Priorities and Initiatives Small Business/Self-Employed Division. Compliance Realignment

Transcription

1 11/17/2015 Priorities and Initiatives Small Business/Self-Employed Division Nov. 20, 2015 Compliance Realignment Small Business Self-Employed Commissioner Small Business Self-Employed Deputy Commissioner Director Collection Director Operations Support Director Examination 2 1

2 11/17/2015 Examination Initiatives Taxpayer Digital Communications o Correspondence Examinations Abusive Promoters/Transactions Tip Income Reporting 4 Preparer Visits and Examinations Collection Initiatives Early Interaction Initiatives o o o Expansion of FTD Alert Soft Letter Program FTD Alert Pilot EFTPS Alert Payroll Service Providers 7 2

3 11/17/2015 Operations Support Initiatives Enterprise Case Management Enhance Compliance Through Outreach Taxpayer Experience 8 New Penalties at a Glance Online Services Online Services & Digital Innovation Future Digital Taxpayer Experience on IRS.gov 8 3

4 11/17/2015 Questions? 4

5 11/17/2015 Field Collection Operations Employment Tax Compliance Efforts Darren John Guillot Director, IRS Field Collection Operations November/2015 FY 2015 Field Collection Operations 28% Decline in Revenue Officers 1

6 11/17/2015 FY 2015 Field Collection Operations 59 $59 Billion: Amounts due from Forms 941 unpaid, as of September 2015, Source: IRS CFO FY 2015 Field Collection Operations Over Two-Thirds Withheld by Employers FY 2015 Field Collection Operations Operating a business is challenging, those not paying taxes withheld in trust gain an unfair advantage over compliant businesses. 2

7 11/17/2015 Early Intervention Initiatives Federal Tax Deposit Alert System FTD Alert X Coded Pilot Tests whether accelerating the timing of alerts increases impact and identifies which taxpayers benefit most from alerts Implementation: April, 2015 EFTPS Early Alerts Modifies the FTD payment platform to create a near real-time system to identify variances in FTDs that will enable/expand treatment streams Implementation: 2016 Early Intervention Initiatives Benefits Expand early intervention program, educate taxpayers and modify taxpayer behavior to enhance compliance Improve collection case selection and assignment Enable data-driven decisions regarding taxpayer contacts Outsourcing Payroll Many employers outsource some or all of their payroll and related tax duties to third-party payroll service providers. Third-party payer services include: Withholding Social Security, Medicare and income tax from wages Timely submitting federal tax deposits Preparation and timely filing of payroll tax returns Preparation and timely filing of information returns 3

8 11/17/2015 Risks of Using Third-Party Payers In rare instances use of a third-party payer can expose a business to risk of: Payroll tax fraud Late or unfiled tax returns Underreported tax liabilities Late or undeposited tax payments Limited notification if a problem arises Initiatives to Mitigate Risks of Using Third-Party Payers Dual Notice Initiative Risks associated with address changes Electronic Federal Tax Payment System enhancements Inquiry PINs confirmation of scheduled payments Initiatives to Mitigate Risks of Using Third-Party Payers Creation of Form 14157, Return Preparer Complaint Used by taxpayers to report suspected fraudulent activity and abusive tax schemes Federal Tax Deposit Alerts Early intervention initiatives Trust Fund Recovery Penalty - IRC

9 11/17/2015 Contact Information Joan M. Moffa Christopher J. Love 5

10 PAYROLL TAX AUDITS AND WORKER CLASSIFICATION Jeffrey M. Sklarz, Esq. Green & Sklarz LLC Frank Agostino, Esq. Agostino & Associates J. Robbie Turnipseed, Esq. Armbrecht Jackson LLP Worker Classification Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors. Independent Contractor or Employee?, Employed/Independent-Contractor-Self-Employed-or-Employee (Visited Jan. 14, 2015) As of 2012, worker misclassification costs about $2 billion annually in lost tax revenue. Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries, NELP Advisory (August 2012) Worker Classification: General Rules Classifying the Relationship 26 USC 3121(d), 26 CFR (d)-1(c) Independent Contractor Employee Statutory Employee Statutory Non-Employee 1

11 Worker Classification: General Rules Independent Contractor If the provider controls the scope of her work and the manner in which the work is offered for hire. [A]n independent contractor is one who, exercising an independent employment, contracts to do a piece of work according to his own methods and without being subject to the control of his employer, except as to the result of his work. This definition has been amplified in subsequent cases but at no time has the basic principle been altered. Darling v. Burrone Bros. Inc., 162 Conn. 187, 195 (1972) (internal quotations omitted). Examples Doctors Lawyers Accountants Worker Classification: General Rules Employees A person is your employee if you can control what that person can do, how they do it and when they do it. The fundamental distinction between an employee and an independent contractor depends upon the existence or nonexistence of the right to control the means and methods of work. Hunte v. Blumenthal, 238 Conn. 146, 155 (1996) Examples: Secretaries/paralegals In-house sales staff CEO of corporations President of the United States Worker Classification: General Rules Statutory Employees Individuals that are independent contractors under state law, but are treated as employees for tax purposes Certain truck drivers Certain insurance salespersons Statutory Non-Employees Individuals that are never treated as employees for tax purposes Real estate agents Direct sellers (i.e. the Avon lady) See IRS Publication 15-A 2

12 Worker Classification: Procedures Examination 26 CFR Can be random or referred by other IRS functions Other government agencies (i.e. CT-DRS, CT-DOL, municipal inspectors, OSHA, etc.) can also advise the IRS of an issue Whether a worker is an independent contractor or employee is based on a totality of the circumstances If an undercollection is determined, the Employer is responsible for making up the employee withholding: If an employer collects less than the correct amount of employee FICA or RRTA tax from an employee with respect to a payment of wages or compensation, the employer must collect the amount of the undercollection by deducting the amount from remuneration of the employee, if any, paid after the employer ascertains the error. 26 CFR (d)(1). Worker Classification: Procedures Notice of Determination of Worker Classification (NDWC) Section 7436 Does not invoke deficiency procedures Concludes audit Tax Court petition must be filed within 90 days of issuance Like a SND Petition can only be filed by the person for whom services are performed, thus the employer. Worker Classification: Procedures Common law test Control test Behavior control Financial control Relationship of the parties See, IRM

13 Worker Classification: Procedures Criminal/Fraud Referral Civil Fraud Intent to evade tax payments Not based on mistake, inadvertence, reliance on incorrect technical advice or carelessness Area Counsel must approve all civil fraud penalties Criminal Referrals Worker Classification: Consequences Liability for employment taxes Penalties for non-payment, late payment, misclassification Preparer penalties Criminal prosecution Worker Classification: Consequences Resolving Misclassification Claims Reasonable Cause See, IRS Pub (Section 530 of the Revenue Act of 1978) Procedural consistence: Employer has classified workers incorrectly as independent contractors and filed all appropriate 1099s since 1978 Substantive consistence: Employer has a reasonable basis for treating workers as independent contractors, such as industry standard. See, IRS CCA CSP is not a voluntary program applies when employer is audited for classification issues. For taxpayers who cannot meet the safe harbor requirements, full payment is required, but only for one year and the employer must agree to treat the workers in question as employees prospectively. Denial of Section 530 relief can be appealed to the Tax Court. Rev. Rul ; Section

14 Worker Classification: Consequences Resolving Misclassification Claims (cont.) Qualification for the Section 530 safe harbor can be valuable Classification Settlement Program (CSP) (IRM ): 100% CSP Offer: If the taxpayer meets the section 530 reporting consistency requirement but either clearly does not meet the section 530 substantive consistency requirement or clearly cannot meet the section 530 reasonable basis test, the offer will be a full employment tax adjustment for the most recent tax year under examination computed using IRC 3509(a), if applicable. See IRM , IRC Section 3509, for explanation of the reduced rates of IRC % CSP Offer: If the taxpayer meets the reporting consistency requirement and has a colorable argument that it meets the substantive consistency requirement and/or the reasonable basis test, the offer will be an adjustment of 25% for the most recent tax year under examination, computed using IRC 3509(a), if applicable. No Assessment CSP Offer (Section 530 applied): If a taxpayer clearly meets the reporting and substantive consistency requirements and satisfies the reasonable basis test, the requirements of section 530 are fully met. However, the taxpayer may wish to enter into an agreement. A taxpayer that enters into such an agreement may begin treating the workers as employees currently or at the beginning of the next year. In each instance, the taxpayer will agree to classify its workers as employees prospectively, thus ensuring future compliance. Worker Classification: Consequences Resolving Misclassification Claims (cont.) Voluntary Classification Settlement Program (VCSP) See, IRS Announcement ( IRB 724): For taxpayers who are not under audit Permits employers to begin treating misclassified independent contractors as employees Employer avoids penalties and interest Employer pays 10% of the employment tax liability that would have been due for the most recent tax year Apply using Form 8952 Employer cannot be under an employment tax audit Worker Classification: Consequences Employee Rights File Form 8919 (Uncollected Social Security and Medicare Tax on Wages) Reviewed by technical specialist Likely to cause an audit Lawsuit for misclassification under 26 U.S.C Provides private right of action for fraudulent filing of a reporting return (i.e. a 1099 or W-2) with respect to another person Damages include costs attributable to resolving deficiencies as a result of such filing. Does not apply to Form 1099-C filings 5

15 Worker Classification: Consequences Lawsuit for misclassification (cont.): To win a Section 7434 claim, worker must prove by clear and convincing evidence that: that the employer issued an information return; that the information return was fraudulent; and that the employer willfully issued the fraudulent return. Statute of limitations to bring 7434 suit: Six (6) years from the date the fraudulent return was filed, or one year after the date the fraudulent information return would have been discovered by exercise of reasonable care. IRC 7434(c). Worker Classification: Undocumented Workers ITINs Interaction with SSA Deferred Action Programs Deferred Action fro Parental Accountability Deferred Action for Childhood Arrivals Worker Classification: Preparer Penalties IRM Assessed under section 6694 Negligence Recklessness Referral to OPR Generally arise by way of an employment tax audit of the preparer s client Key questions preparer will be asked (IRM ): Did the taxpayer meet with the preparer? Did the taxpayer complete a questionnaire and/or have a face-to-face meeting with the preparer? What documentation was provided to the preparer? Did the taxpayer receive a copy of the return? Was the preparer compensated? Special procedure to challenge assessment 15% down and file refund within 30 days of final assessment Must bring suit within EARLIER OF (i) 30 days of denial of refund or (ii) 30 days after expiration of 6 months from filing of refund. 6

16 Worker Classification: Recent Developments 2014 IRS NSAR 5001F (Dec. 12, 2014): TEFRA does not apply to worker classification audits. SECC Corp. v. CIR, 142 T.C. No. 12 (2014), non acq., IRS CCN (Dec. 5, 2014): IRS refused to acquiesce to requirement that IRS provide a Notice of Determination of Worker Classification ( NDWC ) prior to assessing a misclassification assessment National Office Priorities Final regulations under 162(m)(6) as added by 9014 of the ACA. Final regulations under 3402(p)(3) to allow the Secretary to issue guidance in the Internal Revenue Bulletin to describe payments for which the Secretary finds that voluntary income tax withholding is appropriate. (Temporary and proposed regulations were published on November 29, 2013.) Guidance under 4375 and 4376, as added by 6301(e)(2)(A) of the ACA, regarding the annual adjustment in the fee imposed to fund the Patient-Centered Outcomes Research Trust Fund. Notice under 4980I on the excise tax on high cost employer-provided coverage as added by 9001 of the ACA. Guidance under 6402 on employee consents obtained by employer to claim a refund of FICA taxes. ACA Update The IRS is the enforcement agency for compliance with the ACA ACA requires employers to report cost of coverage on W-2 (Rev. Proc ) Rate of Pay Safe Harbor (employer contribution exceeds 9.56% of employee wages) Federal Poverty Line Safe Harbor (individuals below FPL qualify for Medicaid) Non-Full Time Workers (less than 30 hours/week) For 2015 ACA requires employers with 50 or more employees to file a Form 1094 reporting compliance with the mandatory minimum coverage provisions. See, IRS Notice Line 61 of Form 1040 has been revised (notice of healthcare coverage) Significant increase in penalties for misclassification of employees to avoid ACA applications and employer mandate. $2000 per employee per year for not meeting mandate $3000 per employee per year for misclassification Additional general penalties 7

17 IRS Transcript Analysis Presentation Reviewing Transcripts at the beginning of a resolution case. Bill Nemeth, EA President of the GA Assn of Enrolled Agents and a founding member of the GAEA Education Foundation. NTPI Fellow. Currently an NAEA NTPI Level 1 Instructor. He holds bachelors (Kettering Institute) and masters degrees (MIT) in Mechanical Engineering and an MBA in Marketing (Wayne State University). Roger Nemeth, EA Started managing tax franchises in Developed Audit Detective in Qualified as an N.T.P.I. Fellow in Worked as a programmer for the largest Tax Resolution Company integrating automated transcript systems into workflow programs. Assisted in the downloading and research of over 30 million transcripts. 1

18 Presentation Overview This presentation will cover how to utilize IRS Tax Transcripts to evaluate a client s IRS account. With hold times at the IRS exceeding two hours or more this is invaluable information for any tax professional. Several sections in this presentation have enough material to warrant a separate presentation. When available participants will be directed to resources that cover these other areas in greater depth. Why should you pull IRS Transcripts? Everyone lies!!! Stop trying to figure out what your client s problem is by having them tell you. Gather their basic facts, collect any IRS correspondences and have them sign a 2848 or 8821 so you can access their transcripts. Types of IRS Transcripts to acquire for a tax resolution client: Account (1990 Present) Return (Request them all) Wage & Income (Request both forms & summary for the past 10 years) Separate Assessment (Same as account transcripts) Civil Penalties (Same as account transcripts) TXMOD (As needed via FOIA or PPS) Note: Do not use Record of Accounts since they do not update as often as Account Transcripts. 2

19 Tax Resolution Information that can be determined from the Account Transcripts Compliance (Was return filed or not and what type: Original, SFR, Amended). Exam Status (None, Active, or Closed). Exam Type (Income Under Reporting or Exam). ASED Date (Assessed Statute Expiration Date). CSED (Collection Statute Expiration Date also known as Statute of Limitations). Account Balance. Qualification for Fresh Start Installment Agreement or OIC. Collection Status (None, Active, or Closed). Lien Status (None, Active, or Released). Fraud indicators (Accuracy Related Penalties or Penalty for Fraud ). Estimate monthly payment for IA. First Time Penalty Abatement Eligibility. Notices Issued. Compliance For collections the IRS requires filing compliance for the past 6 tax years. A tax year is considered compliant if either an original return is filed or a Substitute For Return (SFR) is filed. Check the transcript for the following transcript codes: 150 Tax Return Filed (Indicates an Original was filed). 150 Substitute tax return prepared by IRS (Indicates an SFR was started). Start working on the tax returns as soon as possible. Pull the Wage & Income Transcripts and gather data from taxpayer. Substitute For Return Guidelines Often times an original return can be filed after an SFR to reduce tax liability. An original return can also be filed after an SFR to start the ASED date. It is very difficult to determine if an original return was filed and accepted after an SFR was filed. PPS has trouble figuring it out. After an SFR is started no Return Transcript will be generated even if an original return is later accepted. The IRS modifies the SFR based on the entries on the original return. The following are STRONG indicators an original return has been accepted after SFR filing on the Account Transcript: Look for transaction Prior tax abated. Filing status other than Single or Married Filing Separately. Exemptions other than 1. Look at AGI minus Taxable Income. SFR is only standard deduction and 1 exemption. 3

20 Check For Examinations Once we have established compliance we need to check for any exams which may be assessed. Check the account transcript transactions for Examination of tax return or Review of unreported income. These indicate the audit process has started. An audit can show up 30 days to 9 months on an Account Transcript before the actual start of the audit. The following transactions indicate an audit has concluded: Closed examination of tax return or Additional tax assessed. Sometimes audits show on the account transcript but the IRS does not follow through. They have until the ASED to assess. Check For Collections Collections determines the speed at which we must handle the case. Check the account transcript transactions for Notice of Intent to Levy issued. 30 days after this date indicates the start of active forced collections. The following events suspend active collection activity. Pending or established Installment Agreement. Pending or established OIC. Bankruptcy or other legal action. Innocent Spouse. Currently Not Collectible. Suspension of Tax Collection for Military Personnel. If any of these events end and there is still a balance the taxpayer is back in active forced collections. Calculate CSED s If possible get the IRS CSED calculations by calling PPS. According to TIGTA the IRS CSED s are inaccurate 40% of the time there is a tolling event. List all the assessments on a spreadsheet and then find the starting and ending date for all of the tolling events: Remember most of the Account Transactions are manually input by the IRS employees so always check with your client to confirm the dates. 4

21 Most Common Tolling Events OIC For the duration of the pending offer plus 30 days if rejected. Bankruptcy For the duration plus 6 months. CDP Hearing Tolls for the duration plus up to 90 days. Pending Installment Agreement For the duration plus 30 days if rejected. Terminated Installment Agreement Tolls for 30 days after termination. Taxpayer Out Of The Country For Longer Than 6 Months For the duration plus an additional 6 months. CSED Example The taxpayer has a 150 Tax Return Filed on 4/15/2013 for $5,000. Taxpayer filed bankruptcy 1/1/2014 which ended on 6/1/14. From the Account Transcript: 520 Bankruptcy or other legal action filed 1/1/ Removed bankruptcy or other legal action 6/1/14 The CSED without any tolling would be 4/15/2013 plus 10 years and 1 day = 4/16/2023 Because the bankruptcy occurs after the assessment and before the 10 year date it tolls the CSED for the duration (152 days) Plus 6 months (182 days) = 3/13/2024. The bankruptcy tolls for a total of 332 days ( ). First Time Penalty Abatement (FTA) The IRS First Time Penalty Abatement policy is a powerful tool that all tax professionals should be utilizing to better serve their clients. It can be used to reduce outstanding balances or get a check depending on how old the abatement is. To qualify for FTA the taxpayer needs to be compliant and in an installment agreement if there are outstanding balances. The FTA will apply to any year that has a Failure to Pay, Failure To File, or both and the prior three years are considered clean. A clean year is considered no penalties in that year, no penalty abatements in that year, or a small penalty amount (usually less than a hundred dollars) that the IRS considers as an inconsequential amount. If the amount is less than $10,000 the IRS will usually approve it over the phone. Over that amount they may require a letter be sent requesting the abatement. A tax pro can call PPS with POA or the Penalty Assistance Line at ext.225 (less of a wait than PPS usually). 5

22 First Time Abatement (of Penalties) Example Conclusion When evaluating a new tax resolution client you should first obtain as many IRS transcripts as needed to do an effective review. First determine Compliance and start working on any tax returns or amended returns that need to be filed. Next check for any examinations that could lead to additional assessments. Check if collections are active or potentially active. This will determine the speed the case will need to be worked. Next calculate the CSED s and compare them to the IRS calculations because if the balances are close to CSED this could help you determine the strategy. Check for First Time Penalty Abatement opportunities. If the taxpayer owes $10,000 and you find a $12,000 abatement your solution could be less than 4 or 5 man hours. QUESTIONS? Additional Free Information Can be found at: TaxHelpSoftware.com and AuditDetective.com 6

23 Payroll Tax Liabilities & Challenging The Trust Fund Recovery Penalty New England IRS Representation Conference November 19, 2015 Presented by Megan L. Brackney, Kostelanetz & Fink LLP, New York, NY Christin M. Bucci, Bucci Law Offices, Ft. Lauderdale, FL Barbara T. Kaplan, Greenberg Traurig, LLP, New York, NY IRC 6672 IRC 6672 allows the IRS to recover trust funds withheld from an employee s pay from any person required to collect, truthfully account for, and pay over any tax imposed and who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof. The employer is deemed to be holding these funds in trust for the U.S. Government. The penalty is referred to as a 100% penalty which means that the entire amount can be recovered against anybody determined to be a responsible person who willfully fails to collect and pay over such tax. What Are Trust Funds? Trust funds are the 7.65% of the Social Security and Medicare tax withheld from an employee s pay and any income tax withheld from the employee s pay. They do not include federal unemployment taxes, the employer s match of the 7.65% for Social Security and Medicare taxes, or accrual of interest and penalties of the employer (which often are quite substantial). 1

24 Two Elements of IRC Responsible Person 2. Willfulness Who is a responsible person? Any and all of the following may be found to be a responsible person. Sole Proprietors Partners Bookkeepers Accounting firms Parent companies Lenders/Creditors Purchasing companies Who is a responsible person? The term responsible person is broad, encompassing anyone responsible for collecting, for accounting and paying over taxes to the government. Responsibility is a matter of status, duty, and authority. The test is a functional one. 2

25 Willfulness Though an individual may have failed to collect and pay over trust fund taxes, he or she will not be deemed a responsible person unless the IRS can show the failure to collect and pay over the trust funds was willful. The IRS view is that willfulness exists where money withheld from employees as taxes, in lieu of being paid over to the Government, was knowingly and intentionally used to pay the operating expenses of the business, or for other purposes. Revenue Ruling The fact that there are insufficient funds to pay both employees and taxes is not a defense. Willfulness A person who was a responsible person and who does not become aware of the trust fund tax liability until later has been held responsible for those trust fund tax liabilities. See In re Slodov, 436 U.S. 238 (1978). Taxpayers will be held liable to the extent they learned of the past trust fund tax liability and then used available assets to prefer other commercial creditors over the United States. Purcell v. United States, 1 F.3d 932 (9th Cir. 1993). In situations where a taxpayer finds out about unpaid payroll tax liabilities that accrued while he or she was a responsible person and, going forward, the taxpayer uses unencumbered funds to pay other creditors in preference to paying the back taxes, such use of the unencumbered funds may constitute a willful failure to pay the delinquent taxes. See Honey v. US, 963 F.2d 1083 (8th Cir. 1992); Brinskele v. U.S., 88 Fed.Cl. 334 (2009). Tax Exempt Organizations No trust fund penalty liability if: Unpaid, volunteer member of any board of trustees or directors of an organization; Serves in an honorary capacity; Does not participate in the day to day or the financial operations of the organization; and Does not know of the organizations failure to remit the trust fund taxes. IRC 6672(e). 3

26 Single Member LLC s Although a single member LLC may be disregarded for income tax purposes, it will be treated as a corporation for purposes of employment taxes beginning Jan. 1, CFR (c). Thus, the trust fund portion of the payroll taxes will attach to a member owner of an LLC if such member meets the definition of a responsible party under IRC 6672 and possesses the requisite willfulness. IRC 3505: Third Party Liability Third parties may become responsible for the trust fund taxes if they loaned money to cover net payroll. This may occur when the business cannot cover net payroll so a spouse or other family member loans the company the net payroll so the employees can be paid. That spouse or family member may be deemed to be a responsible person and liable. Must have actual notice or knowledge that the employer will not make timely payroll deposits of the withholding taxes. Liability is limited to 25% of the funds supplied. Treas. Reg : Liability for Employment Agencies An employment agency is potentially subject to penalties if it actively recruits or provides employees to perform services for its clients, and thereafter pays wages or compensation to the employees and assumes responsibility for the withholding and remittance of payroll taxes. This is so even where the funds by which the employees are paid originate with the client. The IRS can only collect once and can choose which responsible person to go to first. June 2, 2014 Effective date of Treas. Reg

27 Joint and Several Liability Anyone responsible is jointly and severally liable for the tax. Each responsible taxpayer has a right of contribution from the other responsible parties. IRC 6672(d). IRC 6103(e)(9) allows the IRS to disclose to anyone determined to be a responsible person who else is responsible, what collection action was taken and how much the IRS collected. There is no requirement to collect from the employer first! Assessment of trust fund penalties Assessment by Revenue Officer, i.e., Collections. The IRS Revenue Officer will seek interviews from all potential responsible people he or she can locate. Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes will be used for the interview. Based upon the interview and available documentation, such as bank statements and cancelled checks, the Revenue Officer will seek to assess the Trust Fund Recovery penalty against the responsible individuals or businesses. Appeals Once an assessment for trust funds is proposed against a taxpayer, the taxpayer will have 60 days to file a protest and obtain an appeals hearing. 5

28 Administrative Refund Claim A taxpayer is generally required to pay the full amount of tax assessed for the period in question before filing a refund claim or initiating a refund suit. Employment taxes and the trust fund recovery penalty are divisible taxes and therefore, not subject to the full payment rule. See IRC 6331(i)(2). A refund claim can be made after payment of the portion of a trust fund recovery penalty that equals the amount due for a single employee for the period at issue. Administrative Refund Claim Once payment has been made, the taxpayer must complete and file a separate Form 843 (Claim for Refund and Request for Abatement) for each tax period and each type of tax or penalty. This form serves as both a claim for refund and a request to have the unpaid portion of the divisible tax abated. The claim for refund must include each ground upon which a refund is claimed and facts sufficient to establish the grounds for allowance. Only payments made within the two years prior to the claim will be considered for refund. IRC 6511(a). Denial of Administrative Refund/Refund Action A taxpayer must wait to initiate refund litigation until at least 6 months after a refund claim is filed with IRS (unless claim is rejected within those 6 months). IRC 6532(a)(1). If a refund claim is disallowed, the IRS will issue a certified letter (Letter 3784) to indicate disallowance of the claim ( Notice of Claim Disallowance ) and to notify the taxpayer of the 2 year period to file a suit. The taxpayer may file an administrative appeal within 30 days of the date of the Notice of Claim Disallowance, but a timely appeal will not extend the 2 year period. The complaint must be filed within 2 years of Notice of Claim Disallowance. The 2 year period cannot be extended by filing a request to reconsider the disallowance of a claim, or by filing a second refund claim on the same period. The period may be extended if the taxpayer can establish a financial disability, which equitably tolls the period in which to file the complaint. 6

29 District Court Refund Jurisdiction IRC 7422(a): No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof. 28 U.S.C. 1346: The district courts shall have original jurisdiction, concurrent with the United States Court of Federal Claims, of: Any civil action against the United States for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal revenue laws. Federal Court of Claims Jurisdiction 28 U.S.C. 1491(a)(1): The United States Court of Federal Claims shall have jurisdiction to render judgment upon any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort. For the purpose of this paragraph, an express or implied contract with the Army and Air Force Exchange Service, Navy Exchanges, Marine Corps Exchanges, Coast Guard Exchanges, or Exchange Councils of the National Aeronautics and Space Administration shall be considered an express or implied contract with the United States. Venue In the U.S. district court, venue lies where the individual taxpayer resides. 28 U.S.C. 1391(e)(1)(C) & The Court of Federal Claims is open to any taxpayer, regardless of residence or citizenship. 7

30 The Parties The Plaintiff The plaintiff is the taxpayer who paid the tax and filed the refund claim. The Defendant The Defendant is the United States. The Complaint The complaint should include numbered paragraphs, each limited to a single set of facts to allow for clear, concise responses, and the following: short and plain statement of the grounds for the court s jurisdiction short and plain statement of the relevant facts short and plain statement of the grounds for relief demand for relief (each tax period should be separately stated) demand for Specific Amount of Tax and Interest demand for Jury Trial (district court only) Special rules for Court of Claims Answer & Affirmative Defenses The government s answer is due within 60 days of service of complaint (unless court grants extension). The government can raise various affirmative defenses including, but not limited to, lack of standing, lack of subject matter jurisdiction, lack of personal jurisdiction and variance (variance occurs when the complaint goes beyond the administrative refund claim). 8

31 Setoff and Equitable Recoupment Setoffs and equitable recoupment operate to reduce the amount of a taxpayer s recovery, but will not give rise to a judgment in favor of the government. These are adjustments or liabilities that cannot be independently asserted by the government and assessed because the statute of limitations on these items has expired. Under these circumstances, the government is directed to raise the issue as a setoff defense in the answer or amended answer. In Missouri Pac. R.R. v. United States, 338 F.2d 668, 670 (Ct. Cl. 1964), the court explained the types of setoffs: same tax period, same type of tax as refund same tax period, different type of tax, related and ultimately affects the amount of tax involved in refund suit same tax period, different type of tax independent of and unrelated to tax in refund suit a different tax period involving any type of tax, related or unrelated The government must have some basis for setoff; it cannot engage in a fishing expedition. If and only if the government raises a setoff claim, the taxpayer can raise a counter setoff to mitigate the impact. Without the government s setoff claim, a taxpayer s setoff claim would constitute variance. Setoff and Equitable Recoupment, Cont. The doctrine of equitable recoupment permits a taxpayer or the government to offset a current liability for one type of tax with a related but time barred item arising from the same transaction, item or taxable event, and involving parties having an identity of interest. The doctrine of equitable recoupment prevents unjust enrichment. Counterclaims and Third Party Complaints The government will file a counterclaim against the plaintiff for the unpaid balance of trust fund liabilities in its answer or amended answer. The government may also file third party complaints against other individuals who have been assessed with the same trust fund recovery penalties under IRC

32 Answer to Counterclaim and Reply If the government files a counterclaim, the taxpayer must file an answer within 21 days of being served. In the Court of Federal Claims, the taxpayer may file a reply if the government argues setoff or fraud. Cross claims A taxpayer has a statutory claim for contribution if he or she has paid more than his or her proportionate share of trust fund recovery penalties pursuant to IRC 6672(d). Nonetheless, a taxpayer is barred by statute from bringing a contribution claim in pending refund litigation or in any action commenced by the government to collect the penalty. IRC 6672(d). But, the taxpayer may be able to pursue a claim for indemnification based on fraud or breach of contract. 28 U.S.C. 1367(a). Burden of Proof The taxpayer bears the burden of establishing that the jurisdictional requirements have been satisfied and that the taxpayer has a right to the refund claimed by a preponderance of the evidence. In proving a right to the refund, the taxpayer must show that the assessment is erroneous and that taxpayer is entitled to the claimed overpayment. Simply showing a procedural defect will not suffice. The taxpayer also bears these burdens with respect to issues raised by the government in a counterclaim. The government need only establish that the assessment was in fact made and the unpaid balance, both of which can be proven with certified copies of the taxpayer s transcripts. The only areas in which the government bears the burden of proof are with respect to setoffs addressing: (i) the same tax period, but different type of tax independent of and unrelated to tax in refund suit; and (ii) a different tax period involving any type of tax, related or unrelated. 10

33 Standard of review of IRS s denial of refund claim De novo standard of review Under this standard, [t]he factual and legal analysis employed by the Commissioner is of no consequence to the district court. R.E. Dietz Corp. v. United States, 939 F.2d 1, 4 (2d Cir. 1991). The court is required to re determine a taxpayer s tax liabilities for the period at issue in order to determine whether the taxpayer is entitled to a refund and therefore, the IRS s analysis is of no consequence. Id. (citing Lewis v. Reynolds. 284 U.S. 281, 283 (1932)). Collection Issues in Refund Litigation Under IRC 6672(c), no levy may be made against the unpaid portion of a trust fund recovery penalty as long as the taxpayer makes the minimum payment, files a refund claim within 30 days of notice and demand for payment, and gives a bond equal to 1.5 times the unpaid portion of the assessed civil penalties. There is a statutory prohibition against collection by levy of trust fund recovery penalties that are the subject of a refund suit with regard to tax years beginning after December 31, IRC 6331(i)(2)(B) (as amended by 3433(b), P.L ). The IRS is not permitted to initiate litigation to collect unpaid divisible taxes while refund litigation is pending. IRC 6331(i)(4)(A). Collection Issues in Refund Litigation, Cont. Notwithstanding the foregoing, the IRS can and will file liens during refund litigation. The IRS can also continue a levy issued to carry out an offset under IRC 6402 or issued prior to the filing of a refund complaint. IRC 6331(i)(3)(B). Finally, the IRS can offset refunds against the pending trust fund recovery penalty assessments pursuant to IRC 6402 and may initiate collection if collection is in jeopardy. IRC 6331(i)(3)(A)(ii). The statute of limitations on collections is suspended during refund proceedings. IRC A taxpayer can waive the suspension of collection in writing, which will allow the IRS to proceeds with enforced collection actions. IRC 6331(i)(3)(A)(i). 11

34 Frank Agostino, Attorney at Law Robert Fink (Moderator), Attorney at Law Karen L Hawkins, Attorney at Law Claudia Hill, Enrolled Agent, M.B.A. Discussion Resources 1 Conducting a successful tax practice requires more than a basic knowledge of the law and access to software. The scenarios that follow illustrate the challenges 2 Diligence as to Accuracy (10.22) Conflict of Interest (10.29) Due Diligence Standards Returns/Docs (10.34) Competence (10.35) Requirements for Written Advice (10.37) False and Misleading representations (10.51(a)(4) Aiding and Abetting (10.51(a)(7) Oral or Written Opinions (10.51(a)(13)) 3 1

35 Must exercise Due Diligence in: Preparing, approving and filing tax returns, documents, affidavits etc. relating to IRS matters Determining correctness of oral/written representations made to the client or to Treasury personnel Reliance on Another s Work Product? With Reasonable Care 4 One client interest directly adverse to another, OR Significant risk of material limitation By Responsibilities to Another client, Former client, Third person OR PERSONAL INTEREST OF THE PRACTITIONER 5 May represent if: Reasonable belief in ability to provide competent, diligent representation to each affected client Not legally prohibited EACH affected client waives conflict, gives INFORMED consent in writing at the time conflict is known 6 2

36 Taxpayer operates a Subchapter S construction company. T/p explains to his return preparer that approximately one-half of his workers are treated as employees. The remaining workers are paid by cash which is obtained by cashing customers' checks. The preparer also notes that the corporation's books show a high cost of goods sold which consist of payments made to independent contractors. The corporation issues paychecks to both taxpayer and his wife, based on minimum wage. Employment tax returns are filed based on the minimum wage. 7 Taxpayer's wife is a no-show employee, but the preparer does not know this; he has never met nor spoken to taxpayer's wife. The preparer uses a bank reconciliation to prepare the corporation's tax returns. He classifies all checks issued to taxpayer and taxpayer's wife, other than payroll checks, as "shareholder loans." The preparer classifies all checks paying taxpayer's credit cards as advertising and promotion expenses. The corporation has two luxury automobiles but does not keep any records pertaining to the use of those autos. The preparer depreciates both cars. 8 Every year the taxpayer shows up with dozens of receipts for non-cash contributions. On most slips there appears to be a date and notes such as "household goods," "clothing," "books but no dollar amounts. Can the tax preparer take a deduction for these charitable contributions without further inquiry? 9 3

37 Your client tells you that she has opened a bank account jointly with her sister in India to hold money inherited at her mother's death. Her sister is a citizen and resident of India. Although the account earned interest, it was not much and the bank's charges exceeded the interest. Should the tax return preparer report the account? 10 Taxpayer was thrilled with the success of his mobile fish taco business that he opened last year. When he asks you, "how much income do I have to report?" you're taken back. You start giving the "books and records" speech when his eyes glaze over and says, "Look, there's a lot of cash involved here, and I take it in one day and use it the next day to buy fresh ingredients. Then I sell more tacos. Who has time to keep track? So how much do I have to tell them to keep them off my back?" 11 The taxpayer is self-employed. He has never paid estimated taxes. At year end, he sees how things are going and he gives you a net figure for his gross income. Due to his failure to pay any estimated taxes, his joint return shows a significant balance due. This year you receive a call from taxpayer's wife asking that copies of the last three years of their joint returns be sent to her divorce lawyer. Do you have any concerns? 12 4

38 Frank Agostino, Attorney at Law Robert Fink (Moderator), Attorney at Law Karen L Hawkins, Attorney at Law Claudia Hill, Enrolled Agent, M.B.A. Expanded Resources 13 Lawyers Accountants All tax practitioners incl. enrolled agents and actuaries Return preparers 14 ABA Model Rules of Professional Conduct ABA does not possess disciplinary authority State analogues Commentary on model rules ABA and state ethics opinions ABA Tax Section Standards of Tax Practice Statements 15 5

39 AICPA Code of Professional Conduct Applies to all members AICPA possesses disciplinary authority AICPA Statements on Standards for Tax Services (SSTS), which have been adopted by some states State Board of Accountancy rules (look to where you are licensed and employed) 16 Circular 230, 31 C.F.R. Part 10 Incorporates many rules similar to ABA Model Rules of Professional Conduct and AICPA SSTSs BUT, the differences can matter The applicability of Circular 230 is very much in flux as a result of cases and uncertainty regarding the IRS s authority to regulate practice 17 Provisions of the Internal Revenue Code, e.g., 6694, 6695, 7216 Remember how broad the definition of return preparer is in 7701(a)(36) and Treas. Reg It s not just signers Circular 230. Or maybe not? Revenue Procedure

40 31 U.S.C. 330 (1884) 31 C.F.R. Subtitle A, Part 10 (1886) Authorizes regulation of representatives of persons before the Department of the Treasury Delineates expected ethical, professional and technical obligations Authorizes removal from practice for violations Online at Latest revisions effective June 12, 2014 Revenue Procedure Authorizes representation of taxpayers before the IRS by unlicensed/unenrolled return preparers for returns prepared and signed by the preparer Delineates expected ethical, professional and technical obligations Mirrors Circular 230 to a substantial degree Authorizes removal from representation rights for violations 19 There are two sources of IRS s authority to regulate practitioners 5 U.S.C. 500 broadly authorizes attorneys to practice before all Federal agencies and CPAs to practice before the IRS 31 U.S.C. 330 specifically deals with the regulation of practice before the Department of the Treasury 20 Section 500. Administrative practice; general provisions. (a) For the purpose of this section (1) agency has the meaning given it by section 551 of this title; and (2) State means a State, a territory or possession of the United States including a Commonwealth, or the District of Columbia. (b) An individual who is a member in good standing of the bar of the highest court of a State may represent a person before an agency on filing with the agency a written declaration that he is currently qualified as provided by this subsection and is authorized to represent the particular person in whose behalf he acts. (c) An individual who is duly qualified to practice as a certified public accountant in a State may represent a person before the Internal Revenue Service of the Treasury Department on filing with that agency a written declaration that he is currently qualified as provided by this subsection and is authorized to represent the particular person in whose behalf he acts. 21 7

41 (d) This section does not (1) grant or deny to an individual who is not qualified as provided by subsection (b) or (c) of this section the right to appear for or represent a person before an agency or in an agency proceeding; (2) authorize or limit the discipline, including disbarment, of individuals who appear in a representative capacity before an agency; (3) authorize an individual who is a former employee of an agency to represent a person before an agency when the representation is prohibited by statute or regulation; or (4) prevent an agency from requiring a power of attorney as a condition to the settlement of a controversy involving the payment of money. 22 (e) Subsections (b)-(d) of this section do not apply to practice before the United States Patent and Trademark Office with respect to patent matters that continue to be covered by chapter 3 (sections 31-33) of title 35. (f) When a participant in a matter before an agency is represented by an individual qualified under subsection (b) or (c) of this section, a notice or other written communication required or permitted to be given the participant in the matter shall be given to the representative in addition to any other service specifically required by statute. When a participant is represented by more than one such qualified representative, service on any one of the representatives is sufficient. 23 Any licensed attorney or CPA may represent a taxpayer before the IRS, subject to getting a power of attorney Attorneys can represent clients before any agency (Treasury or other) per para. (b), but CPAs can represent them only before the IRS This section does not authorize the practice of law or of accounting. Those are still matters of state licensing (d)(2): This provision does not authorize or limit discipline of individuals appearing before an agency. That s also a function of state law (or of 31 U.S.C. 330?) 24 8

42 Section 330. Practice before the Department. (a) Subject to section 500 of title 5, the Secretary of the Treasury may (1) regulate the practice of representatives of persons before the Department of the Treasury; and (2) before admitting a representative to practice, require that the representative demonstrate (A) good character; (B) good reputation; (C) necessary qualifications to enable the representative to provide to persons valuable service; and (D) competency to advise and assist persons in presenting their cases. 25 (b) After notice and opportunity for a proceeding, the Secretary may suspend or disbar from practice before the Department or censure a representative who (1) is incompetent; (2) is disreputable; (3) violates regulations prescribed under this section; or (4) with intent to defraud, willfully and knowingly misleads or threatens the person being represented or a prospective person to be represented. The Secretary may impose a monetary penalty on any representative described in the preceding sentence. If the representative was acting on behalf of an employer or any firm or other entity in connection with the conduct giving rise to such penalty, the Secretary may impose a monetary penalty on such employer, firm, or entity if it knew or reasonably should have known, of such conduct. Such penalty shall not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty and may be in addition to or in lieu of any suspension, disbarment, or censure of the representative. 26 (c) After notice and opportunity for a hearing to any appraiser with respect to whom a penalty has been assessed under section 6701(a) of the Internal Revenue Code of 1986, the Secretary may- (1) provide that appraisals by such appraiser shall not have any probative effect in any administrative proceeding before the Department of the Treasury or the Internal Revenue Service, and (2) bar such appraiser from presenting evidence or testimony in any such proceeding. (d) Nothing in this section or in any other provision of law shall be construed to limit the authority of the Secretary of the Treasury to impose standards applicable to the rendering of written advice with respect to any entity, transaction plan or arrangement, or other plan or arrangement, which is of a type which the Secretary determines as having a potential for tax avoidance or evasion. 27 9

43 Authority to admit and regulate practice before Treasury under (a) is expressly made subject to 5 U.S.C But that statute is broader, not narrower; and it does not authorize or limit an agency s ability to discipline practitioners. So what does that mean? Treasury has authority to regulate practice per subsection (a). But per (a)(2) it can require good character, reputation, and other qualifications before admitting people to practice And per subsection (b) it has the statutory authority to suspend or disbar incompetent or disreputable representatives, anyone who violates procedural regulations, or certain others 28 Thus, willfully failing to file your own tax returns means you can be disbarred from practice before the IRS. E.g., Director, OPR v. Petrillo, No (April 22, 2011), available at ,00.html Why? It doesn t have anything to do with your practice before the IRS. But it s disreputable conduct. See Cir (a)(6) There are of course numerous defenses e.g., whether the failure to file was willful but for present purposes the point is just that incompetence or disreputable conduct can result in revocation of your ability to practice before the IRS 29 The language in para. (d) relates to shelter opinions. It was expressly added by Congress in 2004, in response to the argument that Treasury couldn t regulate opinion-writing because it wasn t practice before the IRS. But it is also perplexing: It s written in the negative: it doesn t add authority, just says nothing here or elsewhere affects that authority It indicates Treasury can impose standards regarding tax shelter opinions. But what about non-tax shelter opinions or other written advice? 330 begs the question of what practice of representatives before the Dept. of Treasury is. BUT that question was answered in Loving wasn t it? 30 10

44 Loving and other plaintiffs were mere return preparers not CPAs, attorneys, or enrolled agents They sued to enjoin application to them of the return preparer testing and CPE requirements that IRS had promulgated in Circular 230 as part of the new return preparer regulation program ( the Regulations ) Theory: return preparation isn t practice before the Treasury, and preparers aren t representatives The D.C. Circuit described six reasons why the Regulations failed to satisfy step 1 (and step 2) of the Chevron test Tax return preparers are not representatives. Representatives have authority to bind their principal, like an agent 2. Preparing tax returns does not constitute practice before the Treasury Department. The statute suggests that Congress intended practice to mean adversarial proceedings 3. The history of the statute indicates that Congress intended the statute to cover representation in contested proceedings. Originally enacted in 1884 as part of legislation relating to property lost in military service The broader statutory framework suggests that the statute should be read narrowly. Congress has adopted a number of statutes covering the conduct of tax return preparers. These would be superfluous if IRS could already regulate them 5. It should not be presumed that Congress intended a broad delegation of authority to regulate tax return preparers. The regulations would have affected hundreds of thousands of preparers in a multi-billion dollar industry 6. The IRS had not previously interpreted the statute as granting authority to regulate tax return preparers. In fact, several IRS representatives previously stated that the IRS did not possess such authority 33 11

45 Ridgely and his accounting firm (Ryan LLC) prepare ordinary refund claims (claims not on original returns, but before any IRS audit notice) They argued that preparing such claims is not practice before the IRS, and thus that the IRS could not regulate the kind of fees they charged, in particular the Cir restriction on contingent fees 34 The District Court followed Loving and held that preparation of ordinary refund claims is not practice before the IRS This ruling was practically compelled by the logic of Loving The Court concluded, the IRS cannot regulate Ridgely s contingent fee arrangement with his clients to the extent it is in connection with his preparation of ordinary refund claims Unspoken corollary: IRS cannot regulate contingent fees in connection with mere tax return preparation either 35 Sexton v. Hawkins, No. 2:13-cv RFB-VCF (D. Nev. Oct. 30, 2014) Sexton is a former practitioner (lawyer), previously suspended by OPR, who asserts he now only prepares returns. OPR asserts evidence of written tax shelter advicegiving exists and warrants further investigation S argues that OPR has no authority to investigate him, since his is not a practitioner but a mere tax return preparer (post-loving) OPR has been tentatively enjoined from requiring production of documents to investigate whether S is engaged in practice. And IRS was further prohibited from suspending Sexton s ability to e- file because he failed to produce documents (there was no discussion about this in any of the briefsthe judge made the remedy up ) 36 12

46 Davis v. IRS, No. 1:14-cv (N.D. Ohio 2014) Davis is a (formerly) suspended CPA who prepares returns. He argued that the IRS abused its discretion by refusing to let him use the e-filing system, even after OPR and the Ohio Board of Accountancy determined he was fit to resume/continue practice The IRS apparently relented and the case was dismissed in December, Charts below are based on 1,894 Cases Opened Between 01/01/2012 and 12/31/2014, regardless of current status. Case types included: Conduct, Compliance, Hybrid, XP, Enrollment & PTIN Appeals, Reinstatement Requests, and Limited Practice (Rev Proc 81-38). * = No State in CCMS 38 Charts below are based on a total of 2,510 cases closed between 01/01/2012 and 12/31/2014, regardless of date opened. Case types: Conduct, Compliance, Hybrid, Expedited Processing, Enrollment Appeals, PTIN Appeals, and Reinstatement Request. Non Disciplinary: CWOA, CWOS, No 230 Violation, Referred Out, LOJ, Appeal and Reinstatement Decisions, Withdrawn. * = No State in CCMS * AK AL AR AZ CA C O CT DC DE FL GA HI IA ID IL IN KS KY LA M A M D M E MI M N Disciplinary Closures Non Disciplinary Closures M O M S MT N NC ND NE NH NJ M NV NY OH OK OR PA RI SC SD TN TX UT VA VT W A WI W W PR VI V Y Disciplinary Closures Non Disciplinary Closures

47 Fiscal Year 2015 CASE CLOSURES BY TYPE *Reprimand includes 60 Day Compliance Letter, CAF Notification, Cease & Desist Letter, Reprimand, Soft Letter, and DDA closures. * *Non Disciplinary includes Lack of Jurisdiction, Referred Out, No 230 Violation, Closed w/o Sanction, and Closed w/o Action closures. 40 Activity Total Receipts Attorne y CPA EA Other Totals 305 Disbarments (FAD/Consent) Suspensions (FAD/Consent) Expedited Suspensions DDA Censure Monetary Sanction Reprimand/Soft Letter Cease & Desist CWOS, LOJ, NCOA, CWOA Reinstatement Requests Appeals Total Dispositions

48 CASE MIX 43 Fiscal Year 2015 EXTERNAL REFERRALS BY SOURCE 44 Diligence as to Accuracy (10.22) Conflict of Interest (10.29) Due Diligence Standards Returns/Docs (10.34) Competence (10.35) Requirements for Written Advice (10.37) False and Misleading representations (10.51(a)(4) Aiding and Abetting (10.51(a)(7) Oral or Written Opinions (10.51(a)(13)) 45 15

49 Must exercise Due Diligence in: Preparing, approving and filing tax returns, documents, affidavits etc. relating to IRS matters Determining correctness of oral/written representations made to the client or to Treasury personnel Reliance on Another s Work Product? With Reasonable Care 46 One client interest directly adverse to another, OR Significant risk of material limitation By Responsibilities to Another client, Former client, Third person OR PERSONAL INTEREST OF THE PRACTITIONER 47 May represent if: Reasonable belief in ability to provide competent, diligent representation to each affected client Not legally prohibited EACH affected client waives conflict, gives INFORMED consent in writing at the time conflict is known 48 16

50 May not sign a tax return or advise a position on a tax return, willfully, recklessly, or through gross incompetence if: Lacks reasonable basis Unreasonable position (6694(a)(2)) Willful attempt to understate liability (6694(b)(2)(A)) Reckless, intentional disregard of rules and regulations (6694(b)(2)(B)) Patterns matter 49 May not advise taking Positions that are Frivolous May not advise Submissions: to delay or impede tax administration that are frivolous containing or omitting information that demonstrates an intentional disregard of rules or regulations 50 Advised position? Prepared or signed return? Submitting docs/other papers to IRS? Then- Must Advise Client of Potential Penalties and their Avoidance through Disclosure 51 17

51 Reliance on Client Information in good faith, without verification, is OK, but Cannot ignore implications of other information furnished Cannot ignore actual knowledge Must make reasonable inquiries for incorrect, inconsistent or incomplete information No Willful Blindness 52 A practitioner must possess the necessary competence to engage in practice before the Internal Revenue Service. Competent practice requires the knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged See ABA Model Rule 1.1, Competence AICPA Code of Professional Conduct Article V, Due Care 53 Reasonable factual and legal assumptions Reasonably consider all relevant facts Reasonable efforts to identify and ascertain the relevant facts Not rely upon representations, statements, findings, or agreements if reliance would be unreasonable Not take into account the possibility that a tax return will not be audited, or that a matter will not be raised on audit

52 Reliance on taxpayer is unreasonable if the practitioner knows or should know that one or more representations, or assumptions on which any representation is based, are incorrect or incomplete May only rely on the advice of another practitioner if the advice was reasonable and the reliance is in good faith considering all the facts and circumstances May not rely on another practitioner who has a conflict; or is incompetent 55 No participating in any way in the giving of false/misleading info to Dept. of Treasury employees. PoA s Federal tax returns Financial statements Applications (PTIN, Enrollment) Affidavits, declarations, and any other document or statement, written or oral 56 Willfully assisting, counseling, encouraging, suggesting to a client/prospective client: An illegal plan to evade Federal taxes or payment thereof Violation of any Federal tax law 57 19

53 Disreputable/Incompetent Conduct False opinions-knowingly, recklessly, through gross incompetence Intentional or recklessly misleading opinions Pattern of Incompetent Opinions 58 False Opinion = knowing misstatements of fact/law assertion of unwarranted positions counseling/assisting conduct known to be illegal/fraudulent concealing matters required by law to be revealed 59 Reckless conduct = highly unreasonable omission/misrepresentation involving extreme departure from standards of ordinary care that a practitioner should observe under the circumstances Gross Incompetence = gross indifference, grossly inadequate preparation, consistent failure to perform obligations to client Patterns matter 60 20

54 Rights and Responsibilities of practitioners in Disciplinary Cases: Guidance on Restrictions During Suspension or Disbarment: _or_disbarment.pdf Information (Resources) for Tax Professionals: Agents/Information-for-Tax-Professionals 61 Circular 230 Webinar- Soup to Nuts: inar/ FBAR Responsibility: 62 IRS Bars Appraisers from Valuing Facade Easements for Federal Tax Purposes for Five Years IR , March 19, 2014 WASHINGTON The Internal Revenue Service today announced its Office of Professional Responsibility (OPR) has entered into a settlement agreement with a group of appraisers from the same firm accused of aiding in the understatement of federal tax liabilities by overvaluing facade easements for charitable donation purposes. Under the settlement agreement, the appraisers admitted to violating relevant sections of Circular 230 related to due diligence and submitting accurate documents to the government. The appraisers agreed to a five-year suspension of valuing facade easements and undertaking any appraisal services that could subject them to penalties under the Internal Revenue Code. The appraisers also agreed to abide by all applicable provisions of Circular 230. Specifically, the appraisers admitted violating Circular 230, Section 10.22(a)(1), for failing to exercise due diligence in the preparation of documents relating to IRS matters, and Section 10.22(a)(2) for failing to determine the correctness of written representations made to the Department of the Treasury. OPR s settlement agreement with the appraisers includes a disclosure authorization that allows this press release

55 Monetary Sanctions Agreement April 7, 2014 Monetary penalty under 10.50(c) Firm voluntary disclosure and cooperation Contingent Fee arrangements in 2011 and 2012 Other terms: Acknowledged subject matter jurisdiction Implementation of internal training/compliance under Revisions to client engagement practices to comport with Cir

56 EXAMINATIONS OF CASH BASED BUSINESSES Eric L. Green, Esq., Green & Sklarz LLC Michael Villa, Jr., Esq., Meadows, Collier, Reed, Cousins, Crouch & Ungerman LLP Christine Puglisi, Special Agent, Internal Revenue Service Introduction Preparer considerations Hot button issues Issues to consider when preparing returns IRS focus on cash businesses IRS audit techniques for cash businesses Considerations for appealing the exam Preparer Considerations We are not required to examine our own clients In general we may rely in good faith upon client provided information We CANNOT ignore the implications of information provided that we either know or have reason to know is inaccurate, incomplete, inconsistent, or suspect is untrue We are required to disclose questionable positions taken on the return Revenue Procedure

57 Requirement to Make Reasonable Inquiry The return preparer is required to make reasonable inquiries if the information furnished by the taxpayer is either questionable or appears to be inconsistent or incomplete Some deductions or credits require us to confirm that certain information be available before they can be claimed Hot Button Issue: Gross Receipts Federal return v. Sales tax returns Federal return v. Bank deposits Federal return v. Cash register/pos system Federal return v. 1099s reported Hot Button Issue: Expenses Expenses ordinary for this type of business Expenses are in line with industry statistics (the DIF) Expenses are supported by evidence of payment? W-2s or 1099s issued? Were the expenses paid/incurred during the tax year? 2

58 IRS Focus on Cash Businesses The GAO reports that much of the $385 billion tax gap is driven by businesses who underreport their income, often due to cash transactions Focus is now on those individuals or businesses that deal in cash IRS Focus on Cash Businesses 3 Ways to misappropriate cash from a business 1. Skimming it from receipts 2. Cash or goods can be stolen and used later for resale 3. Fraudulent disbursements Indicators of Unreported Income Excessive lifestyle Business continues operating despite losses year after year Bank deposits or liquid investments continue to increase each year despite reporting of losses or low income No income reported yet debt decreases year after year Unusual margins or sales for the industry standard for this type of business 3

59 IRS Focus on Cash Businesses Examiners are to look for income Expenses are generally easier either supported or not Indirect methods of income analysis may be employed Will look at the individual owner as well will create a burden on the taxpayer individually Cash Businesses Targeted Bail Bonds Beauty Salons Car Washes Coin Operated Amusements Convenience Stores Laundromats Scrap Metal Dealers Taxicabs IRS Pre-Contact Planning When the IRS knows it will be targeting a cash business there will be some specific precontact review done The business owner s 1040 will be reviewed a. Is the owner s home in a high-value area disproportionate to reported income? b. Will reported income support family size? c. Does he or she have the foreign accounts box checked? 4

60 IRS Pre-Contact Planning Schedule A Real estate taxes v. address: could more than just the house s real estate taxes be reflected on the Sch. A? Does the mortgage interest reported reflect just the home or could there be other real estate holdings? Can the taxpayer s income carry the reported mortgage interest and real estate taxes reported? Any unusual deductions on the miscellaneous expense line (i.e., gambling losses?) Do the deductions reflect the reported income or could there be other sources of unreported income? IRS Pre-Contact Planning Schedule B Foreign Accounts? Is reported interest or dividend income consistent with reported income? IRS Pre-Contact Planning Schedule D Were properties purchased and sold? Source of funds to acquire such properties? Review 1099 income reported from sales 5

61 IRS Pre-Contact Planning Schedule C Analyze gross receipts reported vs. third party sources Are expenses consistent with industry norms? Are expenses paid in cash? IRS Pre-Contact Planning Examiners are advised to review external sources, including Bureau of Labor Statistics Social Security Administration PO Office Database Department of Motor Vehicles Social Media Google/Yahoo/etc. State Licensing Databases For Retail Businesses The IRS will look at the type of goods sold and review industry analysis Does the revenue reported reflect the purchases reported with industry mark-up? IRS assumes that when goods costs go up that all sellers increase their prices to reflect this, maintaining the same mark-up Inventory levels will be reviewed from year to year to see if changes are properly reflected in the income/purchase numbers reported 6

62 Additional Research Examiner will research to see if any of the following has been filed a. FBAR Form 114 b. Suspicious Activity Reports c. Currency Transaction Reports/8300s Taxpayer Interview Examiner, because of the cash business, will be insistent on the taxpayer interview Will focus on accounting for cash receipts Is all revenue properly reflected on the return as filed? Will request copies of all bank accounts and then ask: Are all bank accounts present? Will focus on cash used to pay expenses as well Auditor knows taxpayer will be more responsive now when no issues have been raised yet Use of MinimumIncome Probes Called a Cash-T Analysis Examiner will review the expenditures Compare them to reported income Shortfall, if unexplained, is considered unreported income 7

63 T-Account Analysis by Examiners Bank Deposits as Unreported Income Bank deposits are prima facia evidence of unreported income Tokarski v. Commissioner Burden to show the IRS determination is wrong lies with the taxpayer Estate of Mason v. Commissioner IRS is required to consider non-taxable sources of income or non-deductible expenses DiLeo v. Commissioner IRS is required to follow all leads reasonably susceptible of being followed that income is from non-taxable sources Holland v. United States Net Worth Analysis Assets Liabilities = Net Worth Obtain a good starting net worth Assets at cost All expenses are factored in deductible and nondeductible Can increases be explained by known income If not, assumed to be unreported income 8

64 Digital Cash Identify deposits and payment sources to see if digital cash is being used Digital cash (also known as e-money, electronic cash, or digital currency) is just like real cash, except it s not tangible Electronic Funds Transfer (EFT), direct deposit, PayPal and WebMoney are all examples of electronic money These digital currencies offer irrevocable online payments, easy online access, and most importantly, identity protection Focus on Industries Examiner will seek to compare other data to gross receipts Hair dresser s calendar x average price v. gross receipts Reported industry standard will be used to compare Pizza shops Purchase of cardboard boxes inventory on hand = pizzas sold Bail Bondsman Bonds posted x 10% = receipts v. reported gross receipts Child care locations seek industry standard of cash v. credit card purchases and compare to reported gross receipts And Remember... Don t be afraid to Appeal! 9

65 Questions? 10

66 MAKING YOUR CLIENTS MORE APPEALING: PREPARING & HANDLING YOUR CLIENT S APPEAL Panelists Debra Reale, Esq., IRS Associate Area Counsel (Connecticut) Michael McLane, Esq., CPA, Acting Manager, IRS Appeals Office (Boston) Christin Bucci, Esq., Bucci Law Offices, P.A. Jeffrey M. Sklarz, Esq., Green & Sklarz LLC Agenda Appeals Judicial Approach and Culture (AJAC) Taking the case to IRS Appeals Overview of IRS Appeals Working with IRS Appeals Specific issues with employment tax appeals Life Under AJAC Rev. Proc Implements 1001(a) of the 1998 Reform Act. Enhances independence of Appeals versus compliance functions (Exam and Collections) through better defined ex parte rules. Retention of appeals on premature referrals Modification of rules concerning submission of new information to appeals 1

67 The New AJAC Rules Appeals Judicial Approach and Culture Promotes a quasi-judicial approach to how appeals handles cases New issues are not to be raised by Appeals Appeals also will not reopen an issue on which the taxpayer and the IRS are in agreement Appeals is not to be the finder of fact AJAC and new information If the taxpayer presents new information appeals is to send the case back to exam or collection If the taxpayer can show they presented it to exam/collection and it was ignored then appeals can consider it Can consider new arguments that support the taxpayer s position Exam will now try very hard to tie up all loose ends Collections will hold the case for 45 days and try to work out an arrangement Appeals 30 day letter or 90 Day letter? Opportunity to resolve without litigation Preparation is key Can request more time Face-to-face or by phone Supporting documentation is critical 2

68 IRS Appeals: An Overview TR Jurisdiction of IRS Appeals IRM 8 Appeals Manual provisions of IRM Rev. Proc (AJAC procedures and guidance) Terminology 30-day letter 90-day letter or Statutory Notice of Deficiency Appeals Officer Settlement Officer IRS Appeals: An Overview (cont.) Appeals Officers are busy. Do not waste their time! There are currently only about 760 Appeals Officers IRS Appeal: An Overview (cont.) Jurisdiction Non-docketed Appeals Protests following issuance of 30-day letter Docketed Appeals Referral to appeals after filing a Tax Court petition when you have not been to appeals before Pros and Cons: docketed vs. non-docketed appeals 3

69 IRS Appeal: An Overview What to Expect at Appeals Preparing for the Hearing An appeal hearing is not an opportunity to make the same argument you made at Exam and lost with make them better. Informal Role of the Appeals Officer Prepare like you are going to trial Your protest should be well drafted written advocacy (think legal brief) Provide the Appeals Officer with all of your legal and factual support prior to the hearing. Do not be afraid to supplement your protest. Be prepared to compromise; but don t be afraid to be firm. IRS Appeal: An Overview The Appeals Hearing The Hearing Appeals Officer presides IRS or taxpayer may record hearing on 10 days written notice Taxpayer maybe represented Multiple hearings may be required Goal is to reach a resolution IRS Appeal: An Overview Resolving and Appeal Settling Cases at Appeals Form 870-AD Closing Agreements Disagreement/No Settlement SND issued; Tax Court rights retained Referral back to Exam 4

70 IRS Appeal: An Overview Presenting New Issues at Appeals Non-docketed cases The IRS cannot raise new issues at Appeals. The taxpayer can raise new issues at Appeals, but Appeals may refer the issues back to Exam for full development. Appeals Officer has discretion to consider new issues raised by the taxpayer Docketed Cases IRS Counsel may raise new issues in pleadings, but IRS bears the burden of proof. IRS Appeals: Preparing for the Appeal Hearing Documentary proof Pre-hearing submissions Expert witnesses Valuation experts (real estate appraisers, business valuation experts) Technical experts (engineers, economists, medical professionals) Expert qualifications just because the federal rules of evidence do not apply at Appeals, don t ignore them Declarations for factual evidence IRS Appeals: Preparing for the Appeal Hearing Issues for Consideration Should the client attend? Will client be helpful or harmful? Will the Appeals Officer treat the case differently? Credibility of client Innocent Spouse cases Reasonable Compensation cases Should you record the hearing? When to terminate the hearing? Should you request a face-to-face? 5

71 IRS Appeals: Preparing for the Appeals Hearing If you decide to have the client attend: Client should be extremely well prepared both substantively and understand how to act Client must understand the difference between desired outcomes and probable outcomes Client must be willing to follow advice Client must control their emotions Client must be credible IRS Appeals: Preparing for the Appeals Hearing Keys to Client preparation: Do advise client of IRS interview and investigation techniques Do advise your client that the appeals conference is an opportunity to settle and confrontation will be counter-productive Do give direct answers to questions posed by the Appeals Officers Do acknowledge your case s weakness (this is huge for building credibility) Do be willing to have a frank discussion of the merits Do advise your clients of YOUR techniques and what she should expect you to do Do address easier to resolve problems first Do go into the conference with settlement authority IRS Appeals: Preparing for the Appeals Hearing Special Considerations: Making a qualified offer Whether to ignore the 30-day letter and go straight to tax court 6

72 An Offer They Can t Refuse IRC 7430 Qualified Offer Anytime from Appeals until 30 days before trial Sets the bar for who is the prevailing party Obtain costs from the IRS Legal fees Help settle your case! 19 Qualified Offer Dear Mr. : This is a Qualified Offer made pursuant to I.R.C. Sec. 7430(g). The taxpayer offers to settle for $.00 the proposed responsibility for her 2009 federal income tax return. This Offer shall remain open until the earliest of the date such offer is rejected, the date trial begins, or the 90th day hereafter in accordance with Treas. Reg. Sec Thank you. IRS Appeals: Preparing for the Appeals Hearing What does the presence of an attorney from IRS Counsel mean? Docketed status of appeal IRS considers the liability substantial Issues raised pose substantial policy questions 7

73 Specific Issues for Employment Tax Appeals Worker classification cases Employment tax assessments Post Appeals Mediation (PAM) Rev. Proc (4.01): Mediation may be used to resolve issues in cases that qualify under this revenue procedure while they are under consideration by Appeals. This procedure may be used only after Appeals settlement discussions are unsuccessful and, generally, when all other issues are resolved but for the issue(s) for which mediation is being requested. Post Appeals Mediation (PAM) PAM is NOT available for: Cases considered by an IRS campus site. Issues docketed in any court, designated for litigation, or under consideration for designation for litigation. "Whipsaw" issues, which are issues for which resolution with respect to one party might result in inconsistent treatment without the participation of the other party. Collection cases, except for certain offer in compromise and Trust Fund Recovery Penalty cases as provided for in Revenue Procedure Other issues listed in Revenue Procedure

74 Post Appeals Mediation (PAM): OIC and TRFP Cases OICs can be mediated if: There are complex calculations concerning collectability (i.e. future income calculations) Where there is a bona fide dispute of fact TRFPs can be mediated if: There is a bona fide dispute of fact Cannot be used to dispute collectability Post Appeals Mediation (PAM): Mediation Process Both parties must agree to mediate Filed with Appeals Team Manager Agreement to mediate is in writing and is specific as to issues The mediator will be an IRS Appeal employee trained as a mediator At the taxpayer s expense, the taxpayer may engage a co-mediator as long as the co-mediator is neutral At the conclusion of the mediation, the mediator submits a report to each party If there is a settlement, it is written up at the mediation as a Form 906 closing agreement Chief Counsel must approve OCI settlements in cases involving more than $50,000 Questions? 9

75 Claudia Hill Enrolled Agent NTPI Fellow Rescue Squad: Troubled Taxpayers Lawrence M. Lawler Certified Public Accountant Certified Tax Resolution Specialist Enrolled Agent NTPI Fellow LG Brooks Enrolled Agent Certified Tax Resolution Specialist NTPI Fellow LG Claudia Larry AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 1 Todays Objective: Provide Understanding of the IRS Offer in Compromise Program What To Do, How To Do It, When To Do, Why To Do It, and perhaps A Few War Stories AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 2 Financial Analysis 433-A (OIC) 433-B (OIC) 433-A 433-B 433-F AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 3 1

76 Collection Information Statements Forms with similar numbers different applications Financial evaluation Often the starting point of the solution 433-A and 433-B Some Installment Agreement Requests, PPIA, CNC, Etc. 433-F: Short Form 433-A (OIC) and 433-B (OIC) DATC & ETA OIC IRS Taxpayer s stuff AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 4 Value of Personal Property Exempt furniture and personal effects, $9,080 ($11,350) Not for 433-A(OIC) Exempt tools of the trade, $4,540 ($5,675) Not for 433-A(OIC) Special collections Both 433-A & 433-A(OIC) AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 5 Offer in Compromise Form 656 The OFFER One part of the contract Signed under the Penalty of Perjury Full disclosure required AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 6 2

77 Preparation of Forms List all property and Assign Value Quick Sale Value (Fair Market Value x 80%) Forced Sale Value (FMV x 75% x 80%=60%) Determine the difference between all income and allowed expense Equity in Assets plus available monthly income = Reasonable Collection Potential (RCP) Proprietors Sec. 5 & 6 on 433-A or 433-A(OIC) AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 7 Overview: Financial Data Equity Component Asset Values Home $400x80% $320K Auto $40x80% 32K 401-K $300x70% 210K Less: Encumbrances Mtge $250K Auto loan 30K 401-K loan 100K Equity $182K Income Component Income Wages (H) $ 8K Wages (W) 2K Allowable Expenses Total $ 9K Excess/mo. $ 1K Income component: $1K x 12 mo.=$12k Total $182K+12K = $194K AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 8 5/21/12 Changes Benefit Taxpayers (Now incorporated in IRM) Reduced future income calculation Income producing asset exclusion Cash of $1,000 Possible additional cash to meet living costs $3,450 equity in vehicles for POI or H&W family Reduced dissipation of assets No retirement of debt on 1 st $400 Delinquent State & Local tax AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 9 3

78 Fair Market Value of Real Estate Property tax assessment base Market comparable Current sales contract Recent appraisal Special circumstances of property AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 10 Equity in Real Estate Determine fair market value (FMV) Deduct necessary repairs, etc. Reduce FMV to Quick Sale Value (QSV) Subtract expenses of sale of property from Quick Sale Value Property tax arrearages Subtract encumbrances from QSV net of expense of sale Result equals equity amount AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 11 Value of Business Assets Consider the cost of dismantling, removing, moving, and re-installing Consider Availability Market Adaptability Proprietorship data Sections 5 & 6 of Form 433-A or 433-A (OIC) AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 12 4

79 Dissipation of Assets IRM Inclusion in RCP No expansion of scope to search for Clearly justify & document to include Five-year window When in relation to the liability How Transferred Funds received and how used Living, medical, another (included) asset Value of asset and t/p interest therein AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 13 Dissipation Examples No liability at date of transfer Smaller liability than dissipated amount Withdraw from IRA for business No liability prior to withdrawal Re-fi for living/medical Payment of unsecured debts Included in RCP Unless special circumstances exist Deliberate in anticipation=reject AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 14 Income & Expense on 433-A (OIC) Gross Income National Standard Expenses Medical Standard (National) Allowable Expenses Local Standards Exceptions AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 15 5

80 Gross Income Taxable and non-taxable Earnings of all types Net from Part 5, Pg. 6 (Schedule C) Depreciation? Business loans? Retirement income Social Security? Net from rental activity Similar adjustments as Schedule C Alimony? Child Support? AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 16 National Standard Expenses Food Household expenses Apparel and services Personal Care products Miscellaneous AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 17 Medical Standard (National) No documentation required for: Under 65 - $60 per month per person 65 and over - $144 per month per person Standard Is in addition to health insurance Actual expense exceeding standard Allowed with documentation Generally excludes elective cosmetic and dental AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 18 6

81 Local Standards Housing & Utility Standard Transportation Standard Lesser of Chart or Actual Exception Justify excess expenses AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 19 Housing & Utilities (Local) Lower of actual or chart Census Bureau & Bureau of Labor Statistics County and Family Size Includes: Mortgage or rent, property taxes, interest, insurance, maintenance, repairs, gas, electric, water, heating oil, garbage collection, telephone, cell phone and internet AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 20 Transportation Standard (Local) Ownership cost Same in all States Monthly operating expenses Regional based on taxpayer locale Married-allowed two Public transportation amount Possible to claim both? AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 21 7

82 Other (potentially) Allowable Expenses Child care Life insurance Taxes Disability insurance for self-employed Health care Union dues Court ordered payments Professional fees Involuntary deductions Expenses for physically or mentally Secured debt handicapped Accounting and professional fees for representing your client Expenses necessary for family health & welfare before IRS Dependent care Expenses for production of income AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 22 Reasonable Collection Potential(RCP) What can be collected from: Personal assets Personal monthly income Business assets Business monthly income AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 23 Summary 1.Reasonable Collection Potential from Assets 2.Amount Available from Income 3.Combine amounts above to determine total RCP 4.Step 3 is not the end, consider collection potential under bankruptcy or other possible reductions AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 24 8

83 Offers in Compromise DOUBT AS LIABILITY 656-L DOUBT AS COLLECTIBILITY 656 EFFECTIVE TAX ADMINISTRATION AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 25 Stated Objectives: Offer Program To resolve disputes Collect what they can Fresh start Get money unavailable through other means AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 26 Contradictions: AKA Tax Reconciliation 2006 Commencing 7/16/06 an OIC without low income exception must include: Lump-Sum OIC: 20% Partial payment Lump-Sum = 5 or fewer installments (monthly) May correct shortfall of 20% Existing Installment Agreement? Installment OIC: 1 st payment, and all due while OIC is pending Failure = Deemed withdrawal Existing Installment Agreement? AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 27 9

84 Waiver Authority IRS may waive required payments (low income) No 20%, or Installments No $186 administrative fee No fee on: Doubt as to Liability OICs AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 28 Streamlined OIC Income up to $100,000 Tax liability less than $50, AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 29 Application of Payments Taxpayer has the right to designate Failure to designate? Apply in the best interest of the government Non-refundable payment of tax AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 30 10

85 Unprocessable Any OIC that does not meet payment requirements may be returned to taxpayer as unprocessable IRS Keeps the money AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 31 OIC Options AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 32 Determination of Processability IRM ( ) OIC deemed not processable if: Taxpayer not in compliance All returns where taxpayer has a filing requirement despite Policy Statement P Will allow 30 days to comply What about SFRs? Estimated taxes-current year Enclose documentation One opportunity to correct In-business all returns filed, timely p/r tax deposits for quarter of filing OIC, trust funds paid or TFRP assessed Taxpayer in bankruptcy AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 33 11

86 Deemed Acceptance An OIC submitted shall be deemed accepted if not rejected before the date which is 24 months after the date of submission If tax liability is in dispute in any judicial proceeding the 24 month period is tolled AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 34 DATL Offer Form 656-L SF Discharged in bankruptcy SOL expired Tax not assessed Improperly assessed Tax was not due Penalty incorrectly assessed Never when previously adjudicated DATL OFFER AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 35 DATC Offer Complete 433-A (OIC) And 433-B (OIC), if needed Determine term and amount of payment Complete Form 656 Mail both 656 with 433-A(OIC) 433-B(OIC) if needed, and Attachments to IRS DATC OFFER AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 36 12

87 Future Income IRM instructs Offer Examiners on how to project future income SBSE Memorandum Discusses use of collateral agreements Expanded AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 37 Collateral Agreement Forms Form 2261 Collateral Agreement-Future Income (Indiv.) Form 2261 A Collateral Agreement-Future Income (Corp.) Form 2261-B 2261 B, Collateral Agreement-Adj. Basis of Specific Assets Form 2261 C Collateral Agreement-Waiver of NOLs, Cap. Losses, and Unused Investment Credits AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 38 Two ways to pay Cash offer 20% down payment, 5 or fewer installments, 5 months, 12 multiplier, plus Available equity Short term deferred offer Up to 24 months, 24 multiplier, plus Available equity AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 39 13

88 Effective Tax Administration OIC Not eligible for DATL or DATC Economic hardship, or detrimental to voluntary compliance Suggest: DATC, special circumstances AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 40 Economic Hardship Factors Long term illness Can t meet basic living expenses Can t borrow against equity Old Age Liquidation leaves taxpayer penniless Other circumstances AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 41 Factors Against Failure to file tax returns or pay tax for a number of years Deliberately avoided tax payment Tax Protestor AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 42 14

89 OIC Stops Enforced Collection But, can they still file a federal tax lien? AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 43 Miscellaneous Points Advise clients about processing time, etc. FAQ If employment taxes: Current quarter compliance (ongoing business) Will IRS remove a lien while an OIC is being processed? AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 44 Form 656 Signed under penalty of perjury Mail the offer to COIC Holtsville Memphis See 656-B AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 45 15

90 COIC Units AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 46 Offer Rejected Administrative Appeal Submit Another Offer Tax Court Petition (special circumstance) Installment Agreement or PPIA Nasty IRS Dude AMERICAN SOCIETY OF TAX PROBLEM SOLVERS 47 16

91 THE ACCOUNTANT S ROLE IN A CRIMINAL TAX INVESTIGATION Larry A. Campagna, Esq. Chamberlain, Hrdlicka, White, Williams & Aughtry Noelle Geiger, Esq. Grassi & Company CPAs Peter D. Hardy, Esq. Post & Schell, P.C. Thanks to Carolyn H. Kendall, Esq. for assisting with these slides The Accountant s Role in the Life of a Criminal Tax Case Help attorney & client understand strengths and weaknesses of government s position Develop and evaluate potential defenses Does defense contemplate fighting, or obtaining favorable plea Reconstruct financial data & perform related analyses Prepare potential tax returns and related filings Assist with pre-charging presentations to the government Serve as an expert witness at trial or sentencing 2 Defining the Accountant s Different Hats Bookkeeper Junior Return Preparer Return Preparer Investigator Client Representative Trial Assistant Testifying Expert 3 1

92 Potential Perils for Representatives Aiding or Assisting in the Preparation or Presentation of a False Return or Other False Document 18 U.S.C. 7206(2) Interference with Administration of the Internal Revenue Laws 18 U.S.C Don t let the client s problems become YOUR problems 4 Establishing & Maintaining Privilege Don t assume that work papers, notes, or s will be covered by privilege Safest course: write (or don t write) everything as though it later might be deemed to be not covered by privilege Fed. R. Crim. P. 16(b)(2) protects work product of the defendant s attorney or agent, other than scientific or medical reports 5 Establishing & Maintaining Privilege: Kovel United States v. Kovel, 296 F.2d 918 (2d Cir. 1961) Provides exception to general rule that presence of third party waives the attorney-client privilege Communications with non-attorney consultants are privileged if they are made in confidence for the purpose of obtaining legal advice from the lawyer Translator rationale Key elements in a Kovel agreement Timing Issues Consider use of second accountant 6 2

93 Eggshell Audit IRS civil examinations generate many IRS Criminal Investigation (IRS CI) investigations Primary goal Avoid criminal referral Secondary goals: Avoid fraud penalty Avoid substantial deficiencies 7 Preparing for Audit Interviewing the client Reviewing documents Independent research Interviewing the return preparer Identifying problem areas Selecting a strategy Cooperation vs. Silence 8 Dealing with the Revenue Agent Who should interface with the agent? Attorney vs. Accountant The initial meeting Responding to Information Document Requests (IDRs) Responding to the request for taxpayer interview Tour of taxpayer s business 9 3

94 Criminal Referral Based on Audit Tweel Doctrine United States v. Tweel, 550 F.2d 29 (5th Cir. 1977) Conducting a criminal investigation under the guise of a civil examination may constitute trickery, fraud, and deceit Remedy can be suppression if material deceit is proven IRS policy Role of Fraud Technical Advisors 10 Criminal Referral, Continued Discovery of firm indications of fraud warrants referral to IRS Criminal Investigation Division (IRS CI) IRM Indicators of fraud include: Substantial unexplained increases in net worth Spending beyond the taxpayer s means Deposits from unexplained sources substantially exceeding reported income Documents that appear to be altered or false Firm indications (affirmative acts) of fraud include: Omissions of specific items where similar items are included Concealment of bank accounts or other assets Failure to deposit receipts in business accounts Covering up sources of receipts 11 Handling the Current Year, Amended or Delinquent Returns Current year returns During examination or post-referral Fifth Amendment concerns Extensions FBARs and other associated required filings Amended returns Delinquent returns Failure to file cases Solicitation policy Voluntary disclosure practice Payment issues 12 4

95 Handling the Current Year, Amended or Delinquent Returns: the Dilemma Willfully failing to file required tax returns is a crime Accurate current return vs prior returns at issue Almost always represents an admission of prior inaccuracy Could be used as evidence of prior fraudulent intent Same problem with respect to any amended returns Constitutes concession of prior inaccuracy 13 Handling the Current Year, Amended or Delinquent Returns: the Dilemma Willfully failing to file required tax returns is a crime Accurate current return vs prior returns at issue Almost always represents an admission of prior inaccuracy Could be used as evidence of prior fraudulent intent Same problem with respect to any amended returns Constitutes concession of prior inaccuracy 14 Handling the Current Year, Amended or Delinquent Returns: Interplay with Prosecution Failure to address previous lack of tax compliance may incentivize auditor/special agent/prosecutor to make referral/charge criminally/what to charge Possible argument that amended returns reflect good-faith effort to correct prior mistake CANNOT reduce criminal tax loss at sentencing by filing amended returns and paying tax owed Failure to have attained full tax compliance can be very problematic at sentencing 15 5

96 The Grand Jury or Administrative Investigation & Plea Negotiations If possible, conduct parallel defense investigation Assist counsel in formulating technical tax defenses Assess wisdom of client attending proffer session Prepare counter-calculations of tax liability Assist in any pre-charging meetings with IRS-CI, DOJ Tax Division, and Office of the U.S. Attorney 16 Testing the Government s Tax Liability Calculations Extent of tax liability is key during audit, investigation, trial, and sentencing Tax due and owing is element of tax evasion Tax loss drives Sentencing Guidelines calculation Government s tax liability calculation may include: Non-taxable items: those resulting from pre-existing assets, loan, gift, inheritance, etc. Items resulting from disputed interpretation of tax code Unsupported extrapolations Items that did not result from requisite criminal intent Previously unclaimed deductions? Keeping out certain tax years can be critical 17 Trial Assist counsel in evaluating and combating government arguments and witnesses Create charts and exhibits Expert report under Fed. R. Crim. P. 16 Written summary of anticipated expert testimony, including general description of expert s opinions, bases and reasons for them, and expert s qualifications Not required to contain detailed justifications Must be disclosed upon government s request, after government has fulfilled its own discovery duties 18 6

97 Trial, Continued Trial Testimony Daubert test for admissibility of expert testimony Exhibits and charts are critical for effective testimony Summary witness testimony under Fed. R. Evid Not an expert under Rule 16 requiring prior notice and report Government may object to any attempt to introduce client s statements through forensic expert as hearsay CANNOT provide testimony directly on mental state Cannot (supposedly) testify as to substance of tax law Prove reliance or good faith mistake via forensic accountant s critique of client s former tax professional Often not admissible testimony 19 Sentencing Sentencing: Calculation of Tax Loss Key to defendant s advisory Guidelines sentencing range More specific tax calculation can defeat presumptive percentages Tax loss under Guidelines can differ from civil tax liability Defense can submit forensic tax report or testimony Plea stipulations on loss will control Guilty plea: Downward variance for extraordinary acceptance of responsibility due to Speedy payment of tax due and owing prior to sentencing Efforts to obtain funds to make necessary payments Affirmative assistance of defense forensic accountant in government s investigation 20 7

98 The New IRS 8300 BSA Exam: From Routine Compliance to Criminal Prosecution November 20, 2015 By: Michael A. Villa, Jr. Esq., Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP, Dallas, TX Peter D. Hardy, Esq., Post & Schell, Philadelphia, PA Larry A. Campagna, Esq., Chamberlain, Hrdlicka, White, Williams & Aughtry, Houston, TX Maria Papageorgiou, Special Agent, Criminal Investigation, Internal Revenue Service, New Haven, CT Specialized Agents Special Enforcement Program ( SEP ) Agents. Experts in the identification and development of cases with fraud potential. IRM Abusive Tax Avoidance Transactions ( ATAT ) Agents. See IRM 4.32 for guidance on the examination process for ATAT. Bank Secrecy Act ( BSA ) Examiners. We will focus on BSA exams in this panel discussion. IRM (BSA Examiner Responsibilities) IRM (BSA Special Procedures) 2 2 BSA Examiners For purposes of IRC 6103, the BSA Examiner is essentially working for Treasury, and not as an IRS employee, thus he/she cannot access tax returns or tax return information. IRM (3) The BSA/AML Examination Manual is located at: Manual.pdf For your convenience, the Examination Procedures for the AML Program is attached hereto at Exhibit A