IRS executive team. Toward the end of my term, I found that they listened to me more often. The meetings seemed to be shorter and more to the point. And I noticed that they sought my advice more frequently.