Alcoa tax department QIP team: a quality application in the tax function
Perry A. Minnis
Alcoa Tax Department QIP Team: A Quality Application in the Tax Function
The Aluminum Company of America (Alcoa), like most corporations with assets over $250 million, is currently audited by the Internal Revenue Service (IRS) under the Coordinated Examination Program – a 24- to 27-month audit cycle during which IRS agents examine the consolidated income tax returns of two or three years. This article summarizes the efforts thus far of a Quality Improvement (QIP) team to use Alcoa’s “Eight Step Quality Improvement Process” to shorten the time it takes the Tax Department to respond during the audit to the requests of IRS agents for more information about a particular topic or transaction.
Alcoa is the world’s largest aluminum company. It employs 61,000 people worldwide and had consolidated assets in 1989 of $11.6 billion. The company’s main business is fabricating aluminum products.
Alcoa has always spent considerable time and money complying with the tax laws of federal, state, and local governments, both in this country and abroad. However, the continual flood of new tax legislation (four major tax bills enacted by Congress in recent years) presented a challenge to Alcoa’s tax managers. Could they change and improve an already complex tax compliance effort without increasing available resources? To meet this challenge, the Tax Department used the Alcoa Eight Step Quality Improvement Process – a rigorous methodology designed to solve problems that limit performance and to increase customer satisfaction.
In the latter part of the 1960s, the IRS developed the large-case corporate audit and audit planning program. This program, commonly referred to as the “Coordinated Examination Program (CEP),” uses large-case audit techniques with respect to the audit of most corporations with assets of over $250 million. Normally, between 24 to 27 months is allocated to complete an audit cycle covering the examination of two to three years’ consolidated income tax returns. Alcoa is currently audited by the IRS under the Coordinated Examination Plan.
Once an audit begins, IRS agents issue Information Document Requests (IDRs) which represent written requests for information relative to areas being reviewed by any agent. Alcoa has found it advantageous to designate one person in the tax department to handle all direct communications with the agent(s) and to be present when other Alcoa employees are communicating with them. This procedure assures the company that the agent is receiving consistent factual information and that a record of all information being provided to the IRS is filed in a central location.
IRS administrative procedures normally require a response to an IDR within 30 days of its receipt. The remainder of this article focuses on the efforts of a Tax Department QIP team to develop an acceptable action plan, using Alcoa’s Eight Step Quality Improvement Process, that will assist the tax audit manager in complying with the 30-day requirement.
The selection of this opportunity for improvement is unique in that although customer satisfaction is the ultimate goal of most quality endeavors, the IRS is not usually thought of as the typical customer a business seeks to please. Indeed, even within Alcoa the identification of the IRS as a customer of the tax department has been the subject of some debate. There were those who argued that the corporation itself, on whose behalf the Tax Department works with the IRS, was the real customer. Rather than take either side of the debate perhaps it is better to think of this situation as one that is common in many business environments.
The Tax Department has conflicting requirements. It has a business requirement placed upon it by the parent corporation to use as few resources as possible to accomplish its departmental mission of ensuring Alcoa’s full compliance with all tax statutes. And it has a customer requirement placed upon it by the recipient (the IRS) of its major output (tax returns) to provide any and all requested tax information in a timely manner. It was up to the QIP team to try to resolve this conflict and satisfy both requirements.
Throughout 1989, Alcoa finance department managers received up to nine days of Quality Awareness Training. Upon completion of this training, teams were formed with managers from functional areas, where possible, and from cross-functional areas with others. One such team, “Tax Team B”, and the process they chose to improve are the subjects of this article. This team of Alcoa employees with diverse disciplines and backgrounds was formed from participants at a training session. This temporary training team was commissioned to identify an opportunity for improvement within their own processes for which they could apply the ALCOA Eight Step Quality Improvement Process. The “Timeline of Events” set forth in Exhibit I,(*) summarizes the activities of the team from its inception through ultimate recommendations and implementation.
Utilizing specific problem identification and selection techniques, the team chose to work on an opportunity to improve the process of responding to IDRs received from the IRS examining agents.
At this point in the process, the team had a specific problem to work on and a measurable goal – to respond to all IDRs within the 30-day period specified in the IRS Audit Manual. The customer was defined as IRS examining agents, not the IRS in general. The team also drafted a preliminary statement of the problem, its effect, and its importance.
The team then reviewed the data from the prior IRS audit cycle to validate that there actually was a problem meeting the 30-day requirement. One insight gleaned from the data and from the recollections of team members about previous audits was that IDRs could be classified into one of two categories:
1) recurring (information requests that occur during
every audit), and
2) nonrecurring (requests that relate only to the years
under current examination).
ANALYZE CAUSES AND EFFECTS
Using Alcoa’s quality improvement process, the team focused on the potential causes contributing to it’s selected problem or opportunity. The Ishikawa Chart (or fishbone diagram as it is sometimes known) is a tool used in this step to assist in determining the root causes of the problem. Tax Team B produced a fishbone diagram (Exhibit II). Several items were identified as possible root causes. Through a ranking system developed by the team, the list was reduced to six major root causes:
* Tax Personnel
* IDR Responses
* Recurring IDRs
* Record Retention
The team decided to consolidate the first three items and designate the opportunity as “Coordination of IDR Replies.”
As the team moved slowly through these first steps of problem solving, members felt increasing frustration. They wanted to move quickly toward finding a solution, and were not sure all this deliberation was necessary. Old habits of jumping to quick answers die hard. Alcoa has on occasion used the phrase “READY-FIRE-AIM” to describe this phenomenon. It had some applicability to the team at this point.
During this time, the team leader was unexpectedly reassigned. Since the member of the team with the most knowledge of the IDR response process was leaving, the team wondered if it should continue to work on this opportunity with the remaining members or switch to a different problem. The team unanimously decided to continue working on the IDR opportunity. The new tax manager of federal audits became a member of the team and a new team leader was chosen.
GENERATE POTENTIAL ACTIONS
The team revised an original problem statement to reflect the additional information developed since the preliminary statement was drafted. The revised problem statement focused attention on the specific opportunity for improvement that the team had chosen to pursue (Exhibit III).
This activity is intended, through a creative process, to generate a list of potential solutions to the root causes of the problem. The team interviewed the Director of Corporate Taxes to find out what he believed the process should be, who should be held accountable for IDRs, and whether there were any conceptual problems with instituting a more formal process for responding to IRS requests.
The team learned that up to this point the IDR process had been managed informally. While the Audit Manager was generally responsible for the conduct of the audit, no one was specifically responsible for responding to IDRs. Interviews held with the Audit Manager and other tax managers provided the team with its first ideas about the specific improvement opportunities it would eventually recommend. These interviews also gave team members enough information to revise an earlier version of a process flow chart (Exhibit IV). The revised chart reflected the potential improvements being considered for recommendation to the lead team – the Tax Quality Council – that had approved the initial problem statement.
EVALUATE AND SELECT ACTIONS
The purpose at this point in the process became selecting the actions that will best solve the problem or realize the opportunity. Accordingly, team members evaluated potential actions that could best achieve the desired improvements. They decided that the following topics should be more thoroughly researched before they recommended actions:
1) IDR control sheet and measurement system;
2) Standardization/accountability for documentation;
3) Department filing system;
4) Central contracting files;
5) Internal pre-audit meeting;
6) Information to IRS without an IDR;
7) Code sheet review; and
Several meetings were spent analyzing these topics. Quality tools such as barriers/enablers analysis were used to determine whether certain actions were feasible and, if taken, would eventually achieve the desired improvements.
The team chose Recommendation No. 1, IDR control sheet and measurement system, as an action of primary importance and implemented several techniques for gathering information that could be used to measure and monitor the IDR response process in future IRS audits. This data gathering will assist in quantifying the effectiveness of the proposed actions, and will help identify additional opportunities to improve the process.
TEST EFFECTIVENESS OF ACTIONS
The activities in this step are meant to verify whether the selected action will achieve the desired effect. Team B would not be in a position to test the effectiveness of any proposed actions until an audit cycle has been completed. Thus, the team established a process measurement system.
The first measurement method recommended by the team was to establish “time tracking” procedures to facilitate measuring and monitoring “flow time” and “touch time” in the IDR response process. Team members recommended that information generated from the timetracking reports (Exhibit V) be regularly summarized and reviewed by the audit manager to determine where and how delays occur in producing timely IDR responses.
The second measurement tool the team created, the “IDR Control Sheet” (Exhibit VI), is a form of agreement. As the audit manager receives IDRs, he makes a decision to either gather the required information himself or to delegate this task. If the task is delegated, the individual selected agrees to provide the information within a specified time. If the response is not timely, this person provides reasons for the delay. In the future, this information will be reviewed to determine possible improvement opportunities.
The next step in the process was for the team to use the knowledge gained thus far to improve the situation, solve the problem, or take advantage of the opportunity.
The team presented eight recommendations to the Tax Quality Council. Five of these recommended actions were determined by the team to be immediately implementable. The remaining three recommendations would require further review and analysis by the Council.
The following recommendations were presented to the Tax Quality Council for approval with immediate implementation:
Action No. 1 – IDR Control Sheet
The team recommended the institution and endorsement of a formal control sheet that collects the data needed to measure the process. This sheet should capture relevant dates, delegations made, and reasons for not making the deadline.
Action No. 2 – Internal Pre-Audit Meeting
The team recommended that a meeting or series of meetings be held to review prior audits, the tax years’ transactions, and new law and reporting requirements. Concerns about issues or documentation should be discussed and, where necessary, assigned for action with agreed deadlines.
Action No. 3 – Information to IRS Without IDR
Team B concluded that submissions of information should normally be made upon receipt of a formal IDR. This action will assist in the control of data being submitted on a timely basis.
Action No. 4 – Code Sheet Review
The team recommended that the manager of federal audits be included in the review of major transactions for the current year tax return under preparation.
Action No. 5 – Delegation
Team B recommended that the audit manager, at his discretion, delegate the IDR response preparation even though the ultimate responsibility for IRS response will remain with the audit manager.
The remaining three recommendations presented to the Council for further review were, as follows:
Action No. 6 – Standards/Accountability
The Tax Department should adopt formal standards for documentation of work product to support tax positions. Team B concluded this opportunity is outside the scope of its authority, but recommended a multi-discipline team be created to review this opportunity. This recommendation stems from the information discovered while researching the recurring IDRs.
Action No. 7 – Department Filing System
It was recommended that an inter-departmental cross-functional team be assigned to establish a process for integrating the Tax Department files into a unified system.
Action No. 8 – Central Contract File
Team B concluded there is an opportunity to improve retrieval of Central Contract files. The decision was made not to pursue this area, however, since the department does not “own” the process.
The final step in this QIP process involves evaluating the continuous effectiveness of improvement actions. It requires continual review of process data to detect signals that the process needs further attention to maintain gains.
The manager of federal audits has implemented the recommendations of Team B in the current audit cycle. He is collecting data from the current audit to determine the effectiveness of these recommendations.
The Alcoa Quality Improvement Process is intended to be flexible enough to be applied universally throughout the corporation and powerful enough to bring about real change. The efforts of Tax Team B seem to prove the point. What began as a training exercise for an ad hoc group of managers became a documented improvement that increased customer satisfaction.
A review of the barriers faced by this team illustrates the power of the method:
* This was an ad-hoc training team, brought together
largely by chance, comprised of members from different
* This team was given no specific mission or direction.
* When the team leader was reassigned, the team faced
not only the loss of leadership, but perhaps more
importantly, the loss of much-needed knowledge of
the IDR process.
* Essentially, the members of the team had extremely
limited training in quality tools and techniques.
Despite the barriers encountered by this team, it was able to recognize a process that required change. The team identified eight opportunities for improvement and developed specific plans for four of these. It generated broad recommendations for the remaining four.
The results of this team’s efforts, although certainly not in the breakthrough category, demonstrate the flexibility and power of Alcoa’s Quality Improvement Process. Team B’s efforts not only helped to establish a foundation for teaming in Alcoa’s Finance Department, but also provided a positive example to others who are trying to implement these concepts in their areas.
At the request of the National Office of the IRS, Tax Team B presented its findings on the IDR response process to the IRS Assistant Commissioner (Examination) and his key staff members as well as several representatives of the IRS quality group. The presentation was made in June 1990 in the Washington D.C. offices of the IRS.
The results of this meeting and of previous meetings with Districk IRS officials indicate that if Team B’s recommendations are successful in producing a faster response cycle to IDRs, tangible benefits will accrue to both the IRS and the Taxpayer. Some of the more significant benefits would be a reduction in total time scheduled for completing the IRS examination cycle and a reduction in questions generated as a result of delays in responding to original requests. These actions will result in substantial administrative cost savings to both the Taxpayer and the IRS. These savings will be further enhanced through improved audit efficiencies associated with strengthening the customer/supplier relationship between the taxpayer and the IRS.
(*) All exhibits are reprinted in the Appendix, beginning on page 291.
PERRY A. MINNIS is Quality Facilitator-Finance for the Aluminum Company of America (Alcoa). Mr. Minnis joined Alcoa upon graduating from John Carrol University 23 years ago, and until his current appoinment was the company’s Manager, Federal Audits and Tax Systems. He previously was a member of Tax Executives Institute’s Pittsburgh Chapter.
COPYRIGHT 1990 Tax Executives Institute, Inc.
COPYRIGHT 2004 Gale Group