Building the Strongest Position for Withstanding an IRS Audit

Transcription

1 Building the Strongest Position for Withstanding an IRS Audit Broadcast Date: August 15, 2012 Copyright 2012 All-Star Tax Series, LLC

2 2011 IRS Data Book: Fiscal Year 2011 Collected: $2.4 trillion Collections net of refunds: $2 trillion Processed: 234 million tax returns More than 143 million individual income tax returns filed, accounting for 61.2% of all returns filed Individual income tax withheld and tax payments, combined, totaled more than $1.3 trillion before refunds. Individual taxpayers received almost $337.8 billion in refunds. IRS spends 53 cents to collect $100 of tax revenue.

3 Reasons a Return Is Selected for Audit A high DiF score Document matching Related party examinations Specific IRS audit initiatives Information from third party sources -- document matching

4 Types of Audits: Correspondence Audit For individuals Reserved for people with whom the IRS believes it can communicate effectively

5 Types of Audits: Office Audit IRS wants taxpayer to come and bring records to an IRS office. Somewhat more complicated subject matter than correspondence audits. Requires a face-to-face explanation of specific items: Basis of property Itemized deduction that may need explanation, such as casualty loss or employee business expenses IRS employee will be following an audit program. IRS will not hesitate to open other years if seems appropriate.

6 Types of Audits: Field Audits Most are business tax audits. IRS agent will come to office expecting taxpayer to have a tax problem, and that IRS will make money. 80% of the audits end up with a tax liability. Likelihood of taxpayer ending up with a tax problem as a result of the audit is high. Auditor will ask to interview taxpayer/client. Tax professionals generally reject this request and ask that the audit be conducted in the tax practitioner s office. Goal: convert field audits into correspondence audits.

7 Types of Audits: Field Audits IRS auditor will assert a right to tour the business location. IRS agent may attempt to turn the tour into a conversation with the business owner. DO NOT allow the IRS agent to do this!

8 How to Audit-Proof a Return Computer-prepared return is always preferable to a hand-prepared return. Schedule C a sure prescription for audit if it has a lot of travel, mileage, entertainment, and auto expenses. Don t round numbers. Account for all Form 1099s, W-2s, and K-1s. Extend/file by the extended due date, but not before. Forego itemizing. Document, document, document!

9 Negligence Penalty: Sec. 6662(b)(1) Fail to do what a reasonable and ordinarily prudent person would do. IRS cannot assess if taxpayer had a reasonable basis for taking the position. Reasonable basis is a relatively high standard of tax reporting. It is significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim.

10 Substantial Understatement Penalty 20% of the portion of the underpayment of tax due to any substantial understatement of income tax Understatement is substantial if it exceeds 10% of the correct tax or $5,000. Penalty applies to undisclosed positions unless the taxpayer has substantial authority for the position. Can be avoided if the taxpayer makes adequate disclosure and has a reasonable basis for position.

11 Fast Track Mediation Optional: does not replace existing dispute resolution options. FTM Appeals Official, serving as a neutral participant, helps the parties understand the nature of the dispute and reach a mutually satisfactory resolution. FTM Appeals Official may recommend a resolution on the merits based on the FTM Appeals Official s analysis of the issues. Either party may withdraw from the mediation process at any time. FTM Appeals Official also may terminate the mediation process. If any issues remain unresolved at the conclusion of FTM, the taxpayer retains all appeal rights.

12 Fast Track Settlement FTS process works best in cases where all unagreed issues are included in the application. Individual unagreed issues or groups of issues will be accepted for FTS in cases where it is determined to be in the best interest of tax administration. When FTS is unsuccessful in resolving all issues, the taxpayer will be offered the opportunity to pursue resolution through traditional Appeals.

13 Early Referrals to Appeals Taxpayer requests early referral to Appeals of developed unagreed issue in an open audit (prior to 30-day letter). Taxpayer and Team Manager agree issue should be referred early. Remaining issues are not expected to be complete before Appeals resolve early referral issue. Closing agreements executed if agreement is reached. If no agreement, taxpayer may request mediation or will be issued a statutory notice of deficiency.

14 Appeals Mediation Available for cases with limited number of issues unresolved following settlement discussions in Appeals. May be used to resolve issues in cases that qualify while they are under consideration by Appeals. This procedure may be used only after Appeals settlement discussions are unsuccessful and, generally, when all other issues are resolved.

15 30-Day Letter When examination results in a proposed tax deficiency, taxpayer issued 30-day letter. Advises of the right to appeal to Appeals Office. If statute of limitations for assessment and collection of tax is about to expire, extensions of time to file a protest will be granted only if the taxpayer consents to extend the Statute of Limitations.

16 90-Day Letter Indicates tax, interest, and penalties owed Right to go to the U.S. Tax Court Within 90 days, taxpayer must submit one of the following: Form 1040 completed and signed Consent to Assessment and Collection form, signed and dated A statement explaining why taxpayer believes he or she is not required to file, or information taxpayer would like IRS to consider

17 Appeals Small Case Request Prepare a small case request instead of a written protest if the total amount for any one tax period is $25,000 or less. Send a letter requesting Appeals consideration. Indicate the changes you do not agree with and the reason you don t agree. No protest required. Form 12203

18 Preparing a Protest Required if total amount > $25,000 All partnership and S corporation cases Include name, address, SS#, and daytime telephone number Statement that taxpayer wants to go to Appeals Tax periods or years All changes taxpayer does not agree with, and why Facts supporting taxpayer s position Legal authorities Sign under penalties of perjury

19 Client Tax Practitioner Privilege Section 7525 extended the attorney-client privilege of confidentiality to tax advice in a noncriminal tax proceeding that is furnished to a client-taxpayer or potential client-taxpayer by any individual who is authorized under Federal law to practice before the IRS. Privilege may be waived in the same manner as the attorney-client privilege.

20 Kovel Rule Attorney-client privilege extended to tax practitioners when a tax practitioners acts at the direction of the lawyer to provide information for the client. Tax practitioner should document the circumstances of hiring, obtain engagement letter from lawyer, label the project's work product "confidential," and properly conduct client meetings. Invoice attorney (not client), send reports directly to the lawyer, and make sure engagement report materials are segregated from other work files.

21 Voluntary Disclosure Will not automatically guarantee immunity from prosecution, but may result in prosecution not being recommended. Occurs when the taxpayer s communication is truthful, timely, complete, and when: Taxpayer cooperates with the IRS; and Taxpayer pays all tax, interest, and penalties.

22 Rules Applicable to Tax Practitioners Circular 230 AICPA s Statements on Standards for Tax Services (SSTSs) ABA Standing Committee on Ethics and Professional Responsibility State bar associations State boards of accountancy

23 Schedule C Abuses Overstate expenses/understate income Fail to pay employment tax or file information returns Claim refunds from earned income credits to which the taxpayer was not entitled Incompetence/lack of integrity of tax preparers

24 Construction Industry Non-reporting of cash payments Non-reporting of bartering transactions Misuse of the completed method of accounting Using the cash method of accounting when the taxpayer is not entitled to use it Deducting expenses that should be capitalized and depreciated Deducting personal expenses