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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

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

slide2
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
Robert C. Webb
  • Practice Areas
    • Tax Controversy and White Collar Crime
    • Business and Commercial Litigation

3

overview
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

taxes are constitutional
Taxes are Constitutional
  • 16th Amendment gave Congress the power to tax income
  • Tax Protestors fail

6

who controls irs
Who Controls IRS
  • Legislative (Congress)
  • Executive (President)
  • Judicial (Courts)

7

legislative branch
Legislative Branch
  • Internal Revenue Code
  • Committee Reports
  • Funding

8

executive branch
Executive Branch
  • Treasury Department
  • IRS Commissioner
  • Treasury Secretary

9

judicial branch
Judicial Branch
  • U.S. Tax Court
  • U.S. District Court
  • U.S. Court of Federal Claims

10

who represents the irs
Who Represents the IRS
  • IRS Lawyers
  • Department of Justice Civil Tax Division

11

federal circuit courts
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
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
What Rules Must the IRS Follow
  • Treasury Regulations
  • Revenue Rulings/Procedures
  • Letter Rulings
  • Internal Revenue Manual (“IRM”)

14

irs examinations
IRS Examinations
  • Service Center (“DLN”)
  • Discriminate Information Function (“DIF”)
  • Multifactor Scoring Process
  • Disproportionate Ratios
  • Refund Claims

16

audit triggers
Audit Triggers
  • Home Based Businesses
  • Excessive Travel and Entertainment Expenses
  • Excessive Charitable Contributions

17

lowering audit risks
Lowering Audit Risks
  • File an Extension
  • Attach Rider to Return
  • Avoid Disproportionate Deductions

18

preventing an audit after selection
Preventing An Audit After Selection
  • No Second Examinations
  • Check the Statute of Limitations
    • 3 years
    • 6 years

19

irs audit focus
IRS Audit Focus
  • Tax Gap $345 Billion
  • Taxes due and not paid
  • National Research Project (“NRP”)

20

irs automated under reporter program
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
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
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 Authority
  • IRS Summons (IRC §7602)
  • Not Self-Enforcing
  • Powell Factors
  • Motion to Quash

24

conclusion of audit
Conclusion of Audit
  • Closing Conference
  • No Change
  • Agree -- Form 870
  • Disagree --
    • Thirty Day Letter
    • Ninety Day Letter

25

final thoughts
Final Thoughts
  • Dealing with Difficult Agents
  • Collecting Attorney Fees (IRC §7430)
  • Shifting the Burden of Proof to the IRS (IRC §7491)

26

irs appeals offices
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
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
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
Preparing for Appeals Conference
  • Freedom of Information Act Request
  • IRS Positions
  • Affidavits for Facts
  • Key CIRCUIT Caselaw
  • Offer to Settle

31

settling with appeals
Settling with Appeals
  • Negotiation Strategy
  • IRS Form 870 or 870-AD

32

alternative dispute resolution adr
Alternative Dispute Resolution (“ADR”)
  • Fast Track Mediation (Rev.Proc. 2003-41)
  • Arbitration

33

final thoughts1
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
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
A Taxpayer’s Secret Weapon
  • Taxpayer Assistance Order (“TAO”)
  • IRS Form 911
  • 10 Year Statute of Limitations from Assessment

36

cdp hearing
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
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
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
Fighting the IRS In Court
  • Tax Court
  • Federal District Court
  • U.S. Court of Federal Claims
  • Bankruptcy Court

40

tax court tickets
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
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

what makes a tax case criminal
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
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
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
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
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

cid investigative priorities
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
Help for Tax Professionals
  • Contingency Fee Cases in Proposed Rules to Circular 230
  • Award of Attorney Fees
  • Taxpayer Advocate Is Geographical
  • MY E-Mail: [email protected]

51

robert c webb1
Robert C. Webb

Frost Brown Todd, LLC

400 W. Market Street, Floor 32

Louisville, Kentucky 40202

502-589-5400

[email protected]

www.frostbrowntodd.com

53

table of contents
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
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 d1
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 d2
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 d3
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 d4
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 Documents 22

- 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 d5
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 d6
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 d7
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 d8
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 d9
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 d10
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 d11
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 d12
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 d13
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 d14
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 d15
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: [email protected] 51

6. Q&A…………………………………………………………………… 52

70

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