CONSIDERATIONS AND STRATEGIES WHEN THE TAXPAYER IS ALREADY IN TROUBLE By Leslie Shields Attorney at Law The Shields Law Firm, P.L.L.C. 402 S. Northshore Drive Knoxville, Tennessee 37919 Phone (865) 546-2400 Fax (865) 909-9105 leslie.shields@shields-law.com October 25, 2012 TABLE OF CONTENTS I. NON FILERS AND DELINQUENT RETURNS II. AMENDED RETURNS III. IRS TARGET AREAS IV. IRS EXAMINATIONS AND AUDITS V. ADMINISTRATIVE APPEALS AND THE APPEALS CONFERENCE VI. U.S. TAX COURT LITIGATION VII. IRS COLLECTION VIII. CRIMINAL INVESTIGATIONS
I. Non Filers and Delinquent Returns Preserve the attorney client privilege where needed; Does the taxpayer want to qualify for the IRS voluntary disclosure program to avoid criminal liability versus a soft filing of the returns? IRM 9.5.11.9 (12-1-02); IRS voluntary disclosure program does not create rights for the taxpayer, but rather is an internal IRS discretionary program; If multiple entities and multiple years, Prepare drafts of all returns for all years to discuss with the attorney and the taxpayer(s) before filing of any the returns if possible; If possible, prepare the returns so that taxpayer can bankrupt the taxes at a later date where possible. 11 USC 523, 6020; Consider the Pros and Cons of filing married separate especially if there will be tax due that cannot be quickly paid; The advantages of filing all the returns at one time; The advantages of hiring a conservative preparer who is not related to the taxpayer; While the returns are prepared and before the returns are filed, map out the goals for the taxpayer and discuss the goals and the plan with the tax preparer before the returns are filed; Discuss and anticipate how the tax problem may affect the business, the taxpayer s health, the taxpayer s marriage and the taxpayer s family; Before the returns are filed, discuss any problem areas should the returns be audited. Before the returns are filed, complete all workpapers and obtain all documentation; Discuss the pros and cons of filing the returns with an explanation letter; 2
Consider the request for waiver of penalties where there is reasonable cause, especially if taxpayer can pay the tax. II. Filing Amended Returns Preserve the attorney client privilege where needed; Prepare the return and the workpapers with the view that it will be audited ; Analyze bank statements/net worth to report all income; To correct overstated or misstated deductions; Can the taxpayer qualify for the IRS Voluntary disclosure program to avoid criminal liability? Be sure to discuss every line item on all returns with the taxpayer to cover everything; Discuss the pros and cons of filing with an explanation letter; Review any non IRS issues such as TDOR issues; spousal issues; Discuss whether there may be an innocent spouse case if the original return was a joint return; 3
III. IRS Target Areas Taxpayer Category Flow through entities and taxpayers with multiple closely held businesses; High income earners (over $100,000); for taxpayers with incomes of $200,000 or higher, there is 1 in 8 chance of being audited; Attorneys, doctors, CEOs CFOs; Abusive trusts; CPA and preparer audits-cap program; Return preparer fraud; Taxpayer with membership in tax avoidance and/or tax protester organizations. Issue Category Payroll audit/independent contractors; proper worker classification; Unreported income/bank deposits method/omitting FORMS K-1; Large charitable deductions; Comingling between entities, search for constructive dividends; Foreign bank accounts and offshore transactions; Unreasonable compensation; Loans to shareholders; 4
Large cash transactions; cash businesses such as taxis, car washes, bars, hair salons, restaurants. Reports of cash transaction deposits can lead to audit of casinos, car dealers; Rental Losses; Home office deduction; Schedule C large meals, travel, entertainment expenses; Schedule C losses; hobby loss rules; Foreign bank accounts, offshore programs have produced $4.4 billion in revenue; Higher than average deductions. IV. IRS Examinations IRS Revenue Agents are trained to be friendly and reassuring while they are gathering information against the taxpayer; Preserve the attorney client privilege; Statute of Limitations on Assessments; The eggshell audit; The sensitive audit; The different ways to work with an attorney during the audit; IRS background checks; 5
Preparing for the audit immediately after the first IRS contact; review with the client any problem areas and review of supporting documentation before the interview; If you know tax will be due, try to prevent extraordinary penalties and prevent IRS from assessing more than 3 years; Some IRS Badges of Fraud Deliberately underreporting or omitting income; Overstating deductions; Keeping 2 sets of books; Making false entries in books and records; Claiming personal expenses as business expenses and using business income to pay personal expenses; Claiming false deductions; Hiding or transferring assets or income; Preparing the client for the interview; The IRS summons and subpoena power; How an audit of the taxpayer can cause an audit of the preparer; Identifying the target areas; Be careful that chit chat or discussions are not construed as concessions or admissions; Working with the examiner and the examiner s manager; The pros and cons of limiting the waiver of the statute of limitations on assessments; 6
The pros and cons of refusing to waive the statute and forcing the issuance of the Notice of Deficiency; Preserving the possibilities of a refund; Don t agree to anything in final until after the auditor determines the number of years to be audited and the penalties are decided and report is issued and computations are analyzed; Taxpayer is entitled to citations for the government s position and written report before taxpayer decides what to do next; Disputing the tax and disputing the penalties and filing the Protest for the appeal; Accelerated issue alternatives such as technical advice, early appeals referrals and fast track programs; Resolving the audit is not a closing letter; If 30 day letter has already expired, try IRS audit reconsideration; Because asserting 5 th Amendment privilege greatly increases the likelihood of criminal investigation, consider controlled cooperation where possible; IRS right to tour business but not in manner that disrupts the business. IRM 4.10.3.3.1; IRS cannot conduct criminal investigations under guise of civil audit without risking suppression of evidence. Tweel 550 F.2d 297 (CA-5) (1977); Revenue Agents cannot give false or deceitful responses to direct questions. IRM 4.2.4.1 (3). 7
V. The Administrative Appeals Process Filing a complete Protest, including innocent spouse and waiver of penalties and affirmative defenses such as expiration of statute of limitations on assessments; The pros and cons of a face to face hearing; The pros and cons of taking the client with you to the Appeals conference; Separating issues of law from issues of fact; Don t finally agree to issues without an IRS computation; Alternative Dispute Resolution, Fast Track Mediation, Early Referral to Appeals. VI. The Notice of Deficiency cy and U.S. Tax Court Litigation Must file suit within 90 days of Notice of Deficiency; If the Notice of Deficiency has expired, try IRS audit reconsideration; Taxpayers Petition in the U.S. Tax Court must be thorough and state all affirmative defenses; Discovery process; Going back to Appeals after the Petition is filed; The Stipulation; Face to Face Settlement conferences; 8
Settling before and during trial; VII. Collection Issues Can the taxpayer bankrupt the taxes? Don t do anything that could preclude this option in the future; Can the taxpayer still request waiver of penalties? Can the taxpayer still qualify for innocent spouse? Does the taxpayer qualify for an Offer in Compromise? Expanded Offer program for qualified taxpayers if income less than $100,000 and tax liability is less than $50,000; Streamline installment pay plans if tax liability is less than $50,000; Request withdrawal of tax lien if under $25,000 and paid within 60 months; Request no lien filed if under $10,000; No financial statements if under $10,000 and paid within 24 months; Regular installment pay plans and the importance of preparing the FORMS 433; Why the installment pay plan may be the worst option for the taxpayer; Even if the taxpayer and/or the practitioner is working with the IRS to resolve the tax liability, always request a Collection Due Process Hearing in response to Final Notice of Intent to Levy with Appeal Rights until the matter is finalized in writing; 9
CNC: currently not collectible status; Collection Due Process Hearings- see Wadliegh 134 TC 280 (2010): 1. Dispute IRS procedure; 2. Make different proposals to satisfy the liability to avoid levy and seizure. VIII. Criminal Investigations Preserve attorney client privilege; In some cases, ask if there is a parallel criminal investigation during the civil audit because civil fraud can become criminal fraud; If the audit is delayed by IRS or IRS disappears, determine if there is a concurrent or simultaneous criminal investigation; Civil Revenue Agent may be discussing with Fraud Technical Advisor; Clues to civil audit with a hidden parallel criminal investigation: 1. IRS contacting third parties 2. Manager attending the audit meetings 3. Many questions about a particular transaction(s) and the taxpayer s intent 4. Revenue Agent disappears and will not return calls. If there is a criminal investigation, taxpayer always needs an attorney. 10
Leslie Shields Attorney at Law leslie.shields@shields-law.com THE SHIELDS LAW FIRM IRM, P.L.L.C. 402 S. Northshore Drive Knoxville, Tennessee 37919 Telephone: (865) 546-2400 Facsimile: (865) 909-9105 BIOSKETCH OF LESLIE SHIELDS Ms. Shields is currently a member of the Executive Committee of the Tax Section of the Tennessee Bar Association and a liaison for the Tennessee Bar to the Internal Revenue Service. She also served this position in 2009 and 2010. In 2011 she was the Tennessee Bar Association Chair of the Tax Section. For more than thirty years her law practice has been devoted primarily to representing taxpayers and preparers in civil and criminal tax controversies throughout the southeastern United States, including, but not limited to, Tennessee, Kentucky, North Carolina, South Carolina, Arkansas, Georgia, Florida, Michigan, Virginia and California. She has defended taxpayers, return preparers and Certified Public Accountants during Internal Revenue Service and Tennessee Department of Revenue audits, investigations, the administrative appeal process, with the federal Office of the Taxpayer Advocate, and before the United States Tax Court, the United States District Court, the United States Sixth Circuit Court of Appeals, and the United States Supreme Court. Ms. Shields has represented taxpayers regarding many issues and is a frequent speaker at educational programs on many tax topics, including but not limited to the following: filing delinquent and amended returns, defending taxpayers during a civil audit or criminal investigation, filing innocent spouse claims, requesting waiver of penalties, the taxability of settlement agreements, requesting IRS private letter rulings, contesting tax penalties, including fraud and return preparer penalties, and Circular 230 requirements for accountants and lawyers. As an invitee to the 2003 United States Tax Court Judicial Conference, Ms. Shields participated alongside the Honorable Judges, counsel for the Department of Justice, attorneys with the IRS Office of Chief Counsel, and other selected tax lawyers who defend taxpayers from across the nation. Ms. Shields also devotes part of her practice to estate planning and estate administration throughout Tennessee. She is a graduate of The Webb School of Knoxville, Emory University and The University of Tennessee School of Law. She is currently a member of the Knoxville Bar Association, the Tennessee Bar Association (Tax and Probate Sections), the American Bar Association (Tax Section), and the Knoxville Estate Planning Council. She can be reached at (865) 546-2400 or leslie.shields@shields-law.com 11