2016 EXAM PANEL LINKS

Transcription

1 2016 EXAM PANEL LINKS Pub 1 Pub 5 Pub 3498 The Examination Process Pub 3498A Examinations by Mail IRM 4.10 Examining Process Tax Information for Business IRS Audit Technique Guides Online Small Business & Self Employed Tax Center Self Employed Individuals Tax Center IRS Freedom of Information IRS VIDEO SECTION

2 ADDITIONAL EXAMINATION INFORMATION Tax-Scams-How-to-Report-Them Report Suspected Abusive Tax Promoters or Preparers Identity-Protection-Homepage Offshore-Voluntary-Disclosure-Program National-Research-Program-(NRP) Fast-Track-Settlement-Info Remember - One Size does not fit all Three different types of examinations 1) Correspondence Audit a) Usually limited to limited number of issues (2 to 4) b) Issues generally are non-business items (Schedule A, Exemption, W-2/1099 income, earned income tax credit) c) Examination handled by mail and generally limited to one year d) Does not include calculation errors e) Handled by mail f) Duration 1 2 months g) CP-2000 letters are not examinations 2) Office Examination Audits a) Usually limited to a limited number of issues b) May include the audit of a small to medium Schedule C Business c) Does not include the audit of other related returns (corporation, 1120S returns, Partnerships) Tax compliance officer may request to inspect these returns, but if audit is necessary, it will be handled by a Revenue Agent (Field Audit) d) Taxpayer will receive an appointment letter (or a telephone contract from tax compliance officer followed by a letter e) Audit conducted in Local IRS Office f) Appointment letter will outline specific issues being examined and items needed to support item g) Examination may be expanded to additional items and years h) Tight specific time line for responses. Total excepted time from appointment letter to closure 4-6 months

3 3) Field Examination Audits a) Audit is more complex and frequently involves multiple entitles and years. The audit may start out directed to key issues, but can be expanded to other issues, years and entities including Partners, Corporation, Corporate Officer, Partners, and other taxpayers. b) Examinations are conducted by Revenue Agents at the business site, or representative s office. c) Appointment letter will identify initial issues and documents needed to assist in the audit process d) Audit can range from 1 day to several months, depending on the scope of the audit and availability of requested information. Revenue Agent should enter into an agreement with the representative as to the scope of the audit and expected completion date. Depending on cooperation, scope of audit, results of initial year examined this mutual agreement date will change. PRACTITIONER KEY POINTS 1) Prepare for Audit. a) Know what issues are being examined and what you need to support the time b) Cooperate with Auditor/Agent c) Be honest with Auditor/Agent if you cannot secure information or keep an appointment, let them know d) Return telephone calls and confirm with a follow-up letter e) Reduce agreements (needed documents, issues closed to writings) f) Keep commitment dates Who Selects Returns for Audit & Sets Scope? 1) The selection process starts with a computerized selection process using a discriminate identification function (DIF) process. The details of the DIF Formula are developed from information developed over the year form national research program studies. 2) The returns are physically reviewed and classified by experienced examination personnel. If the return is deemed to warrant audit, key issues are identified and the return is classified for correspondence, office or field examination. 3) When the selected returns are received at the local level, the manager and/or examiner again reviews the return and determines the items to be audited. Scope of Audits The preliminary scope of the audit is determined by the above noted process; However, the scope of the audit can be expanded or contracted by the auditor or manager.

4 What to do if Auditor & Representative disagree 1) First understand why the auditor feels an adjustment is necessary 2) Request a meeting with the manager 3) Request and Appeals Conference (If this is a field case, you can request a settlement/mediation conference before the case closed from the field). You can still appeal if agreement cannot be reached. Audit Conclusion 1) At the conclusion of the Examination the Examiner/Auditor/Agent will issue a Report of Examination (RAR) also known as a 30 day letter. 2) After the 30 day letter the practitioner can do any of the following: a) Present additional information to be considered (does not extend the 30 day letter response date)\ b) Agree with the findings by signing the agreement section of the report c) Request a meeting with the auditors manager (does not extend 30 day period) d) Make a formal appeal of the findings and submit a written request for an appeals hearing e) Agree with the proposed adjustments/assessment and request a payment agreement or a meeting with a Revenue Officer. f) None of the above actions a 90 day letter (Notice of Statutory Notice will be issued) *The office audit report process is slightly different in that the Examiner will issue a Report of Examination after each meeting, then by starting the 30 day clock. If additional information is not received, or a request to appeal, the case will be sent to have a 90 day letter stating notice of deficiency issued. Examples of Different Types of Audits Correspondence Audit Taxpayer claims a $50,000 alimony payment on his/her return. Letter to taxpayer will request for a copy of the divorce decree setting out the alimony agreement and proof of payment. Also, if not previously provided, the taxpayer will be requested to provide the name and Social Security number of the spouse. Office Examination In addition to the alimony issue noted above, the taxpayer has claimed $50,000 in medical expenses and has a small Schedule C from his/her landscaping business with $25,000 of gross receipts and $60,000 of expenses. Field Examination Same items as noted above, but in addition, the Schedule C (Landscaping business) the taxpayer is a 50% shareholder in the Build-It Big Construction Company, a corporation, and Tie it Down Tents, a Partnership.

5 Field Examination Updates Matt Hutchinson June 2nd, 2016

6 Fiscal Year 2016 Field Examination Program Updates Flow-through entities Offshore tax evasion - OVDI National Research Programs Preparer visits and examinations Fast Track Settlement Program

7 Flow-through Coverage Increase in flow-through entities Partnership filings Complex partnership structures

8 National Research Program

9 Preparer Visits and Examinations SB/SE supports visits for: Return Preparer Office Earned Income Tax Credit Office

10 Fast Track Settlement Program Now Offered Nationwide Launched nationwide on July 1, 2013 IRM , Issue Resolution Benefits include; Reduced overall case time Reduced interest costs Reduces taxpayer burden

11 Field Examination Questions and Answers

12 SOURCE AND APPLICATION OF FUNDS METHOD JAW WAGES 10,000 WITHHOLDING 1,000 INTEREST INCOME 100 REAL ESTATE TAXES 9,000 BEGINNING BANK BALANCE 400 INTEREST EXPENSE 20,000 SCHEDULE C GROSS RECEIPTS 20,000 SCHEDULE C EXPENSE 40,000 TOTALS 30,500 70,000 BANK DEPOSIT AND CASH EXPENDITURES METHOD DEPOSITS 50,000 LESS: LOAN 10,000 PLUS: CASH EXPENSES 20,000 GROSS RECEIPTS 60,000 GROSS RECEIPTS P/R 40,000 DIFFERENCE 20,000

13 CHARLES K. MONTECINO CERTIFIED PUBLIC ACCOUNTANT 1973 Graduate of Rutgers University Self employed as a Certified Public Accountant: 140 South Broadway, Pitman, NJ Licensed Certified Public Accountant: New Jersey, Pennsylvania Member of: American Institute of Certified Public Accountants New Jersey Society of Certified Public Accountants Pennsylvania Institute of Certified Public Accountants The American Society of Tax Problem Solvers - Certified Tax Resolution Specialist New Jersey Society Certified Public Accountants Committee on Cooperation with the IRS American Institute of Certified Public Accountants Tax Practice Section Voted Best of Gloucester County 2003 and 2004 in New Jersey Instructor of Continuing Professional Education courses for NJSCPA and ASTPS in addition to an income tax instructor for the Fairleigh Dickinson CFP course.

14 INDIRECT METHODS OF PROVING INCOME IRM By Jo-Ann Weiner, EA, CFE

15 LESSON OBJECTIVES DEVELOP AN UNDERSTANDING OF THE CONCEPTS OF INDIRECT METHODS DISCUSS THE USES OF INDIRECT METHODS AND WHEN EACH IS MOST APPROPRIATE FOR USE CALCULATE A SIMPLE INDIRECT METHOD OF PROOF

16 MINIMUM INCOME PROBES Done on every audit You should perform one as well Consider Cash T/Source and Application of Funds Consider non-taxables When reconciling deposits for gross receipts reconcile 14 months Determine why excess funds exist Are funds co-mingled?

17 INDICATORS USED TO INITIATE AN INDIRECT METHOD OF PROVING INCOME BOOKS AND RECORDS DON T RECONCILE TO THE RETURN OR THE BOOKS AND RECORDS DON T EXIST EXCESS UNEXPLAINED DEPOSITS NO METHOD TO THE RETURN OR THE RECORDS OR THE METHOD USED DOES NOT REFLECT INCOME INADEQUATE INTERNAL CONTROLS CO-MINGLING OF FUNDS NO INCOME ON DEPOSIT USES CASH INSTEAD OF DEPOSITING HOW DOES T/P KEEP TRACK?

18 INDICATORS (CONTINUED) FINANCIAL ACTIVITIES DO NOT APPEAR IN BALANCE TO RETURN GROSS PROFIT % CHANGES ON PRIOR AND SUBSEQUENT REVIEWS ARE INCONSISTENT

19 MATERIAL UNDERSTATEMENT DISCUSSION WITH MANAGER BY TECHNICIAN IS MANDATORY WHERE UNDERSTATEMENT IS $10,000 OR MORE Fraud considerations

20 INADEQUATE RECORDS LETTER EXISTS ANOTHER DISCUSSION

21 IN DEPTH EXAM OF INCOME RECOMMENDED WHEN: INCOME DOES NOT RECONCILE TO BOOKS/RECORDS UNEXPLAINED DEPOSITS LACK OF INTERNAL CONTROL INDICATION OF UNREPORTED INCOME (VS. A FIRM INDICATION OF UNREPORTED INCOME) NOTE AN IN DEPTH EXAM INCLUDES THE USE OF 3 RD PARTIES (T/P SHOULD BE GIVEN THE CHANCE TO VERIFY FIRST) another discussion

22 SPECIFIC ITEMS VS. INDIRECT METHODS SPECIFIC ITEMS AND DIRECT EVIDENCE IS PREFERRED OVER INDIRECT METHODS INDIRECT METHODS REQUIRE A LIKEY SOURCE OF CASH SPECIFIC ITEMS ARE NOT EASY TO IDENTIFY; FOR EXAMPLE, IN A GROCERY STORE

23 REMINDERS WHEN RECONCILING DEPOSITS TAKE OUT NON-TAXABLES, TRANSFERS, LOANS, GIFTS, INHERITANCES BE READY TO VERIFY ITEMS REMEMBER CASH HOARD

24 TYPES OF INDIRECT METHODS SOURCE AND APPLICATION OF FUNDS METHODS BANK DEPOSITS AND CASH EXPENDITURES METHODS MARKUP METHOD UNIT AND VOLUME METHOD NET WORTH METHOD

25 IRC 446(b) Neither the Code or Regulations define or specifically authorize use of indirect methods. IRC 446(b) PROVIDES THAT IF NO METHOD OF ACCOUNTING HAS BEEN REGULARLY USED BY THE TAXPAYER OR IF THE METHOD USED DOES NOT CLEARLY REFLECT INCOME, THE COMPUTATION OF TAXABLE INCOME SHALL BE MADE AS, IN THE OPINION OF THE SECRETARY, DOES CLEARLY REFLECT INCOME.

26 BURDEN OF PROOF IN UNREPORTED INCOME CASE SERVICE HAS THE BURDEN TO PROVE ITS CASE. LOOK FOR ERRORS SUCH AS DUPLICATIONS WAS CASH HOARD CONSIDERED?

27 FINANCIAL STATUS AUDIT TECHNIQUES PER IRC 7602(e) IRS CAN T USE FINANCIAL STATUS AUDIT TECHNIQUES UNLESS THERE IS A REASONABLE INDICATION THAT THERE IS UNREPORTED INCOME

28 STATEMENT OF ANNUAL ESTIMATED PERSONAL AND FAMILY EXPENSES CAPTURES PERSONAL LIVING EXPENSES TAXPAYER TO PROVIDE INFORMATION REGARDING EXPENSES BLS BUREAU OF LABOR STATISTICS CAN BE ACCESSED AT

29 CASE LAW FOR USING STATISTICAL DATA MILLER V COMMISSIONER PORTILLO V COMMISSIONER SENTER V. COMMISSIONER

30 SELECT PROPER METHOD TO USE WHEN INCOME IS NOT DEPOSITED, A BANK DEPOSIT ANALYSIS IS NOT APPROPRIATE WHEN CASH OUTLAYS CANNOT BE DETERMINED SOURCE AND APPLICATION OF FUNDS MAY NOT BE THE PREFERRED METHOD

31 SOURCE AND APPLICATION OF FUNDS METHOD ANALYSIS OF CASH FLOWS COMPARISON OF ALL KNOWN EXPENDITURES TO ALL KNOWN RECEIPTS FOR THE PERIOD NET INCREASES AND DECREASES IN ASSETS AND LIABILITIES ARE CONSIDERED ALONG WITH NONDEDUCTIBLE EXPENDITURES AND NONTAXABLE INCOME EXCESS EXPENDITURES OVER INCOME IS THE ADJUSTMENT TO INCOME ADJUST FOR ACCRUALS

32 BANK DEPOSITS AND CASH EXPENDITURE METHOD DEPOSITS AS RECONCILED LESS NONTAXABLES PLUS CASH EXPENSES ADJUST FOR ACCRUALS

33 IN CLOSING The material contained in this power point was prepared from consolidating and referencing the Internal Revenue Manual , the Internal Revenue Code and Audit Technique Guides. The practical applications, certain examples, and discussions are mine from experience and knowledge obtained over 35 years of working as a Revenue Agent, Group Manager, and finally Territory Manager at the IRS. Jo-Ann Weiner, EA, CFE, J. L. Weiner and Associates, LLC, 10,000 Lincoln Drive East, Suite 201, Marlton, NJ

34 Jo-Ann Weiner, EA, CFE founded J.L. Weiner & Associates, LLC in As a Forensic Tax Accountant, Jo-Ann s practice consists of tax controversy resolution, assisting in divorce cases, and criminal work. She had over 35 years of experience with the IRS as a Revenue Agent auditing federal tax returns and working as a special enforcement agent on civil cases, criminal cases, and grand jury cases. She had served as an expert witness testifying in court for the government. After retirement from the IRS, Jo-Ann worked for the IRS as an outside contractor teaching Corporate Taxation to Revenue Agents. Jo-Ann is a Certified Fraud Examiner experienced in the examination and determination of corporate fraud and embezzlements. She is a director of the New Jersey Society of Enrolled Agents and a member of the Association of Certified Fraud Examiners. Jo-Ann received NAACP s Frances Hooks Award in 2014 for showing courage in promoting diversity and building bridges across cultures. Jo-Ann volunteers her time as a member of the Executive Leadership Team for the American Heart Association.

35 Matthew Hutchinson Matt graduated Rutgers University in 2004 and began his IRS career in 2005 as a revenue agent. He began as a manager in 2012 in the Edison post of duty. After a year and half, Matt became a manager in the Cherry Hill office for field agents.