DCAA/DCMACompliance &Audit Changes
FacingAll Government Contractors &
Recent Trends in IRS Audits
Dusty Faske, CPA
Denise ...
DCAA/DCMA Compliance & Audit
Changes Facing All Government
Contractors
Overview
1. Federal Procurement
2. Federal Contract Compliance Agencies and FAR Regulations
3. What Has Changed in Recent ...
Federal Procurement
• The Federal Government is the largest
buyer of goods and services in the world
• Department of Defen...
ComplianceAgencies
Defense Contract Audit Agency (DCAA)
History:
• Established July 1, 1965
• Provides audit and financial...
Defense Contract Management
Agency (DCMA)
• Vision: To provide DOD with leading
experts in quality assurance; cost, schedu...
FederalAcquisition Regulation
• The principal set of rules in the Federal Acquisition
Regulation system consists of sets o...
What Has Changed In Recent
Years
• All federal contracts exceeding the $700,000 TINA (Truth in
Negotiations Act) threshold...
Accurate Reporting
• Federal Funding Accountability and Transparency Act (FFATA) and
Federal Subaward Reporting System (FS...
F-35 Contractor Supply Chain Statistics
• 32,500 people across 46 states work on the
program
• 1,400 companies directly su...
DOD Program Contract
F-35 Joint Striker Fighter
Prime Contractor
Lockheed Martin
1st Tier/Teaming Partners
BAE Systems
Nor...
Are YouAFederal Contractor?
DOD
F-35 Contract
Prime Contractor
Lockheed Martin
Pratt & Whitney (Engine)
140 suppliers incl...
DCAACompliance
Accounting System
Key Elements of Accounting System:
• In accord with GAAP (i.e. accrual basis)
• Proper se...
Internal Controls, Policies and Procedures
Written Policy and Procedures Manual that covers, among other
areas, the follow...
What this Means toYou as a Federal
Contractor
• Contract pricing is the single most regulated
aspect of acquisition
• Incr...
Strategies For Success
• Comply with federal requirements to ensure
contract performance and prompt invoice payment
• Prot...
Questions ?
Recent Trends in IRS
Audits
IRSAudits - Topics
1. History of the IRS
2. How is the IRS Organized?
3. Review of Four IRS Divisions
4. Types of Audits
5...
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 ...
History of the IRS
4. Al Capone is convicted of income tax evasion in
1931
History of the IRS
5. The 1942 Revenue Act increased the percentage
of people paying income tax from 5% to 75%
6. Name cha...
History of the IRS
9. In 2000, the IRS reorganized into four major
operating divisions:
 Wage and Investment Division
 S...
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 Fe...
How is the IRS Organized?
Four Divisions of the IRS
1. Wage and Investment
2. Tax-Exempt and Government Entities
3. Small Business and Self-Employed...
Wage and Investment – Taxpayer
Profile
1. Most pay taxes through withholding
2. More than half prepare their own returns
3...
Tax-Exempt and Government
1. Includes non-profits, employee pension plans,
municipalities, tax-exempt bonds and over 550
r...
Tax-Exempt and Government
4. Their stated mission: “To provide customers top quality
service by helping them (their custom...
Small Business / Self-Employed
1. 9 million businesses – each with less than $10
million in assets
2. 41 million self-empl...
Small Business News
1. The IRS is mailing 20,000 letters to small businesses
questioning whether the taxpayer is reporting...
Large Business and International
(LB&I)
1. Formerly Known As Large and Medium-Sized
Businesses
2. Corporations, S Corporat...
LB&I - Industries
• Communications, Technology and Media (CTM)
• Financial Services (FS)
• Heavy Manufacturing and Pharmac...
LB&I - International Functions
• Assistant Deputy Commissioner, International
(ADCI)
• International Individual Compliance...
What’s the Learning Point?
The IRS has become much better organized
and can now take advantage of highly
specialized, high...
Types ofAudits - 4 Types
1. Correspondence audit
2. Field audit
3. Office audit
And my personal favorite:
4. The “This isn...
What’s the Purpose of anAudit?
From the Internal Revenue Code (Sec. 7602)
1. To “ascertain the correctness of any returns”...
What’s the Purpose of anAudit?
From the Internal Revenue Manual
1. Reach a conclusion based on a balanced and
impartial ev...
Who is on the IRS Team?
1. Revenue Agent
Who is on the IRS Team?
2. If someone from the IRS visits you and he/she
has:
Who is on the IRS Team?
2. And
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 mak...
IRS Team of Specialists
1. Computer Audit Specialists (CAS)
2. Employment Tax
3. Engineering (R&D and Asset Allocation)
4....
Life Cycle of theAudit
1. Congratulatory letter - you are under audit
• Sets the years under audit
• Sets up the first app...
Life Cycle of theAudit
3. Subsequent Meetings and Discussions
• A lot of back and forth discussions both verbal and
writte...
Life Cycle of theAudit -
5. Appeals
• Try to settle tax disputes to avoid going to court
• The Appeals Officer gives an “i...
What Has Changed with IRS
Audits?
1. The audit is more of a team effort using technical
specialists
2. Trying to focus on ...
What Has Changed with IRS
Audits?
4. The internet provides current information on the
taxpayer (e.g. review the company’s ...
Common Myths Re: IRSAudits
1. “You can’t audit me on this issue because the last
IRS agent did not have any problem with i...
Common Myths Re: IRSAudits
4. “The IRS agent will always take a reasonable
viewpoint.”
5. “The IRS agent is the bottom of ...
Tips for HandlingAudits
1. Generally, don’t represent yourself
2. Be as professional as possible with all of the IRS
repre...
Questions ?
Thank You
Thank you for your attendance at today’s program.
For more information regarding the topics discussed today, ple...
Insero & Company CPAs, P.C.
Certified Public Accountants
Business & Financial Advisors
Rochester >> 585.454.6996
Corning >...
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DCAA/DCMA Compliance & Audit Changes Facing All Government Contractors and Recent Trends in IRS Audits

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DCAA/DCMA Compliance & Audit Changes Facing All Government Contractors and Recent Trends in IRS Audits

  1. 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. 2. DCAA/DCMA Compliance & Audit Changes Facing All Government Contractors
  3. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 17. Questions ?
  18. 18. Recent Trends in IRS Audits
  19. 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. 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. 21. History of the IRS 4. Al Capone is convicted of income tax evasion in 1931
  22. 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. 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. 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. 25. How is the IRS Organized?
  26. 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. 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. 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. 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. 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. 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. 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. 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. 34. LB&I - International Functions • Assistant Deputy Commissioner, International (ADCI) • International Individual Compliance (IIC) • International Business Compliance (IBC) • Transfer Pricing Operations (TPO)
  35. 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. 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. 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. 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. 39. Who is on the IRS Team? 1. Revenue Agent
  40. 40. Who is on the IRS Team? 2. If someone from the IRS visits you and he/she has:
  41. 41. Who is on the IRS Team? 2. And
  42. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 52. Questions ?
  53. 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. 54. Insero & Company CPAs, P.C. Certified Public Accountants Business & Financial Advisors Rochester >> 585.454.6996 Corning >> 607.973.2075 Disclaimer These materials were prepared solely for the purpose of continuing professional education. They are distributed with the understanding that Insero & Company CPAs, P.C. and its employees are not engaged in rendering legal, accounting, or other professional service as part of this CPE presentation. If advice or other expert assistance is required, the services of a competent professional person should be sought. Please contact an Insero & Company team member with any questions. The information contained herein is general in nature and based on authorities that are subject to change. Insero & Company CPAs, P.C. guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omission, or for results obtained by others as a result of reliance upon such information. Insero & Company CPAs, P.C. assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situation. Circular 230 Disclosure: Any information contained herein, or on any website or email link associated with this document is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. Insero & Company CPAs, P.C. is an integral part of the McGladrey Alliance, a premiere affiliation of independent accounting and consulting firms in the United States, with more than 90 members in 42 states and Puerto Rico. McGladrey Alliance member firms maintain their name, autonomy and independence and are responsible for their own client fee arrangements, delivery of services and maintenance of client relationships. McGladrey Alliance is a business of McGladrey LLP which operates under the McGladrey brand as the fifth largest U.S. provider of assurance, tax and consulting services. McGladrey, the McGladrey logo and the McGladrey Alliance signatures are used under license by McGladrey LLP. McGladrey, the McGladrey logo, the McGladrey Alliance signatures and The McGladrey Classic logo are used under license by McGladrey LLP. Correspondent of the RSM International network of independent accounting, tax and consulting firms.

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