22 Dec [Transcript] Lauren Rinsky Tax Controversies
So, not all IRS representatives are the same, and it’s important to know what type of IRS representative that you’re dealing with. This isn’t on a slide by the way. This is a little pop quiz in the beginning. It’s important to know what type of representative that you or the taxpayer are dealing with. So, look at those who at the IRS. So, I was wondering if there’s anyone here who can give me one of the main differences between a revenue agent and a revenue officer? Someone knows?
Oh yeah. I was a former special agent.
The revenue agent goes out and does the field audits and the examinations, and the revenue officer is typically in the collection area.
Yeah. That’s correct. Okay, good. Yeah, so what she was saying, the revenue agent audits the returns, and the revenue officer is in collections. Now, I’m going to get some slides in. I’ll just talk about three IRS representatives that you may come into contact with, and there’s also more categories other than these three, obviously.
First, would be the revenue agent. So, the revenue agent, they examine or audit the tax return to determine the tax liability. They’re very highly trained IRS exam personnel. The educational prerequisites include having a Bachelor’s degree in accounting or its equivalent. So, when you’re dealing with the revenue agent, and you’re a CPA, you’re on the same page because you’re both used to running numbers and figuring out what the correct amount of tax should be. So, the revenue agent is not involved in the collection of tax debt. They’re just trying to determine the tax liability.
Now, the revenue officer, that’s the person who is collecting taxes on behalf of the IRS. They’re assigned to the most difficult IRS tax debt cases where other automated collection activity hasn’t worked. These are the people that have the power to levy bank accounts, garnish wages, file federal tax liens, and seize assets, and because they’re concerned with collecting the tax debt, and they’re not concerned with determining the proper amount of the tax debt itself, there’s no accounting or tax background for these people. They’re trained in collections. They want to get information like the form 433F, which yeah, there’s all kinds of financial information so they can figure out what the taxpayer has, can they get the money, and how much can they get. If they aren’t going to be able to get it any, then they’re going to close the case and kind of move on if the taxpayer is really uncollectible, because that’s what their goal is, to just get as much as they can, that they’re allowed to get.
I didn’t mention because I was looking at the slide in front of me right there, but I was talking about the revenue agent. As I said, they don’t collect the tax; they’re not carrying firearms, they’re not going to throw you in jail, they’re not going to make arrests. Same with the revenue officer, they might threaten to throw you in jail, but they shouldn’t. They can’t. So, that’s kind of exam and collections.
Then there’s another category, the IRS Special Agents. That’s the police force of the IRS. So, those are their law enforcement officers. So, they’re like police and they’re in the criminal investigation’s division, the CI division of the IRS, and they investigate tax crimes. These are the representatives that would be carrying the firearms and would make an arrest. I guess, the best advice with the special agent would be if the taxpayer is contacted by one of these agents, and I think they typically travel in pairs, the taxpayer should refrain from talking to these people even if they say, “We’re not investigating you.” You should still not say anything and lawyer up, I would say. Lawyer up.
Consult with an attorney and just make sure before the taxpayer possibly digs himself a hole. I’ve heard this often when a taxpayer is contacted by one of these special agents, they’re probably the last one on the list to know they’re being investigated, and they already have this big file built up anyway. So, that’s just three different types of people you could … Dealing with the IRS and it’s important to know who you’re dealing with so that you know how to interact with them. If I didn’t cover somebody that you hear from, Google it and see what they do. You’ll be in a better position to negotiate with them if you know what they’re kinda interested in.
All right, so everyone has asked me what a tax controversy is, so I made a slide, but I’m going just to make this more general than the slide. I’m going to say a tax controversy is a name give to a tax dispute between taxpayers and taxing authorities, and that can be for example, IRS, franchise tax board, the state board of equalization, or the EDD and it usually arises as a result of an audit assessment or a collection activity that’s initiated by the taxing authority. So with the federal tax controversy there’d be the tax authority is the IRS, and then a tax dispute could also be initiated by the taxpayer that is claiming a refund from the taxing authority, so it’d be from the IRS in the case of federal tax controversy.
While the opposing parties in a federal tax controversy are always IRS, they may be represented by different types of attorneys, but it’s always the IRS. Substitutive tax issues could be all over the place. They could be income, gift, estate, employment taxes; it could be anything. So there’s gonna be procedural issues, and there’s gonna be tax issues, and you need to have the ability to understand both. Understand the technical tax law and then all the procedural stuff as well, kind of work within that.
This is a slide I’ve used before; I think it’s really helpful just to see. It’s an overview slide of the federal process, starting at the IRS audit. Then the next level up would be IRS, going to the IRS appeals and then I was going to talk about different things that arise during each of these parts of the process, that’s why I wanted you to have this slide so you could always, if you want, fold the page and you could always look back at it as I’m going through. Up here is administrative levels, you’re still within the IRS. Down here, you’re in trial level courts, fact-finding courts. Here you’re in appeals, so you’re not bringing in new facts anymore you’re just arguing about how this court was wrong, or maybe the IRS is doing that or the DOJ and the supreme court. It’s kind of the general overview of the tax controversy.
All right, so with the IRS audit and start real basic that the IRS is examining or auditing the tax return to verify that the tax reported is correct. There are three types of audits. There’s the correspondence audit, which is where the IRS sends mail to the taxpayer asking for information. Then the IRS office audit where the taxpayer goes to the local district office and talks to the IRS there. Then there’s the field audit, typically, when the IRS official would visit the taxpayer’s home or place of business.
The field audit is the most serious type of audit and that’s because it’s less limited in scope than the other types of audits and it’s also conducted by an IRS revenue agent who, remember I said, is the most highly trained exam personnel and so these are the people that they’re really sending out there for the big, important cases. They’re really looking at. These people out in the field. Whereas a correspondence audit, that’s where it’s conducted by a tax specialist or correspondence exam technician and then with the IRS office audit, it would be a TCO, a tax compliance officer and they’re lower down on the food chain of IRS representatives would be a way to say that. They still need to have the accounting background but it’s like six hours not thirty hours, it’s different. So, when you’re dealing with the revenue agent, you are really dealing with somebody who should be really highly skilled in what they’re doing.
Also, with the field audit, I would say that the taxpayer can and should request that the audit is held somewhere else. The CPA’s office or the attorney’s office and yes, you can make that request for the taxpayer if you have the ability to do that. That’s with a power of attorney, you need to have a power of attorney to act as the taxpayer’s representative for the IRS, and that’s the IRS form 2848. Be sure when you file power of attorney, that you attach any existing ones to it so that the existing power of attorneys don’t get revoked.
If you refer your case to me or somebody else who is an attorney make sure that once the client has engaged them that they get a copy of your power of attorney to attach to theirs because sometimes it’s really hard to get that power of attorney from the taxpayer because they don’t really know what it is, they don’t remember signing it, but that way your power of attorney doesn’t get revoked. I usually try and make sure that I ask them over and over again about it but sometimes you’re in a rush, you’ve got to submit one, and the next thing you know, the one that you already have on file might be revoked.
All right, then I just quickly was going over the attorney-client privilege that only the attorney can give the taxpayer the attorney-client privilege. That means that the attorneys are exempt from testifying at trial. I’m going a little fast because I’m getting into more interesting stuff soon. There is a way that the attorney can bring a CPA or an appraiser or somebody who speaks another language under the attorney-client privilege to help the attorney with the attorney’s client. That extends the attorney-client privilege. It’s not retroactive, so if you’ve already heard something, I can’t cloak that under the attorney-client privilege after the fact.
Then, before we go to the next slide, recent events and just throughout my tax controversy experience, I don’t have a slide, but I made a note to myself right here to discuss retainers, and I was just going to say as a tax controversy attorney and somebody who works in controversies, that I really recommend getting retainers when you take on a tax controversy. It’s just a different … Everybody’s in a different mindset than they are when you’re just helping prepare the returns or doing some kind of planning where there’s this whole positive vibe with everybody. I would say that there’s just a really big difference in the nature of a tax controversy versus transactionally. Say you are trying to help somebody with their audit, but you’re not their regular CPA, well the moment they’re done with the audit they’re going to go. They’re not necessarily a continuing client, so if they haven’t given you a retainer, you might not get paid.
Another thing is, it’s not just about the money. It’s I’ve learned that the taxpayer behaves a lot better when I have their money than when I don’t, and that’s particularly true with collection type case because they tend to be flaky. They’re in collections, they owe a 100,000 to the I.R.S., and they don’t seem really stressed about it at all. It’s kind of when you have their money, and they know you’re billing them, and you’re pulling it from that retainer that you’ve gotten; they’re going to call you back, a little bit faster, than they would if they know that you don’t already have their money.
That’s another reason to get it and then be sure if you do some kind of retainer arrangement that you’re clear that you’re not charging a flat rate because sometimes they think, “Oh well you’ve just given me an estimate, but that maybe that’s just your retainer for where you’re starting for the audit and then if it goes to appeals, you’re going to require more for that.” There’s something called an Evergreen retainer. I don’t know if that’s language people actually put in their agreements, but that’s where the person has to keep replenishing it once it goes below a certain amount.
It’s just a good idea, I recommended it, having the retainer and I wouldn’t let the bill accrue. Even if the taxpayer’s expecting a refund because the same thing, once the controversy is over if they don’t have particularly complicated tax returns going forward, maybe they just had some big issue the year they sold something, you know? You just want to have it there and it just kind of makes everybody gets along better, and everyone’s always happy to get the money left over from the refund then having a bill at the end too.
All right, then I was going to give some tips on a couple things on the audit, during the audit and that first would be, minimizing the contact between the IRS and the auditor and the taxpayer. Then, that I think it’s important to respond to the IRS within their stated deadlines and if you need more time to respond, don’t wait until last minute to request an extension. This I think is really important because if the taxpayer doesn’t respond to the IRS within that stated deadline and ignores the IRS, well, one the IRS is more likely to extend the scope of the audit and just start asking more questions.
So, maybe the audit would have been concluded if they just provided the one thing right away and the other thing that could happen is the IRS could just get angry and jump the gun and send a notice of deficiency. Then, suddenly things are way, way escalated and so it’s really important to not ignore the IRS and also just as the taxpayer’s representative, it’s important to note that if you don’t respond to the revenue agent or officer or whoever you’re dealing with, that’s hurting your credibility with the IRS and that hurts your ability to represent that client and all your other clients that you have before the IRS, if you get a reputation as not responding to the IRS when they want you to.
I guess part of what I’m bringing into this talk so far, is that you want to be concerned about the taxpayer we also want to protect your ability to represent that taxpayer and other taxpayers going forward. You have to think of the whole big picture when you’re handling tax controversy or when you’re interacting with the IRS. Then also just be brief in your responses, don’t volunteer information not requested. Unless you’re trying to get another deduction, then put that right there, give them that information. Keep good copies, or keep good records and copies of what you provide and one helpful way to do this is including a transmittal letter when you respond to the information document requests, IDR’s. In that transmittal letter, you have to describe the documents you provide. If you just say here are the documents you requested that doesn’t really help you with keeping a record of what you’ve submitted. It’s just a poor tree that was turned into a piece of paper.
So, it’s important too; I think transmittal letters are really helpful. It’s also really helpful if the case escalates or you need to pass it on to another CPA or an attorney; it’s nice to have good records so that they don’t have to reinvent the wheel all over again. Then, just noting that the IDR’s at the start of a field audit, they tend to be broad and then they’ll start to get more focused as the audit goes along and so you get an idea of what they’re looking for. Finally, don’t give your original documents to the auditor because if they lose them, then the taxpayer won’t have them to show that the expense was there if the receipts went ’cause they’re not responsible for losing them. We think they should keep everything and have it all organized in their file but human error and it’s not their responsibility to keep it so I would not give original documents. I would always make a copy.
Then, once you’ve had your audit, there are the different ways the audit can conclude. First would be a no change. That’s where the IRS accepts the return as filed and the taxpayer gets a no change letter, so that’s really good news. Another way it could end would be a refund, and that’s where the taxpayer would be due to a refund at the end of the audit. They get interested in that refund, so that’s really good. Then, agreed would be where the IRS proposes changes and the taxpayer agree with the changes, and then a disagreed would be when the IRS proposes changes and the taxpayer disagree with the changes. Of course, it doesn’t have to be an entirely agreed case or entirely disagreed; there could just be some issues that everyone’s disagreeing on.
So this is the breakdown in my mind of how I think of an audit ending. Let’s see. When you’ve got the disagreed and the audit ends as disagreed, then the IRS issues a 30 day … They’ll issue a notice to the taxpayer called a 30-day letter that has the findings of the examiner, audit report and the taxpayers’ appeal rights. You’ve got that on your slide, so I’ll keep going. The examiners propose assessments within the IRS, taxpayer has 30 days in which to file a protest requesting a conference with the IRS field office to discuss the disputed issues, and if the taxpayer does nothing then the IRS would issue a statutory notice of efficiency, also called a stat notice, or IRS calls it a SNOD. I like stat notice. I’ll discuss that later.
Okay, so if the taxpayer replies to the 30-day letter in a timely manner, then the taxpayer will usually receive a response from the IRS stating that they will transfer the case to the IRS appeals division, which is a separate part of the IRS. However, that’s not always the case, and that seems to be becoming less and less the case. The IRS could go straight to the 90-day letter, and I’ve had cases like that. I had one just really recently where we responded to the 30-day letter, and the auditor was adamant that we mail it on the sixth of August, which was a Saturday. I said, “Well, that’s not the rule but fine, I’ll do it.”
So I did that, and then the taxpayer got a notice of deficiency and response, and it was, I’m sure it’s going to be a real big mess because there’s … It’s almost as if the government had disallowed everything on the schedule C. So like all the expenses, phone calls and phone bills, everything so there’s lots of substantiation issues. I don’t know if there really are any, in my opinion, there weren’t really any legal issues there so now they’re stuck with tax court.
Apparently, this is not happening in just my cases. I guess, it’s been happening over the country it seems like with appeals. There seems to be a trend where they don’t seem to be particularly proactive with cases so it’s really important to try to resolve what you can at the audit level. Obviously, if you’re not getting anywhere, then it makes sense, okay, then try to go to appeals, but you might not get that appeal before you go to tax court so it’s still important to try and resolve what you can at the audit level.
I guess, one of the e-mails was saying that part of the problem is they don’t have the personnel or the resources that they usually have. They’re short staffed, and part of this is from the budget problems, and another problem is that they’ve just had a lot of retirements of the experienced staff, so they don’t have a lot of experienced people working in appeals and so even if you get appeals you might get an hour with them, or you might get an appeals officer who’s really stressed out and yell the whole entire time because they just are really overworked.
One of the attorneys that wrote in that e-mail thread that I was in said that they had two cases that went to, let’s see, they went, it said they had two cases where the revenue agents did not audit the taxpayer, and they went straight to the notice deficiency, and then after filing petitions in tax court, the chief counsel’s office had to step in and tell the auditor to do the audit because they hadn’t even done the audit. So IRS counsel’s, you know, “Go do the audit.” It sounded like it was pretty … One of those cases, they said the revenue agent disallowed 100% of the expenses, and it involved real estate and disallowing property taxes even. I mean, it was just … So, there’s just something not so great; they’re just really understaffed. Oh, sorry. Yes?
I think, maybe I’m wrong too, but I think we’ve seen things like that, simply with the return. The client doesn’t respond at all to anything. It just marches through the process, and pretty soon you’re at the 90-day letter, and the client’s all, “I never got anything.” The IRS is not doing anything ’cause they said, “Unless you showed response.” No one responds, and they keep going so pretty soon-
Yeah, it’s like, I think they’re short staffed, it sounds like, in an audit, even also too. I guess maybe that would be if Hillary wins then maybe our business will increase. Or mine will.
Sooner or later, the taxpayer has to respond, or you can’t necessarily blame the IRS for marching down this order. That’s where I think what you just read about came from.
Well, sort of but actually, well the one attorney that I was quoting in that e-mail was, he was saying that the auditor was assigned to the case and didn’t even do the audit. They must have just sent some welcome to audit and then just notice deficiency. My case, we provided a couple hundred pages of receipts and a very concise letter that explain the receipts, and they issued a notice of deficiency. It just made no sense, but yeah, you definitely don’t want to ignore them because that wouldn’t bring it up.
I agree to that.
Okay, so that’s why I said they’ll usually receive a response saying it goes to appeals but it might not. All right, so once an appeals officer is assigned to the … Did I talk about the protests? Yes. Once the appeals officer is assigned to the protestor, I’ll just call it the appeal, typically, it’s a protest when I’m doing a formal written protest versus other cases where it’s a small enough dollar amount, maybe you don’t need it to be in writing, or there’s more informal protest but probably everybody in here, we’re handling an appeal to the IRS, we’re probably doing a protest, a written one.
Once it’s assigned to the appeals officer, they’ll receive the file, including the protest, the audit report etcetera and they’ll determine whether they need more information from the taxpayer and schedule a conference with the taxpayer and/or taxpayers representative to discuss the protest. I guess, another thing to throw in here would be it’s good to have sometimes, your power of attorneys on file, then you’ll get copies of these notices. Sometimes if you have clients that travel a lot and don’t check certified mail, you could miss out on certain documents that are important. Although, I don’t believe that the letter comes certified because it’s not, well, it’s not a statutory letter. There are certain letters that you definitely don’t want to miss that come certified; there are certain types of collection letters that give you certain rights.
If you don’t accept the letter, it doesn’t matter. What matters is they prove they mailed it. I would always accept anything certified by the government. I have a collection case where they didn’t accept it, and they lost their collection appeal rights because of that. All right, when you’re with the appeals office and IRS the conference is typically informal, and it can be deducted by phone, in person or by mail. Unlike a revenue agent, the appeals officer considers the hazards of litigation for both sides in evaluating the case. So when you’re dealing with the revenue agent, and you start talking about, “Oh you are going to lose at trial.” They don’t care. They don’t care if the person doesn’t even have the money to pay it. They should care, but that’s not part of what their job is. Most matters will be settled at the IRS appeals office. Okay, I should speed up. Yes? Oh sorry, yes?
Do the appeals officers get together and have discussions about the hazards of litigation or is it an individual by individual basis?
I would think that the appeals officers, they could talk to each other. They’re not supposed to talk to the examiner without you, but I never worked on the government side. First, this is unusual. I’ve always been on the taxpayer’s side, but I seem to have a lot of cases that have gone pretty high up in the process. One went to the Supreme Court, so I’ve had a lot of going really high up, but it would just be me guessing, but I don’t see why they wouldn’t bounce ideas off each other the same way I do with people here. Then they also would probably have their supervisor, their manager above them, but I don’t know if the hazards of litigation are really going to help that much.
There is a way, sometimes, you can force them to consider the hazards of litigation, like really consider it, with attorney fees and stuff, but that’s like later in my discussion.
I’ve got three separate clients that are in appeals right now. All have the exact same issue with three different auditors. We had our first appeals conference on Thursday, and it went really well so I’m trying to figure out if I can get the other two to be part of that same appeals. Has to do with R&D Credits and whether they’re allowed for a particular industry or not. So, the IRS came in, audited it and said, “No way, R&D doesn’t apply to this industry,” so they disallowed the credits. We’re all in appeals right now. The first conference was Thursday, and as I said, it went really well. I just wonder if they talk to each other-
Are they assigned to different-
One person’s going to say yes, the other one’s going to say no, and it’s the exact same issue.
They’re assigned to different appeals people?
I don’t know if it would help, but I would always put stuff in writing.
As I said, if one person agrees and the other two don’t agree, or two agree, and one doesn’t agree, I’m going to have a mess on my hands.
Say, “Hey, why don’t you go talk to your colleagues.”
I’m a little worried I won’t make it through my slides-
So, I should keep going, but I can totally talk to you about this more.
It’s interesting to me, and I think it’s interesting to other people. Maybe I’ll have time in the end, but I just want to get through a couple things. I can say though from a lot of the litigation I’ve had, I’ve had a lot of cases where I used to work at a … Because all my cases now are newer, so I have less that are at court level, but I had a lot of cases that were in court, and I think that the IRS and I are both just making up the law as we go along.
We had these people left out of the partnership proceeding, and that was really good and then another case, the IRS argued, “Well, they elected out, so they’re actually-” They were using our arguments against us and then we did it against them, and it’s just like you get to this point where it’s just, everyone is making it up because every situation is always going to be a little different. Yeah, you can have three clients the same, but there’s always going to be something that’s going to be almost the same but just slightly different.
I’m going to keep going, my slides and so we’re kind of still on the … There hasn’t been an assessment yet because we’re still in appeals with the discussion that we’ve been having so I thought I’d talk a little about the statute of limitations for assessment. That’s where the IRS, they typically get three years from the date the return was filed to make an assessment, and there are six years in the case of a substantial admission, and that’s when the taxpayer leaves off more than 25% or more of their gross income from … Sorry, I keep reading the slide, but I don’t need to. It’s just right there.
So if you admit more than 25% of the gross income stated in return, they get six years, and it’s unlimited If there’s an un-filed or fraudulent return. So, it’s always important to get that return filed, get that statute-
So, we have a client that got … The partnership got audited for 2011, and then they reopened all the partner and assessed the tax and then we finally realized that the K1 is fine in 2013 but on the partner statute of limitation already expired. What can we do in that case?
There are so many cases on … I couldn’t answer it out of my head right now, but I can just say that I know that there’s different rules where if there’s something from the partner’s return that’s part of that proceeding, that there’s a way that there’s something open in the statute, I’d have to look. I don’t know. Do you think you could ask me later on it?
Yeah, I can talk after this. I’ll keep going, but yeah, there’s weird rules. I wonder what’s going to happen when TEFRA goes away if that’s going to make these cases go away, yeah. I will look into it. I can say that there’s sometimes you can, I wouldn’t say it as legal advice, but sometimes a good jumping point, there’s a Google search, and you find an article that’s written about what you want and then with me it puts me in the right direction of case law and then I just keep going. Sometimes that’s like, with the internet it’s really good to find that but, I’ll get back on that one. I just want to keep going through these.
So, when you’ve got the statute of limitations. It can be extended by written agreement between the IRS and the taxpayer, and these agreements are called consents and IRS has forms for them. There are two basic kinds of consents. There’s a fixed date consent, which sets a specific expiration date for the statute of limitations and an open-ended consent and that has an indefinite length of time. There’s also a restricted consent, which can be either fixed date or open-ended and that limits the further examination to specific issues. You could make it really narrow and probably a little harder to get the IRS agreeing on that.
So the question is, should you extend the statute of limitations? What I look at is if there are legal issues, only legal issues remaining, it doesn’t make much sense to extend the statute of limitations. If there are factual issues, then extending it might make sense. Then a factual issue would be, you look at the facts to resolve that issue. If it’s a legal issue, you’re going to look at the law to resolve the issue.
In a substantiation case and the taxpayer is trying to get some documents to prove some expense, some really big expense, it has to be big enough to be worth extending the statute for. Then it might be a good idea to extend the statute of limitations, but if you’re just arguing with the auditor about whether or not something really is a legal expense or really is a business expense and you’ve already proven that now it’s been paid, then I would say it’s not worth it to extend that statute of limitations because you’re really not dealing with a lawyer. You might be, the revenue agent, some of them are CPA’s, some are lawyers, but it’s probably better to let that kind of go up higher in the process. For me, I would rather not extend it.
I also have just this other slide I added in, it’s just kind of to let you know that even though we’re discussing what happens when you have income tax audit, and there’s the, where we get to do a 30 day letter, the protest in response, there are also other ways that cases get before IRS appeals, and there are other IRS determinations they hear and some of those include the proposed assessment of a trust fund recovery penalty. T, I think I did it, yeah, TFRP in 6672. That’s when the employer has not paid, when they withhold money, when there’s withholding from the employees paychecks, and the employer holds that money in trust and they don’t pay it to the government and then if the government can’t get it from the company, they’ll go after responsible people, responsible persons.
It’s called The Trust Fund Recovery Penalty. So, if the IRS proposes assessing that penalty to your client, this is something that could be appealed to the IRS. Also, issuance of a lien or proposed levy or seizure and there’s a different type of response but still an appeal to IRS. It’s to be a question due to process hearing, or it’s called an equivalent hearing, but that’s something else the IRS appeals handle. Also, a proposed rejection by the IRS of an installment agreement or an offer and compromise. Those are all things that could come under the jurisdiction of appeals, and there are others as well.
So say we’re back in our scenario, we’re following where we have the taxpayer has filed their protest response to a three day letter, they had the appeals conference and so now if the or actually, I guess I started with a couple other things, but next step in the process would be when there is a new issuance from the government of the deficiency, so the 90 day letter. If the taxpayer doesn’t respond to that 30 days a letter or is unable to reach agreement with IRS appeals following the protestor that statute of limitations is about to expire and you’re not willing to extend it, the IRS will send the taxpayer a statutory notice deficiency, commonly referred to as a 90 day letter, stat notice, SNOD.
Of course, it is possible that they won’t issue this notice and the statute will run. That does happen, but it’s not something I would count on. Often if it does the government will try and figure out a way to get you into that six-year statute, if they can. The notice of deficiency is, everyone calls it the ticket to tax court, and that gives the taxpayer 90 days within which to petition the United States tax court to redetermine a deficiency that’s proposed by the IRS. It’s 150 days if it’s mailed to the taxpayer outside the IRS.
It’s really important always to remember that the 90 day period cannot be extended, at all. So you can’t ask the IRS to extend that time period. It’s 90 day or possibly 150 days, cannot be extended. During the 90 day period, the IRS is barred from making an assessment or any collection activity. If you fail to file that tax court petition with the tax court within the 90 day time period, that will result in the deficiency being assessed and if the deficiency, kind of interchanged the words there, deficiency, liability, if it’s assessed and the taxpayer does not pay that amount of the assessment, the IRS will begin collection activity.
I will put up another slide. So this is a statute of limitations for collection as opposed to assessment. Assessments kind of where the IRS puts it on their books and then the collection is, okay, now it’s on the books, let’s go collect it. Typically, the IRS has 10 years from the date the tax is assessed to collect the tax. I think California, it’s 20 years, which is much longer and there used not even to be a statue for collection with California. That statute is a very new statute. I don’t think it’s been tested yet. Nobody’s been able yet to claim it’s run because it’s new and it’s such a long time period.
Anyway, at the IRS, it’s 10 years. However, certain taxpayer actions can extend that collection period, and that would be things like filing bankruptcy or an offer and compromise or a request for innocence spouse relief or timely question due to process appeal. Any of these things prevent the IRS from collecting, so the statute is tolled, and it’s important when you’re thinking of ways to resolve, I call collection cases where the taxpayer has debt with IRS. Yeah, offer and compromise sounds like a great idea but it takes typically, at least nine months for them the even look at that. So the whole time you filed that offer and compromise request with the government, that 10-year statute’s not running, it’s on hold. It’s just sitting on hold, and meanwhile, the person’s probably not making payments, everything’s getting larger with what they owe.
It’s not always the best method especially if the taxpayer has a property with a lot of equity in it, just the whole reasons why it might be denied. Sometimes a regular installment agreement is just much safer, and it won’t toll that statute once you’re in it. While they’re considering it, it’ll be tolled. Then, even though the 10 years, so say the ten years, it still could be extended but it’s extremely unlikely that the IRS can sue the taxpayer for a judgment in court to get more than 10 years and that’s similar to like a credit card company even would reduce the debt to a judgment so the IRS can do that too.
All right, how am I on my time? Okay, appeals to the federal courts. It’s known as a judicial review; taxpayers may request judicial review. IRS determinations by filing the petition with the tax court, with that 90-day letter, right? Or use district court or the Court of Federal Claims. The tax court is a court of limited jurisdiction. Its created by Congress under article one so it’s not in the judiciary branch, and they hear tax cases. The tax court, unlike other judicial venues it does not require the taxpayer to first pay the amount in dispute in order to file suit, and that’s an advantage of the tax court route. The Tax Court is in Washington DC, and the judges travel around the country, and they travel to a bunch of designated cities.
I think there’s a slight, well, you can find this on the tax court page, but some of them are just for small, small, S cases. The under $50,000 cases. That’s where the judges go, but the court is headquartered in DC. Then in tax court, there is no jury trial. The case is tried before a single judge with expertise in tax law, and it has its own rules and procedures that supplement the federals of civil procedure. The IRS represented by chief counsel’s office, the IRS counsel, that’s what I call them. Unlike other judicial forums, non-attornies can represent taxpayers in tax court but only if the nation-attornies is admitted to the U.S. tax court bar. So to get admitted to the tax court, attorneys must submit an application, a fee and a letter in good standing from the appropriate bar. I do have multiple bars but say I could get a letter from California Supreme Court, my highest bar. Get that letter and say I’m in good standing with the bar and that’s what I would be submitting.
For a non-attorneys, non-attorneys must submit the application, a fee, and they must pass a written exam that’s given by the court, and they must also be sponsored by at least two persons that are already admitted to the court. The stats aren’t so great, but attorneys represent the majority of those admitted to the tax court bar, and you can see from this, I found this on tax court webpage. I’ll give you more detail if you want where I got the statistics from so I don’t run from time, but from 2004 to 2012, there are 37 non-attorneys admitted to the tax court bar, and there were 9,738 attorneys were admitted.
Now, there are CPA’s that are lawyers so then they would probably get admitted under the attorney route not take that exam. So this number 37 is not quite as low, but if you are CPA and you’re admitted to tax court, and you’re not a lawyer, you’re special. You’re one of those 37 people. Or I guess whoever came in the last … ‘Cause this statistic only went to 2012. Part of the reason I think that the difference is so, there’s such a big difference, is because the pass rate is not so great.
They have this, the tax court publishes this, so you can pull it up in an online search, or you can look at my slides. I’m going to keep going, but you can see that the pass rate 2014, 126 took this exam, 23 passed it. Part of the reason it’s so difficult is it tests you on tax law, subsequent tax laws, tests you on the rules, the court, tests you on evidence rules. It tests you on professional responsibility, it wants to make sure that you know the text but you also, the procedures, I’d say, I think the procedure’s a lot more important. I have to learn tax law for each case I’m in, and the procedure is kind of similar throughout so I just have like … Being the attorney is really helpful once you’re in tax court.
Okay, and let’s see. So, generally case petitions to the US Tax Court will be considered for settlement by IRS appeals officer before the tax court hears the case, but it’ll be a docketed appeal. That means if there’s a settlement reached with appeals, IRS counsel must agree to that. This is another reason why you go to tax court. So say they just jump the gun when you’re in an audit you don’t get to go to appeals, well when you go to tax court, ideally you’ll get them, once IRS counsel has the case, they’ll send it back to appeal to try to get it resolved. I think appeals actually has almost exclusive jurisdiction in the first four months. I read that somewhere, so I think they do have a policy even where they’re trying to get appeals to look at it. Although appeals are not so interested in your case until it’s calendared ’cause, as I said, appeals are kind of understaffed right now.
So in tax court, the cases commenced by filing a petition and timely petition, a filing fee, a statement of social security numbers or EIN. Then where you request where you want the trial, you pick one of the cities, and sometimes you need an ownership disclosure statement, that’s for certain corporate taxpayers. So then after the petition, the IRS answer and if a reply is required, the case is considered an issue and pre-trial recovery can begin, and that’s typically when it gets kicked back to IRS appeals.
So here’s another venue would be the US District Court. The difference with the district court, tax court, the main difference, is
the taxpayer must first pay the disputed tax liability and file a claim for refund of the tax prior to filing the lawsuit. You could have a judge or jury trial, and DOJ tax is who’s representing IRS, not IRS counsel. Similarly, the US Court of Federal Claims is another venue you can go to. It’s a special limited jurisdiction type court. It’s designed to hear claims against the United States tax claims in that. Just like district court taxpayer must pay the disputed tax liability, file a claim for refund of the tax prior to filing a lawsuit. There’s no jury; the IRS is represented by DOJ, The Department of Justice.
One thing unique about the court of federal claims is that the appeal will always go to the federal circuit whereas other courts will go to whatever circuit court is in, I’ll say the geographical area where the taxpayer is. I’m not going to go into detail on that. So filing a refund generally taxpayer has three years from the date the original term was filed to file that claim for refund or two years from when the tax was paid, whichever is later. So sometimes this works out in the taxpayer’s favor ’cause they don’t pay their 2008 tax ’til 2015, so they have a lot more time to file that refund claim, whereas had they paid it in ’08 then the statute has run. So sometimes it helps out when they haven’t paid, but I would not recommend not paying. Okay, and then, filing the suit for refund, so once you’ve filed this refund claim, you have to do the refund suit within two, no later than two years after the IRS has rejected the claim, but if the IRS sits on it for six months, you can go to district court.
Okay, so how am I on time? Okay good. I just have a little bit more. I’m going to talk about something happy. Taxpayer recovering fees and costs from the government when they’re successful. So, there’s the IRC, so internal revenue code. Section 7430 that gives taxpayers a right to recover reasonable costs including fees of experts and attorneys paid in connection with certain federal tax controversies, giving a very rough description of all this for you, so there’s a lot more detail in it. 7438 covers both litigation costs and costs incurred during administrative proceedings. It’s extremely difficult for a taxpayer to recover costs. So, before I go to my next slide, as I discussed earlier, the IRS uses a 90-day letter, stat notice, to inform the taxpayer of what the IRS has determined to be the taxpayer’s liability.
So, there’s something called a qualified offer, and that’s kind of the not … Or that is the taxpayer’s 90-day letter to the IRS. So with the qualified offer provisions in 7430, they provide the taxpayer and ability to send their own 90-day letter to the IRS. That offers the IRS with the taxpayer believes to be the correct tax liability, and if the IRS doesn’t accept the taxpayer’s qualified offer within 90 days, and the judgment awarded to the IRS is smaller than the amount of the qualified offer the taxpayer had made, then the IRS is on the hook for the taxpayer’s reasonable administrative and litigation costs, such as attorney fees. I say reasonable, so if your rate is $400 an hour, reasonable is maybe $180. I think it’s defined in the code of what the person would get back.
Their qualified offer must be in writing, there’s a whole bunch of timing requirements on it, and it’s a lot more complicated than that, but it is a really good strategy because it increases pressure on the IRS to settle the case, and it creates a potential for the taxpayer to impose costs on the IRS, when the IRS refuses to accept reasonable settlement offers. A case with a qualified offer should jump up that list of the to-do list for the government whether dealing with DOJ, Department of Justice or IRS counsel. Because if the IRS doesn’t act quickly, they may have to pick up the tab for the taxpayer’s fees.
As an example, I had a recent tax court matter where taxpayers were clearly correct. They were clearly correct, and I made a qualified offer to the IRS counsel for one dollar because I was trying to get their attention, and within less than a week I was contacted by IRS appeals, and the case settled within the 90 days, and the taxpayer had nothing. Like I said that case I knew the taxpayer was right. It just somehow … Sometimes, it just goes up in the process, and it doesn’t get caught, and it’s computer errors and stuff like that. Anyway, it’s a really good … Qualified offer kind of gives you some leverage in negotiating with the IRS.
So that’s where my talk ends, ending on a high note where you maybe get the money back and then the taxpayers really happy. So that’s the end, and I don’t know if anyone has questions. Tried to … Hope I didn’t talk too fast, but I had some questions in the middle that I’m happy to follow up on, but does anybody have any more? Okay. I was trying to talk really fast. All right, well then I think, yeah, that’s all for my talk.
Hey Lauren, you talked about that issue about how you don’t get attorneys fees if you do it, you know, on a setting or directly the BOE instead of going through appeals?
Oh, yeah. So that was with, I guess with the state. So that was when I was saying when you go back to here under 7430, there are all these requirements in there you have to exhaust your administrative remedies, you have to meet certain work requirements. So I guess, well what I was talking about with Fiona earlier was that when she was saying, “Well go to the board.” I thought, well, if you jump to the board and you don’t exhaust all your available administrative remedies, so now we’re back in California, then you can’t try and get the attorneys fees from the government and what I’ve learned is that the government does not want to be on the hook for attorney fees, they really look at the issue really closely.
So if you were to skip a part of the process and go straight to the board and you had an opportunity to file the protest and go to an appeals part before you go to the board legalization, ’cause that’s still administrative, it’s not a tax court. It’s still part of the administrative proceedings. You jump to that then for the rest the case the IRS would know, oh you didn’t exhaust your remedies, so you’re going to have a … You won’t really get attorney fees. So you lose a lot of leverage in that. That’s kind of what I was talking about with Fiona. I was just asking her. They kind of know that so they kind of keep you in protest, it seems like. Yeah, that’s kind of what that was.
There’s a bunch of requirements under 7430 federal level, and you have to exhaust your administrative remedies. So the case where the government maybe goes straight from the audit to the nearest efficiency, well you don’t have to file a protest because you can’t, so then there’s nothing to exhaust. You’ve exhausted all available remedies ’cause they never gave you a chance to go to appeals. So that’s, yeah. It’s really based on what the taxpayer chooses to do by what’s available to the taxpayer.
Okay. Anymore? Oh, yeah?
Yeah, I end up doing a fair number of reasonable cause letters for people who’ve got the $10,000 penalty assessments for international delinquent forms, and I don’t know, the IRS seems a bit schizophrenic on this because they’ll give it away through few who self-remediate, but if you file a tax return and a day late, you know, you’ve got a problem. What’s been your, if you’re doing this kind of work, what has been your recent experience in trying to get those penalties evaded for the reasonable cause?
Well, I’ve seen that $10,000 penalty, but usually when it kind of only has to do with just that, the person who hasn’t been willing to pay a retainer for me to do it-
Oh, got it.
So I haven’t taken it, but I can say with the reasonable cause, I’ve had reasonable cause work with the reliance on the tax professional. I’ve had that be successful. Stuck with that penalty, but it’s with the accuracy penalty. So it’s just like a reasonable cause type argument where it was very technical, really complicated. It had to do with the taxpayer getting the property through like a part gift, part sale so there was this whole issue about the basis, calculating the basis of the property. The CPA used the refinancing basis. So they didn’t use the right number, but the taxpayer had given all the documents they could to the CPA, so I was able to get … I had luck with reasonable cause there.
I mean, I don’t think the first time evasion probably doesn’t work with … I don’t know if it works with that, but I don’t know if you’ve ever-
… whatever I can right? Usually, if you can’t do that-
‘Cause it works over the phone.
You have to tell them that their revenue manual got rid of the minimum amount, so I got a $21,000 penalty waived on the phone.
… going to work on the phone if they meet the criteria, but if-
It doesn’t lose interest though, so they still get hit with a really big interest amount sometimes.
I don’t really care about the interest, right?
What does a reasonable cause may allow you better?
Well, yeah. So, everybody asks me if I’ve got a template and I tell them to tell the truth. Yeah, those are tough clients to serve.
I think my interest was, the case I had, is $16,000 interest, $24,000 penalty. So, it was like sometimes interest was high ’cause it was a sale of an option, so it was kind of like, they had all this gain. So sometimes it’s a big number … Yeah, usually not like that, but I would say reasonable ’cause, I mean, I’d say if you have a lot of luck with it, you could publish something on it probably. ‘Cause I think there’s a lot of discretion with the people reviewing it. Until you get it high enough up. Have you ever taken-
I’ve had the experience where everything is getting kicked up to appeals.
Lauren Rinsky: ‘Cause they can’t do the hazards-
The second letter, the third letter is taking too long.
Lauren Rinsky: Have you met appeals on it before?
No, I haven’t yet, but we did have one situation where, honestly, it took a year to resolve.
Especially going to court though.
We agree with you, but it took a year to get there.
Yeah, I guess it’s ’cause appeals is considering how to do litigation? I mean, you can look into it. A qualified offer kind of scenario too, but you have to have a letter that gives you a right to go to appeals before you can make that qualified offer. Once you’re at appeals, you could make a qualified offer. They do take it very seriously. They monitor it; they keep talking. Every phone call they mention it, that we’re talking because of this qualified offer. So, it is really interesting, yeah.
Okay, I don’t want to take your time.
and I know I had … Yeah, some questions