Practice Notes: The Quality Examination Process - Potentially Effective Tool Not To Be Overlooked
Joseph M. DePew, Thomas A. Cullinan, and Kendall C. Jones
Corporate Tax Management - 9/15/2012

Editor's note: This is one in a series of "practice notes," providing readers with background or updates on important issues affecting the avoidance or resolution of controversies with tax authorities. Reader comments should be sent to the authors or to

The Internal Revenue Service has contacted you to let you know that it will be opening an examination of the company's tax return. Or, perhaps, your company is one of those lucky companies under constant examination, a Coordinated Industry Case. In either situation, the IRS examination team will be required to engage in the Quality Examination Process (QEP).[1] The QEP became effective for all examinations beginning after June 1, 2010. The QEP includes all LB&I cases, both Coordinated Industry Cases and Industry Cases.

The QEP seeks the cooperation and input on the part of both the taxpayer and examination team from the initial contact through the closing of the examination and all the steps in between. Before the QEP, the examination team may have used a planning process known as the Joint Audit Planning Process. The Joint Audit Planning Process, launched in 2003, was outlined in a 39-page document issued by the Large and Mid-Size Business Division (LMSB, now LB&I) in collaboration with TEI.[2] The Joint Audit Planning Process, created to advance the goal of collaborative tax administration, sets out the steps to be performed at each stage of an examination. The Joint Audit Planning Process, however, was not uniformly used by IRS examination teams. Further, when it was used, it was often simply viewed as a process to be completed as part of a checklist, instead of a meaningful opportunity for the examination team and the taxpayer to plan the examination together.

Taxpayers that have been through the Joint Audit Planning Process have reported that it varied greatly depending on the examination team working on the case. Some taxpayers were frustrated about the issuance of information document requests by the exam team without prior discussion or advance notice.[3] Perhaps most disappointing, because many at the IRS saw the processes discretionary, the Joint Audit Planning Process was not used universally in practice.[4] In contrast, with the QEP, the IRS now appears to be serious about establishing a process which includes active taxpayer participation and facilitates conducting examinations in an efficient and effective manner.

The QEP is the effort by the IRS to put in place a process that benefits both the IRS and taxpayers by creating efficiency through cooperation during the examination. The goals of QEP are to foster better communication between the taxpayer and the examination team; to streamline the exam process and reduce the burden on both the taxpayer and IRS exam team; to improve consistency in the planning of the examination; to improve the use of jointly developed examination plans; and to emphasize resolution opportunities throughout the examination process.

The QEP formalizes many of the steps and milestones of the examination process in order to garner cooperation and ensure robust communication during the entire process. For example, as part of any QEP, the following actions are contemplated:

  • Feedback from the taxpayer on the IRS's draft audit plan;
  • Work by the taxpayer with the IRS exam team to set materiality thresholds for the exam scope;
  • Discussions between taxpayer and exam team of what specialists should be involved in the examination;
  • Advance discussion by the taxpayer with the exam team of anticipated affirmative claims and roll-forward adjustments;
  • Setting of target dates for milestones of the examination;
  • Agreement on IDR response times;
  • Agreement on the use of sampling or alternative methods;
  • Setting of regular status meeting dates; and
  • Identification of the process for raising of issues (e.g., the issuance and discussion of draft Forms 5701).

The IRS's commitment to making the QEP work, as opposed to simply being part of a checklist, is underscored by the IRS's listing these items (along with other efficiency, planning, execution, and resolution techniques) in the Internal Revenue Manual.[5] In contrast, the Joint Audit Planning Process was never formally included as part of the IRM, but was obliquely referenced in an exhibit.

The Internal Revenue Service Advisory Committee (IRSAC) made a number of recommendations and suggestions on how the IRS could most effectively roll-out the QEP to taxpayers.[6] In its 2010 annual report, IRSAC recommended that the QEP be highlighted at various general meetings of TEI, the AICPA, and the ABA, and observed that the IRS appears to have been doing so successfully. The internal roll-out within the IRS was noted by IRSAC as being an even more important aspect of the QEP than the external rollout to professional taxpayer organizations.

The recognition by IRSAC of the importance of the internal rollout to the examiners demonstrates that IRS exam function cannot view the QEP simply as a "box to check" as part of any examination if the QEP process is to be successful. Instead, both the IRS and taxpayers must use the QEP as a meaningful process in planning and executing the examination at each of its stages. IRSAC further recommended that the use of the QEP should be monitored by the IRS by having senior IRS employees solicit taxpayers' opinions at the close of the examination to inquire, whether in the taxpayer's opinion, the QEP standards were followed.[7] Such a commitment by senior IRS management demonstrates that taxpayers need to utilize the QEP and not allow their examiners to gloss over the QEP.

Anecdotally, some practitioners have questioned whether the QEP will be viewed by some examination teams as mere form over substance. Of course, the QEP is only as good as the participants from both the taxpayer and the IRS examination team make it. If an IRS exam Team Coordinator or Team Manager is merely "checking a box" that the QEP has been discussed and utilized, then the process may not be effective or useful. In such instances, the taxpayer needs to be assertive and ensure that the process is used as intended. Indeed, the QEP contemplates the use of the so-called Rules of Engagement[8] as part of that process and taxpayers should not hesitate to initiate these rules to ensure the QEP is meaningful.

Taxpayers should review, understand, and take full advantage of the QEP as part of any examination. The systematic approach set forth in the QEP can result in many benefits, including a more efficient examination with fewer unresolved issues or misunderstandings. Ultimately, use of the QEP may limit the number of issues that move forward to the IRS Appeals Division or to litigation.

Joseph M. DePew, a member of Sutherland's Tax Practice Group, focuses on tax litigation and controversy, corporate taxation, and income tax with an emphasis on federal and state procedures, dispute resolution, collection, and tax litigation. He received his B.A. degree from the State University of New York (Oswego), his J.D. degree from Ohio Northern University, and his LL.M. degree (Taxation) from the University of Florida. He may be contacted at

Thomas A. Cullinan is a member of the Tax Practice Group of Sutherland Asbill & Brennan LLP. He focuses on tax controversies against the Internal Revenue Service (IRS) and has represented a large number of corporations, partnerships, and high net-worth individuals in all phases of tax controversy. He received his B.A. degree from the State University of New York (Geneseo), his M.S. degree from the State University of New York (Albany), and his J.D. degree from Vanderbilt University. He may be contacted at

Kendall C. Jones is a member of Sutherland's Tax Practice Group. He has more than 32 years of tax controversy experience, including IRS procedural, controversy, and dispute resolution matters, as well as tax litigation. Before entering private practice, Mr. Jones spent 15 years with the IRS, serving as a Large Case Program Manager, National Office Special Trial Attorney, IRS National Tax Shelter Coordinator, a Technical Assistant to the Deputy Chief Counsel, and the Acting District Counsel (Foreign Operations). He received his B.S. degree from the University of Colorado, and his J.D. degree from the University of San Diego. He may be contacted at



1. The Internal Revenue Manual (IRM) sets forth the process for the QEP in Part 4, Chapter 46 and it applies to all business taxpayers with assets over $10 million. The QEP Reference Guide can be found at http:// (last accessed October 10, 2012).
2. This document was reprinted in the November-December 2003 issue of The Tax Executive.
3. Cf. 2010 TNT 207-5.
4. See 2010 Internal Revenue Service Advisory Council Public Report (Report of Large Business and International Subgroup), available at SUBGROUP-REPORT (last accessed on October 10, 2012).
5. See IRM, Part 4, Chapter 46.
6. See note 4 supra.
7. Id.
8. The Rules of Engagement, found in IRM 4.51.1, are a set of rules providing guidance to ensure end-to-end accountability. Thus, if a taxpayer is having an issue with an exam agent or her manager, the Rules of Engagement set forth the process by which the issue can be elevated (or escalated) within the IRS management structure.