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Tips and Traps for Dealing with the IRS: From Start to Finish

Author/Moderator: Wendy Kravit, CPA, MBA
Publisher: AICPA
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Description

Are you prepared to face the IRS from preparing a client’s return all the way through the audit and collection processes? This course gives you practical insights on everything needed to choose or reject a tactic when dealing with the IRS. It will help you represent your client with confidence and show you how to evaluate your client’s options. Recognize what triggers an audit, how to negotiate, settle on appeal, and how to qualify for an IRS collection program. Develop a tax compliance strategy by focusing on the rules the IRS must follow and the latest tax court cases. Evaluate the pros and cons of installment agreements, offers in compromise and other strategies. Keep up to date on the latest laws, regulations, rulings and cases.

  • Deal effectively with the IRS from basic to major issues
  • Evaluate pros and cons of installment agreements, offers in compromise and other strategies
  • Identify the latest legislative, judicial and administrative developments
  • Analyze applicability of recent case settlements

Prerequisite:  Experience in business taxation

Table of Contents

  • Chapter 0 - Overview
    • Course Goals
    • Introduction
    • Organization
    • Conclusion
  • Chapter 1 - Assessment Process
    • Learning Objectives
    • Introduction
    • Assessment Generally
      • Summary Assessment
      • Original Return
      • Penalties
      • Mathematical or Clerical Errors
      • Certain Taxes
      • Payment
      • Taxpayer Waiver
      • IRC ~§~6020(b) Returns
      • Amended Returns
      • Burden of Proof in Tax Proceedings
      • Jeopardy and Termination Assessments
      • Claim for Refund
      • Statutory Requirements for Refund Claim
      • Claim
      • Timing
      • Full Payment Rule
      • Appeals Conference and Federal Court Suit
      • Effect on Taxpayer Remedies of IRC ~§~6330
      • Assessment Statute of Limitations
      • Notice of Deficiency
      • Bankruptcy
    • Summary
    • Question
  • Chapter 2 - The Examination Process
    • Learning Objectives
    • Introduction
    • The Return Selection Process
    • Correspondence Audits
      • The CP 2000 Notice - See Exhibit 2-1
    • Office Audits
      • An Overview of the Typical IRS Office Audit
      • Preparing for an Office Audit
    • Handling Disagreements
    • Field Examinations
      • Extending the Statute of Limitations
    • Appeals
      • The Appeals Officer
      • The Appeals Conference
    • Summary
  • Chapter 3 - Advising Delinquent Taxpayers
    • Learning Objectives
    • Introduction
    • Steps in Representation Process
      • Taxpayer Communications to Certified Public Accountants Privileged
      • Classifications of Taxpayer's Assessment Status
      • Power of Attorney
      • Collection Statute of Limitations
      • Obtaining a Transcript
      • Preliminary Contact with Collection Division Agent
      • Enjoining IRS from Collecting Delinquent Tax
      • Appeal Rights against Collection Actions
      • Taxpayer Interviews with the IRS
      • Practitioner Hot Lines
      • Significant Hardship
    • Penalties and Interest
      • Penalties
      • Interest on Underpayments
      • Interest Abatement
    • Summary
    • Question
    • Appendix - Forms 12153 and 9423
  • Chapter 4 - Offers in Compromise
    • Learning Objectives
    • Introduction
    • Offers in Compromise
      • An Historical Perspective
      • Features
      • The Internal Revenue Service Restructuring and Reform Act of 1998
    • Making the Offer
      • Form 656
      • User Fee
      • Establishing Amount and Terms of Payment
      • Collateral Agreements
      • Employment and Trust Fund Tax Liabilities
      • Consequences of Submitting an Offer
      • Processing the Offer
      • Offer Deemed Accepted if Not Rejected within Two Years
      • Consequences and Implications of Acceptance of Offer
      • Frivolous Tax Submissions
      • Opinion of IRS Chief Counsel
      • Current State of the Offer in Compromise Program
    • Summary
    • Case Study 4-1
      • Directions
      • Assume
    • Appendix - Form 656
  • Chapter 5 - Installment Agreements
    • Learning Objectives
    • Introduction
    • Setting Up the Agreement
    • Restrictions on Levy
      • Collection Limitation Period: Non-Liquidating Installment Agreements
      • Judicial Relief
      • Accrual of Interest and Penalties
      • Extension of Time to Pay Tax on Return
      • Required Acceptance of Certain Agreements
      • Review of Rejected Proposed Installment Agreements
      • Financial Analysis
      • Necessary Expenses
      • Conditional Expenses
      • One-Year Relief Rule
      • Termination or Modification by IRS
      • Frivolous Tax Submissions
      • Direct Payment Arrangements
    • Summary
    • Case Study 5-1
      • Directions
      • Assume
    • Appendix - Forms 1127, 9465, 433-A, and 433-B
  • Chapter 6 - Tax Liabilities and Bankruptcy
    • Learning Objectives
    • Introduction
    • Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
    • Types of Bankruptcies
      • Chapter 7
      • Chapters 11 and 13
    • Impact of the 2005 Act on Availability of Relief under the Bankruptcy Code
    • Discharge of Tax Liabilities in Bankruptcy
      • Priorities of Creditors' Claims
      • 2005 Act and the Tolling of Priority Time Periods
      • Discharge of Tax Debts and Priority of Creditors' Claims
      • Discharge in a Chapter 13 Bankruptcy and the 2005 Act
    • Federal Tax Liens and Bankruptcy
      • Federal Tax Liens: A Primer
      • Federal Tax Liens and Priority Secured Claims
      • Discharge and the Federal Tax Lien
    • Bankruptcy Exemptions
      • Homestead Exemptions
      • Retirement Savings and Education Plan Exemptions
      • Federal Tax Liens and Discharged Tax Liabilities
    • The Automatic Stay
      • The Automatic Stay and IRS Action
      • Effects of a Violation of the Automatic Stay
    • Preferences
    • Property of the Estate
    • The Bankruptcy Court as a Tax Forum
    • Income Tax Election under IRC ~§~1398(d)(2)
    • Case Study 6-1
      • Directions
      • Assume
  • Chapter 7 - The Trust Fund Recovery Penalty of IRC ~§~6672
    • Learning Objectives
    • Introduction
    • Employment and Trust Fund Taxes
    • Crediting of Payment of Employment Taxes
    • Responsible Persons
      • Policy Statement P-5-60 of the IRM
      • Responsibility for General Financial Affairs
      • Corporate Officers
      • Third Parties
      • Willfulness
      • Use of a Payroll Agent
      • Responsibility for Different Functions
    • Penalties and Interest
      • Assessment Limitation Period
      • Deduction of Trust Fund Recovery Penalty Payments
      • Assessment and Appeal of IRC ~§~6672 Penalty
    • Refund Claim
      • Refund Claim and Counterclaim
    • Repeat Offenders
      • Separate Accounting
      • Injunction
    • Designating Remittances
      • Voluntary vs. Involuntary Payment
      • Failing Businesses
      • Bankruptcy Preference Issues
      • Personal Liability for Corporate Debts
      • Allocation of Payments in Bankruptcy Cases
    • Contribution, Indemnification, and Abatement
      • Joint and Several Liability
      • Notice and Education
      • Abatement
      • Appeals
    • Offers in Compromise and Installment Agreements
      • New Test of Procedures for Mediation and Arbitration
    • Summary
    • Questions
    • Appendix - Form 4180
  • Chapter 8 - The Collection Process: Federal Tax Lien, Levy, Seizure, and Sale
    • Learning Objectives
    • Introduction
    • Nature of Lien
      • General Tax Lien
      • Notice of Federal Tax Lien
      • Withdrawal of Notices of Federal Tax Lien
      • Appealing Filed Liens: Collection Due Process Rights
      • Priority of Filed Tax Liens
      • Conditions for Release, Discharge, or Subordination of NFTLs
      • Selling or Mortgaging Property Subject to Tax Lien
    • The Process of Levy and Seizure
      • Property in Possession of Third Parties
      • Information Assisting Levy and Seizure
      • The Mechanics of Levy and Seizure
    • Concurrent Interests
      • Joint Tenants and Tenants in Common
      • Tenancies by the Entirety
    • Sale of Taxpayer's Property
      • Notice and Sale Procedures
      • Request for Sale Following Seizure
      • Minimum Bid Price
      • Requirements of Sale
    • Post-Sale Procedures
      • Release of Levy
      • Proceeds from Sale
    • Limitations on Levy and Seizure Powers
      • Investigation of Status of Property
      • Exempt Property and Other Limitations on Levy Power
      • Release of Levies
    • Taxpayer Action Concerning Levies and Seizures - Collection Due Process Rights
      • Applying for Release
    • Taxpayer Action Concerning Sales
      • Minimum Bid Price
      • Setting Aside the Sale
    • Summary
    • Questions
    • Appendix - Forms 12153 and Form 9423
  • Chapter 9 - Strategies: Bankruptcy, Offer in Compromise, Installment Agreement - Which Is Best for Your Client?
    • Learning Objective
    • Introduction
    • Guidelines
      • Necessary Expenses
      • Conditional Expenses
    • Bankruptcy
      • Advantages
    • Offer in Compromise
      • Debtor Only Has Tax Liabilities
      • Disadvantages/Limitations
    • Installment Agreements
      • Benefit
  • Chapter 10 - Practice before the Internal Revenue Service
    • Introduction
    • Overview of Standards of Tax Practice
    • AICPA Statements on Standards for Tax Services
    • Authority to Practice before the IRS
    • Duties and Restrictions Relating to Practice before the IRS
      • Definition of Practice before the IRS
      • Knowledge of Client's Omission
      • Diligence as to Accuracy
      • Prompt Disposition of Pending Matters
      • Assistance from or to Disbarred or Suspended Persons and Former Internal Revenue Service Employees
      • Practice by Former Government Employees, Their Partners, and Associates
      • Notaries
      • Fees for Professional Services
      • Return of Clients' Records
      • Conflicts of Interest
      • Advertising and Solicitation
      • Negotiation of Taxpayer Checks
    • Standards for Advising on Tax Return Positions and for Preparing or Signing Returns
      • Sources of Authority
      • Documents, Affidavits, and Other Papers
      • Advice as to Penalties
      • Reliance on Client Information
      • Frivolous Positions
      • AICPA Statements
    • Penalties
      • Accuracy-Related Penalty under IRC ~§~6662
      • Avoiding the Accuracy-Related Penalty
      • Substantial Understatements and Tax Shelters
      • Tax Shelter Opinions and the Circular 230 Regulations
      • Judicial and Legislative Developments Regarding Tax Shelter Opinions
      • Summary and General Comments on the Circular 230 Tax Shelter Regulations
    • A More Detailed Description of the Circular 230 Tax Shelter Opinion Regulations
      • Covered Opinions
      • Limited Scope Opinions
      • General Disclosure Rules for Covered Opinions
      • Effect of Opinion That Meets the Required Standards
      • Procedures to Ensure Compliance under the Regulations
      • Requirements for Other Written Advice Other Than Covered Opinions
    • Best Practices for Tax Advisors
    • Sanctions for Violation of Regulations
      • Disciplinary Procedures
    • Question
      • Discussion
  • Chapter 11 - Latest Developments

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Excerpts

Chapter 2 - The Examination Process

Learning Objectives

• Understand the different types of audits that the IRS conducts.
• Determine the appropriate way to handle an audit notice.
• Determine how to respond to IRS inquiries and requests.
• Understand your responsibilities when representing your client in front of the IRS.
• Understand how to advise a client at the conclusion of an audit.

Introduction


For many of our clients, a letter from the IRS requesting clarification of an item reported on a return creates terror. The IRS does its part to help foster that. It attempts to time press releases about tax evasion cases during filing season to help bolster compliance. After all, promoting compliance with the tax law is one of the IRS’s missions.

The audit process is not defined in the Tax Code. The IRS conducts audits in the way that it thinks will be the most efficient way to assess tax. There is no one way to handle an audit because no two IRS examiners are the same and no two taxpayers are the same.

The IRS makes it quite clear that the responsibility of a tax preparer is to determine and report the correct amount of tax. When a preparer signs a tax return, he is declaring, under penalties of perjury, that the return and its schedules are true, correct, and complete based upon all information of which the preparer has knowledge. The tax auditor is also attempting to determine the correct amount of tax based upon all the available information. So, in theory, we have the same goals.

A thorough knowledge of the examination process and the various types of audits will help preparers represent their clients and guide them through the process.

This chapter looks at Service Center Examinations, Office Audits, and Field Examinations and will take you, the preparer, through the steps needed to successfully get your clients through the process.

The Return Selection Process

There are many different ways a return may be selected for audit. The most common method is the DIF (Discriminant Function) score. The DIF score is a mathematical formula used to score income tax returns as to examination potential. These formulas were developed based on National Research Program (NRP) available data. Each return measured under DIF receives a DIF score. Generally, the higher the score, the greater the audit potential. The highest scored returns are made available to Examination upon request. DIF mathematical formulas are confidential and for official use only. The IRM states that a DIF score assigned to a return should not be disclosed to the taxpayer (IRM 4.1.3.2).

The following types of returns are computer scored under the DIF System:

• Individual Returns
• Corporation Returns
• S Corporation Returns
• Partnership Returns
• Fiduciary Returns

Returns may also be selected as part of a special project or for research by the IRS. Individual revenue agents may also request returns for audit from the Service Center if they discover information that suggests there may be audit potential on a return.

Correspondence Audits

Most individuals that will have contact with the IRS are likely to have that contact in the form of a Service Center Audit. Typically, the taxpayer will receive a CP 2000 notice that requires a timely response. Explanations and supporting documents are mailed to the appropriate Service Center, and the item is resolved. The entire audit may be done by correspondence.

The CP 2000 Notice – See Exhibit 2-1

The IRS is increasing the number of correspondence audits. Many of them are initiated due to mismatching of third-party information with items reported on the return. The IRS reports that Schedule D items, capital gains and losses, tend to be a high-problem area.

The Service Center may also issue CP 2000 notices requesting receipts to verify other expenses such as charitable contributions.

Clients should be instructed to immediately bring any letters or notices they receive from the IRS to their preparers. Many CPAs put such a clause in their engagement letter. Speed is of the essence here because the taxpayer only has 30 days from the date of the notice to respond to the IRS.

The CP 2000 letter is a 30-day notice of an assessment of tax. Failure to have the response at the IRS Service Center by the date indicated on the letter will usually result in the amount being assessed. Once assessed, the taxpayer will have to follow the procedures outlined in the 90-day letter and petition the tax court.

Upon receipt of the CP 2000 by the taxpayer, it is generally advisable to prepare a Form 2848, Power or Attorney, and submit it to the IRS as soon as possible. If the client wishes to attempt to save money by handling the response herself, it is a good idea to submit the POA so that it is on the record in case the preparer should need to become involved.

The CP 2000 offers taxpayers the opportunity to examine the information that the IRS has received and compare it to his records. The taxpayer may agree totally, disagree totally, or agree partially with the IRS proposal. If the taxpayer finds that he made an error on the original return, he should not file an amended return. He may mark that he agrees with the changes and sign the form. This gives the IRS permission to immediately start assessment procedures, and he will soon receive a bill. Or, the taxpayer may enclose a check with the form to stop interest and penalties from accruing.

If the response is fairly simple, such as simply having to show the IRS where some income was reported on the return, the taxpayer or his representative may call the IRS and provide that information. If the notice was generated from Brookhaven, Ogden, or Philadelphia, the phone number to call is 800-829-8310. If the notice was generated from Atlanta, Austin, or Fresno, the number to call is 800-829-3009.

If written evidence needs to be submitted, it should be submitted to the address indicated in the letter. Make copies of all relevant documents and submit them with the explanation and a copy of the original CP 2000.

If the taxpayer cannot completely respond to the notice by the date indicated on the letter, he must notify the IRS. He or his representative may call the number at the top of the notice or write the Service Center. In either event, this must be done before the 30-day period has expired. The IRS may allow an additional 30 days to wait for a response, or longer if it is a complicated issue. However, no response by the due date will usually result in the 90-day letter being issued. A taxpayer’s correspondence audit is not assigned to one person at the service center. If there are multiple communications, it is imperative that each correspondence be properly identified so that it will be associated with prior correspondence.

Office Audits

In the case of an office audit, a taxpayer is typically sent a letter that his return has been selected for audit. The letter details the items on the return that are being examined and requests that the taxpayer produce specific records pertaining to those items in person at an IRS office at a specified time and date.

The date and time of the audit is easily changed. The IRS does not expect most people to be available at the random date and time that it chose to put on the letter. Therefore, there is no negative connotation placed upon a taxpayer or representative that calls to change the appointment.

An Overview of the Typical IRS Office Audit


Office audits are not as complex as field examinations and are usually restricted in scope to the items mentioned in the notice. Most office audits are allotted initial time slots of about two hours. The examiner has a worksheet that she will fill out upon examining the evidence that the taxpayer or representative present for the items listed on the audit letter. The auditor did not write the audit letter. However, an examiner may expand the scope of an audit based upon her findings.

Preparing for an Office Audit

Generally, the meeting at the IRS office is fairly informal and relaxed. The examiner in an office audit has to complete a form to create his report. He uses Form 4700 to record what he has seen and verified. The key to a successful audit outcome is organization. A representative should have thoroughly reviewed all documentation that will be presented to the auditor. If there are multiple receipts to verify a particular expense, they should be organized together preferably with an adding machine tape to show the totals. The auditor may test some of the tapes to verify the accuracy.

Most issues in an office audit are centered around whether or not the taxpayer has receipts to verify deductions and whether or not there is unreported income. Common areas for an office audit include itemized deductions, employee business deductions, and less complex Schedule C and Schedule E issues.

The representative should be on time and have a copy of the Power of Attorney with him even if it has already been submitted. The POA should include all open tax years for the taxpayer. If the auditor finds a significant issue in one year, he is very likely to look at the same issue in any other years that are currently open by statute.

753440

Videocourse Details

NASBA Field of Study: Taxes
Level: Basic
Recommended CPE Credit: 8
Product# 753440
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