This document summarizes a presentation given by Insero & Company CPAs on recent changes affecting government contractors and IRS audits. Regarding government contractors, it discusses increased compliance requirements from agencies like DCAA and DCMA, including certified cost reporting and strict record keeping. It outlines the federal procurement process and supply chain. For IRS audits, it provides an overview of the IRS divisions and audit types, noting more specialized auditors and transparency into taxpayers' activities. It discusses strategies like retaining representation and being cooperative.

1. DCAA/DCMACompliance &Audit Changes
FacingAll Government Contractors &
Recent Trends in IRS Audits
Dusty Faske, CPA
Denise Metivier
Richard Krucher, CPA
Insero & Company CPAs, P.C.
August 27, 2013
Insero & Company presents

2. DCAA/DCMA Compliance & Audit
Changes Facing All Government
Contractors

3. Overview
1. Federal Procurement
2. Federal Contract Compliance Agencies and FAR Regulations
3. What Has Changed in Recent Years
4. Are You a Federal Contractor? Where Are You in the Federal Supply
Chain?
5. Review of DCAA Compliance Basics
6. What This Means to Contractors
7. Strategies for Success

4. Federal Procurement
• The Federal Government is the largest
buyer of goods and services in the world
• Department of Defense is the single largest
government procurement agency
• 2014 DOD Budget = $526 Billion
• $8.4 Billion for 29 Joint Strike Fighters

5. ComplianceAgencies
Defense Contract Audit Agency (DCAA)
History:
• Established July 1, 1965
• Provides audit and financial advisory services to Department of
Defense (DOD) and other federal entities responsible for acquisition
and contract administration
• Operates under the authority, direction and control of the Under
Secretary of Defense Chief Financial Officer
• Vision: to protect the taxpayer’s interest
• Mission: perform all necessary contract and subcontract audits in
connection with negotiation, administration and settlement of contracts
and subcontracts to ensure taxpayer dollars are spent on fair and
reasonable contract prices
• DCAA provides contract audit services to all federal agencies

6. Defense Contract Management
Agency (DCMA)
• Vision: To provide DOD with leading
experts in quality assurance; cost, schedule
and supply chain predictability; and contract
administration enabling supplier partners to
achieve contract objectives
• Mission: To provide contract administration
services to the DOD Acquisition Enterprise
and its partners to ensure quality products
and services to the warfighter on time and
within projected cost

7. FederalAcquisition Regulation
• The principal set of rules in the Federal Acquisition
Regulation system consists of sets of regulations which
govern the acquisition process through which the
government purchases (acquires) goods and services
• The FAR system regulates the activities of government
personnel in carrying out the acquisition process
• The single largest part of the FAR is Part 52 which
contains standard contract clauses and “solicitation
provisions”
• Issued in 1983 and took effect in 1984

8. What Has Changed In Recent
Years
• All federal contracts exceeding the $700,000 TINA (Truth in
Negotiations Act) threshold require a compliant DCAA accounting
system and operations
• Accurate reporting (typically certified cost and pricing)
• Onerous recordkeeping
• Strict management of intellectual and proprietary information regarding
disclosure
• Need for federal contract specialists with current federal knowledge
and experience in a quickly changing compliance environment
• Case by case understanding of requirements of each contract and FAR
flow down clauses
• Understanding of contractor options and rights during audit and audit-
assist events
• Understanding of exemptions to certified cost and pricing

9. Accurate Reporting
• Federal Funding Accountability and Transparency Act (FFATA) and
Federal Subaward Reporting System (FSRS) are subject to:
FAR 52.204-10 Reporting Executive Compensation and First-Tier
Subcontract Awards, is inserted into all federal prime contracts and
requires all federal prime contractors to identify in an annual report its
first-tier subcontracts of $25,000 or more issued after August 27, 2012
• E-Verify federal contractor rule (2009)
• Free, internet based system operated by US Department of
Homeland Security and Social Security Administration
• Requires all federal contractors to confirm the employment
eligibility of all persons they hire during a contract term as well as
their current employees who perform work under a federal
contract within the US
What Has Changed In Recent
Years

10. F-35 Contractor Supply Chain Statistics
• 32,500 people across 46 states work on the
program
• 1,400 companies directly supply the four major
contractors
• 600 of these companies are considered small
businesses
• Supplier stability is critical to avoid supplier
disruptions and the ability of the defense
contractor industry to deliver
Are YouAFederal Contractor?

11. DOD Program Contract
F-35 Joint Striker Fighter
Prime Contractor
Lockheed Martin
1st Tier/Teaming Partners
BAE Systems
Northrop
Grumman
1,400 Smaller Companies
Pratt &
Whitney
Are YouAFederal Contractor?
Credit: National Journal Article 7-31-2013
29 Planes
$8.4 Billion

12. Are YouAFederal Contractor?
DOD
F-35 Contract
Prime Contractor
Lockheed Martin
Pratt & Whitney (Engine)
140 suppliers including:
New Hampshire Ball Bearings
Who uses an additional 25 suppliers including:
Latrobe Specialty Metals

13. DCAACompliance
Accounting System
Key Elements of Accounting System:
• In accord with GAAP (i.e. accrual basis)
• Proper segregation of direct and indirect costs
• Accumulation of direct costs by contract
• Proper timekeeping and labor distribution systems
• Costs, which are not allowable in terms of FAR 31 or other
contract provisions, are excluded from costs charged to
government contracts
• Examples of costs that are generally not allowable:
• Advertising
• Bad Debts
• Entertainment
• Interest/Financing Costs
• In full operation, or in the process of becoming fully operational

14. Internal Controls, Policies and Procedures
Written Policy and Procedures Manual that covers, among other
areas, the following:
• Accounting System (Control Environment)
• Integrity and Ethical Values
• Information Technology
• Budget and Planning
• Purchasing
• Material Management
• Estimating
• Compensation and Benefits
• Labor
• Billing
DCAACompliance
Accounting System (Cont.)

15. What this Means toYou as a Federal
Contractor
• Contract pricing is the single most regulated
aspect of acquisition
• Increased risk of being subject to a DCAA audit or
a DCMA audit-assist
• Federal procurement agencies are still the largest
buyers of goods and services in the world
• Compliant suppliers gain a tremendous market
advantage and long term contracts throughout the
federal supply chain
• Remains a consistent and methodical path to new
business development once established

16. Strategies For Success
• Comply with federal requirements to ensure
contract performance and prompt invoice payment
• Protect your business, intellectual property and
proprietary information
• Retain opportunity to participate in federal
contracts and sub-contracts
• Seize opportunities for new business development
in federal market - largest procurement agency in
the world
• Bring added value to overall business valuation

17. Questions ?

18. Recent Trends in IRS
Audits

19. IRSAudits - Topics
1. History of the IRS
2. How is the IRS Organized?
3. Review of Four IRS Divisions
4. Types of Audits
5. What’s the Purpose of the IRS audit?
6. Who Will Represent the IRS in the audit?
7. The Life Cycle of the Audit
8. What Has Changed in Recent Years?
9. Common Myths
10. Tips

20. History of the IRS
1. First income tax passed in 1862
2. Created a Bureau of Internal Revenue
3. We have a picture of the first employee

21. History of the IRS
4. Al Capone is convicted of income tax evasion in
1931

22. History of the IRS
5. The 1942 Revenue Act increased the percentage
of people paying income tax from 5% to 75%
6. Name changed to the Internal Revenue Service
7. 1943 - Employee withholding began
8. 1954 - the filing deadline was switched from
March 15th to April 15th

23. History of the IRS
9. In 2000, the IRS reorganized into four major
operating divisions:
 Wage and Investment Division
 Small Business/Self-Employed
 Large and Medium-Sized Businesses
 Tax-Exempt and Government

24. History of the IRS
10. Almost 98,000 employees in 2012
11. Trying to make the IRS one of the best places to
work in the Federal Government
12. Spent 48 cents to collect $100 of revenue

25. How is the IRS Organized?

26. Four Divisions of the IRS
1. Wage and Investment
2. Tax-Exempt and Government Entities
3. Small Business and Self-Employed Division
4. Large Business and International Division

27. Wage and Investment – Taxpayer
Profile
1. Most pay taxes through withholding
2. More than half prepare their own returns
3. Most interact with the IRS once a year
4. Most receive refunds

28. Tax-Exempt and Government
1. Includes non-profits, employee pension plans,
municipalities, tax-exempt bonds and over 550
recognized Indian tribes
2. Three million “customers”
3. Controls more than $8.2 trillion in assets

29. Tax-Exempt and Government
4. Their stated mission: “To provide customers top quality
service by helping them (their customers) understand and
comply with applicable tax laws and to protect the public
interest by applying the tax law with integrity and fairness
to all.”
5. They have had a problem with being fair…
6. Have had retirements and resignations
7. On the website, in the Leadership section, 4 out of 5
people listed are listed as “acting” (not permanent in their
roles)

30. Small Business / Self-Employed
1. 9 million businesses – each with less than $10
million in assets
2. 41 million self-employed persons
3. 7 million excise, estate and gift tax returns
4. I have a photo of the person in charge

31. Small Business News
1. The IRS is mailing 20,000 letters to small businesses
questioning whether the taxpayer is reporting all of their
cash receipts (Wall Street Journal 8/10/13)
2. The letter is computer-generated, using credit card
transaction data supplied to the IRS
3. The letter is entitled “Notification of Possible Income
Underreporting”
4. Most of these notices are probably going to law-abiding
small businesses

32. Large Business and International
(LB&I)
1. Formerly Known As Large and Medium-Sized
Businesses
2. Corporations, S Corporations and Partnerships
with assets greater than $10 million
3. Organized into six domestic industries and four
international functions

33. LB&I - Industries
• Communications, Technology and Media (CTM)
• Financial Services (FS)
• Heavy Manufacturing and Pharmaceuticals (HMP)
• Natural Resources and Construction (NRC)
• Retailers, Food, Transportation and Healthcare
(RFTH)
• Global High Wealth (GHW)

34. LB&I - International Functions
• Assistant Deputy Commissioner, International
(ADCI)
• International Individual Compliance (IIC)
• International Business Compliance (IBC)
• Transfer Pricing Operations (TPO)

35. What’s the Learning Point?
The IRS has become much better organized
and can now take advantage of highly
specialized, highly qualified audit personnel.

36. Types ofAudits - 4 Types
1. Correspondence audit
2. Field audit
3. Office audit
And my personal favorite:
4. The “This isn’t really an audit but we really would
like to ask you a question or two and we have
already decided that you are wrong” audit

37. What’s the Purpose of anAudit?
From the Internal Revenue Code (Sec. 7602)
1. To “ascertain the correctness of any returns”
2. “determine the liability of any person”
3. “collect any such liability”

38. What’s the Purpose of anAudit?
From the Internal Revenue Manual
1. Reach a conclusion based on a balanced and
impartial evaluation of all the evidence
2. “Determine the facts and apply the law as
interpreted by the Commissioner”

39. Who is on the IRS Team?
1. Revenue Agent

40. Who is on the IRS Team?
2. If someone from the IRS visits you and he/she
has:

41. Who is on the IRS Team?
2. And

42. Who is on the IRS Team?
You have two phone calls to make:
1. Your attorney
2. Your spouse because you are not going to make
it home for dinner

43. IRS Team of Specialists
1. Computer Audit Specialists (CAS)
2. Employment Tax
3. Engineering (R&D and Asset Allocation)
4. International
5. Excise Tax
6. Employee Plans
7. Economists (Transfer Pricing)
8. Exempt Organizations
9. Financial Products
10. Entity Type Specialists (e.g. Partnerships)

44. Life Cycle of theAudit
1. Congratulatory letter - you are under audit
• Sets the years under audit
• Sets up the first appointment
2.First Meeting
• Can be a meeting with a lot of people
• Almost always at the taxpayer’s location
• Go over taxpayer rights
• Agent(s) issue the first set of Information Document
Requests (IDR)
• Generally several opening IDRs from each of the specialists

45. Life Cycle of theAudit
3. Subsequent Meetings and Discussions
• A lot of back and forth discussions both verbal and
written
• The list of issues gets smaller as items are handled
4. Final Settlement
• Eventually we have an agreed case or an unagreed
case
• IRS agent wants an agreed case if possible but you
never know what they will do
• If you don’t agree you can go to “Appeals”

46. Life Cycle of theAudit -
5. Appeals
• Try to settle tax disputes to avoid going to court
• The Appeals Officer gives an “independent” review of
the positions taken by both the IRS and the taxpayer
• Usually the taxpayer is represented by a CPA or a tax
attorney
• 90% of the disputes that are brought to Appeals are
settled at that level
6. Final step would be going to court

47. What Has Changed with IRS
Audits?
1. The audit is more of a team effort using technical
specialists
2. Trying to focus on the substantive issues rather
than “little things”
3. Transparency – with computer matching, FIN 48,
Schedule M-3, Schedule UTP, etc., the IRS
knows a lot more before the audit even starts

48. What Has Changed with IRS
Audits?
4. The internet provides current information on the
taxpayer (e.g. review the company’s home page)
and prior news about the taxpayer
5. Finally, the IRS seems more combative and more
willing to temporarily take “ridiculous” positions to
get a reaction from the taxpayer

49. Common Myths Re: IRSAudits
1. “You can’t audit me on this issue because the last
IRS agent did not have any problem with it.”
2. “I’ll just negotiate with the IRS when the time
comes.”
3. “If I am audited, I will treat the IRS agent in the
worst possible manner.”

50. Common Myths Re: IRSAudits
4. “The IRS agent will always take a reasonable
viewpoint.”
5. “The IRS agent is the bottom of the barrel –
someone who couldn’t get a real job.”

51. Tips for HandlingAudits
1. Generally, don’t represent yourself
2. Be as professional as possible with all of the IRS
representatives
3. You may need to book some sort of additional tax
liability once the issues get narrowed down a bit
4. Be patient
And finally - although it may be hard to believe…
5. Remember the IRS people are people too

52. Questions ?

53. Thank You
Thank you for your attendance at today’s program.
For more information regarding the topics discussed today, please
feel free to contact:
Rick Krucher, CPA
richard.krucher@inserocpa.com
585.697.9604
Insero & Company CPAs, P.C.
www.inserocpa.com
Dusty Faske, CPA
dusty.faske@inserocpa.com
585.697.9619
Denise Metivier
denise.metivier@inseropa.com
585.697.9695

54. Insero & Company CPAs, P.C.
Certified Public Accountants
Business & Financial Advisors
Rochester >> 585.454.6996
Corning >> 607.973.2075
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