WHAT TO DO IF THE IRS COMES KNOCKING

Transcription

1 WHAT TO DO IF THE IRS COMES KNOCKING USA Risk Group The Whole 9 Yards 9th Annual Executive Educational Services Charlotte, North Carolina Ballantyne Resort & Spa May 22, 2014 GARY BOWERS Johnson Lambert & Co. LLP Raleigh, NC CHARLES J. (CHAZ) LAVELLE Bingham Greenebaum Doll LLP Louisville, KY Bingham Greenebaum Doll LLP

2 Life-Cycle of an IRS Audit Selection for Audit Audit vs. Inspection Types of IRS Audits How Far Back Can IRS Audit? Preparing For An Audit Conduct of the Audit Information Document Requests (IDRs) Agreed and Unagreed Issues Appeals and Litigation The Cost of Being Wrong 2 2

3 Audit Selection Matching (W-2, 1099, K-1?) DIF score Collateral Partners / Members / S-Corp Shareholder Officers / Directors Party to same transaction Trust / Beneficiary Referrals Prior audit Informant Large Case 3 3

4 Who gets Selected? (cont d) IRS Projects Captives qualifying under Section 501(c)(15) Excise Tax-cascading Others? (15 Experts?) 4 4

5 Types of Audits Mail-In Audit Office Audit (IRS Office) Informal Needed items specified in letter One sitting Can reschedule if request made Field Audit Taxpayer or representative s office Off premises? One coordinator? Multiple meetings Large taxpayers every day for two years 5 5

6 How Far Back Can the IRS Audit? 3 Years Normal 6 Years Omit 25% of Gross Income on Return Forever No Return Filed (or False/Fraudulent Return Filed) Extending the Statute of Limitations Extending All Issues vs. Selected Issues 6 6

7 Preparing For An Audit Best Approach Is To Have A Good Foundation Excellent Captive Manager Well Conceived Feasibility Study Good Purpose Proper Structure and Insurance Program Regulatory Compliance Capitalization Good Records Corporate Formalities 7 7

8 Conduct of the Audit Representation and Power of Attorney (Form 2848) Self CPA Lawyer Location of the Audit Taxpayer s location CPA s offices Other 8 8

9 Conduct of the Audit (cont d) Treat Agent Professionally Courteously Provide good working conditions Information Document Request (IDR) Written questions and responses Oral explanations? Interviews? 9 9

10 Sample IDR 10

11 Sample IDR (cont d) 11

12 Sample IDR (cont d) 12

13 Sample IDR (cont d) 13

14 Sample IDR (cont d) 14

15 Sample IDR (cont d) 15

16 IRS Goal All of the IDRs are aimed at addressing the below: Non-tax Business Purpose/Sham/Economic Substance Insurance Risk Common Notions of Insurance Risk Shifting Risk Distribution 16 16

17 Agreed Issues In an audit, one or more issues may be settled, even if other issues are not Form 870 is used to agree to the settled issues While in practice this ends the audit of agreed issues, technically the Taxpayer can file a claim for refund and the IRS can reopen (if it gets internal permission for the second audit) If all issues are settled, a no change letter is issued 17 17

18 Unagreed Issues Notice of Proposed Adjustment (NOPA) Response to NOPA Factual vs. Legal Differences Hazards of Litigation Agent can t use Technical Advice Request Advance Issue Resolution early referral of issue(s) to the IRS Appeals Office 18 18

19 Ending The Audit Settlement and Negotiations Meetings With Examiner (and Supervisor) Agreed Upon Issues (Form 870) Unagreed Issues Fast Track mediation with IRS auditor, mediated by an Appeals Officer Appeal for Appeals Office consideration 19 19

20 Appealing Unagreed Issues IRS 30-Day Letter Protest the response to the 30 Day Letter IRS Rebuttal the response to the Protest Ex Parte meeting Appeals and Examiner Meeting(s) With Appeals Officer(s) Statue of Limitations 20 20

21 Appeals Conference Appeals Office s mission is to settle cases Very informal 1 to 3 Appeals Officers No court reporters or other third parties Appeals Officer can consider Hazards of Litigation First conference and subsequent meetings Settlement time to settle 870-AD normally neither side is to reopen Closing Agreement Post Appeals Mediation 21 21

22 Going To Court 90-day Letter Statutory Notice of Deficiency Legal Representation Attorney-Client Privilege Attorney Work Product Cost of Litigation 22 22

23 Going To Court: Litigation Options TAX COURT DISTRICT COURT COURT OF FED. CLAIMS PAY FIRST NO YES YES JUDGE/JURY JUDGE OPTION* *Judge or Jury JUDGE PLACE OF TRIAL LOCAL** **Judge Travels from DC LOCAL LOCAL** **Judge Travels from DC % OF TAX CASES 100% 2% 50% GOVT. LAWYER IRS DOJ DOJ 23 23

24 The Cost of Being Wrong Is It Insurance for Tax Purposes? Disallowance of Premium Deduction to Payor No Premium Income/Reserve Deduction for Captive? If It is Not a Premium, What Is It? Capital Loan Deposit Indemnity Payment Other Income? 24 24

25 The Cost of Being Wrong (cont d) Interest First Quarter 2014 Overpayment Underpayment Deduct Individual 3% 3% No Corporate 2% 3% Yes Large Corporate.5%* 5%** Yes * Overpayment above $10,000 ** Underpayment of $100,000 beginning 30 days after 30-day or 90-day letter 25 25

26 The Cost of Being Wrong (cont d) Penalties: 20% - Negligence/Substantial Understatement 40% - No Economic Substance (20% if disclosed) - Undisclosed Foreign Financial Asset 75% - Fraud Reasonable Cause Act in Good Faith Relief Not available for Economic Substance Penalties 26 26

27 The Cost of Being Wrong (cont d) Should You Pay or Deposit the Unagreed Assessment? Interest on Deficiency Uncertain Tax Position (UTP) Disclosures Audited Financial Statement Implications 27 27