Response Memo to the IRS

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 reallife 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 fastgrowing 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
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proposed adjustment, explain why your client disagrees, and include relevant legal research to defend your client’s case. Be sure to read the NOPA in its entirety
in order to formulate a clear and thorough response.
This assessment addresses the following course outcomes:
 Develop plans that represent clients through the various stages of the IRS audit process for effectively resolving appeals
 Assess impacts of various federal taxation laws and generally accepted accounting principles on clients for informing appropriate responses to IRS audits
 Justify why an appeal is an appropriate course of action for clients based on materiality and applicable taxation rules and regulations
Prompt
Imagine that you are a CPA and your client, XYZ Inc., has received a Notice of Proposed Adjustment (NOPA) from the IRS related to the treatment of per diems
on their prior-year tax return. Your client has decided to appeal the IRS’s proposed adjustment. Now, you must prepare a 2- to 3-page memo to the IRS on behalf
of your client in response to the NOPA. Your memo must have three distinct sections: Issues, Stance, and Support. The Support section is where you need to
defend why your client is appealing, and it should make up the bulk of your memo.
Specifically, the following critical elements must be addressed:
I. Issues: Identify each item that the IRS challenged your client on in the NOPA, and clearly state how the client intends to respond to the proposed
adjustment.
II. Stance: Declare your client’s stance on the items identified above by briefly explaining which facts or legal arguments in the NOPA you consider to be in
error and why.
III. Support: Explain why your client’s appeal should be granted, using relevant legal research to support their case. You may include Internal Revenue
Code, regulations, reference to past revenue rulings, and/or revenue procedures in your defense.
You will submit Final Project II in Module Nine. It should be a complete, polished artifact containing all of the critical elements of Final Project II. It should reflect
the incorporation of feedback gained throughout the course. This submission will be graded with the Final Project II Rubric.