what to do if the irs comes knocking
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WHAT TO DO IF THE IRS COMES KNOCKING USA Risk Group The Whole 9 Yards 9th Annual Executive Educational Services Charlotte, North Carolina Ballantyne Resort & Spa May 22, 2014 GARY BOWERS Johnson Lambert & Co. LLP Raleigh, NC 919.719.6411 CHARLES J. (CHAZ) LAVELLE Bingham Greenebaum Doll LLP Louisville, KY 40202 502.587.3557 © Bingham Greenebaum Doll LLP Life-Cycle of an IRS Audit Selection for Audit Audit vs. Inspection Types of IRS Audits How Far Back Can IRS Audit? Preparing For An Audit Conduct of the Audit Information Document Requests (IDRs) Agreed and Unagreed Issues Appeals and Litigation The Cost of Being Wrong 2 2 Audit Selection Matching (W-2, 1099, K-1?) DIF score Collateral — — — — Partners / Members / S-Corp Shareholder Officers / Directors Party to same transaction Trust / Beneficiary Referrals — Prior audit — Informant Large Case 3 3 Who gets Selected? (cont’d) IRS Projects Captives qualifying under Section 501(c)(15) Excise Tax-cascading Others? (15 Experts?) 4 4 Types of Audits Mail-In Audit Office Audit (IRS Office) — — — — Field Audit — — — — 5 Informal Needed items specified in letter One sitting Can reschedule if request made 5 Taxpayer or representative’s office Off premises? One coordinator? Multiple meetings Large taxpayers – every day for two years How Far Back Can the IRS Audit? 3 Years – Normal 6 Years – Omit 25% of Gross Income on Return Forever – No Return Filed (or False/Fraudulent Return Filed) Extending the Statute of Limitations Extending All Issues vs. Selected Issues 6 6 Preparing For An Audit Best Approach Is To Have A Good Foundation • Excellent Captive Manager • Well Conceived Feasibility Study • Good Purpose • Proper Structure and Insurance Program • Regulatory Compliance • Capitalization • Good Records • Corporate Formalities 7 7 Conduct of the Audit Representation and Power of Attorney (Form 2848) — Self — CPA — Lawyer Location of the Audit — Taxpayer’s location — CPA’s offices — Other 8 8 Conduct of the Audit (cont’d) Treat Agent — Professionally — Courteously — Provide good working conditions Information Document Request (IDR) — Written questions and responses — Oral explanations? — Interviews ? 9 9 Sample IDR 10 Sample IDR (cont’d) 11 Sample IDR (cont’d) 12 Sample IDR (cont’d) 13 Sample IDR (cont’d) 14 Sample IDR (cont’d) 15 IRS Goal All of the IDRs are aimed at addressing the below: — Non-tax Business Purpose/Sham/Economic Substance — Insurance Risk — Common Notions of Insurance — Risk Shifting — Risk Distribution 16 16 Agreed Issues In an audit, one or more issues may be settled, even if other issues are not Form 870 is used to agree to the settled issues While in practice this ends the audit of agreed issues, technically the Taxpayer can file a claim for refund and the IRS can reopen (if it gets internal permission for the second audit) If all issues are settled, a “no change” letter is issued 17 17 Unagreed Issues Notice of Proposed Adjustment (NOPA) Response to NOPA Factual vs. Legal Differences “Hazards of Litigation” – Agent can’t use Technical Advice Request Advance Issue Resolution – early referral of issue(s) to the IRS Appeals Office 18 18 Ending The Audit Settlement and Negotiations Meetings With Examiner (and Supervisor) Agreed Upon Issues (Form 870) Unagreed Issues Fast Track – mediation with IRS auditor, mediated by an Appeals Officer Appeal for Appeals Office consideration 19 19 Appealing Unagreed Issues IRS “30-Day Letter” Protest – the response to the “30 Day Letter” IRS Rebuttal – the response to the Protest Ex Parte meeting – Appeals and Examiner Meeting(s) With Appeals Officer(s) Statue of Limitations 20 20 Appeals Conference Appeals Office’s mission is to settle cases Very informal — 1 to 3 Appeals Officers — No court reporters or other third parties Appeals Officer can consider “Hazards of Litigation” First conference and subsequent meetings Settlement – time to settle 870-AD – normally neither side is to reopen Closing Agreement Post Appeals Mediation 21 21 Going To Court 90-day Letter – Statutory Notice of Deficiency Legal Representation Attorney-Client Privilege Attorney Work Product Cost of Litigation 22 22 Going To Court: Litigation Options PAY FIRST JUDGE/JURY PLACE OF TRIAL TAX COURT DISTRICT COURT COURT OF FED. CLAIMS NO YES YES JUDGE OPTION* *Judge or Jury JUDGE LOCAL** LOCAL LOCAL** **Judge Travels from DC % OF TAX CASES GOVT. LAWYER **Judge Travels from DC 100% 2% 50% IRS DOJ DOJ 23 23 The Cost of Being Wrong Is It “Insurance” for Tax Purposes? Disallowance of Premium Deduction to Payor No Premium Income/Reserve Deduction for Captive? If It is Not a “Premium,” What Is It? — Capital — Loan — Deposit — Indemnity Payment “Other” Income? 24 24 The Cost of Being Wrong (cont’d) Interest First Quarter 2014 Overpayment Underpayment Deduct Individual 3% 3% No Corporate 2% 3% Yes Large Corporate .5%* 5%** Yes * Overpayment above $10,000 ** Underpayment of $100,000 beginning 30 days after 30-day or 90-day letter 25 25 The Cost of Being Wrong (cont’d) Penalties: 20% - Negligence/Substantial Understatement 40% - No Economic Substance (20% if disclosed) - Undisclosed Foreign Financial Asset 75% - Fraud “Reasonable Cause” “Act in Good Faith” Relief — Not available for “Economic Substance” Penalties 26 26 The Cost of Being Wrong (cont’d) Should You Pay or Deposit the Unagreed Assessment? • Interest on Deficiency • Uncertain Tax Position (UTP) Disclosures • Audited Financial Statement Implications 27 27
