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Jonathan E. Strouse Holland & Knight LLP 131 S. Dearborn, 30th Floor Chicago, IL 60603 312-715-5741
jonathan.strouse@hklaw.com 1
1. Introduction
2. (No Circular 230 Discussion)
3. ET Section 102 and Interpretation 102.03
4. Current IRS Structure and Analysis
5. Sample IDR and How To Properly Respond
6. Electronic Data in Exams
7. Illinois Public Accounting Act
8. AICPA Code of Professional Conduct Rule 301
9. SSTS No. 6
10. Privilege Issues ◦ State
◦ Federal
◦ Kovel
11. Other Helpful Tips and Strategies During a Tax Audit
12. IRS Appeals
1. Mission
2. Fast Track Settlement
3. Fast Track Mediation
4. Post-Appeals Mediation
5. Appeals Arbitration
13. Claims for Refund
14. IRS Global High Wealth Industry Group
15. Non-Filers or Tax Evaders
16. Voluntary Disclosures
17. Questions and Comments
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In any professional service, a member shall
maintain objectivity and integrity, shall be free from conflicts of interest….
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◦If a member performs a professional service for aclient;
◦And a member of his or her firm;
◦Has a relationship with another person, entity, product, or service that could;
in the member’s professional judgment,
be viewed by the client or other appropriate parties,
as impairing the member’s objectivity,
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And If:
◦The member believes that his or her service can be performed with objectivity; AND
◦The relationship is disclosed to and consent is obtained from the client or appropriate party;
then the member can perform the professional
service.
◦Examples:
Shareholder dispute between siblings and the accounting
firm represents all or some of the siblings on examinations of their income tax returns for 2010
Same as above, except accounting firm prepares Forms 1040
for each or some of the siblings. Same result.
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ABC CORPORATION SAMPLE IDR FOR AUDIT FOR 2009
1. All bank statements for 2009.
2. All journals (i.e. Cash Disbursement, Cash Receipts).
3. The general ledger and chart of accounts for 2009.
4. Copies of Forms 1120 or 1120S for 2009.
5. Copies of Forms 1040 for Bill Smith for 2008, 2009, and 2010.
6. Copies of all financial statements of the corporation for December 31, 2009.
7. Copies of all communications during 2007 to 2009 between the corporation and its attorney relating to any tax issue.
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8. Copies of all communications between the corporation and its outside accountant for 2009.
9. The management letter, if one exists, for 2009.
10. A listing of each customer that taxpayer sold goods to in 2009 and the amount of each sale.
11. Prepare an organization chart of taxpayer’s billing and shipping departments during 2009.
12. A tour of premises and interview with applicable accounting personnel.
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Section 6001 of the Code – maintain proper
Books and Records
Section 7602(a) – IRS can examine such Books
and Records
Section 7612 of the Code – Limitations on IRS
exam of computer software source codes
CCA 201146017 – Requires taxpayers to
produce to the IRS electronic records, including unaltered “meta data”, upon request (electronic and in native format)
Printout of hard copies
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§450/27 – Accountant as a Witness
◦A CPA is not required to divulge information obtained by him or her in his or her confidential capacity.
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A CPA shall not disclose any confidential
client information without the specific consent of the client.
◦Exceptions
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Governed by AICPA Statement on Standard for
Tax Services (“SSTS”) No. 6
See paragraphs 7-12
◦¶ 7 – advise to disclose
◦¶ 10 – conflict and Rule 301
◦¶ 11 – advise taxpayer to consult attorney
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Federal law does not recognize a general accountant-client privilege (see U.S. v. Arthur Young & Co. 465 U.S. 805 (1984)).
Illinois law provides for an accountant-client privilege (flows to the accountant in Illinois)
In Federal tax cases pending in Federal District or Tax Court, any applicable state accountant-client privilege cannot be invoked (by the accountant or client) Section 7525 of the Code may be invoked, but there are
limitations.
◦The attorney-client privilege is a recognized privilege in the
United States District and United States Tax Courts.
◦Attorney’s invoices
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Best approach is to fit into a Kovel situation (see U.S. v. Kovel, 296 F.2d 918 (2d Cir. 1961) and its progeny).
◦Attorney-client privilege attaches to client communications with agent of attorney (i.e. an accountant).
◦Use of agent (i.e. accountant) must be necessary in the rendering of legal advice.
◦Accountant should be hired by the attorney and used to assist attorney in interpreting difficult or complex issues.
◦Structuring engagement properly with two engagement letters (Attorney letter and accountant letter)
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When to go over the agent’s head
FOIA requests (prior to going to appeals and
at other stages)
Section 7430 - Qualified Offers
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Mission – Resolve tax controversies, without
litigation, that is fair and impartial to both parties, in a way that will enhance voluntary compliance and public confidence.
See §601.106(a)(2)-(4) for lack of appeal’s
settlement authority
Independent; no
ex parte
communicationsWritten protest subsequent to receipt of 30
day letter from Exam.
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Remains in exam or collections
See Rev. Proc. 2003-40 – contains procedures for
LB&I taxpayers and non-LB&I taxpayers (with agreement) to mediate a dispute with a neutral appeals officer.
◦Intended to resolve a fully developed issue within 120 days of acceptance into program.
◦Appeals officer, although neutral, can have ex parte communications with field personnel.
◦IRS issues notice of proposed adjustment and Taxpayer issues a written response
All prior to 30 day letter
◦Includes OIC, 6672, and CDP cases
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For SB/SE cases
◦Appeals officer attempts to mediate tax dispute to expedite a settlement between Taxpayer and Exam.
Usually resolved within 40 days
See Rev. Proc. 2003-41 for complete
information.
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Uses one or more third party mediators
during appeals to facilitate a negotiated settlement on unresolved issues.
◦Taxpayer and Appeals manager select an Appeals mediator. Taxpayer, at their own cost, can also select a non-IRS mediator to assist.
If unable to settle, a statutory notice of
deficiency will be issued.
◦Can’t use for collection cases
See Rev. Proc. 2002-44 and Rev. Proc.
2009-44 (post-appeals mediation)
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Taxpayer and IRS seek a decision by an
uninvolved third party that is binding on everyone.
◦May be used for factual issues only – not legal issues
◦Both IRS appeals and non-IRS personnel may serve as arbitrators
◦Proceed to arbitration within 90 days after signing agreement to arbitrate
◦See Rev. Proc. 2002-44
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The filing of a proper claim for refund is a conditionprecedent to a suit for recovery of overpaid taxes. Filing means delivery of IRS Form 843, Claim for Refund, 1040X, or other applicable form, as the case may be, to the proper Internal Revenue Service addressee.
Neither the Federal District Court nor Court of Federal
Claims has jurisdiction to consider a claim for refund that was not first timely filed and rejected by the IRS. The theory of the case in the claim for refund filed with the IRS must not “substantially vary” from the theory presented to the Federal District Court or Court of Federal Claims.
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A claim for refund must be made within three
years of the date a return was filed or two years from the date the tax was paid, whichever is later. See Code Section 6511.
A taxpayer can file a suit for a refund of taxes
paid in either the Court of Federal Claims or the United States District Court as soon as six months after the date that the refund claim is filed, or the date that the IRS renders a decision on the claim, whichever is earlier. The taxpayer can wait as long as two years until after a notice of disallowance is issued by the IRS to file suit.
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Exists within LB&I
Exams of high wealth individuals and their
related entities
Other countries have similar teams
Using flow-through specialists (SB/SE) and
other international agents
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Historically, IRS focused on a single type of tax return for asingle taxpayer and the examiners focused on particular areas within their core expertise.
Wealth Squad finds compliance issues previously missed and buried within layers of related limited liability companies, partnerships, trusts, private foundations, and other related entities.
Wealth Squad is coordinating examiners and specialists to analyze complex domestic and foreign arrangements created by the sophisticated advisors who assist wealthy individuals and families.
As of 2011, the Wealth Squad had formed seven exam groups
that can engage other operating divisions to assist with audits.
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Review and re-evaluate aggressive tax positions in light of
current legal developments and risk tolerance, and determine whether it makes sense to modify the position going forward, amend prior returns, or be prepared to concede a certain position very early in a potential audit.
Consider pros and cons of disclosing and relying on any tax
opinions.
Identify any conduct that the IRS could find in an exhaustive
audit – whether related to tax reporting -- that could expose the client or others to criminal liability or significant civil liability, and seek advice from competent counsel to manage those risks.
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6 year rule
Penalties
Imprisonment
Filing original or amended returns -
admissions
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What are they?
When do you use them?
How do you use them effectively?
Non-filers FBAR issues 28 29 Bar Admission Education Practices 30 Jonathan E. Strouse Jonathan E. Strouse Partner 312-715-5741 jonathan.strouse@hklaw.com Chicago, IL
Jonathan E. Strouse is a partner in the Chicago office of Holland & Knight where he concentrates his practice in the areas of litigation, federal tax litigation and federal tax controversies, including audits and appeals. Mr. Strouse is co-chair of Holland & Knight's National Tax Controversy and Tax Litigation Team. Mr. Strouse is also licensed as a Certified Public Accountant. • Litigation • Tax Controversies and Litigation • University of Wisconsin Law School, J.D., cum laude • University of Wisconsin, B.B.A., with distinction, Finance and Accounting • Wisconsin • Illinois • U.S. Court of Appeals
for the 7th and 9th Circuits • Trial Bar for the United
