Introduction to Tax Practice and Procedure

Nick Preusch, CPA, JD, LLM

Accuracy Related Penalties

• IRC Sec. 6662 imposes a 20% penalty on:• Substantial understatements of income tax

• Underpayments attributable to negligence or disregard of the rules or regulations

Substantial Understatement

• Defined – A substantial understatement of income tax must exceed the greater of:• 10% of the tax required to be shown on the return; or

• $5,000 (except for corporations); or

• $10,000 for corporations that are not S corporations or personal holding companies.

• There are no other requirements. If the tax deficiency exceeds the limits, the penalty will be assessed. However, there is a reasonable cause exception to the penalty, discussed later.

• For IRC 199A purposes, the 10% of tax required to be shown on the return changes to 5%.

Evaluating Authorities

• Objective standard

• Need to look at closer to source of law

Analysis

• Relevance and persuasiveness

• Look at different standards and what they’re doing

Analysis

• PLR’s have less impact

Analysis

• Type of document matters

• Age of ruling matters

Analysis

• Even if its old, persuasiveness matters

• Can still have little support, but well constructed arguments matter

Authorities

• Applicable provisions of the Internal Revenue Code and other statutory provisions;

• proposed, temporary and final regulations construing such statues;

• revenue rulings and revenue procedures;

• tax treaties and regulations thereunder, and Treasury Department and other official explanations of such treaties;

• court cases;

• congressional intent as reflected in committee reports,

Authorities

• joint explanatory statements of managers included in conference committee reports, and floor statements made prior to enactment by one of a bill's managers;

• General Explanations of tax legislation prepared by the Joint Committee on Taxation (the Blue Book);

• private letter rulings and technical advice memoranda issued after October 31, 1976;

• actions on decisions and general counsel memoranda issued after March 12, 1981 (as well as general counsel memoranda published in pre 1955 volumes of the Cumulative Bulletin);

• Internal Revenue Service information or press releases;

• and notices, announcements and other administrative pronouncements published by the Service in the Internal Revenue Bulletin.

Timing

• Substantial authority can exist either at the time the return is filed or on the last day of the taxable year to which the return relates.

Disclosure

• Disclosure must be made for each year in which an item is taken into account (Reg. 1.6662-4(f)(3)). This means, for example, that a position involving depreciation may have to be disclosed for as long as the property is depreciated.

• The disclosure must be made on Form 8275 or 8275-R or

• Must be made pursuant to the annual Rev. Proc. providing automatic disclosure for certain items (for 2013, the information is in Rev. Proc. 2012-51, 2012-51 I.R.B. 719 ).

Preparer Penalties

• 2008 – Congress introduced preparer penalties

Preparer Penalties

• A return position is unreasonable if• The preparer know or reasonably should have known of the position;

• There was no substantial authority for the position; and

• The position was not disclosed as provided in IRC Sec. 6662, provided there was a reasonable basis for the position. If there was no reasonable basis for the position, the penalty will be assessed, even with disclosure.

Preparer Penalties

• The penalty is the greater of • $1,000 or

• 50% of the income derived or to be derived from the return preparation.

Preparer Penalties

• A penalty is also imposed on any preparer who prepares a return or refund claim with a tax understatement due to willful or reckless conduct (IRC Sec. 6694(b)).

• The penalty is the greater of • $5,000 or

• 50% of the income derived or to be derived from the return preparation

Return Preparer

• A tax return preparer is any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any refund claim under the IRC (Reg. 301.7701-15(a))

• A non-signing tax return preparer is any tax return preparer (except a signing tax return preparer) who prepares all or a substantial portion of a return or refund claim with respect to events that have occurred at the time the advice is rendered (Reg. 301.7701-15(b)(2)).

Substantial Portion of Return

• Single entry can be substantial portion if:• The size and complexity of the item relative to the taxpayer's gross income;

• The size of the understatement attributable to the item compared to the taxpayer's reported tax liability.

Reasonable Cause/Good Faith

• Even if a preparer penalty could be assessed under IRC Sec. 6694(a), it may be avoided if the preparer acted in good faith and the understatement was due to reasonable cause.

Intentional Disregard

• Liable for a penalty under section 6694(b) equal to the greater of $5,000 or 50% of the income derived (or to be derived) by the tax return preparer if any part of an understatement of liability for a return or claim for refund that is prepared is due to • A willful attempt in any manner to understate the liability for tax by a tax

return preparer on the return or claim for refund; or

• Any reckless or intentional disregard of rules or regulations by any such person.

Other Penalties

• Reg. 1.6695-1(a) reinforces the $50 penalty per return, maximum $25,000 for a failure of a signing preparer to provide a taxpayer a copy of the return or refund claim.

• A signing preparer who is not signing a return electronically must sign the return or refund claim after it’s completed, but before it is presented to the taxpayer, including any non-taxable entities, for signature (Reg. 1.6695-1(b)).

Other Penalties

• Under Reg. 1.6695-1(c)) a signing return preparer who fails to furnish one or more identifying numbers of signing tax return preparers or persons employing the signing tax return preparer on a return or refund claim after it is completed and before it is presented to the taxpayer (or nontaxable entity) for signature is subject to a penalty of $50 for each failure, maximum of $25,000 per person per calendar year, unless it is shown that the failure is due to reasonable cause and not due to willful neglect. No more than one $50 penalty can be imposed for any single return or refund claim.

Other Penalties

• Reg. 1.6695-1(d): $50 penalty per failure, maximum $25,000 for a failure to retain and make available for inspection a copy of the return or refund claim or to include the return or refund claim in a record of returns and refund claims and make the record available for inspection. Again, the penalty won’t be assessed if it is shown that the failure is due to reasonable cause and not due to willful neglect

Other Penalties

• IRC Sec. 6060 who fails to meet those requirements is subject to a $50 penalty per failure, with a maximum of $25,000 per person per calendar year, unless such failure was due to reasonable cause and not due to willful neglect.

• Reg. 1.6695-1(f) prohibits any tax return preparer from directly or indirectly endorsing or negotiating a refund check for a taxpayer if the preparer prepared the return or refund claim generating the refund.

Furnishing PTIN

• Under Reg. 1.6109-2, the rule that each tax return and now refund claims must include the identifying number of the tax return preparer required to sign the return or refund claim is retained. In addition, if there is an employment arrangement between the individual tax return preparer and another person, the identifying number of the other person must also appear on the return or refund claim.

• New PTIN case makes PTINs free

Conflict of Interests

• During an audit, at any time, your interests could be different than your client’s interests.

• When this happens, a conflict of interest waiver is needed

Audit Selection

• DIF - determines the returns most likely to generate additional revenue on audit. D

• IF scoring is a secret formula based on statistics developed from prior audits and from the National Research Program (NRP).

Selection Process

• The IRS also selects returns using other criteria:• Some returns are selected randomly to provide audit coverage of all

taxpayers.

• Prepare projects

Audit Scope

• NRP audits – every line is audited on the return

• Regular audits – audit is given areas he/she must review. Can expand scope as needed

Selection Process

• Once selected, returns are forwarded for survey by an IRS agent or employee. The agent will normally determine whether or not the return should be examined.

Selection Process

• Before going to the auditor, the IRS will have a different agent review the return and select items that must be audited. The auditor doing the audit must addresses these and can expand the scope of the audit outside of these selected items.

Selection Process

• Before going to the auditor, the IRS will have a different agent review the return and select items that must be audited. The auditor doing the audit must addresses these and can expand the scope of the audit outside of these selected items.

Audit Selection Process

• Mail, field or office audits• Mail or correspondence exams are the most common audit, and have drawn

heavy fire from Congress as substitutes for field and office audits.

• There is intense pressure to reduce the audit cycle, so agents are now pushing the audit process forward quickly.

Audit Selection Process

• If the exam is a field or office audit, the auditor will then schedule the examination.

• The IRS is staffing up the compliance staff. Since FY 2006, the individual audit rate has remained above 1%. That’s more than the audit rate through the 90’s.

Audits

• In many cases, the IRS position and the taxpayer’s position both have merit given the complexity and history of the tax code.

• The representative should advocate the client’s position within the law.

• Appeals are available if the revenue agent and group manager disagree with the client’s position.

• The Internal Revenue Manual provides guidance to the agent on how to conduct the audit and what steps can or should be taken.

• Don’t be intimidated, but also recognize warning signs that fraud may be an issue.

Manage the Client

• Get the client to sign a Form 2848, Power of Attorney (POA). The IRS won’t discuss the case with a practitioner unless a POA is filed. The POA should generally include both the years before and after the year or years under audit.

• Get an engagement letter signed spelling out the representative’s responsibilities and the scope of representation for the fee – i.e. an appeal will be additional (See Module 9 for a sample engagement letter).

• Discuss the IRS process, the client expectations and the need to understand that the audit is not an all or nothing proposition.

• Discuss fees; get a retainer, a substantial retainer.• Give the client an estimate of the timeline.• Keep the client informed as the process moves along.

Initial Return Review

• Review the return under audit for other problem areas and prepare a strategy to resolve those problems. While the practitioner should not advise the agent of an error on the return without the client’s consent, most practitioners will recommend that the client allow them to disclose the error at the beginning of the audit. This begins to build credibility and trust, and demonstrates that the client is trying to comply with the tax law. If the client refuses to permit disclosure of the error, strongly consider whether to withdraw from the engagement.

First IDR

• Share the Information Document Request (IDR) with the client.

• Try to limit scope of client.

• Typically, during a business audit, the agent will request the general ledger and all receipts or documents relating to certain accounts that have been selected to audit. Prior to meeting the auditor, an effective strategy is to fax him a copy of the general ledger and request he provide an updated IDR sampling the transactions in the accounts he wants to review. This will help to limit the burden of document gathering for your client.

Review Information

• Review the information to be provided to the IRS agent. Remove any privileged information. Also, make sure that the information supports the position on the tax return and that there are no surprises. To the extent there are problems, it’s best to know about those before the agent raises the issue

Tour of Business

•Brief the client on procedures to follow if the IRS agent will conduct the audit at the business• Provide a private, secluded office for the agent to

work, out of the way of the normal business transactions if possible.•Assign one person to interact with the agent during

the audit.• Instruct the person dealing with the agent to

maintain detailed records of conversations, information requested, information provided, etc.

Tour of Business

• Provide the agent any office guidelines – i.e. no smoking, must wear ear protection, etc. just as one would an employee.

• Instruct the employees to be polite and civil to the agent, but to refer any questions, etc. to the individual assigned to interact with the agent.

• Tell the employees not to joke and kid with the IRS agent – it may be misinterpreted.

• If the agent is only going to inspect the premises, make sure, if at all possible, to accompany the agent. Do not permit the agent to “search” the premises; the IRS has no right to conduct a search without a warrant. Be prepared to answer any questions, but don’t be rushed into an answer if the question requires research.

Interview of Client

• If the client is to be interviewed (voluntarily or through enforcement of a summons), the Internal Revenue Manual provides guidance to its agents on how to conduct an interview in IRM 4.10.3.2.7.

• Always be there with client

• In addition to understanding how the IRS will conduct an interview, the client must be thoroughly prepared for the interview. If there are any indications of fraud or even improper activity, the client should consult a competent attorney familiar with tax procedure and criminal tax procedure.

Interview Client• The client should answer only the question asked, not volunteering any

information.

• The client should understand what the critical elements of the case are and the strategy to address them.

• The client should avoid irritating the Appeals Officer or making derogatory comments about the IRS, the Revenue Agent, etc.

• The practitioner should review the IRS instructions in the IRS manual (discussed above) for conducting an interview with the client so the client is prepared.

Audit Strategy

• Prepare an audit strategy. Remember the taxpayer controls the information. Deciding how and when to present the information can have a tremendous impact of the outcome of the audit. Also, given the pressure on agents to reduce the audit cycle time, effective information management can result in an agent deciding not to look at some issues in depth.• Consider whether to summarize data in schedules. In many cases, the agent

may accept the information, only spot-checking the details.

• Where substantiation is lacking, consider providing alternative sources of documentation – third party statements, etc.

• Always bear in mind the benefits of shifting the burden of proof to the IRS.

Memos of Meetings

• Memorialize every meeting with the agent and note what records and information are provided to the agent. Both can be very handy in the event there is a dispute over what was agreed or whether an item was provided. Absent this contemporaneous record of what happened, the client may find himself/herself at a disadvantage should there be a dispute about an issue.

Billing

• Consider sending a bill with each information update. Contemporaneous billing frequently reduces resistance to the bill.

Paying the Audit

• As the audit nears completion, discuss how the tax will be paid. If the client doesn’t have the funds, discuss payment options (i.e. installment payment plan, offer in compromise, etc.). Agents are now asking how the adjustment will be paid, so be prepared with an answer.

Finishing the Audit

• Once a settlement is reached, the client should sign the audit report. While the POA gives this authority to the practitioner, it’s a smart move to get the client to acknowledge and accept the final deal.

• Run audit adjustments through your tax software. IRS software is not always right.

Client Letter

• Once the audit is over, send the client a letter outlining the final resolution of all of the issues. The letter should include• A detailed description of the impact on future years

• Any agreements on new accounting methods, etc.

• A statement that the engagement is completed and no further services will be rendered pursuant to the engagement letter.

Unagreed Case

• If the issues aren’t resolved, the auditor will send the client a 30-day letter (Letter 915(DO)) or a field report (Form 4549). In either case, the issuance of the 30-day letter starts the appeals process.

• If the client doesn’t exercise any appeals rights, then the IRS will issue a Notice of Deficiency (the 90 day letter). The client then has 90 days to file a Tax Court petition. If the client doesn’t file a Tax Court petition within the 90 days, the only recourse the client has is to file a claim for refund with the IRS and when it is denied, to file a refund suit in the District Court or Court of Federal Claims.

Correspondence Audits

• Most practitioners and clients focus on the traditional face-to-face audit process. However, this now accounts for only about 22% of all IRS individual audits. Correspondence audits make up the remaining 78% of audits.

Correspondence Audits

• Information returns matching program – CP 2000 notices

• DIF CORR audit – easily verifiable credits, deductions etc, including most Schedule A items and some income items.

• Other audit items – targeted issues or questions.

Correspondence Audit

• The client has several options for responding to a correspondence audit are;• Agree with the proposed changes, pay the tax, penalties and interest and be

done with it. For small amounts, many clients prefer this approach over a protracted exchange of correspondence with the IRS. In many cases, this is the most cost effective response. However, any deficiency is likely to include a penalty, since penalties are normally added automatically by the IRS system.

Correspondence Audit• Request additional information about the proposed change or the issue

involved. In some cases, the notice will be difficult to interpret. Asking for a clarification can often cut down the audit cycle time and focus the IRS on the real issue.

• Disagree with and/or explain the proposed adjustment. This will most likely happen with the CP 2000 program. For example, an item reported to the IRS as interest may well have been included on Schedule B as a dividend. Such explanations tend to close the case quickly, provided appropriate documentation is included.

Correspondence Audit

• Request the case be transferred to the field or office audit group. Remember though, it’s almost always more advantageous to close the examination with the Service Center.

Handling the Audit

• The initial steps for a correspondence audit should be the same as those for a field exam, with some obvious differences.• The examiner will limit the audit to the issues listed in the letter. It is rare

for the examiner to expand the matters. Still, though, be careful in what information is provided.

• Get a POA. No discussion can occur without one.

• Record the badge number of the IRS examiner. This may facilitate the resolution of problems after the audit is resolved.

Handling the Audit

• Make sure the correspondence deadlines are met. Most notices will request a response in 30 days. While there may be some built-in extensions (for mail delivery, etc.) it is important to meet those deadlines if at all possible. If additional time is needed, a request for a 30 day extension will usually be granted

Handling the Audit

• After the POA is filed with the IRS, consider calling the examiner and going over the case. While it is often difficult to catch the examiner by phone, this may be a way to explain the matter and give the examiner a heads-up on what documentation will be forthcoming. As noted earlier, document the conclusions, etc. of the call.

Response

• As previously recommended, always respond within the allotted time or request an extension of time to respond.

• Provide a detailed response on an item-by-item basis. Include detailed explanations, reconciliations, cross references to the documents, etc. for each item. Where IRS third-party documents are in question, attach copies of those and appropriately cross reference them.

• If income issues are involved, prepare a schedule reconciling the income tax return to the receipts, Forms 1099 etc.

Response

• NEVER SEND ORIGINAL DOCUMENTS.

• Maintain a detailed written record of the calls, correspondence and status of the audit.

• With each letter, include a copy of the last IRS correspondence in the case. This will help match the files.

• Consider sending all correspondence by certified mail.

Objectives

• Evaluate the benefits and detriments to clients of the appeals process.

• Analyze the various appeals opportunities in order to advise clients.

• Determine the steps necessary to move a client’s case through Appeals.

Overview

• The purpose of Appeals is to provide an administrative process to resolve tax disputes without litigation. Most cases are resolved at the Appeals level, thus reducing the burden on the Tax Court and other courts.

• Appeals has jurisdiction over income, estate, gift, employment, excise taxes, additions to tax, and penalties (Reg. 601.106(a)(1)).

• Appeals has no jurisdiction over alcohol, tobacco and firearms taxes (Reg. 601.106(a)(3)).

Advantages

• It’s less expensive than litigation.

• A neutral and experienced IRS Officer will reconsider the issues.

• The hazards of litigation will be considered.

• Appeals has been historically successful at resolving issues (about 88% of the cases are resolved in Appeals).

• There is additional time to settle the case, without any time limits, other than those provided by the statute of limitations.

Advantages

• The decision on which court to use if the case isn’t settled is deferred until after the Appeals process.

• If there are multiple parties, they have more time to coordinate responses and positions.

• The Appeals Officer is more likely to be open about the government’s case than is the trial attorney.

• Litigation costs may be recovered in a subsequent proceeding if the taxpayer prevails.

• No monies must be paid while the appeal is in process.

Disadvantages

• The Appeals Officer can raise new issues, provided there are substantial grounds and there is a material potential effect on the taxpayer’s liability (IRM 8.6.1.6.2).

• If a Tax Court petition is filed, the appeals process may speed up by virtue of the Tax Court docket.

• Non-docketed case resolutions may have less finality than a docketed case, since the resolution will be incorporated in the final decision.

Disadvantages

• Using Appeals may be a futile gesture if the issue is designated as a litigating vehicle by the IRS. The representative should attempt to determine if that is the case before preparing a protest. For example, as of August 2013, the issue of self-employment income of an LLC member cannot be settled at audit or Appeals, but is being settled after a petition is filed in Tax Court and sometimes only hours before trial. Do not be afraid to deal with the IRS as an adversary that does not like to lose. If you have a strong hand, play it. Don’t fold to a bluff.

• The key to an Appeals settlement is negotiation.

Appeals Initiatives

• Pre-submission Conference

• Prefiling Agreements

• CAP

• Industry Issue Resolution Program

• ADR Options• Early Referral

• Mediation

• Fast Track Mediation

Appeals Jurisdiction

• Income, estate, gift, employment and miscellaneous excise tax deficiencies

• Claims for refunds

• Penalties and additions to tax described in Chapter 68 of the IRC, which includes the IRC Sec. 6662 accuracy-related penalty and the late filing and late payment penalties

• Preparer penalties

• Interest abatement

Appeals Jurisdiction

• The IRC Sec. 6672 trust fund recovery penalty

• Jeopardy or termination assessment

• Offer in compromise rejection

• Proposed termination of an installment agreement

• Validity of liens, levies and seizures

• Initial or continuing tax-exempt status

• Private foundation status

• Qualified plan status

Filing Protest

• A written protest is required in any case where there was a field audit and the total of the tax and penalties is greater than $10,000.

Writing a Protest

• An affirmative statement that the taxpayer is appealing the conclusions of the examining agent.

• The taxpayer’s name, address, and daytime telephone number

• The identifying symbols and the date on the 30-day letter. If an extension of time to file the protest has been approved, a statement to that effect should also be included, along with the extended due date.

• The tax periods or years involved. A single protest may cover all of the years and issues included in the 30-day letter.

Writing a Protest

• A list of the adjustments being protested and the reasons for the protest.

• A detailed statement of facts for each issue

• A detailed supporting statement of law or other authority supporting the taxpayer’s position.

Writing a Protest

• The protest must be signed by the taxpayer or the representative and include the following declaration:• If signed by taxpayer - Under the penalties of perjury, I declare that I

examined the statement of facts stated in this protest, including any accompanying documents, and, to the best of my knowledge and belief, they are true, correct and complete.

• If signed by the representative - I declare that I have submitted the protest and accompanying documents and I know (or do not know) whether the statement of facts in the protest and accompanying documents are true and correct.

IRS Response

• The agent and group manager have the right to submit a rebuttal to anything contained in the protest, provided the information isn’t confidential. A copy of any such rebuttal is sent to the client (IRM 4.10.8.11.9).

• The group manager is required to attempt to discuss the disputed issues with the client (or representative) in order to resolve any differences. If an agreement can’t be reached, the case is forwarded to Appeals (IRM 4.10.8.11.9).

Appeals Conference

• There may be more than one Appeals conference, so long as it appears that progress is being made in the case.

• The conference is informal. No transcripts are made and no testimony is given under oath. The entire purpose is to negotiate resolution of the issues.

Ex Parte Communications

• Appeals Officers are generally precluded from discussing with any other IRS employee the strengths or weaknesses of the case or any positions taken in the case (ex parte) without the participation of the taxpayer or representative.

Taxpayer Role In Conference

• As a general rule, the taxpayer should not attend the conference.

• However, it may be important for the taxpayer to attend where the taxpayer’s credibility is critical to the case, since a credible witness increases the IRS’ “hazards of litigation”.

Negotiating Settlement

• Arrange and discuss the issues in the order of their importance to the taxpayer. Once the crucial issues are resolved, the others can usually be quickly disposed of by negotiation. Remember, the purpose of the conference is to settle the case, not “win”.

• Be realistic in the likely outcome.

Hazards of Litigation

• The Appeals Officer must consider the hazards of litigation in reaching a settlement.

• Under the hazards of litigation, the Appeals Officer must consider the case as a judge would in trial. This involves:• The likelihood that the taxpayer can prove the facts presented in the protest

• Whether the facts, if proven, support the taxpayer’s position

• How a judge or jury would apply the law to the facts

• Whether the taxpayer could carry his/her burden of proof

Hazards of Litigation

• Whether the evidence is credible

• How credible the witnesses would be in court

• How ambiguous the tax law is on the issues

• Whether the taxpayer met the requirements to shift the burden of proof to the IRS

• The likelihood that the court would rule in the taxpayer’s favor.

Settlement Offers

• Generally, the representative will be expected to make the first settlement offer.

Settlement Offers

• The offer should be a qualified offer. A qualified offer that is rejected by the IRS can result in an award of attorneys’ fees and costs if the IRS final judgment in court is less than or equal to the offer.

• Requirements for a qualified offer are that:• The offer is written• The offer specifies the amount of the taxpayer’s proposed liability• The offer must be made after the issuance of the 30-day letter, but no later

than 30 days before the case is first set for trial.• The offer must remain open until the offer is rejected, the trial begins, or 90

days after the offer is made.• Only the issues adjudicated by the court qualify.

Post Appeal Options

• Tax Court

• Pay the Tax, file a claim for refund, then sue for a refund in the appropriate Federal District Court.

• Pay the Tax, file a claim for refund, then sue for a refund in the Court of Federal Claims.

Objectives

• When financial data is required

• How to provide financial data and avoid misunderstandings with collection personnel

• Importance of accurate and complete financial data

Overview

• Generally, updated financial information will be required about every six months, so if the case drags on, additional filings may be required. This can work against the client if the client’s financial situation is improving

• The financial statements must be signed under penalties of perjury. If there are false statements in the financial statements, the client could be prosecuted under IRC Sec. 7206(1), which makes it a felony to willfully make false statements. Penalties include up to three years in prison and/or $100,000 fine.

Forms

• Form 433-A (Collection Information Statement for Individuals) – The basic form that all individuals with collection problems will file.

• Form 433-B (Collection Information Statement for Businesses) –Business debtors will file this form, including sole proprietors, who will also file Form 433-A.

• Form 433-F (Collection Information Statement) – Used by ACS to determine the amount of tax an individual can pay.

Income and Expense Issues

• Family health and welfare payments - rent, food, clothing, necessary transportation costs, medical expenses, insurance, alimony, and child support payments - are allowed (IRM 5.15.1).

• The IRS provides national standard amounts and local standards for monthly expenses and for certain individual expenses (IRM Exhibit 5.15.1).

Income and Expense Issues

• National standards include the following expenses, determined for the client’s income level (IRM 5.15.1.8). Taxpayers are allowed the national standards on a per-person basis without questioning the actual amounts spent. You can access current collection standards at http://www.irs.gov/Individuals/Collection-Financial-Standards• Shoes, clothing, laundry, dry cleaning and shoe repair

• Food, including meals away from home

• Health insurance

• Housekeeping supplies, garden supplies cleaning supplies, office supplies and miscellaneous supplies.

Income and Expense Issues

• A miscellaneous amount is a percentage of other categories and is based on Bureau of Labor Statistics data.

• Any deviation from the national standard amount – for special dietary needs, etc. must be justified and substantiated.

• Out-of-pocket medical expenses are allowed along with health insurance premiums. However, plastic surgery and elective dental work are generally not allowed.

Income and Expense Issues

• Local Standards• Housing and utilities - mortgage or rent, property taxes, interest, parking,

necessary maintenance and repair, homeowner's or renter's insurance, homeowner dues and condominium fees.

• Utilities - includes gas, electricity, water, fuel, oil, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning, and telephone and cell phone.

• Transportation – vehicle payments (lease or purchase), insurance, maintenance, fuel, state and local registration, inspection, parking, tolls, driver’s licenses and public transportation. If a husband and wife own two vehicles, they are entitled to the amounts claimed, up to the maximum allowance. The IRS does permit a higher transportation amount if the taxpayer has a long commute.

Income and Expense Issues

• Expenses not allowed• A child’s college education expenses

• Pet expenses, unless they are minimal

• Any expenses viewed as extravagant

Objectives

• Importance of clear description of duties

• Risks of signing forms and/or checks

• Two part defense . . . not responsible . . . not willful

IRC 6672

• "any person required to collect, truthfully account for, and pay over any tax imposed by [the Code] who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of tax evaded, or not collected, or not accounted for and paid over."

Factors• In analyzing whether to assert the penalty against an individual, the IRS

will generally consider the following factors: • Look at all facts and circumstances

• Focus on scope of individual's authority over financial affairs

• Mere power to make the requisite payments to the IRS is insufficient

• Practical authority to direct payment is adequate

Willfulness

• In addition to being a responsible party, the individual must also have acted willfully, although that is probably the easier of the two tests to meet.

• A good summary of the willfulness standard is that the person makes a deliberate choice not to pay the payroll taxes, with knowledge that the payroll taxes are due. Willfulness can also exist if the responsible person fails to act after becoming aware of a known or obvious risk that payroll taxes haven’t been paid. Note that there are very few requirements to establish willfulness. If the tax isn’t paid, the willfulness requirement will generally be met.

Imposing the Penalty

• After all potentially responsible persons are interviewed and documents reviewed, the Revenue Officer will submit to the Group Manager a recommendation of assertion or nonassertion of penalty on Form 4183.

• All persons considered for the penalty are listed, and the reasons why the penalty is or is not asserted listed.

Imposing the Penalty

• IRS letter 1153(DD) is then mailed to each person on whom the penalty is proposed. Responsible persons may either agree to the penalty in writing or file a formal protest within 60 days requesting an appeals conference.

• If within 30 days from the date notice and demand is made, the assessed person pays an amount necessary to commence a refund suit, files a claim for refund, and posts a bond equal to 150% of the minimum payment required to commence a refund suit, IRC Section 6672(b)(1) prohibits the post-assessment collection of the penalty.

Collection Process

• Notice of Deficiency – Used for additional tax liabilities except for employment taxes, unpaid amounts on a filed return, underpayment of estimated payments and various penalties including the IRC Sec. 6700 and 6701 penalties

• Assessment – Absent a Notice of Deficiency, this starts the collection process

• Notice and Demand

• Lien and levy

• Collection Due Process Hearing

Assessment

• Authority for assessments lies with the IRS Area and Service Center Directors (IRC Sec. 6201; Reg. 301.6201-1).

• Assessment is simply a “ministerial act”. The IRS director schedules the liability and signs the assessment register.

Notice and Demand

• Notice and demand must be made within 60 days of the assessment.

• A separate notice and demand is sent to each spouse.

• The notice and demand starts the collection process and paves the way for liens and levies if the tax remains unpaid.

IRS Collections

• ACS

• Online Installment Agreements

• Revenue Officers

• Third Party Collections

Managing the Client

• The client is normally under a great deal of stress.

• The client may have unrealistic expectations – i.e. the TV ads showing happy taxpayers settling their tax debts for “pennies on the dollar”.

• The client may not realize the collection issues – i.e. change of lifestyle that may have to be addressed.

Managing the Client

• Get a client

• Have an engagement letter

• Manage expectations

Notice of Deficiency

• A notice of deficiency must be issued before the IRS can assess additional income, estate, gift and most excise taxes (IRC Sec. 6213(a)). Taxes shown on filed returns are automatically assessed through a summary assessment process.

• A notice of deficiency must be mailed to the taxpayer’s last known address by certified or registered mail (Reg. 301.6212-2).

Assessment

• A tax must be assessed to enter into the collection process.

• Returns filed with balances due are immediately assessed without the requirement of a notice of deficiency. This is called a summary assessment (IRC Sec. 6201(a)(1)).

• Enforced collection activity cannot commence until 30 days after assessment (IRC Sec. 6331(d)).

Statute of Limitations

• General rule is that a tax must be assessed within three years after the return involving the tax is filed (IRC Sec. 6501(a)).• An early-filed return is deemed to be filed on the due date (IRC Sec.

6501()(1)).• The statute is suspended for any period during which the IRS is prohibited

from assessing the tax and for an additional 60 days (IRC Sec. 5503(a)(1)).• The statute of limitations for a partner or S shareholder is not determined

by the entity filing date, but by the individual partner or shareholder filing date (Bufferd v. Comm., 504 U.S. 523).

• However, if the TEFRA audit procedures apply, it is the entity return that governs the statute. The new partnership audit procedures eliminate TEFRA and the statute is at the entity level.

Payment Issues

• The IRS applies involuntary payments as it desires, which usually means to the taxpayer’s detriment (Muntwyler v. U.S., 703 F.2d 1030 (CA7, 1983)).

• Voluntary payments can be designated by the taxpayer to be applied as the taxpayer desires (Rev. Proc. 2002-26, 2002-15 IRB 746).

Payment Issues

• If the taxpayer doesn’t designate the application of a voluntary payment, the IRS will apply the payment in a way that best serves the IRS interest. The payment will be applied to satisfy the liability for successive periods in descending order to tax, penalty and interest, in that order (Rev. Proc. 2002-26, 2002-15 IRB 746).

Tax Liens

• The federal tax lien arises if the assessed tax is not paid within 60 days. No public filing is required for the lien to take effect. (IRC Sec. 6321).

• The lien attaches to all of the taxpayer’s property, both existing at the time and subsequently acquired (IRC Sec. 6321).

• The lien has priority over the taxpayer’s interest in the property and over all third party interests in the property unless the third party’s rights are “perfected” under local law prior to the attachment of the lien.

Tax Liens

• The lien attaches to joint tenancy property and tenancy in common property. If the property is held in joint tenancy, state law will control whether the IRS lien survives the death of the taxpayer (U.S. v. Librizzi, 108 F.3d 136 (7th Cir. 1997)).

• The IRS has the right to sell the joint tenancy or tenancy in common property in its entirety, with each owner getting his or her proportionate share of the proceeds.

Tax Liens

• The tax lien expires when the tax is paid or after ten years from the assessment (IRC Sec. 6502). The ten year period is extendable in some circumstances.

Tax Levy

• A levy requires some third party to pay what is owed to the taxpayer to the IRS.

• All property of the taxpayer is subject to levy (IRC Sec. 6331).

• A levy must be executed within the 10-year statute of limitations on collection (IRC Sec. 6502).

Levy

• A levy is prohibited during certain times• During the time any refund proceeding brought in a federal court for a

refund (IRC Sec. 6331(i)).

• During a pending Offer in Compromise (IRC Sec. 6331(k)(1)).

• During the term of an installment agreement (IRC Sec. 6331(k)(2)).

• Prior to completing an investigation of the property’s status (IRC Sec. 6331(j)(1)).

• Where the expense of the levy exceeds the FMV of the property at the time of the levy (IRC Sec. 6331(f)).

Levy

• Procedure for a levy• Notice and demand – the levy can’t occur until 10 days after the notice and

demand.

• Notice of Intent to Levy

• Notice of Levy

Levy

• The IRS must release the levy when (IRC Sec. 6343)• The tax liability is paid or the statute runs;

• The taxpayer convinces the IRS that a release of the levy would facilitate collection;

• The taxpayer executes an installment agreement;

• The levy causes an undue hardship on the taxpayer; or

• The value of the levied property is greater than the tax liability, thus permitting a release on the excess asset.

Defending Collection Actions

• Innocent Spouse Relief

• Taxpayer Assistance Order

• Installment Agreement

• Offer in Compromise

• Collection Due Process Hearing

• Collection Appeals Program