bob webb 2006© september 28, 2006 the internal revenue service: everything you always wanted to...
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![Page 1: Bob Webb 2006© September 28, 2006 The Internal Revenue Service: Everything You Always Wanted To Know But Were Afraid To Ask Presented By: Robert C. Webb,](https://reader035.vdocument.in/reader035/viewer/2022081519/56649d3f5503460f94a17f3a/html5/thumbnails/1.jpg)
Bob Webb 2006© September 28, 2006
The Internal Revenue Service:Everything You Always Wanted To
Know But Were Afraid To Ask
Presented By:
Robert C. Webb, Member
Frost Brown Todd, LLC
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2 Bob Webb 2006© September 28, 2006
• Member of Frost Brown Todd, LLC, Louisville, Kentucky
• Offices in Kentucky, Indiana, Ohio and Tennessee
• Education– Georgetown University Law Center,
LLM, 1990– University of Louisville, Louis D.
Brandeis School of Law JD, 1988– University of Kentucky, BS, 1985
Robert C. Webb
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3 Bob Webb 2006© September 28, 2006
Robert C. Webb
• Practice Areas– Tax Controversy and White
Collar Crime– Business and Commercial
Litigation
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4 Bob Webb 2006© September 28, 2006
Overview
1. Understanding the IRS Organization
2. Audit Risks for Taxpayers
3. Fighting The IRS
4. What Makes a Case Criminal vs. Civil
5. Hot Topics for IRS Enforcement
6. Q & A
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5 Bob Webb 2006© September 28, 2006
1. Understanding the IRS Organization
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6 Bob Webb 2006© September 28, 2006
Taxes are Constitutional
• 16th Amendment gave Congress the power to tax income
• Tax Protestors fail
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7 Bob Webb 2006© September 28, 2006
Who Controls IRS
• Legislative (Congress)
• Executive (President)
• Judicial (Courts)
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8 Bob Webb 2006© September 28, 2006
Legislative Branch
• Internal Revenue Code
• Committee Reports
• Funding
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9 Bob Webb 2006© September 28, 2006
Executive Branch
• Treasury Department
• IRS Commissioner
• Treasury Secretary
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10 Bob Webb 2006© September 28, 2006
Judicial Branch
• U.S. Tax Court
• U.S. District Court
• U.S. Court of Federal Claims
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11 Bob Webb 2006© September 28, 2006
Who Represents the IRS
• IRS Lawyers
• Department of Justice Civil Tax Division
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12 Bob Webb 2006© September 28, 2006
Federal Circuit Courts
• 12 Courts for 11 Circuits and the District of Columbia
• Taxpayers Appeal to these Courts
• U.S. Supreme Court
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13 Bob Webb 2006© September 28, 2006
IRS Organization
• Post 1998 Reform Act
• IRS Oversight Board (Policy and Strategy)
• 4 Operating Divisions
• Specialized IRS Units
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14 Bob Webb 2006© September 28, 2006
What Rules Must the IRS Follow
• Treasury Regulations
• Revenue Rulings/Procedures
• Letter Rulings
• Internal Revenue Manual (“IRM”)
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15 Bob Webb 2006© September 28, 2006
2. Audit Risks for Taxpayers
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16 Bob Webb 2006© September 28, 2006
IRS Examinations
• Service Center (“DLN”)
• Discriminate Information Function (“DIF”)
• Multifactor Scoring Process
• Disproportionate Ratios
• Refund Claims
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17 Bob Webb 2006© September 28, 2006
Audit Triggers
• Home Based Businesses
• Excessive Travel and Entertainment Expenses
• Excessive Charitable Contributions
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18 Bob Webb 2006© September 28, 2006
Lowering Audit Risks
• File an Extension
• Attach Rider to Return
• Avoid Disproportionate Deductions
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19 Bob Webb 2006© September 28, 2006
Preventing An Audit After Selection
• No Second Examinations
• Check the Statute of Limitations– 3 years– 6 years
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20 Bob Webb 2006© September 28, 2006
IRS Audit Focus
• Tax Gap $345 Billion
• Taxes due and not paid
• National Research Project (“NRP”)
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21 Bob Webb 2006© September 28, 2006
IRS Automated Under-Reporter Program
• Targets Tax Gap
• 4 Million AUR Notices Issued
• $3.9 Billion in Tax Assessments
• IRS Matching Program (CP 2000 Notice)
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22 Bob Webb 2006© September 28, 2006
How to Prepare for an Audit
• Review Information Document Request
• Prepare and File Power of Attorney
• Review Tax Returns, Work Papers and Source Documents
• Review Case Law, Regulations and the IRM
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23 Bob Webb 2006© September 28, 2006
How to Handle an Audit
• Documents Bates Stamped and Chronological Order (“ACP”)
• Pre-Audit Conference with Revenue Agent
• Document all Contacts with Agents
• Copy all Documents for the Agent
• Keep Agent Busy
• Use Affidavits for Facts
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24 Bob Webb 2006© September 28, 2006
IRS Summons Authority
• IRS Summons (IRC §7602)
• Not Self-Enforcing
• Powell Factors
• Motion to Quash
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25 Bob Webb 2006© September 28, 2006
Conclusion of Audit
• Closing Conference
• No Change
• Agree -- Form 870
• Disagree -- – Thirty Day Letter– Ninety Day Letter
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26 Bob Webb 2006© September 28, 2006
Final Thoughts
• Dealing with Difficult Agents
• Collecting Attorney Fees (IRC §7430)
• Shifting the Burden of Proof to the IRS (IRC §7491)
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27 Bob Webb 2006© September 28, 2006
3. Fighting the IRS
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28 Bob Webb 2006© September 28, 2006
IRS Appeals Offices
• Administrative Forum for Contesting IRS Compliance Actions
• 80% to 90% of Cases Resolved
• Hazards of Litigation is Key
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29 Bob Webb 2006© September 28, 2006
When to Seek Appeals Office Review
• NON-DOCKETED Cases• 30 Day Letter (Proposed Deficiency)• Collection Actions• Refund Denied
• Docketed• Regular Cases• S-Cases
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30 Bob Webb 2006© September 28, 2006
How to Seek Appeals Office Review
• Respond to 30 Day Letter
• Greater than $25,000 requires a Written Protest
• Small Case Procedure
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31 Bob Webb 2006© September 28, 2006
Preparing for Appeals Conference
• Freedom of Information Act Request
• IRS Positions
• Affidavits for Facts
• Key CIRCUIT Caselaw
• Offer to Settle
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32 Bob Webb 2006© September 28, 2006
Settling with Appeals
• Negotiation Strategy
• IRS Form 870 or 870-AD
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33 Bob Webb 2006© September 28, 2006
Alternative Dispute Resolution (“ADR”)
• Fast Track Mediation (Rev.Proc. 2003-41)
• Arbitration
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34 Bob Webb 2006© September 28, 2006
Final Thoughts
• Qualified Offers
• Beware of IRC §6673 Penalties
• Form 870, Closing Agreement or Stipulations
• Settled Cases Are Generally Not Reopened Absent Fraud
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35 Bob Webb 2006© September 28, 2006
Special IRS Collections Matters
• Collection Due Process (“CDP”)
• Collection Appeals Process (“CAP”)
• Offer in Compromise
• Trust Fund Recovery Penalty
• Equivalent Hearing
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36 Bob Webb 2006© September 28, 2006
A Taxpayer’s Secret Weapon
• Taxpayer Assistance Order (“TAO”)
• IRS Form 911
• 10 Year Statute of Limitations from Assessment
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37 Bob Webb 2006© September 28, 2006
CDP Hearing
• Federal Tax Lien Filed
• Notice of Intent to Levy
• Suspends Collection Activity
• File IRS Form 12153 to Request
• Judicial Review
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38 Bob Webb 2006© September 28, 2006
CAP Hearing
• Expedited Appeal of Collection Actions BEFORE They Occur
• Proposed Lien Filing; Installment Agreement Rejected
• Levies That Have Attached
• Group Manager Meeting Required
• No Judicial Review
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39 Bob Webb 2006© September 28, 2006
New Offer in Compromise Rules
• TIP&R Act of 2005 (IR 2006-106)
• July 16, 2006 Effective Date
• 20% of Offer Amount (Nonrefundable) (Unless Waiver)
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40 Bob Webb 2006© September 28, 2006
Fighting the IRS In Court
• Tax Court
• Federal District Court
• U.S. Court of Federal Claims
• Bankruptcy Court
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41 Bob Webb 2006© September 28, 2006
Tax Court Tickets
• If Appeals Fails to Resolve a Case (“90 Day Letter”)
• Collection Due Process (“CDP”)
• Innocent Spouse
• Interest Abatements
• Worker Classifications and Amount of Employment Taxes Owed
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42 Bob Webb 2006© September 28, 2006
Top 10 Litigated Issues
• CDP• Gross Income (§61)• Failure to File, Negligence and Frivolous
Penalties• Trade or Business Expense (§162)• Family Status• Innocent Spouse• Summons Enforcement• Trust Fund Recovery Penalty
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43 Bob Webb 2006© September 28, 2006
4. What Makes a Case
Criminal vs. Civil
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44 Bob Webb 2006© September 28, 2006
What Makes a Tax Case Criminal
• Amount of Money Involved
• Badges of Fraud/Concealment
• Pattern of Conduct
• High Profile Taxpayer
• Tax Professional
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45 Bob Webb 2006© September 28, 2006
What Is The Criminal Investigation Division
• CID Has Approximately 4,400 Employees World Wide
• 2,800 Special Agents
• CID Activity in 2005
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46 Bob Webb 2006© September 28, 2006
How IRS Special Agents Work
• Surprise Visits are Key Despite Miranda Type Warning
• Always two Agents
• Beware of Joint CIVIL and CRIMINAL Investigations
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47 Bob Webb 2006© September 28, 2006
How to Deal with IRS Special Agents
• Get Authority from your Client to Convey Confidential Information
• Keep a Numbered Set of Copies for All Documents Given to Special Agents
• Have Witnesses Present for Any Discussions
• IRC §7525 Privilege Does Not Apply
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48 Bob Webb 2006© September 28, 2006
Advice to Taxpayers
• No Destroying or Altering Documents
• Do Not Tell a CPA or Tax Preparer What Is on Your Mind
• Hire an experienced Criminal Tax Lawyer
• Do Not Talk to Third Parties about the Case
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49 Bob Webb 2006© September 28, 2006
5. Hot Topics for IRS Enforcement
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50 Bob Webb 2006© September 28, 2006
CID Investigative Priorities
• Tax Return Preparer Fraud• FINCEN and FBAR Compliance• Tax Haven Abuses• Tax Shelters (Are Factual Assumptions in
Tax Opinions Realistic?)• Trusts to Conceal Income• Cash Economy• Failure to Withhold Taxes
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51 Bob Webb 2006© September 28, 2006
Help for Tax Professionals
• Contingency Fee Cases in Proposed Rules to Circular 230
• Award of Attorney Fees
• Taxpayer Advocate Is Geographical
• MY E-Mail: [email protected]
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52 Bob Webb 2006© September 28, 2006
Q & A
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53 Bob Webb 2006© September 28, 2006
Robert C. Webb
Frost Brown Todd, LLC
400 W. Market Street, Floor 32
Louisville, Kentucky 40202
502-589-5400
www.frostbrowntodd.com
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54 Bob Webb 2006© September 28, 2006
Table of Contents
The Internal Revenue Service: Everything You AlwaysWanted To Know But Were Afraid to Ask……………………………………...1
Robert C. Webb………………………………………………………………….. 2
Overview………………………………………………………………………….. 4
1. Understanding the IRS Organization………………………………...5Taxes are Constitutional……………………………………………… 5- 16th Amendment gave Congress the power to tax income….. 6- Tax Protestors fail………………………………………………...6Who Controls IRS……………………………………………………...7- Legislative (Congress)……………………………………………7- Executive (President)……………………………………………. 7- Judicial (Courts)…………………………………………………...7
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55 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
- Legislative Branch……………………………………………8- Internal Revenue Code……………………………….. 8- Committee Reports…………………………………….8- Funding………………………………………………….8
- Executive Branch………………………………………........ 9- Treasury Department…………………………….........9- IRS Commissioner……………………………………..9- Treasury Secretary……………………………………. 9
- Judicial Branch……………………………………………...10- U.S. Tax Court………………………………………...10- U.S. District Court…………………………………….10- U.S. Court of Federal Claims………………………..10
Who Represents the IRS…………………………………………….11- IRS Lawyers………………………………………………... 11- Department of Justice Civil Tax Division…………………11
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56 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
Federal Circuit Court………………………………………………… 12- 12 Courts for 11 Circuits and the District of Columbia………12- Taxpayers Appeal to These Courts…………………………... 12- U.S. Supreme Court…………………………………………….12IRS Organization……………………………………………………...13- Post 1998 Reform Act…........................................................13- IRS Oversight Board (Policy and Strategy)………………….. 13- 4 Operating Divisions…………………………………………...13- Specialized IRS Units…………………………………………...13What Rules Must the IRS Follow…………………………………... 14- Treasury Regulations………………………………………...... 14- Revenue Rulings/Procedures…………………………………. 14- Letter Rulings…………………………………………………… 14- Internal Revenue Manual (“IRM”)……………………………...14
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57 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
2. Audit Risks for Taxpayers…………………………………………... 15IRS Examinations……………………………………………………. 16- Service Center (“DLN”)………………………………………… 16- Discriminate Information Function (“DIF”)…………………… 16- Multifactor Scoring Process…………………………………… 16- Disproportionate Ratios………………………………………... 16- Refund Claims…………………………………………………...16Audit Triggers………………………………………………………… 17- Home Based Businesses……………………………………… 17- Excessive Travel and Entertainment Expenses…………….. 17- Excessive Charitable Contributions…………………………...17Lowering Audit Risks…………………………………………………18- File an Extension……………………………………………….. 18- Attach Rider to Return…………………………………………. 18- Avoid Disproportionate Deductions…………………………... 18
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58 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
Preventing An Audit After Selection………………………………...19- No Second Examinations……………………………………… 19- Check the Statute of Limitations……………………………… 19
- 3 years……………………………………………………….19- 6 years……………………………………………………….19
IRS Audit Focus……………………………………………………… 20- Tax Gap $345 Billion…………………………………………… 20- Taxes due and not paid………………………………………... 20- National Research Project (“NRP”)……………………………20IRS Automated Under-Reporter Program………………………… 21- Targets Tax Gap………………………………………………...21- 4 Million AUR Notices Issued…………………………………. 21- $3.9 Billion in Tax Assessments……………………………… 21- IRS Matching Program (CP 2000 Notice)…………………….21
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59 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
How to Prepare for an Audit…………………………………………22- Review Information Document Request……………………... 22- Prepare and File Power of Attorney…………………………...22- Review Tax Returns, Work Papers and Source Documents 22- Review Case Law, Regulations and the IRM………………...22How to Handle an Audit……………………………………………...23- Documents Bates Stamped and Chronological Order
(“ACP”)…………………………………………………………... 23- Pre-Audit Conference with Revenue Agent…………………. 23- Document all Contacts with Agents…………………………...23- Copy all Documents for the Agent……………………………. 23- Keep Agent Busy………………………………………………..23- Use Affidavits for Facts…………………………………………23
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60 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
IRS Summons Authority…………………………………………….. 24- IRS Summons (IRC §7602)…………………………………… 24- Not Self-Enforcing……………………………………………… 24- Powell Factors…………………………………………………...24- Motion to Quash…………………………………………………24Conclusion of Audit…………………………………………………...25- Closing Conference……………………………………………..25- No Change……………………………………………………….25- Agree – Form 870……………………………………………….25- Disagree –
- Thirty Day Letter…………………………………………… 25- Ninety Day Letter…………………………………………...25
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61 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
Final Thoughts……………………………………………………….. 26- Dealing with Difficult Agents…………………………….......... 26- Collecting Attorney Fees (IRC §7430)……………………….. 26- Shifting the Burden of Proof to the IRS (IRC §7491)………. 26
3. Fighting the IRS……………………………………………………… 27IRS Appeals Offices…………………………………………………. 28- Administrative Forum for Contesting IRS
Compliance Actions……………………………………………. 28- 80% to 90% of Cases Resolved……………………………….28- Hazards of Litigation is Key…………………………………… 28
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62 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
When to Seek Appeals Office Review…………………………….. 29- Non-Docketed Cases…………………………………………...29
- 30 Day Letter (Proposed Deficiency)……………………. 29- Collection Actions………………………………………….. 29- Refund Denied……………………………………………... 29
- Docketed………………………………………………………… 29- Regular Cases………………………………………………29- S-Cases……………………………………………………...29
How to Seek Appeals Office Review………………………………. 30- Respond to 30 Day Letter……………………………………... 30- Greater than $25,000 requires a Written Protest…………… 30- Small Case Procedure…………………………………………. 30
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63 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
Preparing for Appeals Conference………………………………….31- Freedom of Information Act Request………………………….31- IRS Positions…………………………………………………….31- Affidavits for Facts……………………………………………… 31- Key CIRCUIT Caselaw………………………………………… 31- Offer to Settle…………………………………………………… 31Settling with Appeals………………………………………………… 32- Negotiation Strategy…………………………………………….32- IRS Form 870 or 870-AD……………………………………….32Alternative Dispute Resolution (“ADR”)…………………………… 33- Fast Track Mediation (Rev. Proc. 2003-41)…………………. 33- Arbitration………………………………………………………...33
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64 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
Final Thoughts……………………………………………………….. 34- Qualified Offers…………………………………………………. 34- Beware of IRC §6673 Penalties………………………………. 34- Form 870, Closing Agreement or Stipulations………………. 34- Settled Cases Are Generally Not Reopened Absent Fraud.. 34Special IRS Collections Matters……………………………………. 35- Collection Due Process (“CDP”)……………………………… 35- Collection Appeals Process (“CAP”)…………………………. 35- Offer in Compromise…………………………………………… 35- Trust Fund Recovery Penalty…………………………………. 35- Equivalent Hearing……………………………………………... 35A Taxpayer’s Secret Weapon………………………………………. 36- Taxpayer Assistance Order (“TAO”)…………………………..36- IRS Form 911…………………………………………………… 36- 10 Year Statute of Limitations for Assessment……………… 36
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65 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
CDP Hearing………………………………………………………….37- Federal Tax Lien Filed…………………………………………. 37- Notice of Intent to Levy …………………………………………37- Suspends Collection Activity…………………………………...37- File IRS Form 12153 to Request………………………………37- Judicial Review…………………………………………………. 37CAP Hearing ………………………………………………………….38- Expedited Appeal of Collection Actions BEFORE They
Occur…………………………………………………………….. 38- Proposed Lien Filing; Installment Agreement Rejected……. 38- Levies That Have Attached……………………………………. 38- Group Manager Meeting Required…………………………… 38- No Judicial Review……………………………………………... 38
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66 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
New Offer in Compromise Rules……………………………………39- TIP&R Act of 2005 (IR 2006-106)…………………………….. 39- July 16, 2006 Effective Date…………………………………... 39- 20% of Offer Amount (Nonrefundable) (Unless Waiver)…… 39Fighting the IRS In Court…………………………………………….40- Tax Court………………………………………………………... 40- Federal District Court…………………………………………...40- U.S. Court of Federal Claims…………………………………..40- Bankruptcy Court………………………………………………..40Tax Court Tickets……………………………………………………. 41- If Appeals Fails to Resolve a Case (“90 Day Letter”)………. 41- Collection Due Process (“CDP”)……………………………… 41- Innocent Spouse……………………………………………….. 41- Interest Abatements……………………………………………. 41- Worker Classifications and Amount of Employment
Taxes Owed…………………………………………………….. 41
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67 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
Top 10 Litigated Issues………………………………………………42- CDP……………………………………………………………… 42- Gross Income (§61)……………………………………………. 42- Failure to File, Negligence and Frivolous Penalties………… 42- Trade or Business Expense (§162)…………………………... 42- Family Status…………………………………………………….42- Innocent Spouse……………………………………………….. 42- Summons Enforcement……………………………………….. 42- Trust Fund Recovery Penalty…………………………………. 42
4. What Makes a Case Criminal vs. Civil…………………………….. 43What Makes a Tax Case Criminal…………………………………. 44- Amount of Money Involved……………………………………. 44- Badges of Fraud/Concealment………………………………...44- Pattern of Conduct………………………………………………44- High Profile Taxpayer …………………………………………..44- Tax Professional………………………………………………...44
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68 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
What Is The Criminal Investigation Division………………………. 45- CID Has Approximately 4,400 Employees World Wide……. 45- 2,800 Special Agents…………………………………………... 45- CID Activity in 2005……………………………………………..45How IRS Special Agents Work…………………………………….. 46- Surprise Visits are Key Despite Miranda Type Warning…… 46- Always two Agents……………………………………………... 46- Beware of Joint CIVIL and CRIMINAL Investigations……… 46How to Deal with IRS Special Agents……………………………... 47- Get Authority from your Client to Convey Confidential
Information……………………………………………………….48- Keep a Numbered Set of Copies for All Documents
Given to Special Agents……………………………………….. 48- Have Witnesses Present for Any Discussions……………… 48- IRC §7525 Privilege Does Not Apply………………………….48
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69 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
Advice to Taxpayers………………………………………………… 48- No Destroying or Altering Documents……………………….. 48- Do Not Tell a CPA or Tax Preparer What is on Your Mind.. 48- Hire an Experienced Criminal Tax Lawyer………………….. 48- Do Not Talk to Third Parties about the Case……………….. 48
5. Hot Topics for IRS Enforcement…………………………………… 49CID Investigative Priorities…………………………………………. 50- Tax Return Preparer Fraud……………………………………. 50- FINCEN and FBAR Compliance……………………………… 50- Tax Haven Abuses…………………………………………….. 50- Tax Shelters (Are Factual Assumptions in Tax
Opinions Realistic?)……………………………………………. 50- Trusts to Conceal Income……………………………………... 50- Cash Economy…………………………………………………..50- Failure to Withhold Taxes…………………………………….. 50
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70 Bob Webb 2006© September 28, 2006
Table of Contents (cont’d)
Help for Tax Professionals…………………………………………. 51- Contingency Fee Cases in Proposed Rules to
Circular 230……………………………………………………... 51- Award of Attorney Fees……………………………………….. 51- Taxpayer Advocate is Geographical…………………………. 51- MY E-Mail: [email protected]................................... 51
6. Q&A…………………………………………………………………… 52