Working with the IRS

Chapter Twelve

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

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

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

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

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

IRS Organization (cont’d)

Chief Counsel (cont’d) Writes

Regs Proposed legislation Tax Treaties Executive orders Revenue Rulings Private Letter Rulings

Etc.

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. ($$)

IRS Organization (cont’d)

Note: The following no longer exist Regional offices / Regional Commissioner District offices – District Director

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,”

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.

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.

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.

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.

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).

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) ).

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

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

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

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

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.”

The IRM

Handbook [4.2]3.2.1.4 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.”

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.”

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.

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

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)

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:

A. Cash receipts of more than $10,000.

B. Consecutive or related transactions which total more that $10,000.

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

A. (combining cash and non-cash to appear to avoid filing requirements)

B. (structuring a single transaction into multiple transactions).

Market Segment Specialization

Program(MSSP)

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)

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 ……”

MSSP - Ministers

(Totally changing gears)

MSSP

Ministers

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.

MSSP - Attorneys

(Changing gears again)

MSSP

Attorneys

MSSP - Attorneys

Purposes: “2. To increase voluntary compliance in

an area in which compliance was poor.”

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.

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

Preparing for an IRS Audit MSSP

Drywallers Garment Contractors Lawsuit Awards and Settlements Mortuaries Retail Liquor Taxicabs Veterinary Medicine

MSSP

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

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)

Exam – selection of returns (cont’d)

Tax shelters Cash operations Abnormal deductions

Exam

Audits –

> Correspondence examinations

> Office examination (generally being discontinued)

> Field examinations

(Dealing with the Internal Revenue Agent)

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

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

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

Audits (cont’d)

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)

The Appeals Process

Reasons to take advantage of Appeals Process Very 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: (next slide)

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

The Appeals Process

The Appeals Conference Evidence Law Strengths, weaknesses, precedents, reliability Hazards of Litigation Objective – if litigated, who will win this issue? Intermediate settlement

The Appeals Process

In the absence of agreement here, Appeals will initiate the Deficiency Procedure

And then - the judicial process

Appeals Process (cont’d)

Deficiency Procedure – Again, this is The Ninety-Day Letter – be aware, this is the Statutory Notice of Deficiency

Options – NOTE: Options are 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

Assessment of Tax

Verify proper assessment Timely? Assessment Official Authority? Amount correct?

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

Collection (cont’d)

Administrative Appeals:

> Liens on property

> Levies of wages or bank account

> Seizures or property

CollectionLiens

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

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)

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

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 defences

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 TP will have to pay state and/or other

jurisdictional fees will be added to amount owed

CollectionLevies

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.

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

Levies (cont’d)

Topics for discussion on appeal is same as for Liens.

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

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

Levies (cont’d)

Property will be released when/if Amount of government’s interest in property is

paid New escrow agreement Acceptable bond Acceptable agreement for paying tax Expense of selling the property is more than

debt

Levies (cont’d)

Sale of Seized Property IRS must wait 60 days, during which

TP may ask that it be sold w/in 60 days Public Notice will be posted (local newspaper, flyer, etc.) Original of Notice to TP

After the Notice is placed, IRS must wait 10 days before sale (unless property is perishable)

IRS will compute a minimum bid price (generally 80% of forced sale value)

You may appeal the minimum bid price

Levies (cont’d)

Proceeds of the sale If less than the tax bill and expenses of levy

and sale, you will still have to pay the unpaid tax

If more than the tax bill and expenses, surplus will be refunded

Levies (cont’d)

Real Estate TP may redeem real estate w/in 180 days of

the sale Must pay purchaser the amount paid for the

property, plus interest at 20% annually (interest on the funds paid to the government by the purchaser)

Levies (cont’d)

Property that cannot be seized: School books, certain clothing Personal and household effects, up to $6,250 Tools of trade, up to $3,125 Unemployment benefits Certain annuity and pension benefits Certain disability payments

Levies - Property that Cannot be Seized (cont’d)

Salary, wages, or income included in a judgment for court-ordered child support

Certain public assistance payments Minimum weekly exemption for wages, salary,

and other income

Collection (cont’d)

Opportunities for Relief Installment Agreement Offer in Compromise Temporary Delay in Collection Process

Installment Agreement

< $10,000 - Automatic upon request > $10,000 – more troublesome, but is doable Will be an up front user fee (now $43) Interest and penalties will continue Beware – if miss payment, will be interest on

interest May be better to attempt loan at bank or by CC,

if available

Installment Agreement

Note: If under threat of levy, upon application for installment, cannot levy While request for installment agreement is

being considered While appeal of rejection of installment

agreement is being evaluated For 30 days after rejection While installment agreement is in effect

(assuming payments are current)

Offer in Compromise

May apply to Taxes Interest Penalties Additions to tax

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)

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

Trust Fund Recovery Penalty §6672

Also commonly known as 100% Penalty §6672 Penalty

§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

§6672 Penalty Responsible 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

§6672 Penalty Responsible Person (cont’d)

Officer or employee of the company Member or employee of a partnership Corporate director or shareholder Member of board of trustees of a nonprofit

organization Another person having authority and

control over funds to direct their disbursement

§6672 Penalty Responsible Person (cont’d)

Responsible Person – willfully fails to collect or pay trust fund taxes.

Willfulness – Must have known about the unpaid taxes Must have used the funds for other purposes

Questions?