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
3 Bob Webb 2006© September 28, 2006
Robert C. Webb
• Practice Areas– Tax Controversy and White
Collar Crime– Business and Commercial
Litigation
4 Bob Webb 2006© September 28, 2006
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
5 Bob Webb 2006© September 28, 2006
1. Understanding the IRS Organization
6 Bob Webb 2006© September 28, 2006
Taxes are Constitutional
• 16th Amendment gave Congress the power to tax income
• Tax Protestors fail
7 Bob Webb 2006© September 28, 2006
Who Controls IRS
• Legislative (Congress)
• Executive (President)
• Judicial (Courts)
8 Bob Webb 2006© September 28, 2006
Legislative Branch
• Internal Revenue Code
• Committee Reports
• Funding
9 Bob Webb 2006© September 28, 2006
Executive Branch
• Treasury Department
• IRS Commissioner
• Treasury Secretary
10 Bob Webb 2006© September 28, 2006
Judicial Branch
• U.S. Tax Court
• U.S. District Court
• U.S. Court of Federal Claims
11 Bob Webb 2006© September 28, 2006
Who Represents the IRS
• IRS Lawyers
• Department of Justice Civil Tax Division
12 Bob Webb 2006© September 28, 2006
Federal Circuit Courts
• 12 Courts for 11 Circuits and the District of Columbia
• Taxpayers Appeal to these Courts
• U.S. Supreme Court
13 Bob Webb 2006© September 28, 2006
IRS Organization
• Post 1998 Reform Act
• IRS Oversight Board (Policy and Strategy)
• 4 Operating Divisions
• Specialized IRS Units
14 Bob Webb 2006© September 28, 2006
What Rules Must the IRS Follow
• Treasury Regulations
• Revenue Rulings/Procedures
• Letter Rulings
• Internal Revenue Manual (“IRM”)
15 Bob Webb 2006© September 28, 2006
2. Audit Risks for Taxpayers
16 Bob Webb 2006© September 28, 2006
IRS Examinations
• Service Center (“DLN”)
• Discriminate Information Function (“DIF”)
• Multifactor Scoring Process
• Disproportionate Ratios
• Refund Claims
17 Bob Webb 2006© September 28, 2006
Audit Triggers
• Home Based Businesses
• Excessive Travel and Entertainment Expenses
• Excessive Charitable Contributions
18 Bob Webb 2006© September 28, 2006
Lowering Audit Risks
• File an Extension
• Attach Rider to Return
• Avoid Disproportionate Deductions
19 Bob Webb 2006© September 28, 2006
Preventing An Audit After Selection
• No Second Examinations
• Check the Statute of Limitations– 3 years– 6 years
20 Bob Webb 2006© September 28, 2006
IRS Audit Focus
• Tax Gap $345 Billion
• Taxes due and not paid
• National Research Project (“NRP”)
21 Bob Webb 2006© September 28, 2006
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)
22 Bob Webb 2006© September 28, 2006
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
23 Bob Webb 2006© September 28, 2006
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
24 Bob Webb 2006© September 28, 2006
IRS Summons Authority
• IRS Summons (IRC §7602)
• Not Self-Enforcing
• Powell Factors
• Motion to Quash
25 Bob Webb 2006© September 28, 2006
Conclusion of Audit
• Closing Conference
• No Change
• Agree -- Form 870
• Disagree -- – Thirty Day Letter– Ninety Day Letter
26 Bob Webb 2006© September 28, 2006
Final Thoughts
• Dealing with Difficult Agents
• Collecting Attorney Fees (IRC §7430)
• Shifting the Burden of Proof to the IRS (IRC §7491)
27 Bob Webb 2006© September 28, 2006
3. Fighting the IRS
28 Bob Webb 2006© September 28, 2006
IRS Appeals Offices
• Administrative Forum for Contesting IRS Compliance Actions
• 80% to 90% of Cases Resolved
• Hazards of Litigation is Key
29 Bob Webb 2006© September 28, 2006
When to Seek Appeals Office Review
• NON-DOCKETED Cases• 30 Day Letter (Proposed Deficiency)• Collection Actions• Refund Denied
• Docketed• Regular Cases• S-Cases
30 Bob Webb 2006© September 28, 2006
How to Seek Appeals Office Review
• Respond to 30 Day Letter
• Greater than $25,000 requires a Written Protest
• Small Case Procedure
31 Bob Webb 2006© September 28, 2006
Preparing for Appeals Conference
• Freedom of Information Act Request
• IRS Positions
• Affidavits for Facts
• Key CIRCUIT Caselaw
• Offer to Settle
32 Bob Webb 2006© September 28, 2006
Settling with Appeals
• Negotiation Strategy
• IRS Form 870 or 870-AD
33 Bob Webb 2006© September 28, 2006
Alternative Dispute Resolution (“ADR”)
• Fast Track Mediation (Rev.Proc. 2003-41)
• Arbitration
34 Bob Webb 2006© September 28, 2006
Final Thoughts
• Qualified Offers
• Beware of IRC §6673 Penalties
• Form 870, Closing Agreement or Stipulations
• Settled Cases Are Generally Not Reopened Absent Fraud
35 Bob Webb 2006© September 28, 2006
Special IRS Collections Matters
• Collection Due Process (“CDP”)
• Collection Appeals Process (“CAP”)
• Offer in Compromise
• Trust Fund Recovery Penalty
• Equivalent Hearing
36 Bob Webb 2006© September 28, 2006
A Taxpayer’s Secret Weapon
• Taxpayer Assistance Order (“TAO”)
• IRS Form 911
• 10 Year Statute of Limitations from Assessment
37 Bob Webb 2006© September 28, 2006
CDP Hearing
• Federal Tax Lien Filed
• Notice of Intent to Levy
• Suspends Collection Activity
• File IRS Form 12153 to Request
• Judicial Review
38 Bob Webb 2006© September 28, 2006
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
39 Bob Webb 2006© September 28, 2006
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)
40 Bob Webb 2006© September 28, 2006
Fighting the IRS In Court
• Tax Court
• Federal District Court
• U.S. Court of Federal Claims
• Bankruptcy Court
41 Bob Webb 2006© September 28, 2006
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
42 Bob Webb 2006© September 28, 2006
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
43 Bob Webb 2006© September 28, 2006
4. What Makes a Case
Criminal vs. Civil
44 Bob Webb 2006© September 28, 2006
What Makes a Tax Case Criminal
• Amount of Money Involved
• Badges of Fraud/Concealment
• Pattern of Conduct
• High Profile Taxpayer
• Tax Professional
45 Bob Webb 2006© September 28, 2006
What Is The Criminal Investigation Division
• CID Has Approximately 4,400 Employees World Wide
• 2,800 Special Agents
• CID Activity in 2005
46 Bob Webb 2006© September 28, 2006
How IRS Special Agents Work
• Surprise Visits are Key Despite Miranda Type Warning
• Always two Agents
• Beware of Joint CIVIL and CRIMINAL Investigations
47 Bob Webb 2006© September 28, 2006
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
48 Bob Webb 2006© September 28, 2006
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
49 Bob Webb 2006© September 28, 2006
5. Hot Topics for IRS Enforcement
50 Bob Webb 2006© September 28, 2006
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
51 Bob Webb 2006© September 28, 2006
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]
52 Bob Webb 2006© September 28, 2006
Q & A
53 Bob Webb 2006© September 28, 2006
Robert C. Webb
Frost Brown Todd, LLC
400 W. Market Street, Floor 32
Louisville, Kentucky 40202
502-589-5400
www.frostbrowntodd.com
54 Bob Webb 2006© September 28, 2006
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
55 Bob Webb 2006© September 28, 2006
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
56 Bob Webb 2006© September 28, 2006
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…………………………………………….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
57 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
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
58 Bob Webb 2006© September 28, 2006
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”)……………………………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
59 Bob Webb 2006© September 28, 2006
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………………...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
60 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
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
61 Bob Webb 2006© September 28, 2006
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……………………………………………………… 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
62 Bob Webb 2006© September 28, 2006
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
63 Bob Webb 2006© September 28, 2006
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…………………………………………………… 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
64 Bob Webb 2006© September 28, 2006
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.. 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
65 Bob Webb 2006© September 28, 2006
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…………………………………………………. 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
66 Bob Webb 2006© September 28, 2006
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)…… 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
67 Bob Webb 2006© September 28, 2006
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…………………………….. 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
68 Bob Webb 2006© September 28, 2006
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……………………………………………..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
69 Bob Webb 2006© September 28, 2006
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…………………………………… 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
70 Bob Webb 2006© September 28, 2006
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
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