Do Problem 1-10 Chapter 2

Do Problem 1-10

Chapter 2

1. 
   Formal Requirements of a Return
   

Sufficient return starts the running of the statute of limitations (Blount 86 TC 383 (1986))

2. 
   Filing Tax Returns
   

Individual Returns—3 mos 15 days, Corporate--2 mos 15 days, Partnerships & Fiduciary--3mos and 15 days, Tax exempt--4mos & 15 days.

Review Tower & Tower practices

3. 
   Filing Extensions
   

Form 4868 individual gets an automatic 4-month extension. Note that this mitigates the failure to file penalty, but not failure to pay. Review Form 4868.

Additional extension of 90 days is available if the taxpayer can show reasonable cause. Generally this is not a problem. File on Form 2688, Application for Additional Extension of Time to File. Corporations can obtain a 3-month automatic extension by filing Form 7004.

4. 
   Amended Returns
   

The taxpayer has the option of amending his return is he discovers a mistake on the original return. If filed before the due date, the amended return is considered the tax return for that year. If filed after the due date the IRS has the discretion to accept or reject the amended return (note the statute of limitations remains with the original return)

5. 
   Tax Payments
   

Payment is due on the original due date of the return, can be check or

money order in US funds or by debit or credit card. There may be an

extension of the payment date related to “undue hardship” but this is not

common. Note that the withholding and estimated tax requirements results in

the payment of the tax in a timely fashion.

Example: Dot Com AMT Incentive stock option issues.
The taxpayer should note on the check ID # of the payor and the specific

purpose of the payment.

records, or other data which may be relevant” in determining the correctness

of any tax return. § 6201 IRS is authorized to make inquiries, determinations,

and assessments of all taxes under the internal revenue laws. §7602(a)(2)

gives the IRS summons power, which enables the IRS to compel a taxpayer to

  produce records or testify under oath. IRS examination personnel are authorized to serve summons.

2. 
   Audits
   

Audit lottery & the raising of revenue—IRS selects returns that raise revenue.

Note the coordinated examination program (CEP) where an IRS agent or agents are permanently assigned to a corporation.
DIF formula is used select returns for audits, as well as claim or refund , and information return matching program, and the “infection” process.
Three types of audits—correspondence, office and field.
Correspondence—most common, conducted by mail. Usually involve revenue items (Form 1099) or withholdings, estimated tax payments or credits.
Office audit—conducted at district office. Taxpayer meets with auditor, brings specific information and documentation. Usually involve large and unusual itemized deductions.
Field audits—conducted by revenue agents at the taxpayer’s place of business

Issues are not as clear.

2. 
   Audit Strategy
   

Correspondence audit—respond quickly and concisely in order to limit the scope of the audit

2. 
   Reconstructing Income when the Books and Records are Incomplete
   

Many methods are available; note that the IRS is not confined to a single approach. Most common are the net worth and specific items methods. Others include: bank transaction, bank deposits, source and application of funds, and T account.

What was Cooper’s defense? Did the IRS prevail?

1. 
   § 6013(d)(3) In general husband and wife are jointly and severally liable for
   

Omit United States Department of Justice v Tax Analysts (pp 129-143), Church of Scientology (pp 150-154), Diandre v US (pp 160-165), Martin (165-171), Ward (171-176)

1. 
   Disclosure Under the Freedom of Information Act:
   

• 
  Descriptions of the agency’s organizational structure and operations, procedural rules, available forms and statements of general policy and interpretations. (e.g. publication of temporary & final regulations)
  

• 
  Information made available by an agency for public inspection and copying, or for sale. (e.g. final opinions, administrative staff manuals and instructions to employees that might affect a member of the public—CCH publishes this information)
  

Do Problem 3-4

• 
  Records of the agency. Taxpayer must request this information according to published rules. Records includes statistical studies → revenue agent’s report.
  

• 
  IRS has the burden of justifying failure to make agency records available for inspection. § 552 (b) of 5 USC. Nine exemptions are available but three are particularly important to tax practice: (1) Ex 3—IRS may withhold information if that information is specifically exempted from disclosure by another statute. (e.g. § 6103 seeks to ensure the confidentiality of a taxpayer’s return and tax return information. (2) Ex 5—IRS may refuse to disclose inter-agency or intra-agency memoranda that would not be available by law to a private party in litigation with the IRS (e.g. attorney-client privileges) (3) Ex 7—applies to records or information compiled for law enforcement purposes.
  

2. 
   Using FOIA during the Tax Controversy Process
   

• 
  The IRS “secret law”—PLR’s, Determination Letters, Chief Counsel Advice, and Action of Decision memoranda are available under § 6110 or FOIA. Also available the Internal Revenue Manual, IRS legal analysis of important issues.
  

• 
  If the taxpayer wishes to obtain materials that were prepared by the IRS during an audit of the taxpayers’ own return, the taxpayer must make an individual FOIA request. (Access is limited while the examination is progress; once the examination is concluded and the IRS has issued a 30-day letter, the taxpayer may submit a FOIA request seeking access to all materials contained in the taxpayers administrative file This information would be particularly helpful in settling the case in sthe Appeals division.
  

The administrative file will normally contain a copy of the agent’s working files, including workpapers, notes, intra-agency memoranda, affidavits and interview transcripts. The file also contains all records compiled by the agent during the audit, including records obtained from third parties.

• 
  Requesting Information Under FOIA, Reg. 601.702(c) presents requirements for the request: Must be in writing, signed by the requesting taxpayer, address to the appropriate IRS disclosure office. The requesting part must “reasonably describe” the records sought.
  

• 
  Once the FOIA request is received by the IRS, the agency normally has 10 days in which to notify the requesting part of its initial determination to grant or deny the request. Requests by the IRS for additional time are common. If the IRS denies the request, a notification is sent to the requesting party notifying him of the denial.
  

• 
  Access to Written Determinations Under § 6110
  

As mentioned earlier the IRS is required to make available “written determinations” such as general consul memo, PLR’s.

A confidentiality provision limiting the circumstances under which, and to whom the IRS may disclose information about the taxpayer. The taxpayer’s return is broadly defined to include any tax or information return, amended return, declaration of estimated tax, claim for refund, as well as any supporting schedules and attachments. The formulation encompasses virtually all information collected by the IRS as part of an audit of the taxpayer’s return.

What was the nature of Rice’s conviction? What action did Rice subsequently take against the US?; what was the nature of his complaint? Did the Court of Appeals agree? Why or Why not?

3. 
   Exceptions under § 6103 Permitting Disclosure
   

§ 6103 (c),(e) –IRS may disclose returns and return information to a third party designated by the taxpayer to receive the information and to a person having a material interest in the return or return information. Taxpayer may obtain a copy of his own return, each spouse may obtain a copy of a jointly filed return, a partner may obtain a copy of a partnership return. § 6103 (i),(j),(k),(l) authorizes the IRS to exchange taxpayer information with various federal, state, and local agencies. These agencies are entitled to use this information for several specified purposes such as administering state tax programs, enforcing child support payments, and conducting criminal investigations.

Do Problem 3-7

Insert answer to Problem 3-7 here

Chapter 4

Settlement of Tax Disputes

Omit: Federal Tax Litigation: Civil Practice and Procedure (Second Edition) by Junghans and Becker (pages 197—199) and Kretchmar vs US 9 Cl. Ct. 191 (1985)

(Pages 207-217)

§ 4.02 Settlement Opportunities After IRS Examination of the Taxpayer’s

Return

• 
  According to many tax practitioners, the earlier a case is settled, the better. Many variables are time sensitive: representation fees, filing fees, other litigation costs, IRS interest charges (compounded on a daily basis), increased risk of assessment of additional deficiencies.
  

• 
  “Qualified” settlement offer from the taxpayer--§ 7430 (c)(4)(E)
  

• 
  Options at the Conclusion of the Examination
  

At the conclusion of most office and field audits, the revenue agent who conducted the examination will discuss his findings with the taxpayer or his representative before submitting a formal report. The revenue may conclude that there are no changes to the taxpayer’s liability (No Change Report) or more commonly propose adjustments to the taxpayer’s liability. The taxpayer normally is given an opportunity at the conclusion of the examination to reach a compromise with the agent or his supervisor. This is a very important stage in the processing of a tax case, many settlements are reached that might not be possible if discussions were deferred until after formal reports have been written or issued.

• 
  If the settlement negotiations at the examination level have stalled because of disagreement over a single issue, the taxpayer might consider availing himself of the IRS’s Early Referral Program.
  

• 
  If the taxpayer and the revenue agent can reach a mutually acceptable agreement at the conclusion of the examination, the taxpayer normally will be asked to sign Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency of Tax. Review Form 870 on pages 185.
  

The taxpayer waives his right to receive a statutory notice of deficiency, which will prevent the taxpayer from later contesting the liability in Tax Court.

The taxpayer can still challenge the adjustment by paying the liability, and making a claim for refund in either the Court of Federal Claims or US District Court.
[2] Unagreed Cases

• 
  If the taxpayer and the revenue agent cannot come to an agreement, the agent normally will prepare and submit to the taxpayer a preliminary notice of deficiency, called a “30-day letter.” Review sample 30-day letter on pages 187 and 188.
  

• 
  Insert Sample 30 day letter here.
  

• 
  Options available to the taxpayer—(1) agree to the proposed adjustments and sign the form 870 waiver.(2) contest the revenue agent’s findings to the IRS Appeals Division. The taxpayer is generally granted 30 days in which to request a conference. (3) If the taxpayer elects not to pursue an appeal or otherwise fails to respond, he will receive from the IRS a statutory notice of deficiency (90-day letter) which authorizes the taxpayer, within 90 days after the notice of deficiency is sent to file a petition with the tax court to redetermine the amount of the proposed liability. The taxpayer may decide to forgo the 30 days letter and instead receive the statutory notice of deficiency and file a petition with the tax court..
  

Settlement at the IRS Appeals Division

• 
  85% of the large cases handled by the Appeals Division are settled. Taxpayers other recourse is to the courts.
  

• 
  If the amount of the adjustment exceeds $10,000 the taxpayer is required to file a written protest to obtain Appeals consideration. Review contents of protest letter on page 192.
  

• 
  Taxpayer has three options in filing a protest—(1) a skeletal protest, (2) an agent’s report responsive protest and (3) a comprehensive protest.
  

The taxpayer should consider filing a skeletal protest that meets the minimum requirements for filing a protest when there is concern for the continued involvement of the agent at the examination level.

An agent’s report responsive protest is often utilized when a taxpayer’s facts or laws are weak and the strategy is to attack the error or misrepresentation in the agent’s report thereby limiting the focus to those items.
A comprehensive protest is one where the taxpayer develops fully all of the factual and legal arguments to be presented at the appeals conference. This concept is generally used when a taxpayer believes he has a strong probability of prevailing on the issues and is not concerned with agent or appeals officer having time to analyze the taxpayer’s position.
The protest should concentrate on the facts of each issue. When development of the facts is difficult or impossible because they do not exist in recorded form or involve an element of intent or business purpose, a taxpayer should give consideration to the use of affidavits. When developing the technical aspects of an argument the taxpayer should cite supporting cases and as importantly distinguish unfavorable cases.
The taxpayer will obtain a better negotiating position by preparing a comprehensive protest that details the taxpayer’s factual and legal arguments. Note the relationship between the contents of the protest and the work papers prepared to support the tax treatment of a proposed transaction. There are risks associated with a comprehensive protest. Detailed factual assertions not previously considered during the audit might cause the Appeals Officer to return the case to the revenue agent for further investigation.

Between the Protest and the Conference—Taxpayer Strategies

• 
  Many taxpayer representatives appear at conferences unprepared because several features of the conferences mislead them. The conference is a fairly informal meeting between the appeals officer, the representative. Rules of evidence do not apply and there is no formal structure to the conference. In addition while the appeals officer serves in effect as judge during the conference, representatives frequently forget that the officer also will be serving an adversary during the proceeding. The officer’s judgelike role occurs mainly after the conference when the hazards of litigation are balanced to determine an acceptable settlement. During the conference the appeals officer will be a staunch advocate of the IRS’s position.
  

The representative can best protect the taxpayer’s interests by preparing for the conference as though it were a trial.

a.. The taxpayer should be interviewed thoroughly. This means asking questions that will elicit all unfavorable information from the client and ensure that the facts are not being hidden or distorted. After the interview all records and documents should be reviewed to check the accuracy of the taxpayer’s statements. Note that new evidence cannot be presented at the appeals conference

2. 
   Investigation of the facts should be followed by legal research
   

c. After preparing the case settlement proposals should be prepared. The proposals should be structured issue by issue because the appeals officer is not permitted to trade concessions on one issue for concessions on another.

Procedure at a conference varies between appeals officers but is always informal.

Generally the parties begin discussing the issues, gradually find their areas of

agreement and disagreement and work their way towards discussing specific settlement possibilities. In most cases all this is done in one conference, though sometimes the officer will refer the case back for additional fact finding.

The IRS guidelines say the conferences are to be informal “to promote frank discussion and mutual understanding”. Appeals officers must handle cases objectively with a goal of reaching a decision based on the merits of the issues in dispute and not with the attitude that settlements must be made. All physical evidence that supports the taxpayer’s position should be brought to the conference. Evidence should be brought even when the taxpayer believes it would not be admissible in court, because the rules of evidence do not prevail at an appeals conference.
Even if the taxpayer and the Appeals Officer are unable to resolve all issues, efforts should be made to resolve as many issues as possible. Before agreeing to a full or partial settlement, however, the taxpayer should carefully consider how the settled issue might affect the taxpayer’s exposure for past and future taxable years.
Note that a taxpayer negotiating a nondocketed case before the Appeals Division may request mediation if conventional methods fail. Mediation is a negotiation technique in which the parties are assisted by a neutral and objective third party mediator who does not have decision-making authority.
[7] Disposing of a Case at Appeals
If the taxpayer and the Appeals Division can reach a mutually acceptable settlement, the parties normally memorialize that settlement by signing Form 870-AD. Form 870-AD is similar to Form 870 with the addition of a statement to the effect that if the agreement is accepted by the IRS, the IRS agrees not reopen the case for the taxable years involved except in specified circumstances. In return the taxpayer agrees to the assessment of any settled liability and commits himself not to file a claim for refund for the taxable year at issue.

Do Problem 4-3.

§ 4.03 Closing Agreements
A statutory closing agreement under § 7121 is intended to provide the taxpayer with absolute finality with respect to a particular issue or item. Once executed the formal closing agreement prevents either party from reopening the case absent a showing of fraud, malfeasance, or the misrepresentation of a material fact. Closing agreements are limited to specific situations that are much narrower than the situations in which Form 870 or 870AD might be used to settle a case. See Forms 866 & 906.Revenue Procedure 68-16—outlines appropriate uses of closing agreements.
Do Problem 4-2


§ 4.04 Settlement of Court Cases
Many cases are settled after being docketed in court. The judge as a “stipulated decision” enters a Tax Court case that is settled by agreement of the parties.

Chapter 5

Restrictions on Assessment of Tax
Omit Colestock 102 TC 380 1994) (p235-239, Badracco 464 US 386 (1984) (pp 239-247), Houlberg TCM 1985-497 (pp249—256), Fredericks 126 F 3d 433 (CA-3, 1997) (pp 256-2709) & Gill 306 F2d 902 (CA-5 1962) (pp 272-274)

§ 5.02 Types of Assessments

• 
  Summary Assessments
  

§ 6201 (a) authorizes the IRS to immediately assess and collect any tax computed and shown to be due on a taxpayer’s original tax return, as well as any additional taxes computed and shown to be due on a subsequently filed amended return. The IRS is not required to send the taxpayer a notice of deficiency.

In addition the Code authorizes the IRS to summarily assess any additional tax due as a result of a mathematical error or clerical error made by the taxpayer on the return. However, before so doing, the IRS must notify the taxpayer of the alleged error and include an explanation of the basis for recomputation. The taxpayer is given 60 days from the date the notice of assessment is sent to contest the error by filing a request for an abatement of the assessment. Whether or not the IRS agrees to reassess the tax must be made pursuant to deficiency procedures. The statute defines “mathematical or clerical error” to include arithmetic errors, inconsistent entries on the return, omissions of information necessary to properly substantiate a return item and deductions exceeding a statutory limit. § 6213(g)(2).
This is a common problem in manually prepared returns.
Example: The retired professor.

• 
  General Restrictions on Deficiency Assessments
  

§ 6212—Before assessing a deficiency in income, estate and gift taxes, and before assessing most penalties the IRS must first send the taxpayer a “notice of deficiency” or “statutory notice” (also called a 90 day letter). Once the IRS sends the notice, it cannot assess the tax during the 90 day or 150 day period following issuance of the notice (commonly called the “prohibited period”). This assessment delay gives the taxpayer an opportunity to contest the deficiency by petitioning the Tax Court, the only court that grants taxpayers pre-assessment review. If the taxpayer petitions the Tax Court, the “prohibited period” lasts until the Tax Court’s decision becomes final.

• 
  Jeopardy and Termination Assessments
  

§ 6861 allows for immediate assessment where the IRS believes that assessment or collection of the tax will be jeopardized by delay. § 6861 (a) The IRS will send notice and demand for payment, and if it has not already sent a notice of deficiency, the IRS must mail one to the taxpayer within 60 days of the assessment. Reg. 301.6861-1 sets forth the most commonly encountered conditions under which a jeopardy assessments may be made:

1. 
   the IRS believes the taxpayer is designing to depart quickly from the United States or to conceal himself
   
2. 
   the IRS believes the taxpayer is planning to quickly place his property beyond the reach of the Government by concealing the property, dissipating it, transferring it to other persons or removing it from the country or
   
3. 
   the IRS believes the taxpayer’s financial solvency is imperiled.
   

Review Antique Collectors Case

For these same reasons the IRS may make a termination assessment under § 6851.

For the most part the procedures are the same. IRS bears the burden that it acted reasonably. § 7429 requires the IRS within five days of making an assessment to provide the taxpayer with a written statement of the information on which the IRS relied in making the assessment or levy. The taxpayer has 30 days to request administrative review. § 7429 (b) provides for expedited follow up judicial review in the US District Courts.

A jeopardy assessment is employed when the IRS determines a deficiency after the end of taxable year to which the assessment relates. A termination assessment in contrast is utilized when collection is put in jeopardy before the taxpayer’s year has ended.
§ 5.03 The Statutes of Limitations on Assessment of Tax

• 
  The general rule: § 6501 the IRS must assess tax within three years of when the return is filed. An early return is deemed filed on the due date.
  

Rev. Rul. 81-269 addresses issues associated with an early return and a changes to the due date caused by Saturdays, Sundays and legal holidays.

Review: A digression--Archdiocese of St. Petersburg Case

• 
  Exceptions to the Three-Year Statutory Period
  

Request for prompt assessment. Under § 6501 (d) the executor of an estate or a liquidating corporation may make a request for prompt assessment that will shorten the limitations period to 18 months. In the case of an estate the prompt assessment procedures apply to any tax (other than estate tax) for which a return is required and for which the decedent or the estate may be liable.
Substantial Omission of Items § 6501(e)(1)(A) A “substantial omission of items” includes an omission “from gross income of an amount properly includible there which is in excess of 25 percent of the amount of gross income stated in the return.” The six-year statute does not apply unless an entire amount is omitted.
Do Problem 1-B (i-a,& c) omit parts b & d
False or Fraudulent Return
§ 6501(c)(1)-(3) The statute of limitations is unlimited if the taxpayer files no return, a false return or a fraudulent return. However, the Tax Court permitted a three year limit in Bennett 30 TC 114 (1958) in case in which a taxpayer fraudulently fails to file a tax return and subsequently files a non-fraudulent return.

In Badaracco 464 US386 (SC 1986) the statute remained unlimited; the taxpayer filed a fraudulent return and then an amended non-fraudulent return.

Do Problem 5-1B ii and 1C

Tolling of the Statute of Limitations on Assessment

§ 6401 The IRS must assess tax before the statute of limitations on assessments expires, or any amount assessed must be refunded to the taxpayer. Because the notice of deficiency is a prerequisite to assessment of a deficiency the notice must be sent before the statute of limitations on assessments. The notice triggers a “prohibited period” and the statute of limitations is tolled during the period that the IRS is prohibited from assessing tax plus 60 days. Determining the timeliness of an assessment therefore can require counting days fairly precisely.

If the taxpayer signs Form 870 permitting immediate assessment of the tax, that cuts short the prohibited period. That in turn will shorten the time period during which the statute is tolled.
Do Problem 5-1A

Extensions of Time to Assess the Tax

It is often the case that the IRS is unable to complete an examination of the taxpayer’s return during the prescribed assessment period. If the assessment period is about to expire before an assessment is made the IRS commonly requests that the taxpayer sign a consent extending the general statute of limitations. It is not uncommon in fact for the IRS to request seriatim extensions of the statute of limitations as each extension nears expiration.

Extensions can be made on Form 872, Consent to Extend the Time to Assess Tax, or Form 872-A, Special Consent to Extend the Time to Assess Tax. Form 872 (the “fixed-date” consent provides for an extension for a finite period of time stated in the agreement, typically one year. Form 872-A (the “open-ended” consent) is an unlimited extension of time, which is terminated 90 days after either (1) the IRS receives a Form 872-T from the taxpayer, (2) the IRS mails a Form 872-T to the taxpayer or (3) the IRS mails the taxpayer a notice of deficiency. In the latter case, the extension period will not expire until 60 days after the prohibited 90-day period.
The fundamental question of whether a taxpayer should sign a consent does not lend itself to an easy answer.
Do Problems 5-2
§ 5.04 Exceptions to the Statutes of Limitations
The Statutory Mitigation Provisions §§1311-1314 To prevent a double benefit to either the government or the taxpayer the statutory mitigation provisions allow reopening of a barred year in specified circumstances.

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