It’s a scenario all business appraisers hope to avoid, but it’s likely that, at some point in your career, the IRS will audit one of your business valuations due to an issue related to the discount for lack of marketability (DLOM). Facing an IRS audit can seem daunting and may leave you scratching your head. Why did your valuation trigger an audit? What’s next? Just how much of your time will this take? Fortunately, there’s no need to panic. With these five straightforward tips from former IRS territory manager Michael Gregory, you can make the process less painful and time-consuming and reduce the chance of IRS audits in the future.
1. Develop a relationship
Our typical reaction to being questioned or challenged is to respond negatively. This is natural. However, to get through your audit efficiently, it’s very important to de-escalate this response. Before moving right into the negotiation in your first meeting with the IRS, ask whether the other party would be willing to spend a few minutes to get to know you. Developing an open dialogue and an element of trust can go a long way.
2. Listen to understand
Listening to understand means asking open-ended questions, paraphrasing what the other party stated, and summarizing—not offering your opinion or solutions. By listening to the other party, you can work to uncover interests or concerns and may very well discover elements that the other party has misunderstood or may not be aware of as part of the process.
3. Educate to inform
Many appraisers have been told not to be an advocate for their client but for their work. In this instance, being an advocate for your work is misguided. You need to be there to educate the IRS on what you did and why.
4. Negotiate focus on interests
You’re now ready to begin the process of a negotiation, and, just like any other negotiation, you need to understand who the decision-maker is. The decision-maker is not the IRS business valuer. The initial decision-maker is the agent or the estate and gift tax attorney. The final decision-maker is the manager of the agent, or the manager of the estate and gift tax attorney. Seek to uncover the interests of those involved, and always keep those interests in mind as you negotiate the valuation issues.
5. How to steer clear of future IRS audits
After navigating through the process unscathed and successfully resolving all of the issues the IRS raised, what is left to do? Only to celebrate, and to use this experience as a reminder to do everything you can in the future to avoid facing an IRS audit again.
For a list of models that the IRS most likely will accept, along with a deeper discussion of the tips mentioned here, download the free e-book, DLOMs and the IRS by Michael Gregory.