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The Internal Revenue Service: Everything You Always Wanted To Know But Were Afraid To Ask. Presented By: Robert C. Webb, Member Frost Brown Todd, LLC. Robert C. Webb. Member of Frost Brown Todd, LLC, Louisville, Kentucky Offices in Kentucky, Indiana, Ohio and Tennessee Education

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The Internal Revenue Service:Everything You Always Wanted To Know But Were Afraid To Ask

Presented By:

Robert C. Webb, Member

Frost Brown Todd, LLC


Robert C. Webb

  • Member of Frost Brown Todd, LLC, Louisville, Kentucky

  • Offices in Kentucky, Indiana, Ohio and Tennessee

  • Education

    • Georgetown University Law Center, LLM, 1990

    • University of Louisville, Louis D. Brandeis School of Law JD, 1988

    • University of Kentucky, BS, 1985

2


Robert C. Webb

  • Practice Areas

    • Tax Controversy and White Collar Crime

    • Business and Commercial Litigation

3


Overview

  • Understanding the IRS Organization

  • Audit Risks for Taxpayers

  • Fighting The IRS

  • What Makes a Case Criminal vs. Civil

  • Hot Topics for IRS Enforcement

  • Q & A

4


1. Understanding the IRS Organization

5


Taxes are Constitutional

  • 16th Amendment gave Congress the power to tax income

  • Tax Protestors fail

6


Who Controls IRS

  • Legislative (Congress)

  • Executive (President)

  • Judicial (Courts)

7


Legislative Branch

  • Internal Revenue Code

  • Committee Reports

  • Funding

8


Executive Branch

  • Treasury Department

  • IRS Commissioner

  • Treasury Secretary

9


Judicial Branch

  • U.S. Tax Court

  • U.S. District Court

  • U.S. Court of Federal Claims

10


Who Represents the IRS

  • IRS Lawyers

  • Department of Justice Civil Tax Division

11


Federal Circuit Courts

  • 12 Courts for 11 Circuits and the District of Columbia

  • Taxpayers Appeal to these Courts

  • U.S. Supreme Court

12


IRS Organization

  • Post 1998 Reform Act

  • IRS Oversight Board (Policy and Strategy)

  • 4 Operating Divisions

  • Specialized IRS Units

13


What Rules Must the IRS Follow

  • Treasury Regulations

  • Revenue Rulings/Procedures

  • Letter Rulings

  • Internal Revenue Manual (“IRM”)

14


2. Audit Risks for Taxpayers

15


IRS Examinations

  • Service Center (“DLN”)

  • Discriminate Information Function (“DIF”)

  • Multifactor Scoring Process

  • Disproportionate Ratios

  • Refund Claims

16


Audit Triggers

  • Home Based Businesses

  • Excessive Travel and Entertainment Expenses

  • Excessive Charitable Contributions

17


Lowering Audit Risks

  • File an Extension

  • Attach Rider to Return

  • Avoid Disproportionate Deductions

18


Preventing An Audit After Selection

  • No Second Examinations

  • Check the Statute of Limitations

    • 3 years

    • 6 years

19


IRS Audit Focus

  • Tax Gap $345 Billion

  • Taxes due and not paid

  • National Research Project (“NRP”)

20


IRS Automated Under-Reporter Program

  • Targets Tax Gap

  • 4 Million AUR Notices Issued

  • $3.9 Billion in Tax Assessments

  • IRS Matching Program (CP 2000 Notice)

21


How to Prepare for an Audit

  • Review Information Document Request

  • Prepare and File Power of Attorney

  • Review Tax Returns, Work Papers and Source Documents

  • Review Case Law, Regulations and the IRM

22


How to Handle an Audit

  • Documents Bates Stamped and Chronological Order (“ACP”)

  • Pre-Audit Conference with Revenue Agent

  • Document all Contacts with Agents

  • Copy all Documents for the Agent

  • Keep Agent Busy

  • Use Affidavits for Facts

23


IRS Summons Authority

  • IRS Summons (IRC §7602)

  • Not Self-Enforcing

  • Powell Factors

  • Motion to Quash

24


Conclusion of Audit

  • Closing Conference

  • No Change

  • Agree -- Form 870

  • Disagree --

    • Thirty Day Letter

    • Ninety Day Letter

25


Final Thoughts

  • Dealing with Difficult Agents

  • Collecting Attorney Fees (IRC §7430)

  • Shifting the Burden of Proof to the IRS (IRC §7491)

26


3. Fighting the IRS

27


IRS Appeals Offices

  • Administrative Forum for Contesting IRS Compliance Actions

  • 80% to 90% of Cases Resolved

  • Hazards of Litigation is Key

28


When to Seek Appeals Office Review

  • NON-DOCKETED Cases

    • 30 Day Letter (Proposed Deficiency)

    • Collection Actions

    • Refund Denied

  • Docketed

    • Regular Cases

    • S-Cases

  • 29


    How to Seek Appeals Office Review

    • Respond to 30 Day Letter

    • Greater than $25,000 requires a Written Protest

    • Small Case Procedure

    30


    Preparing for Appeals Conference

    • Freedom of Information Act Request

    • IRS Positions

    • Affidavits for Facts

    • Key CIRCUIT Caselaw

    • Offer to Settle

    31


    Settling with Appeals

    • Negotiation Strategy

    • IRS Form 870 or 870-AD

    32


    Alternative Dispute Resolution (“ADR”)

    • Fast Track Mediation (Rev.Proc. 2003-41)

    • Arbitration

    33


    Final Thoughts

    • Qualified Offers

    • Beware of IRC §6673 Penalties

    • Form 870, Closing Agreement or Stipulations

    • Settled Cases Are Generally Not Reopened Absent Fraud

    34


    Special IRS Collections Matters

    • Collection Due Process (“CDP”)

    • Collection Appeals Process (“CAP”)

    • Offer in Compromise

    • Trust Fund Recovery Penalty

    • Equivalent Hearing

    35


    A Taxpayer’s Secret Weapon

    • Taxpayer Assistance Order (“TAO”)

    • IRS Form 911

    • 10 Year Statute of Limitations from Assessment

    36


    CDP Hearing

    • Federal Tax Lien Filed

    • Notice of Intent to Levy

    • Suspends Collection Activity

    • File IRS Form 12153 to Request

    • Judicial Review

    37


    CAP Hearing

    • Expedited Appeal of Collection Actions BEFORE They Occur

    • Proposed Lien Filing; Installment Agreement Rejected

    • Levies That Have Attached

    • Group Manager Meeting Required

    • No Judicial Review

    38


    New Offer in Compromise Rules

    • TIP&R Act of 2005 (IR 2006-106)

    • July 16, 2006 Effective Date

    • 20% of Offer Amount (Nonrefundable) (Unless Waiver)

    39


    Fighting the IRS In Court

    • Tax Court

    • Federal District Court

    • U.S. Court of Federal Claims

    • Bankruptcy Court

    40


    Tax Court Tickets

    • If Appeals Fails to Resolve a Case (“90 Day Letter”)

    • Collection Due Process (“CDP”)

    • Innocent Spouse

    • Interest Abatements

    • Worker Classifications and Amount of Employment Taxes Owed

    41


    Top 10 Litigated Issues

    • CDP

    • Gross Income (§61)

    • Failure to File, Negligence and Frivolous Penalties

    • Trade or Business Expense (§162)

    • Family Status

    • Innocent Spouse

    • Summons Enforcement

    • Trust Fund Recovery Penalty

    42


    4. What Makes a Case Criminal vs. Civil

    43


    What Makes a Tax Case Criminal

    • Amount of Money Involved

    • Badges of Fraud/Concealment

    • Pattern of Conduct

    • High Profile Taxpayer

    • Tax Professional

    44


    What Is The Criminal Investigation Division

    • CID Has Approximately 4,400 Employees World Wide

    • 2,800 Special Agents

    • CID Activity in 2005

    45


    How IRS Special Agents Work

    • Surprise Visits are Key Despite Miranda Type Warning

    • Always two Agents

    • Beware of Joint CIVIL and CRIMINAL Investigations

    46


    How to Deal with IRS Special Agents

    • Get Authority from your Client to Convey Confidential Information

    • Keep a Numbered Set of Copies for All Documents Given to Special Agents

    • Have Witnesses Present for Any Discussions

    • IRC §7525 Privilege Does Not Apply

    47


    Advice to Taxpayers

    • No Destroying or Altering Documents

    • Do Not Tell a CPA or Tax Preparer What Is on Your Mind

    • Hire an experienced Criminal Tax Lawyer

    • Do Not Talk to Third Parties about the Case

    48


    5. Hot Topics for IRS Enforcement

    49


    CID Investigative Priorities

    • Tax Return Preparer Fraud

    • FINCEN and FBAR Compliance

    • Tax Haven Abuses

    • Tax Shelters (Are Factual Assumptions in Tax Opinions Realistic?)

    • Trusts to Conceal Income

    • Cash Economy

    • Failure to Withhold Taxes

    50


    Help for Tax Professionals

    • Contingency Fee Cases in Proposed Rules to Circular 230

    • Award of Attorney Fees

    • Taxpayer Advocate Is Geographical

    • MY E-Mail:BWebb@FBTLAW.COM

    51


    Q & A

    52


    Robert C. Webb

    Frost Brown Todd, LLC

    400 W. Market Street, Floor 32

    Louisville, Kentucky 40202

    502-589-5400

    bwebb@fbtlaw.com

    www.frostbrowntodd.com

    53


    Table of Contents

    The Internal Revenue Service: Everything You Always

    Wanted To Know But Were Afraid to Ask……………………………………...1

    Robert C. Webb…………………………………………………………………..2

    Overview…………………………………………………………………………..4

    1.Understanding the IRS Organization………………………………...5

    Taxes are Constitutional………………………………………………5

    -16th Amendment gave Congress the power to tax income…..6

    -Tax Protestors fail………………………………………………...6

    Who Controls IRS……………………………………………………...7

    -Legislative (Congress)……………………………………………7-Executive (President)…………………………………………….7

    -Judicial (Courts)…………………………………………………...7

    54


    Table of Contents (cont’d)

    -Legislative Branch……………………………………………8

    -Internal Revenue Code………………………………..8

    -Committee Reports…………………………………….8

    -Funding………………………………………………….8

    -Executive Branch………………………………………........9

    -Treasury Department…………………………….........9

    -IRS Commissioner……………………………………..9

    -Treasury Secretary…………………………………….9

    -Judicial Branch……………………………………………...10

    -U.S. Tax Court………………………………………...10

    -U.S. District Court…………………………………….10

    -U.S. Court of Federal Claims………………………..10

    Who Represents the IRS…………………………………………….11

    -IRS Lawyers………………………………………………...11

    -Department of Justice Civil Tax Division…………………11

    55


    Table of Contents (cont’d)

    Federal Circuit Court…………………………………………………12

    -12 Courts for 11 Circuits and the District of Columbia………12

    -Taxpayers Appeal to These Courts…………………………...12

    -U.S. Supreme Court…………………………………………….12

    IRS Organization……………………………………………………...13

    -Post 1998 Reform Act…........................................................13

    -IRS Oversight Board (Policy and Strategy)…………………..13

    -4 Operating Divisions…………………………………………...13

    -Specialized IRS Units…………………………………………...13

    What Rules Must the IRS Follow…………………………………...14

    -Treasury Regulations………………………………………......14

    -Revenue Rulings/Procedures………………………………….14

    -Letter Rulings……………………………………………………14

    -Internal Revenue Manual (“IRM”)……………………………...14

    56


    Table of Contents (cont’d)

    2.Audit Risks for Taxpayers…………………………………………...15

    IRS Examinations…………………………………………………….16

    -Service Center (“DLN”)…………………………………………16

    -Discriminate Information Function (“DIF”)……………………16

    -Multifactor Scoring Process……………………………………16

    -Disproportionate Ratios………………………………………...16

    -Refund Claims…………………………………………………...16

    Audit Triggers…………………………………………………………17

    -Home Based Businesses………………………………………17

    -Excessive Travel and Entertainment Expenses……………..17

    -Excessive Charitable Contributions…………………………...17

    Lowering Audit Risks…………………………………………………18

    -File an Extension………………………………………………..18

    -Attach Rider to Return………………………………………….18

    -Avoid Disproportionate Deductions…………………………...18

    57


    Table of Contents (cont’d)

    Preventing An Audit After Selection………………………………...19

    -No Second Examinations………………………………………19

    -Check the Statute of Limitations………………………………19

    -3 years……………………………………………………….19

    -6 years……………………………………………………….19

    IRS Audit Focus………………………………………………………20

    -Tax Gap $345 Billion……………………………………………20

    -Taxes due and not paid………………………………………...20

    -National Research Project (“NRP”)……………………………20

    IRS Automated Under-Reporter Program…………………………21

    -Targets Tax Gap………………………………………………...21

    -4 Million AUR Notices Issued………………………………….21

    -$3.9 Billion in Tax Assessments………………………………21

    -IRS Matching Program (CP 2000 Notice)…………………….21

    58


    Table of Contents (cont’d)

    How to Prepare for an Audit…………………………………………22

    -Review Information Document Request……………………...22

    -Prepare and File Power of Attorney…………………………...22

    -Review Tax Returns, Work Papers and Source Documents22

    -Review Case Law, Regulations and the IRM………………...22

    How to Handle an Audit……………………………………………...23

    -Documents Bates Stamped and Chronological Order

    (“ACP”)…………………………………………………………...23

    -Pre-Audit Conference with Revenue Agent………………….23

    -Document all Contacts with Agents…………………………...23

    -Copy all Documents for the Agent…………………………….23

    -Keep Agent Busy………………………………………………..23

    -Use Affidavits for Facts…………………………………………23

    59


    Table of Contents (cont’d)

    IRS Summons Authority……………………………………………..24

    -IRS Summons (IRC §7602)……………………………………24

    -Not Self-Enforcing………………………………………………24

    -Powell Factors…………………………………………………...24

    -Motion to Quash…………………………………………………24

    Conclusion of Audit…………………………………………………...25

    -Closing Conference……………………………………………..25

    -No Change……………………………………………………….25

    -Agree – Form 870……………………………………………….25

    -Disagree –

    -Thirty Day Letter……………………………………………25

    -Ninety Day Letter…………………………………………...25

    60


    Table of Contents (cont’d)

    Final Thoughts………………………………………………………..26

    -Dealing with Difficult Agents……………………………..........26

    -Collecting Attorney Fees (IRC §7430)……………………….. 26

    -Shifting the Burden of Proof to the IRS (IRC §7491)……….26

    3.Fighting the IRS………………………………………………………27

    IRS Appeals Offices………………………………………………….28

    -Administrative Forum for Contesting IRS

    Compliance Actions…………………………………………….28

    -80% to 90% of Cases Resolved……………………………….28

    -Hazards of Litigation is Key……………………………………28

    61


    Table of Contents (cont’d)

    When to Seek Appeals Office Review……………………………..29

    -Non-Docketed Cases…………………………………………...29

    -30 Day Letter (Proposed Deficiency)…………………….29

    -Collection Actions…………………………………………..29

    -Refund Denied……………………………………………...29

    -Docketed…………………………………………………………29

    -Regular Cases………………………………………………29

    -S-Cases……………………………………………………...29

    How to Seek Appeals Office Review……………………………….30

    -Respond to 30 Day Letter……………………………………...30

    -Greater than $25,000 requires a Written Protest……………30

    -Small Case Procedure………………………………………….30

    62


    Table of Contents (cont’d)

    Preparing for Appeals Conference………………………………….31

    -Freedom of Information Act Request………………………….31

    -IRS Positions…………………………………………………….31

    -Affidavits for Facts………………………………………………31

    -Key CIRCUIT Caselaw…………………………………………31

    -Offer to Settle……………………………………………………31

    Settling with Appeals…………………………………………………32

    -Negotiation Strategy…………………………………………….32

    -IRS Form 870 or 870-AD……………………………………….32

    Alternative Dispute Resolution (“ADR”)……………………………33

    -Fast Track Mediation (Rev. Proc. 2003-41)………………….33

    -Arbitration………………………………………………………...33

    63


    Table of Contents (cont’d)

    Final Thoughts………………………………………………………..34

    -Qualified Offers………………………………………………….34

    -Beware of IRC §6673 Penalties……………………………….34

    -Form 870, Closing Agreement or Stipulations……………….34

    -Settled Cases Are Generally Not Reopened Absent Fraud..34

    Special IRS Collections Matters…………………………………….35

    -Collection Due Process (“CDP”)………………………………35

    -Collection Appeals Process (“CAP”)………………………….35

    -Offer in Compromise……………………………………………35

    -Trust Fund Recovery Penalty………………………………….35

    -Equivalent Hearing……………………………………………...35

    A Taxpayer’s Secret Weapon……………………………………….36

    -Taxpayer Assistance Order (“TAO”)…………………………..36

    -IRS Form 911……………………………………………………36

    -10 Year Statute of Limitations for Assessment………………36

    64


    Table of Contents (cont’d)

    CDP Hearing………………………………………………………….37

    -Federal Tax Lien Filed………………………………………….37

    -Notice of Intent to Levy…………………………………………37

    -Suspends Collection Activity…………………………………...37

    -File IRS Form 12153 to Request………………………………37

    -Judicial Review………………………………………………….37

    CAP Hearing………………………………………………………….38

    -Expedited Appeal of Collection Actions BEFORE They

    Occur……………………………………………………………..38

    -Proposed Lien Filing; Installment Agreement Rejected…….38

    -Levies That Have Attached…………………………………….38

    -Group Manager Meeting Required……………………………38

    -No Judicial Review……………………………………………...38

    65


    Table of Contents (cont’d)

    New Offer in Compromise Rules……………………………………39

    -TIP&R Act of 2005 (IR 2006-106)……………………………..39

    -July 16, 2006 Effective Date…………………………………...39

    -20% of Offer Amount (Nonrefundable) (Unless Waiver)……39

    Fighting the IRS In Court…………………………………………….40

    -Tax Court………………………………………………………...40

    -Federal District Court…………………………………………...40

    -U.S. Court of Federal Claims…………………………………..40

    -Bankruptcy Court………………………………………………..40

    Tax Court Tickets…………………………………………………….41

    -If Appeals Fails to Resolve a Case (“90 Day Letter”)……….41

    -Collection Due Process (“CDP”)………………………………41

    -Innocent Spouse………………………………………………..41

    -Interest Abatements…………………………………………….41

    -Worker Classifications and Amount of Employment

    Taxes Owed……………………………………………………..41

    66


    Table of Contents (cont’d)

    Top 10 Litigated Issues………………………………………………42

    -CDP………………………………………………………………42

    -Gross Income (§61)…………………………………………….42

    -Failure to File, Negligence and Frivolous Penalties…………42

    -Trade or Business Expense (§162)…………………………...42

    -Family Status…………………………………………………….42

    -Innocent Spouse………………………………………………..42

    -Summons Enforcement………………………………………..42

    -Trust Fund Recovery Penalty………………………………….42

    4.What Makes a Case Criminal vs. Civil……………………………..43

    What Makes a Tax Case Criminal………………………………….44

    -Amount of Money Involved…………………………………….44

    -Badges of Fraud/Concealment………………………………...44

    -Pattern of Conduct………………………………………………44

    -High Profile Taxpayer…………………………………………..44

    -Tax Professional………………………………………………...44

    67


    Table of Contents (cont’d)

    What Is The Criminal Investigation Division……………………….45

    -CID Has Approximately 4,400 Employees World Wide…….45

    -2,800 Special Agents…………………………………………...45

    -CID Activity in 2005……………………………………………..45

    How IRS Special Agents Work……………………………………..46

    -Surprise Visits are Key Despite Miranda Type Warning……46

    -Always two Agents……………………………………………...46

    -Beware of Joint CIVIL and CRIMINAL Investigations………46

    How to Deal with IRS Special Agents……………………………...47

    -Get Authority from your Client to Convey Confidential

    Information……………………………………………………….48

    -Keep a Numbered Set of Copies for All Documents

    Given to Special Agents………………………………………..48

    -Have Witnesses Present for Any Discussions………………48

    -IRC §7525 Privilege Does Not Apply………………………….48

    68


    Table of Contents (cont’d)

    Advice to Taxpayers…………………………………………………48

    -No Destroying or Altering Documents………………………..48

    -Do Not Tell a CPA or Tax Preparer What is on Your Mind..48

    -Hire an Experienced Criminal Tax Lawyer…………………..48

    -Do Not Talk to Third Parties about the Case………………..48

    5.Hot Topics for IRS Enforcement……………………………………49

    CID Investigative Priorities………………………………………….50

    -Tax Return Preparer Fraud…………………………………….50

    -FINCEN and FBAR Compliance………………………………50

    -Tax Haven Abuses……………………………………………..50

    -Tax Shelters (Are Factual Assumptions in Tax

    Opinions Realistic?)…………………………………………….50

    -Trusts to Conceal Income……………………………………...50

    -Cash Economy…………………………………………………..50

    -Failure to Withhold Taxes……………………………………..50

    69


    Table of Contents (cont’d)

    Help for Tax Professionals………………………………………….51

    -Contingency Fee Cases in Proposed Rules to

    Circular 230……………………………………………………...51

    -Award of Attorney Fees………………………………………..51

    -Taxpayer Advocate is Geographical………………………….51

    -MY E-Mail: BWebb@FBTLAW.COM...................................51

    6.Q&A……………………………………………………………………52

    70


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