How to handle a federal tax dispute. audit, appeal and litigation
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Transcript of How to handle a federal tax dispute. audit, appeal and litigation
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How to Handle a Federal Tax Dispute: Audit, Appeal and Litigation
Lauren A. Rinsky
Royse Law Firm, PCDirect Dial: (650) 521‐[email protected]
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Overview
Court of Federal Claims
District CourtTax Court
IRS AppealsIRS Audit Notice of Deficiency
Claim for Refund
Federal Circuit
Circuit Court
Supreme Court
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Selection for Audit
• Returns may be selected for a variety of reasons, such as:–Random selection–Computer screening–Document matching program–Related Examinations
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IRS Audit
• IRS process for examining a return to determine its correctness
• Three Types:–Office audit–Correspondence audit–Field audits
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Representation During Audit
• Taxpayer can act on own behalf or• Be represented by a “federally authorized tax practitioner,” such as:– an attorney, CPA, enrolled agent, or enrolled actuary.
• If the taxpayer filed joint return, then one or both spouses can meet with the IRS
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Power of Attorney “POA”
• To act as the taxpayer’s representative, you must have proper written authorization from the taxpayer– IRS Form 2848– For married couples – one form per person
• Existing POAs that the taxpayer does not want to revoke, must be attached to any new POA.
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Attorney‐Client Privilege
• Only an attorney can give the taxpayer the attorney‐client privilege, meaning that the attorney is exempt from testifying against the taxpayer should the case go to trial.
• CPA or tax preparer could be made to testify against the taxpayer.
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Tax Advisor’s Privilege Under IRC § 7525
• Statutory “tax practitioner‐client privilege” provided by IRC §7525(a)(1). Very narrow in scope, and is entirely inapplicable to criminal tax cases. Also:– Applies only to provision of “tax advice”– Does not provide any protection for the tax practitioner’s work product.
– Does not apply to written tax advice to corporate type clients concerning their corporations’ involvement in tax shelters.
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Kovel Engagement
• Originated in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)
• Attorney retains non‐legal professional, such as a CPA, to assist the attorney in rendering legal advice to the attorney’s client.
• Properly executed, it extends attorney‐client privilege to CPA’s work and communications.
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During IRS Audit
• Keep copies and good records of what you provide
• Ask IRS for an audit plan and timetable
• Ask IRS to send its requests for information in writing
• Be as brief as you can; do not volunteer information
• Do not give original documents to auditor
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To Preserve Privileged or Protected Information and Documents
• Taxpayer can decline to disclose the privileged material, and instead submit a “privilege log”
• The log should state:–Privilege or protection being claimed, and–Describe the material in a manner that, without revealing the information, enables the IRS or court to assess applicability of the claimed privilege or protection
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Results of Audit
• No Change:– IRS accepts return as filed, and taxpayer receives a “no change letter” stating that the examiner proposed no changes! Yay!
• Refund:– Taxpayer is due a refund and gets interest on the refund!! Woo hoo!!
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Results of Audit (continued)
• Agreed:– IRS proposed changes and taxpayer agrees with the changes. • If money is owed, there are several payment options available (i.e., pay in full, installment agreement, offer in compromise)
• Disagreed:– IRS proposed changes and the taxpayer disagrees with those changes...
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Results of Audit (continued)
• Disagreed (continued)– The IRS will issue a notice to the taxpayer called a “30‐day Letter” that states the findings of the examiner and the taxpayer’s appeal rights.
Note: The 30‐day Letter could also be received if taxpayer ignores the IRS audit
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Appeal within the IRS(30‐day Letter)
• To appeal the examiner’s proposed adjustments, the taxpayer has 30 days to file an appeal (i.e., a “Protest”) and request a conference with IRS Appeals Office to discuss the disputed issues
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Appeal within the IRS(30‐day Letter)
• If taxpayer does nothing, then the IRS will issue a 90‐day Letter (Statutory Notice of Deficiency) discussed later.
Note: Since the 30‐day Letter is an administrative letter, and not a statutory notice, the IRS may grant taxpayer’s request for an extension of time to reply to the 30‐day Letter
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Statute of Limitations (“SOL”)for Assessment
• IRS typically gets 3 years from the date the return was filed to make an assessment. See IRC §6501
• 6 years in the case of “substantial omission”– An omission of 25% or more of gross income stated in the return
• Unlimited for unfiled or fraudulent returns!!
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Extending the Statute of Limitations for Assessment
• The assessment period can be extended by agreement. IRC §6501(c)(4) – If only legal issues remain, then it does not make much sense to extend the SOL
– If there are factual issues, then extending SOL might make sense
• For example, substantiation, where taxpayer needs more time to provide documents and information
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Distinguish Between Factual and Legal Issues
• To distinguish between factual and legal issues, ask where you must look to reach a conclusion.– If you consult only the law, then the issue is legal in nature
–Otherwise, it is a factual issue that must be resolved though gathering additional information
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Statutory Notice of Deficiency(90‐day Letter)
• If:– Taxpayer does not respond to 30‐day Letter; or – Is unable to reach an agreement with the Appeals Office following a protest; or
– SOL for assessment is about to expire;
• Then: – IRS will send the taxpayer a Statutory Notice of Deficiency, commonly referred to as a “90‐day Letter.” IRC §6212.
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Statutory Notice of Deficiency(“Ticket to Tax Court”)
• Gives the taxpayer 90 days within which to petition the U.S. Tax Court to redetermine the liability that is proposed by the IRS. – 150 days if the letter is mailed to the taxpayer outside of the U.S.
• Since the 90‐day period is prescribed by statute, it cannot be extended!
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Statutory Notice of Deficiency(90‐day Letter)
• During the 90‐day period, the IRS is barred from making an assessment or collection activity.
• Failure to file a timely petition with the U.S. Tax Court will result in the deficiency being assessed by the IRS!!
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Appeals to the Federal Courts(Judicial Review)
• Taxpayers may request judicial review of IRS determinations by filing a petition with the:–U.S. Tax Court–U.S. District Court–U.S. Court of Federal Claims
• These courts are independent of the IRS
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U.S. Tax Court
• Federal court of limited jurisdiction, established by Congress under Article I of the U.S. Constitution.
• Located in Washington, D.C., and the judges travel around the country to designated cities to hear cases
• Does not require the taxpayer to first pay the amount in dispute. IRC §6213(a)
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U.S. Tax Court (continued)
• No jury trials; case is tried before a judge• Has its own rules and procedures that supplement the Federal Rules of Civil Procedure
• Except for “S cases”, decisions are appealable to the appropriate Circuit Court.
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U.S. Tax Court Judges
– Regular judges• The 19 regular judges appointed by the President, after confirmation by the Senate, for a term of 15 years
– Senior judges• Presidentially appointed judges who have reached mandatory retirement age of 70 and are recalled by the Chief Judge to assist in disposition of cases
– Special trial judges• Equivalent of magistrates in federal district courts, serve at the discretion of the Chief Judge
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U.S. Tax Court (continued)
Generally, a case petitioned to U.S. Tax Court will be considered for settlement by an IRS Appeals Officer before the U.S. Tax Court hears case.• However, it will be a “docketed appeal,” meaning any settlement will need IRS counsel’s approval
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Golsen Rule
• The U.S. Tax Court is bound by the precedent of the Circuit Court in the geographic jurisdiction in which the taxpayer is located. Golsen v. Comm’r, 54 T.C. 742 (1970)
– Thus, sometimes the U. S. Tax Court will reach different rulings for different taxpayers on same facts
Example: If taxpayer is domiciled in San Francisco, which is in the 9th Circuit, then the U.S. Tax Court would be bound by precedent of the 9th Circuit.
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Federal Courts Circuit Map
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Federal Courts Circuit Map
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ROYSE LAW
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Small Cases (“S cases”)
• For tax disputes involving $50,000 or less for any one year, taxpayers may elect to have case designated as a small tax case (“S case”)
• Heard by a Special Trial Judge.• Less formal procedure than regular cases
Note: Decisions in S cases are final and not appealable!
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U.S. Tax Court (continued)
• The Statutory Notice of Deficiency has a presumption of correctness.
• Taxpayer generally has burden of proving that the IRS’s determination is improper
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U.S. Tax Court (continued)
• The case is commenced by the filing of a timely Petition.
• Also,– Filing fee ($60)– Statement of Taxpayer(s) Identification Number(s)
– Request for place of trial– Ownership Disclosure Statement (required for certain taxpayers). See Tax Court Rule 20(c)
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U.S. Tax Court (continued)
• After the Petition, IRS Answer, and (if required) the Taxpayer’s Reply are filed, – The case is considered “at issue” and pretrial discovery can begin
• This is typically where the IRS administrative file is sent (back) to the Appeals Office to be considered for settlement.
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U.S. Tax Court (continued)
• Tax Court rules permit the IRS to amend its Answer “when justice so requires”
• Burden of proof on any new matter or increase in deficiency raised in the Amended Answer falls on IRS.
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U.S. Tax Court Pretrial Discovery
• U.S. Tax Court’s rules reflect: – An abbreviated discovery process – A strong preference for stipulation of facts and documents over testimony
– A desire to reduce burdens and expenses associated with litigation in other judicial forums
• Court expects parties to attempt to attain objectives of discovery through informal consultation or communication before utilizing formal discovery procedures
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U.S. District Court
• Taxpayer may challenge IRS’s determination in District Court, but with procedural prerequisite!!– Taxpayer must first pay the disputed tax liability andfile a claim for refund of the tax paid prior to filing the lawsuit
• Option for judge or jury trial• Bound by the legal precedent in the geographic jurisdiction of the taxpayer
• Appeals made to the Circuit Court in the geographic jurisdiction of the taxpayer
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Time for Filing Claim for Refund
• Generally, taxpayer must file claim for a refund within 3 years from the date the original tax return was filed or 2 years from the date the tax was paid, whichever is later.
• Taxpayer generally must file suit for a refund no later than 2 years after the IRS has rejected the claim. – However, taxpayer can file suit if it has been 6 months since the refund claim was filed and the IRS has not yet delivered a decision.
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U.S. Court of Federal Claims
• Court of limited jurisdiction created by Congress under Article I of the U.S. Constitution
• No jury trials• Taxpayer must first pay the disputed tax liability and file a claim for refund of the tax paid prior to filing the lawsuit.
• Bound by precedent of the former Court of Claims, Federal Circuit, and U.S. Supreme Court
• Appeals go to the Federal Circuit
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U.S. Court of Federal Claims
• Taxpayer cannot file suit in the U.S. Court of Federal Claims if Taxpayer’s claim is for credit or refund of a penalty that relates:– To promoting an abusive tax shelter –Or to aiding and abetting the understatement of tax liability on someone else’s return
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