USA Risk Group The Whole 9 Yards 9th Annual Executive Educational Services Charlotte, North Carolina Ballantyne Resort & Spa May 22, 2014
WHAT TO DO IF THE IRS COMES
KNOCKING
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
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
Who gets Selected? (cont’d)
IRS Projects
Captives qualifying under Section 501(c)(15)
Excise Tax-cascading
Types of Audits
Mail-In Audit
Office Audit (IRS Office)
— Informal
— Needed items specified in letter
— One sitting
— Can reschedule if request made
Field Audit
— Taxpayer or representative’s office
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
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
Conduct of the Audit
Representation and Power of Attorney (Form
2848)
— Self
— CPA
— Lawyer
Location of the Audit
— Taxpayer’s location
— CPA’s offices
Conduct of the Audit (cont’d)
Treat Agent
— Professionally
— Courteously
— Provide good working conditions
Information Document Request (IDR)
— Written questions and responses
— Oral explanations?
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
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
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
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
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)
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
Going To Court
90-day Letter – Statutory Notice of Deficiency
Legal Representation
Attorney-Client Privilege
Attorney Work Product
Going To Court: Litigation Options
TAX COURT DISTRICT COURT COURT OF FED. CLAIMSPAY FIRST NO YES YES
JUDGE/JURY JUDGE OPTION*
*Judge or Jury
JUDGE
PLACE OF TRIAL LOCAL** **Judge Travels from DC
LOCAL LOCAL** **Judge Travels from DC
% OF TAX CASES 100% 2% 50%
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
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
