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Working with the IRS

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  1. Working with the IRS Chapter Twelve

  2. Organization of IRS • IRS Oversight Board (RRA’98) • President appoints • Six members from private sector, staggered 5-year terms • Commissioner is standing member • NTEU (IRS employee union) appoints one standing member • Recommends to President candidates for Commissioner

  3. Organization of IRS (cont’d) • IRS Oversight Board (cont’d) • Develops long term strategy • Reviews and approves mission, strategic plans, annual budget request • As name implies, oversight of IRS • No authority to affect tax policy of intervene into IRS personnel or procurement matters

  4. Organization of IRS (cont’d) • Commissioner • Political appointment • 5-year term • Member of IRS Oversight Board • Chief Counsel – also reports directly to Treasury, also a political appointment • Deputy Commissioner • Criminal Investigation • National Taxpayer Advocate • Appeals • Shared Services

  5. IRS Mission Statement Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all

  6. IRS Organization (cont’d) • Chief Counsel • Political appointment • Commissioner’s lawyer - agency’s highest ranking legal advisor • Reports to the Commissioner • Enforcement and administration of the tax laws • Litigates disputed tax issues cases not otherwise resolvable

  7. IRS Organization (cont’d) • Chief Counsel (cont’d) • Writes • Regs • Proposed legislation • Tax Treaties • Executive orders • Revenue Rulings • Private Letter Rulings • Etc.

  8. IRS Organization (cont’d) • Deputy Commissioner • Operating Divisions • Large and Mid-Size Business – D.C. ($$) • Small Business/Self-Employed – Atlanta ($$) • Wage and Investment Income – D.C. ($$) • Exempt-Organization and Government Entities – D.C. ($$)

  9. IRS Organization (cont’d) • Note: The following no longer exist • Regional offices / Regional Commissioner • District offices – District Director

  10. Taxpayer Advocate • National Taxpayer Advocate • Taxpayer intervention system • Local Taxpayer Advocates • Taxpayer Bill of Rights • Form 911 - Taxpayer Assistance Order (TAO) • On page 391, last paragraph under Taxpayer Rights re. “confidentiality privilege,”

  11. Taxpayer Bill of Rights • Taxpayers guaranteed certain rights • A recording of any administrative proceeding, after a 10-day request notice • Transcript of administrative proceeding interview (at TP’s expense) • An explanation of IRS position on any administrative matter it initiates • May be represented by attorney, CPA, or other person permitted to practice before IRS • Etc.

  12. SEC. 7525. CONFIDENTIALITY PRIVILEGES • 7525(a)(1) GENERAL RULE.--With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.

  13. SEC. 7525. CONFIDENTIALITY PRIVILEGES (cont’d) • 7525(a)(2) LIMITATIONS.--Paragraph (1) may only be asserted in-- • (A) any noncriminal tax matter before the Internal Revenue Service; and • (B) any noncriminal tax proceeding in Federal court brought by or against the United States.

  14. SEC. 7525. CONFIDENTIALITY PRIVILEGES (cont’d) • 7525(a)(3)(A) FEDERALLY AUTHORIZED TAX PRACTITIONER.--The term "federally authorized tax practitioner" means any individual who is authorized under Federal law to practice before the Internal Revenue Service if such practice is subject to Federal regulation under section 330 of title 31, United States Code.

  15. SEC. 7525. CONFIDENTIALITY PRIVILEGES (cont’d) • 7525(a)(3)(B) TAX ADVICE.--The term "tax advice" means advice given by an individual with respect to a matter which is within the scope of the individual's authority to practice described in subparagraph (A).

  16. SEC. 7525. CONFIDENTIALITY PRIVILEGES (cont’d) • 7525(b) SECTION NOT TO APPLY TO COMMUNICATIONS REGARDING CORPORATE TAX SHELTERS.-- • The privilege under subsection (a) shall not apply to any written communication between a federally authorized tax practitioner and a director, shareholder, officer, or employee, agent, or representative of a corporation in connection with the promotion of the direct or indirect participation of such corporation in any tax shelter (as defined in section 6662(d)(2)(C)(iii) ).

  17. Tax Practitioner Confidentiality Privilege • RRA’98 • Extends attorney-client confidentiality privilege in tax matters to non-attorney’s authorized to practice before the IRS • May be asserted only in noncriminal proceedings

  18. Tax Practitioner Confidientality Privilege (cont’d) • Confidentiality Privilege does not extend to: • Preparation of tax returns • Giving accounting or business advice • Tax accrual workpapers • Be aware of it, use it with discretion

  19. Returns / Examination Division • Preliminary Review of Filed Returns • Handled from service centers • Mathematical errors • Not an examination • “Deficiency procedure” not required • No administrative remedy • IRC §6213(b)(1) • Unallowable items • Same as above

  20. Exam – Slight Diversion • The “IRM” (Internal Revenue Manual) • Each Operating Division has one • Exam’s is Part IV • Collection is Part V • Appeals’ is Part VIII • Be familiar with it • It is published, and is on IRS’s website – • It tells examiner’s how to conduct certain types of audits

  21. The IRM • Preparing for an IRS Audit • Handbook [4.2]3.2.1 “IRC §7521(c) states that an examiner cannot require a taxpayer to accompany an authorized representative to an examination interview in the absence of an administrative summons. However, the taxpayer’s voluntary presence at the interview can be requested through the representative as a means to expedite the examination process.”

  22. The IRM • Handbook [4.2] 2. “IRC §7602 allows examiners to obtain testimony from third parties who can provide relevant information to determine the correct liability for a taxpayer. • “3. Caution should be taken to not disclose any tax information of a confidential nature when contacts are made with third parties.”

  23. Preparing for an IRS Audit • Handbook [4.2]3.3.5 “1. An examiner may consider inspecting the taxpayer’s residence. Due to privacy issues and the intrusiveness of such inspections, their use should be limited. The purpose … includes (but is not limited to): • B. Determining the taxpayer’s financial status.”

  24. Preparing for an IRS Audit • Handbook [4.2]3.3 1. “The physical observation of the taxpayer’s operation, or tour of business site, is an integral part of the examination process.

  25. Preparing for an IRS Audit Examination Techniques Handbook 4.3.2 Examination Collectibility Handbook 4.3.21 Exam Offer-in-Compromise Handbook 4.3.3 Excise Tax Handbook 4.4.3 Retail Industry Handbook 104.6 Employment Tax Handbook 104.3 AIMS/Processing Handbook Handbook 104.7 Financial Products and Transactions Handbook

  26. Preparing for an IRS Audit Anti-Money Laundering Handbook §4.3.4 Anti-Money Laundering Handbook, Chapter 26, Role of the Examiner: Sub§11.4.1 Review Currency and Banking Retrieval System (CBRS) for cash activity (Forms 8300 filed for cash deposits of $10,000 or more)

  27. Preparing for an IRS AuditAnti-Money Laundering (Cont’d) Sub§11.4.3 1. Examiner should inspect cash receipts and sales journals, bank statements, and deposit slips to verify: • Cash receipts of more than $10,000. • Consecutive or related transactions which total more that $10,000.

  28. Preparing for an IRS AuditAnti Money Laundering (Cont’d) Sub§11.4.3 2. The examiner should be alert to identify transactions that attempt to avoid the reporting requirements of IRC §6050I (Form 8300 requirements) by • (combining cash and non-cash to appear to avoid filing requirements) • (structuring a single transaction into multiple transactions).

  29. Market Segment Specialization Program (MSSP)

  30. MSSP – Pizza Restaurants • “Because pizza restaurants are basically cash businesses, the potential for skimming exists. The type of entities discussed in this guide are the family owned mom and pop types of establishments.” (Not chains or franchises)

  31. MSSP – Pizza Restaurants • “Overall, documentation of income and expenses in this industry has been found to be lacking. … cash register tapes are not retained and income is not deposited intact. There is generally little or no documentation to verify gross receipts…… Purchases are often paid in cash … invoices are not kept. Employees are often paid in cash ……”

  32. MSSP - Ministers (Totally changing gears) MSSP Ministers

  33. MSSP - Ministers • Although overall potential examination issues are prevalent, the guidelines consist more of a recitation of those potential issues resulting from the law applicable to ministers that differ from other individual taxpayers.

  34. MSSP - Attorneys (Changing gears again) MSSP Attorneys

  35. MSSP - Attorneys • Purposes: • “2. To increase voluntary compliance in an area in which compliance was poor.”

  36. MSSP - Attorneys • Attorney-Client Privilege • Attorneys may refuse to provide any documents which contain client’s name. This can include a client list, general ledger, client ledger cards, cancelled checks, and client trust accounts. • Osterhoudt v. U.S., 722 f.2d 591 (9th Cir. 1983): “Thus, the general rule is that disclosure of client identity is not an infringement of the attorney-client privilege.

  37. Preparing for an IRS Audit MSSP • Example of other MSSP Papers: • Architect • Artists and Art Galleries • Auto Body and Repair • Bail Bond • Bars and Restaurants • Child Care Providers

  38. Preparing for an IRS Audit MSSP • Drywallers • Garment Contractors • Lawsuit Awards and Settlements • Mortuaries • Retail Liquor • Taxicabs • Veterinary Medicine

  39. MSSP • The MSSP papers also are all available online, on IRS’s web page:

  40. Exam • Selection of returns for audit • Discriminant function (DIF) • National Research Program, formerly Taxpayer Compliance Measurement Program (TCMP) (“outlawed” by Congress) • Informant • Economic Reality (also outlawed by Congress)

  41. Exam – selection of returns (cont’d) • Tax shelters • Cash operations • Abnormal deductions

  42. Exam Audits – > Correspondence examinations > Office examination (generally being discontinued) > Field examinations (Dealing with the Internal Revenue Agent)

  43. Audits (cont’d) • Conclusion of Audit • Discussion of adjustments • Make sure the RA clearly explains the proposed adjustments and you understand • Don’t be reluctant to request a meeting with the Agent’s Manager if necessary – this is an acceptable procedure • Thirty-day letter / “Preliminary Notice” (also called a Revenue Agent’s Report (RAR) • Administrative procedure – not statutory

  44. Audits (cont’d) • Options • 1. Agree • 2. File a protest (w/in 30days, or request extension), request administrative appeal • 3. Ignore, bypass Appeals, accept “Deficiency Procedure” • Then • Default SND, pay tax • Default SND, pay tax, file suit in DC or CFC • Petition Tax Court – w/in 90-Days (§6213) – NOT THREE MONTHS

  45. Audits (cont’d) • Appeals Protests • May be made orally or simple written request if tax and penalties are under $2,500 per year • Otherwise, must be in writing • If proposed tax and penalties are over $10,000, protest must be formal, setting out • Specific facts, • Applicable law, and/or • Other authority, in support of position