the internal revenue service: everything you always wanted to know but were afraid to ask

Bob Webb 2006© September 28, 2006

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

2 Bob Webb 2006© September 28, 2006

• 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

Robert C. Webb


Robert C. Webb

• Practice Areas– Tax Controversy and White

Collar Crime– Business and Commercial

Litigation


Overview

1. Understanding the IRS Organization

2. Audit Risks for Taxpayers

3. Fighting The IRS

4. What Makes a Case Criminal vs. Civil

5. Hot Topics for IRS Enforcement

6. Q & A


1. Understanding the IRS Organization


Taxes are Constitutional

• 16th Amendment gave Congress the power to tax income

• Tax Protestors fail


Who Controls IRS

• Legislative (Congress)

• Executive (President)

• Judicial (Courts)


Legislative Branch

• Internal Revenue Code

• Committee Reports

• Funding


Executive Branch

• Treasury Department

• IRS Commissioner

• Treasury Secretary


Judicial Branch

• U.S. Tax Court

• U.S. District Court

• U.S. Court of Federal Claims


Who Represents the IRS

• IRS Lawyers

• Department of Justice Civil Tax Division


Federal Circuit Courts

• 12 Courts for 11 Circuits and the District of Columbia

• Taxpayers Appeal to these Courts

• U.S. Supreme Court


IRS Organization

• Post 1998 Reform Act

• IRS Oversight Board (Policy and Strategy)

• 4 Operating Divisions

• Specialized IRS Units


What Rules Must the IRS Follow

• Treasury Regulations

• Revenue Rulings/Procedures

• Letter Rulings

• Internal Revenue Manual (“IRM”)


2. Audit Risks for Taxpayers


IRS Examinations

• Service Center (“DLN”)

• Discriminate Information Function (“DIF”)

• Multifactor Scoring Process

• Disproportionate Ratios

• Refund Claims


Audit Triggers

• Home Based Businesses

• Excessive Travel and Entertainment Expenses

• Excessive Charitable Contributions


Lowering Audit Risks

• File an Extension

• Attach Rider to Return

• Avoid Disproportionate Deductions


Preventing An Audit After Selection

• No Second Examinations

• Check the Statute of Limitations– 3 years– 6 years


IRS Audit Focus

• Tax Gap $345 Billion

• Taxes due and not paid

• National Research Project (“NRP”)


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)


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


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


IRS Summons Authority

• IRS Summons (IRC §7602)

• Not Self-Enforcing

• Powell Factors

• Motion to Quash


Conclusion of Audit

• Closing Conference

• No Change

• Agree -- Form 870

• Disagree -- – Thirty Day Letter– Ninety Day Letter


Final Thoughts

• Dealing with Difficult Agents

• Collecting Attorney Fees (IRC §7430)

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


3. Fighting the IRS


IRS Appeals Offices

• Administrative Forum for Contesting IRS Compliance Actions

• 80% to 90% of Cases Resolved

• Hazards of Litigation is Key


When to Seek Appeals Office Review

• NON-DOCKETED Cases• 30 Day Letter (Proposed Deficiency)• Collection Actions• Refund Denied

• Docketed• Regular Cases• S-Cases


How to Seek Appeals Office Review

• Respond to 30 Day Letter

• Greater than $25,000 requires a Written Protest

• Small Case Procedure


Preparing for Appeals Conference

• Freedom of Information Act Request

• IRS Positions

• Affidavits for Facts

• Key CIRCUIT Caselaw

• Offer to Settle


Settling with Appeals

• Negotiation Strategy

• IRS Form 870 or 870-AD


Alternative Dispute Resolution (“ADR”)

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

• Arbitration


Final Thoughts

• Qualified Offers

• Beware of IRC §6673 Penalties

• Form 870, Closing Agreement or Stipulations

• Settled Cases Are Generally Not Reopened Absent Fraud


Special IRS Collections Matters

• Collection Due Process (“CDP”)

• Collection Appeals Process (“CAP”)

• Offer in Compromise

• Trust Fund Recovery Penalty

• Equivalent Hearing


A Taxpayer’s Secret Weapon

• Taxpayer Assistance Order (“TAO”)

• IRS Form 911

• 10 Year Statute of Limitations from Assessment


CDP Hearing

• Federal Tax Lien Filed

• Notice of Intent to Levy

• Suspends Collection Activity

• File IRS Form 12153 to Request

• Judicial Review


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


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)


Fighting the IRS In Court

• Tax Court

• Federal District Court

• U.S. Court of Federal Claims

• Bankruptcy Court


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


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


4. What Makes a Case

Criminal vs. Civil


What Makes a Tax Case Criminal

• Amount of Money Involved

• Badges of Fraud/Concealment

• Pattern of Conduct

• High Profile Taxpayer

• Tax Professional


What Is The Criminal Investigation Division

• CID Has Approximately 4,400 Employees World Wide

• 2,800 Special Agents

• CID Activity in 2005


How IRS Special Agents Work

• Surprise Visits are Key Despite Miranda Type Warning

• Always two Agents

• Beware of Joint CIVIL and CRIMINAL Investigations


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


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


5. Hot Topics for IRS Enforcement


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


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]


Q & A


Robert C. Webb

Frost Brown Todd, LLC

400 W. Market Street, Floor 32

Louisville, Kentucky 40202

502-589-5400

[email protected]

www.frostbrowntodd.com


Table of Contents

The Internal Revenue Service: Everything You AlwaysWanted To Know But Were Afraid to Ask……………………………………...1

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

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

1. Understanding the IRS Organization………………………………...5Taxes are Constitutional……………………………………………… 5- 16th Amendment gave Congress the power to tax income….. 6- Tax Protestors fail………………………………………………...6Who Controls IRS……………………………………………………...7- Legislative (Congress)……………………………………………7- Executive (President)……………………………………………. 7- Judicial (Courts)…………………………………………………...7


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



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…………………………………………….12IRS Organization……………………………………………………...13- Post 1998 Reform Act…........................................................13- IRS Oversight Board (Policy and Strategy)………………….. 13- 4 Operating Divisions…………………………………………...13- Specialized IRS Units…………………………………………...13What Rules Must the IRS Follow…………………………………... 14- Treasury Regulations………………………………………...... 14- Revenue Rulings/Procedures…………………………………. 14- Letter Rulings…………………………………………………… 14- Internal Revenue Manual (“IRM”)……………………………...14



2. Audit Risks for Taxpayers…………………………………………... 15IRS Examinations……………………………………………………. 16- Service Center (“DLN”)………………………………………… 16- Discriminate Information Function (“DIF”)…………………… 16- Multifactor Scoring Process…………………………………… 16- Disproportionate Ratios………………………………………... 16- Refund Claims…………………………………………………...16Audit Triggers………………………………………………………… 17- Home Based Businesses……………………………………… 17- Excessive Travel and Entertainment Expenses…………….. 17- Excessive Charitable Contributions…………………………...17Lowering Audit Risks…………………………………………………18- File an Extension……………………………………………….. 18- Attach Rider to Return…………………………………………. 18- Avoid Disproportionate Deductions…………………………... 18



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”)……………………………20IRS 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



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………………...22How 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



IRS Summons Authority…………………………………………….. 24- IRS Summons (IRC §7602)…………………………………… 24- Not Self-Enforcing……………………………………………… 24- Powell Factors…………………………………………………...24- Motion to Quash…………………………………………………24Conclusion of Audit…………………………………………………...25- Closing Conference……………………………………………..25- No Change……………………………………………………….25- Agree – Form 870……………………………………………….25- Disagree –

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



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……………………………………………………… 27IRS Appeals Offices…………………………………………………. 28- Administrative Forum for Contesting IRS

Compliance Actions……………………………………………. 28- 80% to 90% of Cases Resolved……………………………….28- Hazards of Litigation is Key…………………………………… 28



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



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…………………………………………………… 31Settling with Appeals………………………………………………… 32- Negotiation Strategy…………………………………………….32- IRS Form 870 or 870-AD……………………………………….32Alternative Dispute Resolution (“ADR”)…………………………… 33- Fast Track Mediation (Rev. Proc. 2003-41)…………………. 33- Arbitration………………………………………………………...33



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.. 34Special 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……………………………………………... 35A Taxpayer’s Secret Weapon………………………………………. 36- Taxpayer Assistance Order (“TAO”)…………………………..36- IRS Form 911…………………………………………………… 36- 10 Year Statute of Limitations for Assessment……………… 36



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…………………………………………………. 37CAP 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



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)…… 39Fighting the IRS In Court…………………………………………….40- Tax Court………………………………………………………... 40- Federal District Court…………………………………………...40- U.S. Court of Federal Claims…………………………………..40- Bankruptcy Court………………………………………………..40Tax 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



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…………………………….. 43What 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



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……………………………………………..45How 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……… 46How 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



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…………………………………… 49CID 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



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