Dealing with the IRS _ Audits

DA N G I BS O N 7 3 2 - 2 4 3 - 7 3 0 3

DEALING WITH THE IRS *AUDITS*

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Tax Resolution Decision Tree

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Audit

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HELPFUL HINTS – AUDIT NOTICE

• Don’t Ignore• Read closely• Don’t assume the

worst• Don’t assume

proper request – Look for Templates• Look for deadlines

• Call if questions• Know your TP

rights*• Keep copies• Never send your

originals• IRS never emails –

Watch ScamsT

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TAXPAYERS’ RIGHTS

1. The Right to Be Informed: Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes. 2. The Right to Quality Service: Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service. 3. The Right to Pay No More than the Correct Amount of Tax: Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly.

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TAXPAYERS’ RIGHTS (CONT)

4. The Right to Challenge the IRS’s Position and Be Heard: Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position. 5. The Right to Appeal an IRS Decision in an Independent Forum: Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers generally have the right to take their cases to court.

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TAXPAYERS’ RIGHTS (CONT)6. The Right to Finality: Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit. 7. The Right to Privacy: Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing. 8. The Right to Confidentiality: Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.D

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TAXPAYERS’ RIGHTS (CONT)

9. The Right to Retain Representation: Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation. 10. The Right to a Fair and Just Tax System: Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.

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POLLING QUESTION #1

Have you ever, personally, been audited by the IRS?

1 – Yes2 - No

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http://www.irs.gov/Refunds/Where's-My-Refund-It's-Quick,-Easy,-and-Secure.

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http://www.irs.gov/Filing/Individuals/Amended-Returns-(Form-1040-X)/Wheres-My-Amended-Return-1

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http://www.irs.gov/Individuals/Get-Transcript

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http://www.irs.gov/Tax-Professionals/e-services---Online-Tools-for-Tax-Professionals

Practitioner Priority Service: 1-866-860-4259

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POLLING QUESTION #2

Have you ever used the services described in the previous slides?

1 – Yes2 - No

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CONTACTING IRS BY PHONE

• Note (Document)• Date/time• Agent’s name• Badge number• Summary

• Before ending call• Set expectations • TP and IRS

• Note deadlines• IRS does!

• Typical Phone Issues• Refund inquiries

(web*)• Return items• Missing payments• Status of return• Amended (web*)• Transcripts (web*)• CP 2000 matching• Math errors• First-time abatement

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BE PREPARED BEFORE CONTACT

Know Facts • Interview TP• Obtain Transcripts• Review returns at Issue• Research the law/cases/rulings

Document all contacts with taxing authority• Date/time• Agent’s name and ID• Issues discussed• Outcomes• Follow-up: For IRS and For TP (include timing)

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BE PREPARED B/F CONTACT (CONT)• POA(Form 2848 ) or Tax Info Auth(Form 8821)• 8821: Information gathering/Not for representation• 2848: Represent TP before all offices of the IRS

• Returns• Notices• Cancelled Checks• All tax IDs• Fax Machines (RightFax) – IRS has this now!• Good way to document communications with IRS.

• Get the TP current – Tax Filings/Estimated Payments

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BE PREPARED B/F CONTACT (CONT)Statute of Limitations Analysis - Obtain transcripts

• For Assessment (Assessment done before collection)• 3 Years from original due date or filing (later of the 2)• Extended to 6 years – 25%+ omitted gross income• No statute for non-filers or fraudulent returns• For non-filers 6 years of returns + current often works

• All PR returns statute starts on the 4/15, after filing.• Collections• 10 years from date of assessment• Watch tolling events – Bankruptcy proceedings, OIC pending or

CDP hearing• Refunds• 3 years from filing of return or 2 years from payment (later of

the 2)

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BE PREPARED B/F CONTACT (CONT)If on the Phone:

• Headset• Easy Access to move around• Readily available Fax• Comfortable chair• Other productive work

Helpful to know potential options available • Liability: Reasonable Cause, FTA, misapplication of law• Collections: PPIA, IA, OIC, CNC

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BE PREPARED B/F CONTACT (CONT)

When Corresponding, include….• TP Name and FID (On all pages)• Tax Year• Type of Tax• Copy of Notice• Form 2848 or Form 8821• Well Indexed Supporting Documentation

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IRS LEVELS OF AUTHORITY

• ACS• Tax Examiners• TCO• RA (A for Audit)• RO (O for Owes)• Offer Specialists• Taxpayer Advocates• Appeals Officer (E)/Settlement Officer (C)• Manager• Group• Territory

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REP LEVEL OF AUTHORITY

• Providing info to IRS (one-way only)• Anyone

• Obtaining info from IRS• Need 8821 (anyone can use)

• Exam representation – 2848 POA• Enrolled: CPA/EA/JD• Others: Unenrolled preparer, company employee

(limited)• Collection representation – 2848• Must be enrolled

• POA can sign a 8821 for a TP• Can send 2848/8821 to agent, then fax to CAF

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PUB 4019

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CAF Units

IRS Practitioner Hotline866-860-4259

Handle up to 3 cases/CallMust be Ind or Biz, no mixingBetter to call IRS, then writeAsk for ASED, CSED. TP Right #6

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CP 2000 NOTICE – MATCHINGAUTOMATED UNDER REPORTER (AUR)

• Matches Return with info IRS receives – 3rd Party• Shows Adjustment, Propose Tax or Refund• Not a bill at this point• Watch date. Normally, 30 days response• Review very carefully• If you agree, do not amend return, just let IRS know• If you disagree, don’t sign notice• Explain on writing why you disagree• Attach copy of all documentation support• Attach copy of notice• Watch for Deadlines!

• Unopened envelopes still count!T

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30 DAY LETTER_STAT NOTICEMust meet deadlines to preserve rights to:• Appeals (30-Day Letter)• 30 days from date on letter (extendable)• If less than 6 months left on statute of limitation, may go

right to stat notice (see below)• Not dictated by statute so extension to respond is available

• Tax Court (Statutory Notice of Deficiency)• 90 dates from date on letter (not extendable)• If you haven’t been to appeals, referred to there first.• If you’ve been to appeals, you can request meeting with IRS

chief counsel’s office.

If these are missed, case moves to Collection.T

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AUDIT DIVISION

• 3 Methods of Assessment• Self Assessment (Return filing)• Deficiency (Upon audit or examination)• Jeopardy/Termination (Ability to assess or collect is in

danger)• Jeopardy – For years that have ended.• Termination – For years not ended - Tax year deemed

completed

• Assessment• Needed for Collection Purposes• Required starting point for collection

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AUDIT DIVISION(CONT)

• Types - Field/Office/Correspondence/CP 2000/TCMP• Deal with a TCO (Office) or RA (Field)• Deal with tax examiners on a Correspondence Audit• At a minimum inquire about the following:• Ask why being Audited• Ask for Managerial contact Info• Ask about any 3rd Party Contact (Pub 1)

• Agree or Disagree with Outcome• Disagree: Speak to agent and/or supervisor• If still disagree: Petition Appeals (30 day letter) • If not satisfied with appeals, 2 alternatives• Petition Tax Court (90 day or Stat Notice) – Not Extendable• Pay Tax, sue in District or Claims Court

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Third-Party Contact• Ask who they are or will be going to.• Request:• Summary of Discussions – Ltr 3172• 3rd Party Contact notes – Likely will need a FOIA request

• For any that haven’t happened yet• Address contact that might be detrimental or deemed

harassment. • See if you can provide info that Agent is looking for.

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IRS Exam and Technique GuidesGood Starting Point is IRS Playbook - IRM

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IRS Exam and Technique GuidesIndustry specific guides – ATG

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The IRM and ATG provide guidance. IRS personnel, by policy, must follow. For Practitioners, they are guidance only. Don’t assume that they synch with Law or Regulations.

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• Appeals Petition (to 30 day letter) • Background - New AJAC procedures – More Judicial in nature• Request Face-to-Face Meeting (Make sure you’re prepared!)• Develop the Facts• Discussion of Applicable Law• Propose Solution, then Conclusion

• Watch All Expiration Dates! If based on Notice, use TP’s• Request Auditor’s WP to prepare for Appeals• Ask Auditor. They are suppose to give it to you. IRC 6013(e)• If Auditor not forthcoming• Submit FOIA Request to IRS In Writing to IRS Disclosure Office• http://www.irs.gov/uac/IRS-Disclosure-Offices• CC: Auditor’s Manager• Mention your request to auditor.• Mention in the FOIA request that you asked the auditor

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http://www.irs.gov/uac/IRS-Disclosure-Offices

http://www.irs.gov/uac/IRS-Disclosure-Offices

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Extending the Statute of Limitations(Don’t take lightly)Your rights:• Refuse• Limit to particular issues• Limit the extension to a particular period (Keep to 6 mos)

Criminal Investigation Division (CID) Contact• Always request to know:• Target• Subject• Person of Interest

• Request a “friendly” summons if POI. • Tread light. Seek counsel, if appropriate – Target/Subject

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Reason for Audits• CP 2000 – Matching• Inter – jurisdiction Exchange• National Research Program (NRP)• Taxpayer Compliance Measurement Program (TCMP)

• Discriminate Function System (DIF Scores) • Related or Associated TPs• Public Records• Non-filer Information• Whistleblower (normally compensated w/some %)

Watch for the “F” word• Once suspected, STOP, Contact a Tax Atty.• For Non-Atty, no privilege exist in a criminal case.• Could use Kovel• Avoid using Preparer of returns. Use “Dummy”

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Eggshell Audits – Civil potentially going Criminal• Objectives of Practitioners• Keeping exam civil v. criminal - Primary!• Preserving Privilege under Kovel (Avoid Preparer)• Dealing with civil fraud penalty

• TP compliance• Questioning (Perjury)• Summons• Self-incrimination (5th Amendment)

• Badges of Fraud• Service’s attempt to overcome Tweel case• Fraud Technical Advisor

• Revenue Agents go “Black”D

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No Records Audits• Cohan Rule• Not for T&E or Gifts

• Reconstruct• Estimate• Obtain IRS transcripts• Contact Vendors• Obtain Bank statements/Employers• Affidavits

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WHAT IF YOU GET A SUMMONS?FORM 2039

• Nothing in the IRC giving IRS power to enforce.• DOJ attorney involvement needed – District

Court.• Requirement to enforce summons -- Powell. • Powell Criteria (All 4 must be met)• Investigation much be legitimate.• Information sought must be relevant.• IRS must not already possess.• All administrative steps must have been

exhausted.• Like notices, do not ignore.• Consult with legal counsel, if necessary.

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WHAT IF YOU GET A SUMMONS?FORM 2039 (CONT)

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AUDIT PREPARATION• Review IRM Part 4 – Examining Process (Particularly IRM 4.10)• Interview taxpayer• Familiarize yourself with business• Explain audit process to taxpayer• Outline expectation you have with respect to taxpayer

• Minimum that TP should bring• Copy of returns• All IRS correspondence

• If you accept engagement• Engagement letter - Note scope and year(s) covered• Cover appeals?• Cover collections?

• Fees• Retainer• POA

• Technically, you must know your stuff• Exam Process• Tax Issues

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AUDIT PREPARATION(CONT)

• Review Return for Sensitive Issues• T&E• Auto• Deferred Income• Accrued Wages/Commission/Salaries

• Reconcile Bank Deposits to Gross Revenues• Look at Related Companies (Similar issues, I/C Accounts)• Contact Auditor• Ascertain reason for audit selection• Narrow down issue(s)• Get name/number of their boss• Arrange business tour/Summary of TP business• Set up off-site field location for auditor• Select date/time that will allow TP time to properly prepare• Possible discussion on unintentional return inaccuracies.

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CONDUCT OF THE AUDIT

Conducting the AuditLocation outside of place of businessRestrict discussions to lead person on the caseMake sure key issues are well documentedProvide requested documents in orderly manner

Make sure request on IDRs are proper. Watch for template requests.

Provide only what is requested, never volunteer information unless doing so is favorable

Don’t have to advocate for the ServiceFor unclear or broad request, don’t guessWatch for deadlines in providing information

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CONDUCT OF THE AUDIT(CONT)

Conducting the AuditMaintain a “copies” folder or logSegregate any documents where asserting privilege

Set up separate folder marked – “Protected under IRC 7525”Prior to Audit Meeting

Ask TP about privileged information TP is only one who can designate as privilege

Advocate aggressively, but remember….Creditability and integrity are your greatest assets.

Request ECD – Estimated Completion DatesAdopt a style that works for you Anything you provide to Agent becomes “record”

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Privilege LogIf you create a privilege file under IRC 7525, a log should be maintained and provided to Service, when requested:• Date privilege asserted• Type document• Author(s)• Recipient(s)• General Subject Matter of Document• Privilege claimed (Federal tax practitioner privilege

under IRC 7525) Caution: only for Non-Criminal

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Contact with Auditor• Emphasis with TP and agent • No contact between 2 without reps knowledge

• Keep in mind --- Agent is trained investigator• Agent would like nothing better than dialogue w/TP• Make sure Rep CC’s on correspondence• Tell client to send all correspondence to Rep

• If By-Pass letter issue – address and appeal• As a Rep, watch for too broad of question• i.e. Any wrong doing here?

• Always argue penalties

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Contact with Auditor• First meeting• Always ask for ID - Make sure they are not CI.• Especially if you have 2 of them

• Ask what issues caused the audit• Before audit

• Systems identifies issues• Agent review by hand to further develop• Manager/Agent meeting establishes issues to be audited• Ask to speak to Supervisor if expanding scope

• Nuclear Option• Section 1203(b) – IRS Restructuring and Reform Act of

1998.• Used for blatant agent misconduct

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CONDUCT OF THE AUDIT (CONT)

Shifting Burden of Proof to IRS• IRS allows has burden of proof in fraud cases.

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POLLING QUESTION #3

On average, how has your experience with the IRS been when you have spoken to them over the phone?

1 – Just wonderful2- OK3 - Awful4 - Never spoke to IRS on the phone

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AUDIT CLOSING• Agreed to agree or disagree on issues• Discuss disagreed with RA boss• Always address reduction of penalties• Haggle over following• Facts• Issue trading (possibly include penalties)• Percentage concessions• RA less apt to “horse trade”

• Closing Memo, to memorialized is recommended• Fax to agent so that it becomes part of the “record”

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AUDIT CLOSING(CONT)• If still disagree, request 30-day letter• Prepare a protest letter• Send to RA, requesting an appeal• Set date/time with Appeals• Discuss with Appeals Officer

• If still disagree, request 90-day letter• May get in place of 30-day letter • If less than 6 mos on assessment statute

• Petition tax court, then referred to appeals• Otherwise, petition tax court• Work with IRS Chief Counsel’s office

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POLLING QUESTION #4

Have you ever dealt with the Taxpayer Advocate?

1 – Yes2 - No

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APPEALS

• Most cases can be appealed• AO: Audit/Exam Determination• SO: Collection Determination

• Audit/Exam• Exam and then 30 day letter

• Collection• Administrative• CAP (Final decision, no judicial review)

• Statutorily• CDP (Request within 30 Days)/Appeal to Tax Court/Toll

• Judicial review available• Equivalency Hearing (Request in 1 year)/No TC/No Tolling

• No judicial review

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AFTER APPEALS?Tax Court• No requirement to pay the tax before hearing• No jury• Tends to be less formal• Especially small cases involving $50K or less

• Many TP represent themselves. • Normally, judges very helpful to pro se petitioners(TP)

• File petition and pay a $60 Fee

Audit Reconsideration• In the case of new material facts

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AFTER APPEALS?(CONT)Audit Reconsideration• Information to be submitted for request• Statement summarizing issues being contended• Documents supporting TP position• Copy of materials furnished to the IRS• Copies of notices/letter received from the IRS on the matter(s)

• IRS will review• If disagree can request a conference with Appeals

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TAXPAYER ADVOCATE• Can be used as any point in the process.• There to assist you in cutting through red tape.• Cannot just wave a magic wand• In order to utilize, must have exhaust all admin

remedies

https://www.irs.gov/Advocate/Local-Taxpayer-Advocate

Nationwide Phone Number: 1-877-777-4778D



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THANKS FOR ATTENDING!

Any Questions?

Dan Gibson [email protected]

mailto:[email protected]

Dealing with the IRS _ Audits

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