Overview of Business Assessments and Audits Flashcards
What do special agents handle?
Criminal, investigates tax crimes and related financial crimes
What do revenue agents handle?
Civil, performs audits
What do revenue officers handle?
Civil, handles tax collection matters
What do appeals officers handle?
Civil, handles appeals from audits and certain collection matters
What do IRS Counsel handle?
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.
What does the DOJ that is tax related?
What does the USAO do that is tax related?
- 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.
What are the 3 types of income tax examinations?
- Correspondence examinations
- Office examinations
- Field examinations
What are correspondence examinations?
- 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.
What are office examinations?
Who conducts them?
When are decisions made?
- 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.
What are field examinations?
- 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
4 elements for a valid return
- Contains sufficient data to calculate a tax liability
- Purports to be a return
- Represents an honest and reasonable attempt to satisfy the requirements of the tax law; and
- is executed by the taxpayer under penalties of perjury
- Can’t get out later after you signed it
Methods of proof
- 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
IDR = Information Document Requests
- 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.
IRS Summons Authority
- 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.
Service of summons
The IRS may serve a summons by:
- Delivery in hand to the person; or
- 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)
Time and place for responding to summons
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.
Failure to obey summons?
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.”
Right of notice of third-party contacts – Taxpayer First Act of 2019
- 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.
Notice of Third Party Contacts – Taxpayer First Act of 2019 Exceptions
(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.
Right to Privacy During Third Party Contacts and Interviews
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).
What are John Doe Summons?
The government must obtain a court order (ex parte) after establishing that:
- The summons relates to the investigation of a particular person or ascertainable group or class of persons;
- 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
- 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).
What are the new restrictions for John Doe Summons?
- 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
Dual Purpose Summons
- 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
Formal Document Requests (FDR)
- 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
