Overview of Business Assessments and Audits

Question 1

What do special agents handle?

Answer 1

Criminal, investigates tax crimes and related financial crimes

Question 2

What do revenue agents handle?

Answer 2

Civil, performs audits

Question 3

What do revenue officers handle?

Answer 3

Civil, handles tax collection matters

Question 4

What do appeals officers handle?

Answer 4

Civil, handles appeals from audits and certain collection matters

Question 5

What do IRS Counsel handle?

Answer 5

Lawyers for the IRS – they represent the IRS in Tax Court, help the IRS develop guidance, and assist agents and officers and other government lawyers with tax issues. They do not represent the IRS or the government in federal court.

Question 6

What does the DOJ that is tax related?

What does the USAO do that is tax related?

Answer 6

• The DOJ is involved in both civil and criminal aspects of tax enforcement.
• The DOJ has Civil and Criminal Tax Divisions in D.C.

Civil:
- The DOJ represents the government (i.e., defends the actions of the IRS), in civil tax cases in federal court (i.e., summons enforcement actions, refund actions).

CriminaL:
- The DOJ prosecutes federal tax crimes in federal court.

• The local United States Attorneys Offices are under the umbrella of DOJ.
• AUSA’s (Assistant United States Attorneys) also represent the government in civil and criminal matters in federal district courts along with DOJ attorneys.

Question 7

What are the 3 types of income tax examinations?

Answer 7

1. Correspondence examinations
2. Office examinations
3. Field examinations

Question 8

What are correspondence examinations?

Answer 8

• Generally conducted by Campus operations
• Conducted by mail and fax
• Tax Examiners and Tax Compliance Officers
• Reconciling W-2’s and 1099’s with what companies give out

A correspondence examination typically begins with an IRS computer-generated letter to the taxpayer that sets forth the examination process, identifies one or more items on the tax return that are being questioned, and requests information to explain the items being questioned. An IRS examiner will then review the taxpayer’s response and determine whether to close the case, request additional information, or recommend a tax change.

Question 9

What are office examinations?

Who conducts them?

When are decisions made?

Answer 9

• Generally only looking individual returns
• Limited number of issues
• Where you have a revenue agent assigned and not just looking at just one issue
• Why did you report this or that in some way
• Conducted in IRS offices
• Conducted by Tax Compliance Officers
• They sent you requests for information

An office exam is generally conducted by tax compliance officer (“TCO”). As with all IRS exams, the taxpayer is notified via regular mail that the taxpayer’s return is under exam.

Generally office examinations are more fact intensive and are therefore more efficiently conducted by an in person meeting with the taxpayer or the taxpayer’s representative.

TCOs generally try to reach a decision by the end of the first meeting so being well prepared for the first meeting is very important.

Question 10

What are field examinations?

Answer 10

• Conducted at place of business, home, representative’s office, where books and records are kept
• All business returns, some individual returns
• Includes Large Business and International
• All types and sizes of issue
• Revenue Agents conduct exams/audits

Question 11

4 elements for a valid return

Answer 11

1. Contains sufficient data to calculate a tax liability
2. Purports to be a return
3. Represents an honest and reasonable attempt to satisfy the requirements of the tax law; and
4. is executed by the taxpayer under penalties of perjury

• Can’t get out later after you signed it

Question 12

Methods of proof

Answer 12

• Taxpayer may not have adequate books and records
• IRS can use direct & indirect methods to reconstruct a taxpayer’s income:
• -> Direct – review specific item of income or deduction
• -> Indirect – use circumstantial information to infer income
  1. Net worth method
  2. Bank Deposit Method (cross reference from bank deposits)
  3. Cash Expenditure Method
  4. Other ideas?
• They went to a tax advisor = can be no penalties
• If you can’t substantiate = bad
• Preponderance of evidence = IRS can make assessment

Question 13

IDR = Information Document Requests

Answer 13

• Written request for Information and Documents from the IRS to the taxpayer in the audit (can’t refuse to provide info to IRS).
• IRS has expansive power to collect information and from taxpayers.
• The IDR is not self-enforcing.
• IRS can also use summons authority to obtain the information and documents if the taxpayer does not comply with the IDR.

Question 14

IRS Summons Authority

Answer 14

• Alternative to Information Document Requests
• I.R.C. § 7602 - authorizes the IRS to issue a summons to taxpayers and third parties to:
  1. Examine books and records;
  2. Obtain testimony from the taxpayer; and
  3. Obtain testimony from third parties who can provide information that may be relevant to determining a taxpayer’s liability or ascertaining the correctness of a return.
• I.R.C. § 7602(a) - provides that a summons may be issued to:
  1. Ascertain the correctness of any return;
  2. Make a return where none has been made;
  3. Determine the liability of any person for any tax; or
  4. Collect any such liability.
• I.R.C. § 7602(b) - The IRS also may issue a summons to inquire into any offense.
• I.R.C. § 7602(d) - The IRS cannot issue a summons if a Department of Justice referral is in effect.

Question 15

Service of summons

Answer 15

The IRS may serve a summons by:

1. Delivery in hand to the person; or
2. By leaving the summons at the person’s last place of abode.

The IRS may serve a summons on a third-party recordkeeper by registered or certified mail.
- Third-party recordkeepers include banks, consumer reporting agencies, any person extending credit through the use of credit cards, brokers, attorneys, accountants, barter exchanges, regulated investment companies, enrolled agents, and owners or developers of a computer software source code. I.R.C. § 7603.
(Can take service if you’re already representing the client so they don’t have to go to their house)

Question 16

Time and place for responding to summons

Answer 16

I.R.C. § 7605 provides that the time and place for responding to a summons must be reasonable and my not be less than ten days after the summons was issued.

Question 17

Failure to obey summons?

Answer 17

I.R.C. § 7210 provides “any person who, being duly summoned to appear to testify, or to appear and produce books, accounts, records, memoranda, or other papers, as required under sections . . . . 7602, 7603, and 7604(b), neglects to appear or to produce such books, accounts, records, memoranda, or other papers, shall, upon conviction thereof, be fined not more than $1,000, or imprisoned not more than 1 year, or both, together with costs of prosecution.”

Question 18

Right of notice of third-party contacts – Taxpayer First Act of 2019

Answer 18

• IRC § 7602(c) provides that an IRS agent may not contact any person other than the taxpayer with respect to the determination of the tax liability of such taxpayer without providing reasonable notice in advance to the taxpayer that contacts with anyone other than the taxpayer may be made.
• The IRS shall periodically provide the taxpayer a record of persons contacted and shall provide such record on request to the taxpayer.
• The IRS may provide notice in advance that third parties may be contacted.

Question 19

Notice of Third Party Contacts – Taxpayer First Act of 2019 Exceptions

Answer 19

(c)(3) Exceptions. This subsection shall not apply–
(A) to any contact which the taxpayer has authorized;
(B) if the Secretary determines for good cause shown that such notice would jeopardize collection of any tax or such notice may involve reprisal against any person; or
(C) with respect to any pending criminal investigation.

Question 20

Right to Privacy During Third Party Contacts and Interviews

Answer 20

The taxpayer’s right to privacy will be protected when contacting third parties for information.
Information will be collected, to the greatest extent practicable, directly from the taxpayer to whom it relates.
Third party contacts will be made when the taxpayer is unable to provide necessary information or when the examiner needs to verify information provided.
Information about taxpayers collected from third parties will be verified to the extent practicable with the taxpayer before action is taken.
Internal Revenue Manual 4.10.3.3.1.4, 4.11.57.3

IRS employees may make investigative disclosures to the extent necessary in obtaining information, which is not otherwise reasonably available, with respect to the correct determination of tax, liability for tax, or the amount to be collected. I.R.C. § 6103(k)(6).

Question 21

What are John Doe Summons?

Answer 21

The government must obtain a court order (ex parte) after establishing that:

1. The summons relates to the investigation of a particular person or ascertainable group or class of persons;
2. There is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law; and
3. The information sought to be obtained from the examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.

This procedure is ex parte and based “solely on the petition and supporting affidavits” of the government.
I.R.C. § 7609(f).

Question 22

What are the new restrictions for John Doe Summons?

Answer 22

• The Taxpayer First Act provides a new requirement in I.R.C. § 7609(f): “The Secretary shall not issue any summons described in the preceding sentence unless the information sought to be obtained is NARROWLY TAILORED to information that pertains to the failure (or potential failure) of the person or group or class of persons referred to in paragraph (2) to comply with one or more provisions of the internal revenue law which have been identified for purposes of such paragraph.”
• Information sought MUST BE NARROWLY TAILORED
• Information sough must also be in summons
• Also added statute of limitations

Question 23

Dual Purpose Summons

Answer 23

• The IRS does not have to use the John Doe summons procedure when it serves a summons on a particular taxpayer with the “dual purpose” of investigating that taxpayer’s tax liability and unidentified parties’ tax liabilities.
• A dual-purpose summons does not constitute a John Doe summons and the IRS does not have to comply with Code Sec. 7609(f) “as long as all the information sought is relevant to a legitimate investigation of the summoned taxpayer.”
• The IRS, however, cannot issue a summons to a specific taxpayer as a pretext for avoiding the John Doe summons requirements.

A dual-purpose summons is a summons issued with the purposes of investigating both the tax liability of a named taxpayer and the tax liability of other, unnamed parties. In some investigations, it may be possible for the IRS to obtain the identities of taxpayers without issuing a John Doe summons

Question 24

Formal Document Requests (FDR)

Answer 24

• During an exam, if foreign-based documentation requested by an IDR is not sufficiently provided, the IRS can issue an FDR.
• If the FDR is not substantially complied with and the taxpayer did not have reasonable cause for failure to comply, the taxpayer shall be prohibited from introducing into evidence foreign-based documentation relevant to the tax treatment of the examined item at issue. I.R.C. § 982.
• If IRS is looking for foreign based documentation bc outside of jurisidciton of US = they issue FDR
• No court involved

Question 25

Summons enforcement

Answer 25

• Don’t need to go to court
• If client doesn’t respond to summons = agent and manager decide if taxpayer is right and they can drop it
• If you miss a deadline = usually OK
• A summons is not self-enforcing, so the IRS may bring an action in district court to COMPEL a taxpayer or third party to comply with a summons. I.R.C. § 7604(b). The individual taxpayer may raise his, her, or its arguments in that proceeding
• Note that a taxpayer recipient of a summons issued in connection with that taxpayer’s own tax liability may NOT bring a petition to quash the summons because the United States government has not waived its sovereign immunity to allow such petitions. Abraham v. United States,

Question 26

What is the right to move to quash third-party summons?

How many days after notice of the summons is given do you need to make action to quash summons to third party?

Answer 26

Taxpayer may move to quash a summons issued to a third-party under I.R.C. § 7609.

An action to quash must be brought within 20 days after notice of the summons is given to the identified party, and a copy of the moving party’s petition must be sent both to the summoned party and to the Service by registered or certified mail. I.R.C. §7609(b)(2)(B).

Question 27

Summons Enforcement

1. Summons are ___ in nature?
2. What is the purpose of summons?
3. What are the 4 Powell factors that the IRS needs to show in order to enforce a contested summons?
4. How do you achieve proving the 4 Powell factors?

Answer 27

1. Summons-enforcement proceedings = “summary in nature.”
2. The purpose of a summons is “not to accuse,” but only “to inquire.”
3. In order to enforce a contested summons, the IRS must demonstrate that:
4. “The investigation will be conducted pursuant to a legitimate purpose;”
5. “The inquiry may be relevant to the purpose;”
6. “The information sought is not already within the Commissioner’s possession;” and
7. “The administrative steps required by the Code have been followed.”
8. This is not a difficult standard to meet and is usually achieved through an examiner’s affidavit. United States v. Powell

Question 28

What happened in US v. Powell case?

What was the holding?

Answer 28

• IRS issued summons for materials that were really old
• Exception to statute of limitations = if there’s fraud
• Powell argued that there’s no probable cause for fraud
• Holding: IRS had very broad authority; can go back all years to verify information = no probable cause needed or indicia of fraud; as long as it’s for legitimate purpose
• Courts will almost always side with IRS because they need ease to get info and not go to court
• IRS must act in good faith = if able to show things in Powell test

Question 29

For the enforcement of summons, what is the good faith rule about?

How does the gov demonstrate good faith?

Is the party objecting to the summons automatically entitled to an evidentiary hearing?

How does a taxpayer have a right to conduct an examination of an IRS official regarding the purpose for issuing a summons?

Answer 29

• The government generally satisfies its initial burden of demonstrating that the summons was issued in good faith by filing an affidavit from the investigating agent attesting to the four “Powell factors.”
• The court may quash an IRS summons “on any appropriate ground”— including improper purpose.
• The party objecting to the summons, however, is not automatically entitled to an evidentiary hearing.
• The taxpayer has a right to conduct an examination of an IRS official regarding the purpose for issuing a summons if the taxpayer can “point to specific facts or circumstances plausibly raising an inference of bad faith.” United States v. Clarke, 573 U.S. 248 (2014).

Question 30

What are the 8 potential defenses to enforcement of a summons?

Answer 30

1. The summons was issued for an improper purpose.
2. The summoned information is not relevant to the audit of the taxpayer.
3. The IRS already has the information summoned. (doesn’t usually work because IRS can summon records from bank/3rd party AND taxpayer because they may have different information or taxpayer altered it.)
4. The IRS did not follow the necessary administrative steps for issuing and enforcing a summons. (Example: IRS didn’t give taxpayer advanced notice about 3rd parties, requirements for John Doe summons.)
5. The documents sought do not exist.
6. The summonsed party does not have possession, custody, or control of the documents or information sought. (Not a defense if accountant has your documents because you can ask your accountant to send them back to you.)
7. There is a Department of Justice referral in effect. I.R.C. § 7602(d). (When IRS suspects someone committed tax crime and refers it to DOJ = this is when it’s a defense.)
8. The summoned information is privileged. (Most common).

Question 31

What is the improper purpose doctrine under US v. Powell?

Answer 31

“An abuse [of process] would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute or for any other purpose reflecting on the good faith of the particular investigation.”

Question 32

What is the relevancy standard for summons enforcement?

Answer 32

• 7602 relevancy standard for IRS summons is not to the same relevance standards used in deciding whether to admit evidence in federal court.
• 7602 language reflects Congress’ express intention to allow the IRS to obtain items of “EVEN POTENTIAL RELEVANCE to an ongoing investigation, without reference to its admissibility.” - US v. Arthur Young & Co.
• 7602 gives IRS license to fish = it’s good enough that IRS wants to investigate if something is relevant

Question 33

What is the possession, custody, or control defense for summons?

Answer 33

A legal or physical inability to produce the documents is a complete defense justifying noncompliance with an IRS summons.

One must, however, make an exhaustive search for missing documents and must make sincere attempts to regain possession over documents taken by third parties.

Question 34

What are the Circular 230 Requirements for Practitioners under 31 C.F.R. 10.20(a)?

Answer 34

1. A practitioner must, on a proper and lawful request by a duly authorized officer or employee of the IRS, PROMPTLY SUBMIT records or information in any matter before the IRS unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.
2. Where the requested records or information are NOT IN THE POSSESSION of, or subject to the control of, the practitioner or the practitioner’s client, the practitioner must promptly NOTIFY the requesting IRS officer or employee and the practitioner must PROVIDE any information that the practitioner has regarding the identity of any person who the practitioner BELIEVES MAY HAVE POSSESSION OR CONTROL of the requested records or information. The practitioner must make REASONABLE INQUIRY of his or her client regarding the IDENTITY of any person who may have possession or control of the requested records or information, but the practitioner is NOT REQUIRED to make inquiry of any other person or independently verify any information provided by the practitioner’s client regarding the identity of such persons.
3. When a proper and lawful request is made by a duly authorized officer or employee of the IRS, concerning an inquiry into an alleged violation of the regulations in this part, a practitioner must PROVIDE ANY INFORMATION the practitioner has concerning the alleged VIOLATION and TESTIFY regarding this information in any proceeding instituted under this part, UNLESS the practitioner believes in good faith and on reasonable grounds that the information is privileged.

Question 35

What does Circular 230 provide under 31 C.F.R. 10.20(b)?

Answer 35

A practitioner may not interfere, or attempt to interfere, with any proper and lawful effort by the Internal Revenue Service, its officers or employees, to obtain any record or information UNELSS the practitioner believes in good faith and on reasonable grounds that the record or information is PRIVILEGED.