Day 1: March 6, 2012:

Transcription

1 DEFENDING AGAINST IRS AUDITS AND COLLECTIONS, PART 1 AND PART 2 First Run Broadcast: March 6 & 7, :00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) This program will provide you with a practical guide to defending individual clients and closely held business owners against IRS audits and collection activity. Audits involving income and employment tax liability will be covered. The program will discuss the different types of audits to which your client may be subject, the different type of IRS personnel involved at each level of audit, and the risks involved with each. Preparing for the audit, including what information you will need and where to get it, along with the appeals process will be examined. The program will also discuss defending against collection activity, with an emphasis on forms of settlements and standards for settlements. Day 1: March 6, 2012: Defending against IRS audits and collections for individuals and closely held business owners Audits involving income tax and employment tax liability Different types of audits letter, office, and field audits and procedures and personnel involved in each Developing a strategy for the audit Understanding the scope of an audit, auditor discretion and how to respond to initial inquiries Day 1: March 6, 2012: Preparing for an audit what you need to know and where to get it, including document requests from the IRS Ascertaining what the IRS s goal in the audit and a reasonable range of settlements Forms of settlement and settlement standards Understanding the appeals process and rates of success at each level Collections process, defenses, and forms of penalty abatement Speaker: Stephen J. Turanchik is an attorney in the Los Angeles office of Paul Hastings, LLP, where his practice focuses on tax litigation at the state and federal levels as well as tax controversy work at the administrative levels. Before entering private practice, he is previously litigated for six years for the U.S. Department of Justice, Tax Division, where he litigated over 300 tax cases in federal, bankruptcy, state and probate court. He has also lectured at Loyola Law School and California State University, Fullerton on topics relating to tax litigation. Mr. Turanchik received his B.A. from the College of the Holy Cross, his J.D. from Fordham University School of Law, and his LL.M. in Taxation from New York University School of Law.

2 VT Bar Association Continuing Legal Education Registration Form Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT Fax: (802) PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name: Middle Initial: Last Name: Firm/Organization: Address: City: State: ZIP Code: Phone #: Fax #: Address: I will be attending: Defending Against IRS Audits & Collections, Part 1 Teleseminar March 6, 2012 Early Registration Discount By 2/28/2012 Registrations Received After 2/28/2012 VBA Members: $70.00 Non VBA Members/Atty: $80.00 VBA Members: $80.00 Non-VBA Members/Atty: $90.00 NO REFUNDS AFTER February 28, 2012 PLEASE NOTE: Due to New Hampshire Bar regulations, teleseminars cannot be used for New Hampshire CLE credit PAYMENT METHOD: Check enclosed (made payable to Vermont Bar Association): $ Credit Card (American Express, Discover, MasterCard or VISA) Credit Card # Exp. Date Cardholder:

3 Vermont Bar Association ATTORNEY CERTIFICATE OF ATTENDANCE Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: March 6, 2012 Seminar Title: Defending Against IRS Audits & Collections, Part 1 Location: Credits: Teleseminar 1.0 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

4 VT Bar Association Continuing Legal Education Registration Form Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT Fax: (802) PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name: Middle Initial: Last Name: Firm/Organization: Address: City: State: ZIP Code: Phone #: Fax #: Address: I will be attending: Defending Against IRS Audits & Collections, Part 2 Teleseminar March 7, 2012 Early Registration Discount By 2/29/2012 Registrations Received After 2/29/2012 VBA Members: $70.00 Non VBA Members/Atty: $80.00 VBA Members: $80.00 Non-VBA Members/Atty: $90.00 NO REFUNDS AFTER February 29, 2012 PLEASE NOTE: Due to New Hampshire Bar regulations, teleseminars cannot be used for New Hampshire CLE credit PAYMENT METHOD: Check enclosed (made payable to Vermont Bar Association): $ Credit Card (American Express, Discover, MasterCard or VISA) Credit Card # Exp. Date Cardholder:

5 Vermont Bar Association ATTORNEY CERTIFICATE OF ATTENDANCE Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: March 7, 2012 Seminar Title: Defending Against IRS Audits & Collections, Part 2 Location: Credits: Teleseminar 1.0 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

6 DEFENDING AGAINST IRS AUDITS AND COLLECTIONS, PART 1 Prepared by: Stephen J. Turanchik Paul Hastings LLP Los Angeles stephenturanchik@paulhastings.com Matthew L. Kadish Kadish, Hinkel & Weibel Cleveland mkadish@khwlaw.com James Rownd Kadish, Hinkel & Weibel Cleveland jrownd@khwlaw.com I. Overview: Audit Timeline, Statistics and Red Flags A. Voluntary Systems of Reporting Taxes 1. Contrast with involuntary system like sales taxes 2. Threat of an IRS Audit encourages voluntary compliance 3. Why IRS cares so muich about W-2 vs B. Percentages 1. In 2000, only 0.5% of individuals were audited 2. In 2010, that number was 1.11% 3. More of an emphasis on high-income taxpayers a. In 2010, 8.36% of taxpayers with income > $1million were audited b. In 2010, 2.65% on taxpayers with income > $200,000, but less than $ 1 million c. The vast majority of these were correspondence exams. 4. Same is true for corporations, although the focus is one size (as opposed to income) a. Assets > $250 million were examined at a rate of 24% 1

7 b. Assets between $10 million and $250 million was 12.5% c. Assets < $10 million was approximately 1% 5. Willie Sutton, the notorious bank robber, was asked, Why do you rob banks? His answer: That s where the money is. a. IRS takes the same approach b. But can vary with political climate / administration C. How Are Returns Selected for Examination? 1. Potential participants in abusive tax avoidance transactions a. Information obtained by the IRS through third parties. b. Fulchrum enforcement 2. Computer Scoring a. IRS Computer programs give each return numeric scores. b. The Discriminant Function System (DIF) score rates the potential for change, based on past IRS experience with similar returns. c. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel screen the highestscoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review. 3. Information Matching a. Some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return. 4. Related Examinations a. Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination. 2

8 D. Some Red Flags 1. Home office deduction 2. High level entertainment deductions 3. High level charitable contributions 4. Losses from sole proprietorships used to offset other income 5. Shareholder loans as disguised compensation 6. Amended return E. Timeframe for Audits 1. Statute of Limitations a. Generally. The general statute of limitations for making an assessment is three years from the date the tax return is filed. b. Extended. 6 years for substantial omissions of income; unlimited if fraud or nonfiling. Other special rules can apply in other cases (such as unreported foreign accounts). 2. IRS generally begins an examination between six and eighteen months after the tax return is filed. II. Types of Audits Letter, Office and Field A. Correspondence Audit 1. Description a. Conducted by correspondence b. Usually only addresses one tax year and one tax item. 2. Conducted by Tax Examiners a. Qualifications of Examiners 3

9 b. During fiscal year (FY) 2010, more than 82 percent of the examinations of individuals were performed by correspondence. 3. According to the Taxpayer Advocate, in Correspondence Examination, the IRS is less likely to ask questions that would yield an accurate determination. (But they re automated, so it s cheaper for the Government). B. Office Audit 1. Description 2. Conducted by Revenue Agents a. Qualifications of Revenue Agents C. Field Audits 1. Description 2. Conducted by Revenue Agents D. Employment tax audits 1. Determination of employment classification 2. Trust fund taxes failure to withhold and/or remit. 3. Determination of Responsible Persons ( 6672) E. Estate and Gift Audits 1. Conducted by Estate Tax Attorney F. Large Corporate Audits / Wealth Squad G. Criminal Tax Audits (CID) 1. The doorbell rings while you re at dinner mind if I come in? 2. Agent shows a badge 3. Talk to my lawyer. III. Scope of Audit 4

10 A. Understanding the IRS Goals 1. IRS objective is a quality audit 2. Not necessarily disallowed deductions or additional tax 3. Audit may be limited in scope to particular items, or could be broad based 4. The agent is looking to understand the business of the taxpayer and ensure that the appropriate tax has been paid. B. Understanding the Client s Goals 1. Learn what soft spots if any are on the tax return a. Interviewing your client b. Speaking with the tax return preparer c. Will influence what strategy you take with the IRS 2. IRS audit defense can be costly (accountant / attorney fees) a. Internal business costs b. Swift resolution may be cheaper than a long fight C. How to Respond to the IRS 1) Especially if there are items of exposure that have not been examined 2) Be prepared early and set the stage 1. Assemble files and records of the client in good order. a. It helps reduce the time of the examination both for the taxpayer and for the agent. b. An expeditious examination is convenient for the agent and beneficial for the taxpayer. 5

11 c. It conveys to the agent an impression of efficiency and cooperation that can prove to be an intangible benefit to the taxpayer during the course of the examination. d. Review of the records also gives some indication of what questions the agent is likely to raise. 2. No obligation to volunteer information; but no stonewalling a. Do not count on the agent forgetting about a request b. Beware client interviews, especially without representative (attorney, CPA) present 3. Keep records of everything provided and/or said to the agent D. Representative s Goals 1. Limit the scope of the examination. 2. Keep a record of what the agent has seen a. (i.e., what the agent knows and does not know); and 3. Move the agent through the examination as quickly as possible 4. If possible, get the IRS Agent on your team all working together to get to the right result. IV. Developing an Audit Strategy A. Treat the IRS Agent professionally 1. Probably the most important point of these two hours 2. Avoid an adversarial climate a. It can cause extensive delay, unnecessary challenges, and excessive costs to the client. 3. Representative should attempt to establish an atmosphere of credibility and trust with the agent. 6

12 a. Failure to provide adequate records to support items on the return, for example, may unavoidably create a credibility gap and either prolong the examination or force the agent to resolve questionable items in the Service's favor, leaning heavily against the taxpayer. 4. An agent should be treated with courtesy and consideration. 5. No representation should be made without support, and promises made (e.g., production of records; deadlines) should not be broken. a. As desirable as a proper atmosphere is, in some cases it will not be possible, no matter what the representative's wishes. 6. Control over all circumstances affecting the result of an examination may not be possible, but representatives will have performed their obligations to clients if they are prepared and deal with the agent in a professional manner. B. Determine the Client s Goals 1. Expectations May Need to be Adjusted 2. Limit Scope of Audit 3. Limit Monetary Exposure 4. Any Concerns About Fraud? (Identify as early as possible). C. Should your client be interviewed? 1. Direct contact between the agent and the taxpayer (or taxpayer s employees) should be minimized. 2. Agents are trained in interviewing techniques designed to elicit information. 3. They will ask open ended questions, and will listen carefully to the responses. 7

13 4. Absent having been served an administrative summons, a taxpayer has the right to refuse to be interviewed. a. Although, historically examining agents have been reluctant to press for taxpayer interviews, examining agents have become more aggressive in seeking taxpayer interviews and using summonses to compel them. b. If interviewed pursuant to a summons or otherwise, the taxpayer has a right to counsel and may assert appropriate privileges. c. Refusing an interview will likely impact the course of the audit. 5. Have agent work through representative (Form 2848). 6. Train the client to have all questions answered by the representative. 8

14 DEFENDING AGAINST IRS AUDITS AND COLLECTIONS, PART 2 I. Preparing for an Audit A. Gathering Information 1. Likely Sources Prepared by: Stephen J. Turanchik Paul Hastings LLP Los Angeles stephenturanchik@paulhastings.com Matthew L. Kadish Kadish, Hinkel & Weibel Cleveland mkadish@khwlaw.com James Rownd Kadish, Hinkel & Weibel Cleveland jrownd@khwlaw.com a. Tax return preparer b. Finance / Accounting Departments c. Legal Files d. Prior Years Tax Returns e. Interviewing taxpayer (and spouse?) 2. Who Is The Client a. Individual b. Spouse also? c. Entity and owners? d. Multiple clients in employment tax audit? e. Engagement letter and conflicts of interest. B. Remove and separate privileged information 32:MARCH 6 & 7, 2012 MATERIAL (2 OF 2){ }

15 1. In an opinion letter (especially from an attorney), the taxpayer's tax adviser may have raised possible problems with a transaction. 2. An opinion letter represents only an opinion, not the factual data and underlying records on which taxability rests. 3. The letter may constitute a communication between the attorney and the client that is not subject to disclosure under the attorney-client privilege, work product doctrine, or (if with the accountant) the less useful tax practitioner s privilege. 4. The purpose of removing privileged material is not to keep its existence secret but to segregate what the taxpayer may be able to resist disclosing. C. Advise the client and others who may deal with the agent not to ramble, whether in an interview or document production request. Stick to the question asked, and respond as succinctly as possible. 1. There is no requirement to volunteer information. 2. Never (ever) lie or misrepresent facts (that goes for clients and representatives both).. 3. Circular 230 Rules Governing Practicing Before the IRS D. Initial Meeting with Agent 1. Have a preliminary meeting with the agent to present the power of attorney form (Form 2848). By statute, IRS cannot discuss taxpayer information with anyone who is not an authorized representative. 2. At this meeting, establish the ground rules for the examination. a. This request is not presumptuous. b. In a large case examination, the case manager revenue agent is required to ask for a pre-examination conference to do precisely the same thing. 3. It is important, at any rate, for agents to know that they should communicate with the representative rather than with the client. 4. Communication with the representative is necessary to avoid a taxpayer's change in explanation or position E. What if the IRS Wants to Move In? - 2 -

16 1. By managing the audit and providing timely information to the agent, you reduce the risk that the agent will ask to set up shop at the client 2. Is there space for the agent the client s premises? 3. Be sure to keep agent segregated from the finance / accounting departments. 4. Brief employees a. Make sure they understand to be polite and respectful, and not to volunteer information. b. Advise them to avoid chatter or casual conversation with the agent. II. Determining a reasonable range of audit settlements, forms of settlements, and settlement standards (5 minutes) Jim A. Revenue Agent s Authority 1. Revenue agents have no formal authority to settle cases, but as a practical matter, settlements on issues do occur during the examination. 2. It is to a taxpayer's advantage to dispose of issues or adjustments with the revenue agent after the examination. 3. At the agent level, there is no Service position to justify. There is no administrative record as such, and consequently no need to support any change from the position the agent has taken. a. Once the agent takes a position, there is a certain amount of administrative inertia that makes abandonment of the agent's position more difficult. b. The taxpayer is perceived by the IRS as having the burden of proving that the agent is wrong and that the taxpayer was right in the position taken on the return. B. Settlement on Some Issues May Not Be Possible - 3 -

17 1. The agent may be bound by the National Office's position on an issue a prime issue on which the National Office wishes a court decision, and therefore cannot settle. 2. The agent must follow: a. IRS regulations, revenue procedures and/or revenue rulings on point (but not PLRs, TAMs, or other lesser guidance) b. Nonacquiescence to a Tax Court decision adverse to the Service c. IRS internal audit directives (including IRM) 3. The agent also cannot take into account the hazards of litigation (at least not in theory). 4. At the audit level, factual issues are easier to settle than legal issues. III. End of the Audit and Appeals A. Four Possible Outcomes 1. No change- the examiner proposes no change in the taxpayer s tax liability. 2. Agreed - the examiner proposes adjustments to the taxpayer s tax liability and the taxpayer agrees to sign a consent with respect to all of the adjustments. (Note the auditor is not concerned with collecting the liability, just ascertaining the correct number). 3. Unagreed -- the examiner proposes adjustments to the taxpayer s tax liability and the taxpayer does not agree to sign a consent with respect to all adjustments. 4. Partially Agreed the examiner proposes adjustments to the taxpayer s tax liability and the taxpayer agrees to sign a consent with respect to some of the adjustments, but not to others. B. If Unagreed or Partially Agreed, Taxpayer may have up to three Options to Continue to Contest the Revenue Agent s Report. 1. IRS issues a 30-day letter. Taxpayer can then pursue case with IRS Office of Appeals (generally given as an option; taxpayer may need to extend the statute of limitations)

18 2. IRS issues a Notice of Deficiency (90-day letter, or statutory notice ). Taxpayer has 90 days to file a petition in U.S. Tax Court, to be able to contest the liability without first having to pay. 3. Full Pay Tax, Make a Claim for Refund and then File a Suit for Refund (U.S. District Court or Court of Claims). C. IRS Office of Appeals 1. Internal Revenue Manual: The purpose of the IRS Appeals office is to resolve tax controversies without litigation to the extent possible. 2. Unlike Revenue Agents, Appeals Officers can take into account hazards of litigation. a. Both factual and legal 3. Appeal is initiated by taxpayer filing a written Protest. D. Types of Settlements 1. Mutual Concession Settlements a. Both parties concede that there is substantial uncertainty as to how the courts would interpret and apply the law, or as to what facts the courts would find, in deciding the issue in dispute. b. There is substantial strength to both parties position so that neither party is willing to concede in full. c. Each party makes concessions based on the relative strength of the opposing position in an attempt to reach a settlement that is fair to both sides. 1) For example, a property valuation issue and an issue involving reasonable compensation typically involve mutual concessions. 2. Split Issue Settlements a. A form of mutual concession settlement of an issue that, if litigated, would result in a decision totally for or against the taxpayer

19 b. A split issue settlement is based on a percentage or stipulated amount of the tax in controversy. 1) Appeals Officers use this when no other method of settlement is appropriate. c. Distinguishing feature: the result could not be reached if the issue were tried in court. 1) for example, whether a debt is a business or nonbusiness bad debt, whether a bond issue qualifies for exemption, or whether a reorganization is tax-free. d. In a case involving multiple issues, frequently settlement is reached not by splitting issues but largely by trading one issue for another. E. Appeals Officers Do Not Want to Conduct an Audit 1. Appeals cases should be factually developed 2. Appeals officers are not supposed to raise new issues 3. Appeals officers may send cases back to exam if not developed (or sometimes just concede the underdeveloped issue) IV. Collections process, defenses, and forms of penalty abatement, including liens and levies (19 minutes) Jim/Steve A. Collection 1. Prior to taking any collection efforts, the IRS must assess the tax and issue a notice and demand for payment of the assessed tax. a. Taxes reported on a return are self-assessed b. Deficiencies generally cannot be assessed until 91 days after the issuance of a Notice of Deficiency. 2. The notice and demand is critical because it gives rise to the administrative collection remedies provided in the Code

20 3. The initial notice and demand is typically followed by two or three computer-generated billing notices issued by the Service Center. 4. The notice cycle then shifts to the branch of the IRS that will implement collection action for issuance of the formal notice of intent to levy. B. Federal Tax Lien a. Most balance due amounts are forwarded to the Automated Collection System (ACS) branch of the IRS. b. Certain large dollar and special cases may be assigned directly to the collection field office for assignment to an IRS Revenue Officer for collection. 1. The federal tax lien is the backbone of the federal tax collection process. 2. The federal tax lien arises upon assessment, notice and demand, and failure to pay. a. This is sometimes referred to as a secret lien because it requires nothing to be filed. b. It attaches to all of the taxpayer s property and rights to property owned on or acquired after the date of assessment. c. Until the notice of federal tax lien is properly filed, however, the lien is not perfected against bona fide purchasers and certain classes of creditors. 3. The federal tax lien is an encumbrance on property. 4. The lien itself, however, does not result in the direct collection of any tax liability. 5. Rather, three devices are available to the IRS to enforce the federal tax lien: a. administrative levy; b. administrative seizure; and c. judicial collection remedies 6. Notice of Federal Tax Lien - 7 -

21 C. Federal Tax Levy a. Can cause financial hardship for those taxpayers that require revolving credit. b. NFTL will take priority over later lent funds c. NFTL has a special provision that gives it priority over accounts receivable 45 days after filing the NFTL 1. The primary effect of a levy served on a third party who owes funds to the taxpayer is to require the third party to pay the funds directly to the IRS. 2. Since the IRS applies the funds to the taxpayer s delinquent tax liability, the taxpayer loses the right to receive the funds from the third party. 3. Levies can be released if: a. The underlying liability is satisfied or is unenforceable due to the expiration of the statute of limitations for collection; b. The IRS determines that the release of the levy would facilitate collection; c. An installment payment agreement has been executed (unless the agreement specifically allows a levy); d. The IRS determines that the levy causes an undue financial hardship (an expedited review is available for a levy on tangible personal property essential in carrying on a trade or business); or e. A partial release of levy is appropriate because the value of the levied property is greater than the tax liability and the partial release does not hinder collection D. Defenses to Collection E. Penalty Abatement V. Voluntary Disclosures A. Unfiled Tax Returns - 8 -

22 1. Voluntary Disclosure can be a useful tool for curing a taxpayer s failure to file tax returns. 2. Goals: a. Avoid criminal prosecution b. Minimize penalties (depending upon facts and circumstances) B. To qualify for voluntary disclosure: 1. The taxpayer communicates with IRS in a truthful, timely, and complete fashion 2. The taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his/her correct tax liability 3. The taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. 4. Disqualifiers C. Quiet Disclosures a. Taxpayer is currently the subject of a criminal investigation or civil examination b. The IRS notified the taxpayer that it intends to commence an examination or investigation c. Taxpayer is under investigation by any law enforcement agency d. Source of income is from illegal activity e. Taxpayer has reason to believe that the IRS has obtained information concerning the taxpayer s tax liability, e.g. other audits or whistleblowers 1. Pros and cons 2. Prospective vs. Retrospective 3. Special considerations in foreign bank account cases - 9 -

23 PROFESSIONAL EDUCATION BROADCAST NETWORK Speaker Contact Information Defending Against IRS Audits and Collections, Part 1 and Part 2 Stephen J. Turanchik Paul Hastings LLP Los Angeles (o) (213) stephenturanchik@paulhastings.com Matthew L. Kadish Kadish, Hinkel & Weibel Cleveland (o) (216) mkadish@khwlaw.com James Rownd Kadish, Hinkel & Weibel Cleveland (o) (216) jrownd@khwlaw.com