The Internal Revenue Service: Everything You Always Wanted To Know But Were Afraid To Ask

1. 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

2. Robert C. Webb • 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 2

3. Robert C. Webb • Practice Areas • Tax Controversy and White Collar Crime • Business and Commercial Litigation 3

4. Overview • Understanding the IRS Organization • Audit Risks for Taxpayers • Fighting The IRS • What Makes a Case Criminal vs. Civil • Hot Topics for IRS Enforcement • Q & A 4

5. 1. Understanding the IRS Organization 5

6. Taxes are Constitutional • 16th Amendment gave Congress the power to tax income • Tax Protestors fail 6

7. Who Controls IRS • Legislative (Congress) • Executive (President) • Judicial (Courts) 7

8. Legislative Branch • Internal Revenue Code • Committee Reports • Funding 8

9. Executive Branch • Treasury Department • IRS Commissioner • Treasury Secretary 9

10. Judicial Branch • U.S. Tax Court • U.S. District Court • U.S. Court of Federal Claims 10

11. Who Represents the IRS • IRS Lawyers • Department of Justice Civil Tax Division 11

12. Federal Circuit Courts • 12 Courts for 11 Circuits and the District of Columbia • Taxpayers Appeal to these Courts • U.S. Supreme Court 12

13. IRS Organization • Post 1998 Reform Act • IRS Oversight Board (Policy and Strategy) • 4 Operating Divisions • Specialized IRS Units 13

14. What Rules Must the IRS Follow • Treasury Regulations • Revenue Rulings/Procedures • Letter Rulings • Internal Revenue Manual (“IRM”) 14

15. 2. Audit Risks for Taxpayers 15

16. IRS Examinations • Service Center (“DLN”) • Discriminate Information Function (“DIF”) • Multifactor Scoring Process • Disproportionate Ratios • Refund Claims 16

17. Audit Triggers • Home Based Businesses • Excessive Travel and Entertainment Expenses • Excessive Charitable Contributions 17

18. Lowering Audit Risks • File an Extension • Attach Rider to Return • Avoid Disproportionate Deductions 18

19. Preventing An Audit After Selection • No Second Examinations • Check the Statute of Limitations • 3 years • 6 years 19

20. IRS Audit Focus • Tax Gap $345 Billion • Taxes due and not paid • National Research Project (“NRP”) 20

21. 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) 21

22. 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 22

23. 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 23

24. IRS Summons Authority • IRS Summons (IRC §7602) • Not Self-Enforcing • Powell Factors • Motion to Quash 24

25. Conclusion of Audit • Closing Conference • No Change • Agree -- Form 870 • Disagree -- • Thirty Day Letter • Ninety Day Letter 25

26. Final Thoughts • Dealing with Difficult Agents • Collecting Attorney Fees (IRC §7430) • Shifting the Burden of Proof to the IRS (IRC §7491) 26

27. 3. Fighting the IRS 27

28. IRS Appeals Offices • Administrative Forum for Contesting IRS Compliance Actions • 80% to 90% of Cases Resolved • Hazards of Litigation is Key 28

29. When to Seek Appeals Office Review • NON-DOCKETED Cases • 30 Day Letter (Proposed Deficiency) • Collection Actions • Refund Denied • Docketed • Regular Cases • S-Cases 29

30. How to Seek Appeals Office Review • Respond to 30 Day Letter • Greater than $25,000 requires a Written Protest • Small Case Procedure 30

31. Preparing for Appeals Conference • Freedom of Information Act Request • IRS Positions • Affidavits for Facts • Key CIRCUIT Caselaw • Offer to Settle 31

32. Settling with Appeals • Negotiation Strategy • IRS Form 870 or 870-AD 32

33. Alternative Dispute Resolution (“ADR”) • Fast Track Mediation (Rev.Proc. 2003-41) • Arbitration 33

34. Final Thoughts • Qualified Offers • Beware of IRC §6673 Penalties • Form 870, Closing Agreement or Stipulations • Settled Cases Are Generally Not Reopened Absent Fraud 34

35. Special IRS Collections Matters • Collection Due Process (“CDP”) • Collection Appeals Process (“CAP”) • Offer in Compromise • Trust Fund Recovery Penalty • Equivalent Hearing 35

36. A Taxpayer’s Secret Weapon • Taxpayer Assistance Order (“TAO”) • IRS Form 911 • 10 Year Statute of Limitations from Assessment 36

37. CDP Hearing • Federal Tax Lien Filed • Notice of Intent to Levy • Suspends Collection Activity • File IRS Form 12153 to Request • Judicial Review 37

38. 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 38

39. 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) 39

40. Fighting the IRS In Court • Tax Court • Federal District Court • U.S. Court of Federal Claims • Bankruptcy Court 40

41. 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 41

42. 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 42

43. 4. What Makes a Case Criminal vs. Civil 43

44. What Makes a Tax Case Criminal • Amount of Money Involved • Badges of Fraud/Concealment • Pattern of Conduct • High Profile Taxpayer • Tax Professional 44

45. What Is The Criminal Investigation Division • CID Has Approximately 4,400 Employees World Wide • 2,800 Special Agents • CID Activity in 2005 45

46. How IRS Special Agents Work • Surprise Visits are Key Despite Miranda Type Warning • Always two Agents • Beware of Joint CIVIL and CRIMINAL Investigations 46

47. 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 47

48. 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 48

49. 5. Hot Topics for IRS Enforcement 49

50. 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 50