The Internal Revenue Service:
Everything You Always Wanted To
Know But Were Afraid To Ask
Presented By:
Robert C. Webb, Member
Frost Brown Todd, LLC
September 28, 2006
Bob Webb 2006©
Robert C. Webb
• Member of Frost Brown Todd, LLC,
Louisville, Kentucky
• Offices in Kentucky, Indiana, Ohio and
Tennessee
• Education
– Georgetown University Law Center,
LLM, 1990
– University of Louisville, Louis D.
Brandeis School of Law JD, 1988
– University of Kentucky, BS, 1985
September 28, 2006
2
Bob Webb 2006©
Robert C. Webb
• Practice Areas
– Tax Controversy and White Collar
Crime
– Business and Commercial
Litigation
September 28, 2006
3
Bob Webb 2006©
Overview
1.
2.
3.
4.
5.
6.
Understanding the IRS Organization
Audit Risks for Taxpayers
Fighting The IRS
What Makes a Case Criminal vs. Civil
Hot Topics for IRS Enforcement
Q&A
September 28, 2006
4
Bob Webb 2006©
1. Understanding the IRS Organization
September 28, 2006
5
Bob Webb 2006©
Taxes are Constitutional
• 16th Amendment gave Congress the power
to tax income
• Tax Protestors fail
September 28, 2006
6
Bob Webb 2006©
Who Controls IRS
• Legislative (Congress)
• Executive (President)
• Judicial (Courts)
September 28, 2006
7
Bob Webb 2006©
Legislative Branch
• Internal Revenue Code
• Committee Reports
• Funding
September 28, 2006
8
Bob Webb 2006©
Executive Branch
• Treasury Department
• IRS Commissioner
• Treasury Secretary
September 28, 2006
9
Bob Webb 2006©
Judicial Branch
• U.S. Tax Court
• U.S. District Court
• U.S. Court of Federal Claims
September 28, 2006
10
Bob Webb 2006©
Who Represents the IRS
• IRS Lawyers
• Department of Justice Civil Tax Division
September 28, 2006
11
Bob Webb 2006©
Federal Circuit Courts
• 12 Courts for 11 Circuits and the District of
Columbia
• Taxpayers Appeal to these Courts
• U.S. Supreme Court
September 28, 2006
12
Bob Webb 2006©
IRS Organization
• Post 1998 Reform Act
• IRS Oversight Board (Policy and Strategy)
• 4 Operating Divisions
• Specialized IRS Units
September 28, 2006
13
Bob Webb 2006©
What Rules Must the IRS Follow
• Treasury Regulations
• Revenue Rulings/Procedures
• Letter Rulings
• Internal Revenue Manual (“IRM”)
September 28, 2006
14
Bob Webb 2006©
2. Audit Risks for Taxpayers
September 28, 2006
15
Bob Webb 2006©
IRS Examinations
• Service Center (“DLN”)
• Discriminate Information Function (“DIF”)
• Multifactor Scoring Process
• Disproportionate Ratios
• Refund Claims
September 28, 2006
16
Bob Webb 2006©
Audit Triggers
• Home Based Businesses
• Excessive Travel and Entertainment
Expenses
• Excessive Charitable Contributions
September 28, 2006
17
Bob Webb 2006©
Lowering Audit Risks
• File an Extension
• Attach Rider to Return
• Avoid Disproportionate Deductions
September 28, 2006
18
Bob Webb 2006©
Preventing An Audit After Selection
• No Second Examinations
• Check the Statute of Limitations
– 3 years
– 6 years
September 28, 2006
19
Bob Webb 2006©
IRS Audit Focus
• Tax Gap $345 Billion
• Taxes due and not paid
• National Research Project (“NRP”)
September 28, 2006
20
Bob Webb 2006©
IRS Automated Under-Reporter
Program
• Targets Tax Gap
• 4 Million AUR Notices Issued
• $3.9 Billion in Tax Assessments
• IRS Matching Program (CP 2000 Notice)
September 28, 2006
21
Bob Webb 2006©
How to Prepare for an Audit
• Review Information Document Request
• Prepare and File Power of Attorney
• Review Tax Returns, Work Papers and
Source Documents
• Review Case Law, Regulations and the
IRM
September 28, 2006
22
Bob Webb 2006©
How to Handle an Audit
• Documents Bates Stamped and
Chronological Order (“ACP”)
• Pre-Audit Conference with Revenue Agent
• Document all Contacts with Agents
• Copy all Documents for the Agent
• Keep Agent Busy
• Use Affidavits for Facts
September 28, 2006
23
Bob Webb 2006©
IRS Summons Authority
• IRS Summons (IRC §7602)
• Not Self-Enforcing
• Powell Factors
• Motion to Quash
September 28, 2006
24
Bob Webb 2006©
Conclusion of Audit
•
•
•
•
Closing Conference
No Change
Agree -- Form 870
Disagree -– Thirty Day Letter
– Ninety Day Letter
September 28, 2006
25
Bob Webb 2006©
Final Thoughts
• Dealing with Difficult Agents
• Collecting Attorney Fees (IRC §7430)
• Shifting the Burden of Proof to the IRS
(IRC §7491)
September 28, 2006
26
Bob Webb 2006©
3. Fighting the IRS
September 28, 2006
27
Bob Webb 2006©
IRS Appeals Offices
• Administrative Forum for Contesting IRS
Compliance Actions
• 80% to 90% of Cases Resolved
• Hazards of Litigation is Key
September 28, 2006
28
Bob Webb 2006©
When to Seek Appeals Office Review
• NON-DOCKETED Cases
• 30 Day Letter (Proposed Deficiency)
• Collection Actions
• Refund Denied
• Docketed
• Regular Cases
• S-Cases
September 28, 2006
29
Bob Webb 2006©
How to Seek
Appeals Office Review
• Respond to 30 Day Letter
• Greater than $25,000 requires a Written Protest
• Small Case Procedure
September 28, 2006
30
Bob Webb 2006©
Preparing for Appeals Conference
• Freedom of Information Act Request
• IRS Positions
• Affidavits for Facts
• Key CIRCUIT Caselaw
• Offer to Settle
September 28, 2006
31
Bob Webb 2006©
Settling with Appeals
• Negotiation Strategy
• IRS Form 870 or 870-AD
September 28, 2006
32
Bob Webb 2006©
Alternative Dispute Resolution
(“ADR”)
• Fast Track Mediation
(Rev.Proc. 2003-41)
• Arbitration
September 28, 2006
33
Bob Webb 2006©
Final Thoughts
• Qualified Offers
• Beware of IRC §6673 Penalties
• Form 870, Closing Agreement or Stipulations
• Settled Cases Are Generally Not Reopened
Absent Fraud
September 28, 2006
34
Bob Webb 2006©
Special IRS Collections Matters
• Collection Due Process (“CDP”)
• Collection Appeals Process (“CAP”)
• Offer in Compromise
• Trust Fund Recovery Penalty
• Equivalent Hearing
September 28, 2006
35
Bob Webb 2006©
A Taxpayer’s Secret Weapon
• Taxpayer Assistance Order (“TAO”)
• IRS Form 911
• 10 Year Statute of Limitations from
Assessment
September 28, 2006
36
Bob Webb 2006©
CDP Hearing
• Federal Tax Lien Filed
• Notice of Intent to Levy
• Suspends Collection Activity
• File IRS Form 12153 to Request
• Judicial Review
September 28, 2006
37
Bob Webb 2006©
CAP Hearing
• Expedited Appeal of Collection Actions
BEFORE They Occur
• Proposed Lien Filing; Installment
Agreement Rejected
• Levies That Have Attached
• Group Manager Meeting Required
• No Judicial Review
September 28, 2006
38
Bob Webb 2006©
New Offer in Compromise Rules
• TIP&R Act of 2005 (IR 2006-106)
• July 16, 2006 Effective Date
• 20% of Offer Amount (Nonrefundable)
(Unless Waiver)
September 28, 2006
39
Bob Webb 2006©
Fighting the IRS In Court
• Tax Court
• Federal District Court
• U.S. Court of Federal Claims
• Bankruptcy Court
September 28, 2006
40
Bob Webb 2006©
Tax Court Tickets
• If Appeals Fails to Resolve a Case
Day Letter”)
(“90
• Collection Due Process (“CDP”)
• Innocent Spouse
• Interest Abatements
• Worker Classifications and Amount of
Employment Taxes Owed
September 28, 2006
41
Bob Webb 2006©
Top 10 Litigated Issues
• CDP
• Gross Income (§61)
• Failure to File, Negligence and Frivolous
Penalties
• Trade or Business Expense (§162)
• Family Status
• Innocent Spouse
• Summons Enforcement
• Trust Fund Recovery Penalty
September 28, 2006
42
Bob Webb 2006©
4. What Makes a Case
Criminal vs. Civil
September 28, 2006
43
Bob Webb 2006©
What Makes a
Tax Case Criminal
• Amount of Money Involved
• Badges of Fraud/Concealment
• Pattern of Conduct
• High Profile Taxpayer
• Tax Professional
September 28, 2006
44
Bob Webb 2006©
What Is The
Criminal Investigation Division
• CID Has Approximately 4,400 Employees
World Wide
• 2,800 Special Agents
• CID Activity in 2005
September 28, 2006
45
Bob Webb 2006©
How IRS Special Agents Work
• Surprise Visits are Key Despite Miranda
Type Warning
• Always two Agents
• Beware of Joint CIVIL and CRIMINAL
Investigations
September 28, 2006
46
Bob Webb 2006©
How to Deal with
IRS Special Agents
• Get Authority from your Client to Convey
Confidential Information
• Keep a Numbered Set of Copies for All
Documents Given to Special Agents
• Have Witnesses Present for Any
Discussions
• IRC §7525 Privilege Does Not Apply
September 28, 2006
47
Bob Webb 2006©
Advice to Taxpayers
• No Destroying or Altering Documents
• Do Not Tell a CPA or Tax Preparer What Is on
Your Mind
• Hire an experienced Criminal Tax Lawyer
• Do Not Talk to Third Parties about the Case
September 28, 2006
48
Bob Webb 2006©
5. Hot Topics for IRS Enforcement
September 28, 2006
49
Bob Webb 2006©
CID Investigative Priorities
•
•
•
•
Tax Return Preparer Fraud
FINCEN and FBAR Compliance
Tax Haven Abuses
Tax Shelters (Are Factual Assumptions in
Tax Opinions Realistic?)
• Trusts to Conceal Income
• Cash Economy
• Failure to Withhold Taxes
September 28, 2006
50
Bob Webb 2006©
Help for Tax Professionals
• Contingency Fee Cases in Proposed
Rules to Circular 230
• Award of Attorney Fees
• Taxpayer Advocate Is Geographical
• MY E-Mail:
September 28, 2006
BWebb@FBTLAW.COM
51
Bob Webb 2006©
Q&A
September 28, 2006
52
Bob Webb 2006©
Robert C. Webb
Frost Brown Todd, LLC
400 W. Market Street, Floor 32
Louisville, Kentucky 40202
502-589-5400
bwebb@fbtlaw.com
www.frostbrowntodd.com
September 28, 2006
53
Bob Webb 2006©
Table of Contents
The Internal Revenue Service: Everything You Always
Wanted To Know But Were Afraid to Ask……………………………………... 1
Robert C. Webb………………………………………………………………….. 2
Overview………………………………………………………………………….. 4
1.
Understanding the IRS Organization………………………………...5
Taxes are Constitutional……………………………………………… 5
16th Amendment gave Congress the power to tax income….. 6
Tax Protestors fail………………………………………………... 6
Who Controls IRS……………………………………………………... 7
Legislative (Congress)……………………………………………7
Executive (President)……………………………………………. 7
Judicial (Courts)…………………………………………………...7
September 28, 2006
54
Bob Webb 2006©
Table of Contents (cont’d)
Legislative Branch……………………………………………8
Internal Revenue Code……………………………….. 8
Committee Reports…………………………………….8
Funding………………………………………………….8
- Executive Branch………………………………………........ 9
Treasury Department…………………………….........9
IRS Commissioner……………………………………..9
Treasury Secretary……………………………………. 9
- Judicial Branch……………………………………………...10
U.S. Tax Court………………………………………...10
U.S. District Court…………………………………….10
U.S. Court of Federal Claims………………………..10
Who Represents the IRS……………………………………………. 11
- IRS Lawyers………………………………………………... 11
- Department of Justice Civil Tax Division………………… 11
-
September 28, 2006
55
Bob Webb 2006©
Table of Contents (cont’d)
Federal Circuit Court………………………………………………… 12
12 Courts for 11 Circuits and the District of Columbia……… 12
Taxpayers Appeal to These Courts…………………………... 12
U.S. Supreme Court……………………………………………. 12
IRS Organization……………………………………………………...13
Post 1998 Reform Act…........................................................ 13
IRS Oversight Board (Policy and Strategy)………………….. 13
4 Operating Divisions…………………………………………...13
Specialized IRS Units…………………………………………...13
What Rules Must the IRS Follow…………………………………... 14
Treasury Regulations………………………………………...... 14
Revenue Rulings/Procedures…………………………………. 14
Letter Rulings…………………………………………………… 14
Internal Revenue Manual (“IRM”)……………………………...14
September 28, 2006
56
Bob Webb 2006©
Table of Contents (cont’d)
2.
Audit Risks for Taxpayers…………………………………………... 15
IRS Examinations……………………………………………………. 16
Service Center (“DLN”)………………………………………… 16
Discriminate Information Function (“DIF”)…………………… 16
Multifactor Scoring Process…………………………………… 16
Disproportionate Ratios………………………………………... 16
Refund Claims…………………………………………………...16
Audit Triggers………………………………………………………… 17
Home Based Businesses……………………………………… 17
Excessive Travel and Entertainment Expenses…………….. 17
Excessive Charitable Contributions…………………………...17
Lowering Audit Risks………………………………………………… 18
File an Extension……………………………………………….. 18
Attach Rider to Return…………………………………………. 18
Avoid Disproportionate Deductions…………………………... 18
September 28, 2006
57
Bob Webb 2006©
Table of Contents (cont’d)
Preventing An Audit After Selection………………………………... 19
No Second Examinations……………………………………… 19
Check the Statute of Limitations……………………………… 19
- 3 years……………………………………………………….19
- 6 years……………………………………………………….19
IRS Audit Focus……………………………………………………… 20
Tax Gap $345 Billion…………………………………………… 20
Taxes due and not paid………………………………………... 20
National Research Project (“NRP”)……………………………20
IRS Automated Under-Reporter Program………………………… 21
Targets Tax Gap………………………………………………... 21
4 Million AUR Notices Issued…………………………………. 21
$3.9 Billion in Tax Assessments……………………………… 21
IRS Matching Program (CP 2000 Notice)…………………….21
September 28, 2006
58
Bob Webb 2006©
Table of Contents (cont’d)
How to Prepare for an Audit………………………………………… 22
Review Information Document Request……………………... 22
Prepare and File Power of Attorney…………………………...22
Review Tax Returns, Work Papers and Source Documents 22
Review Case Law, Regulations and the IRM………………...22
How to Handle an Audit……………………………………………... 23
Documents Bates Stamped and Chronological Order
(“ACP”)…………………………………………………………... 23
Pre-Audit Conference with Revenue Agent…………………. 23
Document all Contacts with Agents…………………………... 23
Copy all Documents for the Agent……………………………. 23
Keep Agent Busy……………………………………………….. 23
Use Affidavits for Facts………………………………………… 23
September 28, 2006
59
Bob Webb 2006©
Table of Contents (cont’d)
IRS Summons Authority…………………………………………….. 24
IRS Summons (IRC §7602)…………………………………… 24
Not Self-Enforcing……………………………………………… 24
Powell Factors…………………………………………………...24
Motion to Quash…………………………………………………24
Conclusion of Audit…………………………………………………...25
Closing Conference……………………………………………..25
No Change……………………………………………………….25
Agree – Form 870……………………………………………….25
Disagree –
- Thirty Day Letter…………………………………………… 25
- Ninety Day Letter…………………………………………...25
September 28, 2006
60
Bob Webb 2006©
Table of Contents (cont’d)
Final Thoughts……………………………………………………….. 26
Dealing with Difficult Agents…………………………….......... 26
Collecting Attorney Fees (IRC §7430)……………………….. 26
Shifting the Burden of Proof to the IRS (IRC §7491)………. 26
3.
Fighting the IRS……………………………………………………… 27
IRS Appeals Offices…………………………………………………. 28
Administrative Forum for Contesting IRS
Compliance Actions……………………………………………. 28
80% to 90% of Cases Resolved……………………………….28
Hazards of Litigation is Key…………………………………… 28
September 28, 2006
61
Bob Webb 2006©
Table of Contents (cont’d)
When to Seek Appeals Office Review…………………………….. 29
Non-Docketed Cases…………………………………………...29
- 30 Day Letter (Proposed Deficiency)……………………. 29
- Collection Actions………………………………………….. 29
- Refund Denied……………………………………………... 29
Docketed………………………………………………………… 29
- Regular Cases………………………………………………29
- S-Cases……………………………………………………...29
How to Seek Appeals Office Review………………………………. 30
Respond to 30 Day Letter……………………………………... 30
Greater than $25,000 requires a Written Protest…………… 30
Small Case Procedure…………………………………………. 30
September 28, 2006
62
Bob Webb 2006©
Table of Contents (cont’d)
Preparing for Appeals Conference………………………………….31
Freedom of Information Act Request………………………….31
IRS Positions……………………………………………………. 31
Affidavits for Facts……………………………………………… 31
Key CIRCUIT Caselaw………………………………………… 31
Offer to Settle…………………………………………………… 31
Settling with Appeals………………………………………………… 32
Negotiation Strategy…………………………………………….32
IRS Form 870 or 870-AD……………………………………….32
Alternative Dispute Resolution (“ADR”)…………………………… 33
Fast Track Mediation (Rev. Proc. 2003-41)…………………. 33
Arbitration………………………………………………………...33
September 28, 2006
63
Bob Webb 2006©
Table of Contents (cont’d)
Final Thoughts……………………………………………………….. 34
Qualified Offers…………………………………………………. 34
Beware of IRC §6673 Penalties………………………………. 34
Form 870, Closing Agreement or Stipulations………………. 34
Settled Cases Are Generally Not Reopened Absent Fraud.. 34
Special IRS Collections Matters……………………………………. 35
Collection Due Process (“CDP”)……………………………… 35
Collection Appeals Process (“CAP”)…………………………. 35
Offer in Compromise…………………………………………… 35
Trust Fund Recovery Penalty…………………………………. 35
Equivalent Hearing……………………………………………... 35
A Taxpayer’s Secret Weapon………………………………………. 36
Taxpayer Assistance Order (“TAO”)………………………….. 36
IRS Form 911…………………………………………………… 36
10 Year Statute of Limitations for Assessment……………… 36
September 28, 2006
64
Bob Webb 2006©
Table of Contents (cont’d)
CDP Hearing …………………………………………………………. 37
Federal Tax Lien Filed…………………………………………. 37
Notice of Intent to Levy …………………………………………37
Suspends Collection Activity…………………………………...37
File IRS Form 12153 to Request………………………………37
Judicial Review…………………………………………………. 37
CAP Hearing …………………………………………………………. 38
Expedited Appeal of Collection Actions BEFORE They
Occur…………………………………………………………….. 38
Proposed Lien Filing; Installment Agreement Rejected……. 38
Levies That Have Attached……………………………………. 38
Group Manager Meeting Required…………………………… 38
No Judicial Review……………………………………………... 38
September 28, 2006
65
Bob Webb 2006©
Table of Contents (cont’d)
New Offer in Compromise Rules……………………………………39
TIP&R Act of 2005 (IR 2006-106)…………………………….. 39
July 16, 2006 Effective Date…………………………………... 39
20% of Offer Amount (Nonrefundable) (Unless Waiver)…… 39
Fighting the IRS In Court……………………………………………. 40
Tax Court………………………………………………………... 40
Federal District Court…………………………………………... 40
U.S. Court of Federal Claims…………………………………..40
Bankruptcy Court……………………………………………….. 40
Tax Court Tickets……………………………………………………. 41
If Appeals Fails to Resolve a Case (“90 Day Letter”)………. 41
Collection Due Process (“CDP”)……………………………… 41
Innocent Spouse……………………………………………….. 41
Interest Abatements……………………………………………. 41
Worker Classifications and Amount of Employment
Taxes Owed…………………………………………………….. 41
September 28, 2006
66
Bob Webb 2006©
Table of Contents (cont’d)
Top 10 Litigated Issues……………………………………………… 42
CDP……………………………………………………………… 42
Gross Income (§61)……………………………………………. 42
Failure to File, Negligence and Frivolous Penalties………… 42
Trade or Business Expense (§162)…………………………... 42
Family Status…………………………………………………….42
Innocent Spouse……………………………………………….. 42
Summons Enforcement……………………………………….. 42
Trust Fund Recovery Penalty…………………………………. 42
4.
What Makes a Case Criminal vs. Civil…………………………….. 43
What Makes a Tax Case Criminal…………………………………. 44
Amount of Money Involved……………………………………. 44
Badges of Fraud/Concealment………………………………...44
Pattern of Conduct………………………………………………44
High Profile Taxpayer …………………………………………..44
Tax Professional………………………………………………... 44
September 28, 2006
67
Bob Webb 2006©
Table of Contents (cont’d)
What Is The Criminal Investigation Division………………………. 45
CID Has Approximately 4,400 Employees World Wide……. 45
2,800 Special Agents…………………………………………... 45
CID Activity in 2005…………………………………………….. 45
How IRS Special Agents Work…………………………………….. 46
Surprise Visits are Key Despite Miranda Type Warning…… 46
Always two Agents……………………………………………... 46
Beware of Joint CIVIL and CRIMINAL Investigations……… 46
How to Deal with IRS Special Agents……………………………... 47
Get Authority from your Client to Convey Confidential
Information………………………………………………………. 48
Keep a Numbered Set of Copies for All Documents
Given to Special Agents……………………………………….. 48
Have Witnesses Present for Any Discussions……………… 48
IRC §7525 Privilege Does Not Apply………………………….48
September 28, 2006
68
Bob Webb 2006©
Table of Contents (cont’d)
Advice to Taxpayers…………………………………………………
No Destroying or Altering Documents………………………..
Do Not Tell a CPA or Tax Preparer What is on Your Mind..
Hire an Experienced Criminal Tax Lawyer…………………..
Do Not Talk to Third Parties about the Case………………..
5.
48
48
48
48
48
Hot Topics for IRS Enforcement…………………………………… 49
CID Investigative Priorities…………………………………………. 50
Tax Return Preparer Fraud……………………………………. 50
FINCEN and FBAR Compliance……………………………… 50
Tax Haven Abuses…………………………………………….. 50
Tax Shelters (Are Factual Assumptions in Tax
Opinions Realistic?)……………………………………………. 50
Trusts to Conceal Income……………………………………... 50
Cash Economy…………………………………………………..50
Failure to Withhold Taxes…………………………………….. 50
September 28, 2006
69
Bob Webb 2006©
Table of Contents (cont’d)
Help for Tax Professionals…………………………………………. 51
Contingency Fee Cases in Proposed Rules to
Circular 230……………………………………………………... 51
Award of Attorney Fees……………………………………….. 51
Taxpayer Advocate is Geographical…………………………. 51
MY E-Mail: BWebb@FBTLAW.COM................................... 51
6.
Q&A…………………………………………………………………… 52
September 28, 2006
70
Bob Webb 2006©