10/29/2012. In any professional service, a member shall maintain objectivity and integrity, shall be free from conflicts of interest.

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1 Jonathan E. Strouse Holland & Knight LLP 131 S. Dearborn, 30th Floor Chicago, IL Introduction 2. (No Circular 230 Discussion) 3. ET Section 102 and Interpretation Current IRS Structure and Analysis 5. Sample IDR and How To Properly Respond 6. Electronic Data in Exams 7. Illinois Public Accounting Act 8. AICPA Code of Professional Conduct Rule SSTS No Privilege Issues State Federal Kovel 11. Other Helpful Tips and Strategies During a Tax Audit 12. IRS Appeals Mission Fast Track Settlement 3. Fast Track Mediation 4. Post-Appeals Mediation 5. Appeals Arbitration 13. Claims for Refund 14. IRS Global High Wealth Industry Group 15. Non-Filers or Tax Evaders 16. Voluntary Disclosures 17. Questions and Comments 2 In any professional service, a member shall maintain objectivity and integrity, shall be free from conflicts of interest. 3 1

2 If a member performs a professional service for a client; And a member of his or her firm; Has a relationship with another person, entity, product, or service that could; in the member s professional judgment, be viewed by the client or other appropriate parties, as impairing the member s objectivity, And If: The member believes that his or her service can be performed with objectivity; AND The relationship is disclosed to and consent is obtained from the client or appropriate party; then the member can perform the professional service. Examples: Shareholder dispute between siblings and the accounting firm represents all or some of the siblings on examinations of their income tax returns for 2010 Same as above, except accounting firm prepares Forms 1040 for each or some of the siblings. Same result

3 ABC CORPORATION SAMPLE IDR FOR AUDIT FOR All bank statements for All journals (i.e. Cash Disbursement, Cash Receipts). 3. The general ledger and chart of accounts for Copies of Forms 1120 or 1120S for Copies of Forms 1040 for Bill Smith for 2008, 2009, and Copies of all financial statements of the corporation for December 31, Copies of all communications during 2007 to 2009 between the corporation and its attorney relating to any tax issue. 8. Copies of all communications between the corporation and its outside accountant for The management letter, if one exists, for A listing of each customer that taxpayer sold goods to in 2009 and the amount of each sale. 11. Prepare an organization chart of taxpayer s billing and shipping departments during A tour of premises and interview with applicable accounting personnel

4 Section 6001 of the Code maintain proper Books and Records Section 7602(a) IRS can examine such Books and Records Section 7612 of the Code Limitations on IRS exam of computer software source codes CCA Requires taxpayers to produce to the IRS electronic records, including unaltered meta data, upon request (electronic and in native format) Printout of hard copies 450/27 Accountant as a Witness A CPA is not required to divulge information obtained by him or her in his or her confidential capacity. A CPA shall not disclose any confidential client information without the specific consent of the client. Exceptions

5 Governed by AICPA Statement on Standard for Tax Services ( SSTS ) No. 6 See paragraphs advise to disclose 10 conflict and Rule advise taxpayer to consult attorney Federal law does not recognize a general accountantclient privilege (see U.S. v. Arthur Young & Co. 465 U.S. 805 (1984)). Illinois law provides for an accountant-client privilege (flows to the accountant in Illinois) In Federal tax cases pending in Federal District or Tax Court, any applicable state accountant-client privilege cannot be invoked (by the accountant or client) Section 7525 of the Code may be invoked, but there are limitations. The attorney-client privilege is a recognized privilege in the United States District and United States Tax Courts. Attorney s invoices Best approach is to fit into a Kovel situation (see U.S. v. Kovel, 296 F.2d 918 (2d Cir. 1961) and its progeny). Attorney-client privilege attaches to client communications with agent of attorney (i.e. an accountant). Use of agent (i.e. accountant) must be necessary in the rendering of legal advice. Accountant should be hired by the attorney and used to assist attorney in interpreting difficult or complex issues. Structuring engagement properly with two engagement letters (Attorney letter and accountant letter)

6 When to go over the agent s head FOIA requests (prior to going to appeals and at other stages) Section Qualified Offers Mission Resolve tax controversies, without litigation, that is fair and impartial to both parties, in a way that will enhance voluntary compliance and public confidence. See (a)(2)-(4) for lack of appeal s settlement authority Independent; no ex parte communications Written protest subsequent to receipt of 30 day letter from Exam. Remains in exam or collections See Rev. Proc contains procedures for LB&I taxpayers and non-lb&i taxpayers (with agreement) to mediate a dispute with a neutral appeals officer. Intended to resolve a fully developed issue within 120 days of acceptance into program. Appeals officer, although neutral, can have ex parte communications with field personnel. IRS issues notice of proposed adjustment and Taxpayer issues a written response All prior to 30 day letter Includes OIC, 6672, and CDP cases

7 For SB/SE cases Appeals officer attempts to mediate tax dispute to expedite a settlement between Taxpayer and Exam. Usually resolved within 40 days See Rev. Proc for complete information. Uses one or more third party mediators during appeals to facilitate a negotiated settlement on unresolved issues. Taxpayer and Appeals manager select an Appeals mediator. Taxpayer, at their own cost, can also select a non-irs mediator to assist. If unable to settle, a statutory notice of deficiency will be issued. Can t use for collection cases See Rev. Proc and Rev. Proc (post-appeals mediation) Taxpayer and IRS seek a decision by an uninvolved third party that is binding on everyone. May be used for factual issues only not legal issues Both IRS appeals and non-irs personnel may serve as arbitrators Proceed to arbitration within 90 days after signing agreement to arbitrate See Rev. Proc

8 The filing of a proper claim for refund is a condition precedent to a suit for recovery of overpaid taxes. Filing means delivery of IRS Form 843, Claim for Refund, 1040X, or other applicable form, as the case may be, to the proper Internal Revenue Service addressee. Neither the Federal District Court nor Court of Federal Claims has jurisdiction to consider a claim for refund that was not first timely filed and rejected by the IRS. The theory of the case in the claim for refund filed with the IRS must not substantially vary from the theory presented to the Federal District Court or Court of Federal Claims. A claim for refund must be made within three years of the date a return was filed or two years from the date the tax was paid, whichever is later. See Code Section A taxpayer can file a suit for a refund of taxes paid in either the Court of Federal Claims or the United States District Court as soon as six months after the date that the refund claim is filed, or the date that the IRS renders a decision on the claim, whichever is earlier. The taxpayer can wait as long as two years until after a notice of disallowance is issued by the IRS to file suit. Exists within LB&I Exams of high wealth individuals and their related entities Other countries have similar teams Using flow-through specialists (SB/SE) and other international agents

9 Historically, IRS focused on a single type of tax return for a single taxpayer and the examiners focused on particular areas within their core expertise. Wealth Squad finds compliance issues previously missed and buried within layers of related limited liability companies, partnerships, trusts, private foundations, and other related entities. Wealth Squad is coordinating examiners and specialists to analyze complex domestic and foreign arrangements created by the sophisticated advisors who assist wealthy individuals and families. As of 2011, the Wealth Squad had formed seven exam groups that can engage other operating divisions to assist with audits. Review and re-evaluate aggressive tax positions in light of current legal developments and risk tolerance, and determine whether it makes sense to modify the position going forward, amend prior returns, or be prepared to concede a certain position very early in a potential audit. Consider pros and cons of disclosing and relying on any tax opinions. Identify any conduct that the IRS could find in an exhaustive audit whether related to tax reporting -- that could expose the client or others to criminal liability or significant civil liability, and seek advice from competent counsel to manage those risks. 6 year rule Penalties Imprisonment Filing original or amended returns - admissions

10 What are they? When do you use them? How do you use them effectively? Non-filers FBAR issues Jonathan E. Strouse Jonathan E. Strouse Partner Chicago, IL Jonathan E. Strouse is a partner in the Chicago office of Holland & Knight where he concentrates his practice in the areas of litigation, federal tax litigation and federal tax controversies, including audits and appeals. Mr. Strouse is co-chair of Holland & Knight's National Tax Controversy and Tax Litigation Team. Mr. Strouse is also licensed as a Certified Public Accountant. Practices Litigation Tax Controversies and Litigation Education University of Wisconsin Law School, J.D., cum laude University of Wisconsin, B.B.A., with distinction, Finance and Accounting Bar Admissions Wisconsin Illinois U.S. Court of Appeals for the 7 th and 9 th Circuits Trial Bar for the United States District Court for the Northern District of Illinois 30 10