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What the non-tax lawyer should know about tax procedure.
Jeffrey B. Kahn, Esq. - Board Certified Tax Lawyer
Law Offices of Jeffrey B. Kahn, P.C.
Walnut Creek - San Francisco - San Jose - Los Angeles - San Diego - Orange County
C. Unreported Income
1. In the debriefing of the client, before any disclosures are made, counsel will best be able to determine whether the taxpayer has engaged in activities that are likely to be known to the IRS. If the IRS decides that the information is not new to it, agents will listen politely and then use that information against the taxpayer, who will not have dug a hole from which he or she may never emerge.
2. Among other things, counsel must ensure that the unreported income was all "legal source" income - money made from lawful dealings. Dealers in illegal drugs, for example, cannot benefit from the voluntary disclosure policy. The taxpayer must also be willing to disclose all entities that are related to him or her. For example, if he or she owns a string of restaurants each separately incorporated, the IRS will expect him or her to identify each and to make sure that each set of returns is up to date and accurate.
Given the hazards built into the involuntary disclosure policy, is it ever wise to pursue a disclosure? These days, in particular, the answer is "yes". Law enforcement resources are stretched thin, and with the Justice Department focused on terrorism, the IRS is often happy to get a taxpayer back in the fold without having to launch an investigation. The taxpayer must simply be aware of the rules and be candid with counsel about his or her situation. While there are no guarantees, practice reveals that properly made voluntary disclosures are usually effective. As long as the taxpayer is careful, he or she likely will wind up poorer but still free, which definitely beats poorer and in jail.
II. Civil Tax Controversies
A. Types of IRS Examinations
1. The simplest examinations conducted by the IRS are Campus Examinations. Campus Examinations are correspondence exams addressing simple problems like substantiation that can be resolved easily by correspondence and/or telephone.
2. Area Office Examinations may be conducted for slightly more complicated issues such as small business returns and more complex non-business returns. Area Office Examinations may be conducted by correspondence, office interview or even by a field examination, depending on type and complexity of the return. In all cases, the taxpayer is asked to provide supporting documentation of questionable items. Business returns will always examined an office or field interview rather than a correspondence examination.
As a practical matter, examiners at the correspondence and office levels are much less invasive. The examining agents are required to process many cases and often have little time to completely familiarize themselves with the return. Indeed, the examiner may not have reviewed the taxpayer's file and return until after the taxpayer has replied to all correspondence regarding the examinations is generally not until the day of the interview. The scope of office examinations is generally limited to items on a checklist of issues contained in the Internal Revenue Manual. The examiners have little discretion and basically, are charged with Manual. The examiners have little discretion and basically, are charged with verifying income deductions based upon records provided. A taxpayer's inability to produce adequate records may lead not only to disallowance of the disputed items for the year at issue, but also to audits of other years' returns.
3. Field Examinations involve more complex issues. The examining agent will be a revenue agent, as opposed to an officer auditor. He or she will be better trained and will have more experience. A Field Examination consists of examination of a taxpayer's books and records at the taxpayer's place of business or where the books, records or source documents are maintained. The agent will revuew the taxpayer's entire return and all documentation related to that return. The agent may be assisted by a technical specialist such as an "engineer agent
if the return presents a special issue such as valuation. Unlike, office auditors, revenue agents spend considerable time preparing for the examination. Prior to the examination, the revenue agent will review any prior examination reports from the same taxpayer. This may lead to scrutiny of recurring issues or inclusion of other years' returns in the examination. Of course, the revenue agent will also look at the return for unusual or questionable items.
B. Taxpayer Rights During an IRS Audit
1. The right to be provided certain information describing the examination process and other rights at the commencement of the examination.
2. Examinations must be conducted at a reasonable time and place and taxpayers have the right to bring representation to any interview.
3. The taxpayers have the right to record any interviews with the agent.
4. The taxpayers also have the right not to be interviewed, except through the summons process, and must be notified of any summons to third party and of their rights to quash any such summons.
5. Taxpayers have the right to have their tax information kept confidential.
C. Burden of Proof
1. Generally, there was a rebuttable presumption that IRS's determination of tax liability is correct, and therefore (with some exceptions such as fraud), the burden of proof was on the taxpayer to show that the IRS's determination was wrong.
2. For income - the taxpayer has the burden of proof that funds received or benefits earned are not taxable.
3. For expenses - the taxpayer has the burden of proof that funds paid or costs incurred are deductible.
D. Interacting with the IRS Agent
1. When possible, the taxpayer's representative, not the taxpayer, should interact with the agent. Indeed, in most cases, the meetings should take place at the representative's office, not the taxpayer's employees) should be minimized. Agents are trained in interviewing techniques designed to elicit information. They will ask open ended questions, and will listen carefully to the responses. Taxpayers who meet with an agent should be careful to answer only the question asked.
2. Absent having been served an administrative summons, a taxpayer has the right to refuse to be interviewed. Although, historically examining agents have been reluctant to press for taxpayer interviews, examining agents have been reluctant to press for taxpayer interviews, examining agents have become more aggressive in seeeking taxpayer interciews and using summonses to compel them. If interviewed pursuant to a summons or otherwise the taxpayer has a right to counsel and may assert appropriate privileges.