Internal Revenue Service Audit & Notice of Proposed Adjustment Memorandum

Internal Revenue Service Audit & Notice of Proposed Adjustment Memorandum

TAX 700 Final Project II Guidelines and Rubric
Response Memo to the IRS
Overview
Researching

special tax issues for clients is important these days, as the Internal

Revenue Service (IRS) can challenge every aspect of difficult tax

stances. Certified Public Accountants (CPAs) must strive to navigate

their way through the ever-complicated tax code and back up every stance

they take with facts, relevant federal statutory tax legislation, and

case law to create a strong argument. This course has provided you with

real-life examples of IRS adjustments and has given you the opportunity

to respond and defend your client.
The treatment of per diem expenses

on tax returns has become a trending issue for the IRS in regard to

combining them with lodging, not including them as wages when the

assignment is greater than one year, and even not adding back the meals

and entertainment portion as part of a tax adjustment. This is a

real-life topic that has affected many companies over the past several

years, and you will have the ability to defend it just as other CPAs

have done for their clients.
Imagine that you are a CPA working for

an accounting firm. Your client is a Fortune 500 public company that has

revenues exceeding $10 billion. It is a fast-growing company that has

engaged your firm to handle all tax compliance and consulting. The

client has recently received notification from the IRS, and they have

determined that they will be under audit for the prior tax year. The

client contacts you to help them through this process. While meeting

with the IRS to understand what they need for their audit, you provided

the IRS with your client’s trial balances, recent tax return work

papers, and the tax returns themselves.
After further review of those

documents, the IRS provided your client with a Notice of Proposed

Adjustment (NOPA) related to per diem expenses that the client has been

providing to their employees when they travel for business. The per

diems were for the combined lodging and meal expenses. The IRS is

recommending that these per diems are nondeductible at a rate of 50

percent. The adjustment they have proposed is $5 million. While

discussing the issue with your client, you learn that they have

accounted for per diem expenses the same way for the past several years

in their tax returns. You estimate that the fees associated with your

services will be $250,000. This fee includes defending your client

before the IRS, drafting a response plan, preparing a NOPA response, and

defending your client through an appeal.
In Final Project I, you

drafted a plan for how your client should respond to the NOPA. Your plan

explained the client’s current situation, determined why they should

appeal to the IRS, and advised them on how to properly document the tax

uncertainty on their public disclosures. You also recommended measures

that your client can take to correct the tax issue related to per diems

for avoiding future audits.
For Final Project II, you must prepare a

memo to the IRS in response to the NOPA to initiate the appeal. Your

response will discuss the issue associated with the