Working with the IRS

1. Working with the IRS

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

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

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

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

9. Taxpayer Advocate • National Taxpayer Advocate • Taxpayer intervention system • Local Taxpayer Advocates • Taxpayer Bill of Rights • Form 911 - Taxpayer Assistance Order (TAO)

10. 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.

11. Returns / Examination Division • Preliminary Review of Filed Returns • Handled from service centers • Mathematical errors • Not an examination • “Deficiency procedure” not required • Summary assessment • Request of assessment abatement within 60 days • IRC §6213(b)(1) • Unallowable items • Same as above

12. 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 – irs.gov • It tells examiner’s how to conduct certain types of audits

13. 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

14. Market Segment Specialization Program (MSSP)

15. 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)

16. 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 ……”

17. 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

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

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

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

21. Exam Audits – > Correspondence examinations > Office examination > Field examinations (Dealing with the Internal Revenue Agent)

22. Audits (cont’d) • Conclusion of Audit • Discussion of adjustments • “Preliminary Notice” (also called a Revenue Agent’s Report (RAR) • Thirty-day letter • Administrative procedure – not statutory

23. Audits (cont’d) • Options • 1. Agree • 2. File a protest (w/in 30days, or request extension), request administrative appeal • This will delay issuance of the 90 day letter (statutory notice of deficiency (SND)) • 3. Ignore, bypass Appeals, accept “Deficiency Procedure” • Then • Default SND, pay tax • Default SND, pay tax, file suit in DC or CFC • 4. Petition Tax Court – w/in 90-Days (§6213) – NOT THREE MONTHS

24. 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

25. Small TC Cases • Remember, can request a hearing with TC’s Small Case Division if the deficiency and penalty (not interest) does not exceed $50,000 (per year). TP can appear pro se. • (Ceiling amount is statutory, but is increased occasionally by Congress)

26. The Appeals Process • Reasons to take advantage of Appeals Process • High rate of agreement • May be able to obtain a favorable “settlement,” or at least an acceptable one • The judicial process is next • Very important – if ultimately litigated, will only be able to obtain recovery of litigation costs if administrative remedies are exhausted. • Failure to appeal can also trigger a penalty of up to $25,000 for failure to pursue admin remedies.

27. Appeals Process Recovery of Litigation Costs • Requirements for recovery of litigation costs (IRC §7430): • Petitioner has exhausted administrative remedies • Petitioner substantially prevails in litigation • Government cannot prove its position was substantially justified

28. The Appeals Process • The Appeals Conference • Hazards of Litigation • Objective – if litigated, who will win this issue? • Intermediate settlement

29. The Appeals Process • In the absence of agreement here, Appeals will initiate the Deficiency Procedure • And then - the judicial process

30. Appeals Process (cont’d) • Deficiency Procedure – Again, this is The Ninety-Day Letter – be aware, this is the Statutory Notice of Deficiency • Options – the same as before, except now you have exhausted your administrative remedies • Agree • Ignore – default the SND, pay tax • Ignore – default the SND, pay tax, file suit in DC of CFC • Petition Tax Court within 90 days.

31. Post-Assessment(the collection phase)

32. The Collection Process • If you think the amount being collected is incorrect • Discuss with Revenue Officer, then don’t be reluctant to request meeting with RO’s Manager • Most Collection matters now may be appealed administratively

33. Collection (cont’d) • Administrative Appeals: > Liens on property > Levies of wages or bank account > Seizures or property

34. Collection Liens • A legal claim to your property as security for tax debt • Notice of Federal Tax Lien may be filed after • Tax is assessed • Notice of Demand for Payment (a bill) has been sent, AND • You have not paid the debt w/in 10 days

35. Liens (cont’d) • Lien notice publicly notifies all creditors that IRS has claim against all your property, including property acquired after the filing • Lien attaches to all your property • House • Car • Property rights (accounts receivable, etc)

36. Liens (cont’d) • Appeal • IRS must notify you w/in 5 business days after filing of a lien • You may ask for review by RO’s Manager • You must file request for Appeal w/in 30 days of notice

37. Liens (cont’d) Issues for discussion on appeal are limited: > Taxes all paid before lien > Tax assessed and lien filed while in bankruptcy subject to automatic stay > Procedural error in assessment > Statute for collection has expired > Discuss collection options > Spousal defenses

38. Liens (cont’d) • Release of the Notice of Federal Tax Lien will be (should be) issued • Within 30 days after the debt is satisfied, or • Within 30 days after IRS accepts a bond you submit guaranteeing payment of the debt

39. Collection Levies • Levy – a legal seizure of property to satisfy a tax debt • Distinguished from lien in that property is actually taken • Property subject – car, boat, house, etc., or • Property owned by TP but held by someone else (wages, retirement account, bank account, licenses, CSV of life insurance, etc.

40. Levies (cont’d) • Levy may take place after • Tax is assessed and Notice and Demand for Payment sent • Tax not paid, and • Final Notice of Intent to Levy and Notice of Right to Hearing • + 30 days

41. Levies (cont’d) • Levy on a bank account • The bank must hold the money for 21 days to give TP a chance to make other arrangements • After 21 days, the bank must send the money to IRS

42. Levies (cont’d) • Release of Levy will be when/if • Debt is paid • Collection statute expired before levy was filed • Installment agreement approved, unless levy is included • Expense of selling the property would be more than the tax debt

43. Collection (cont’d) • Opportunities for Relief • Installment Agreement • Offer in Compromise • Temporary Delay in Collection Process

44. Installment Agreement • < $10,000 - Automatic upon request • > $10,000 – more troublesome, but is doable • Will be an up front user fee • Interest and penalties will continue • Beware – if miss payment, will be interest on interest.

45. Offer in Compromise • May apply to • Taxes • Interest • Penalties • Additions to tax

46. Offer in Compromise (cont’d) • Grounds for an offer • Doubt as to liability (similar to establishing liability amount under Exam or Appeals processes) • Doubt as to collectibility (does TP have ability to pay) • “promote effective tax administration” (assessed tax is correct, but TP under economic hardship or other special circumstance)

47. Temporary Delay in Collection • Temporary delay because of inability to pay currently • Be aware that interest/penalties will continue • During the delay, IRS may file a Notice of Federal Tax Lien to “protect the government’s interest in your assets

48. Trust Fund Recovery Penalty §6672 Also commonly known as • 100% Penalty • §6672 Penalty

49. §6672 Penalty (cont’d) • Trust Fund Taxes – taxes withheld and held for employees until employer makes a federal tax deposit of them • Trust Fund Recovery Penalty – 100% of the trust fund taxes not paid over to government • Responsible person – person responsible for paying over the trust fund taxes to the government

50. §6672 PenaltyResponsible Person (cont’d) • If IRS determines you are the Responsible Person, they will issue you a Notice and Demand for Payment • Party determined responsible has 60 days to appeal