Accounting 432/732 Outline—Chapter 1



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Accounting 432/732

Outline—Chapter 1

Omit Harary v Blumenthal, Para Technologies Trust, & In Re Withrop Drake Thies



§ 1.01 Introduction


  • Federal tax controversies defined: disputes between taxpayers and the Internal Revenue Service.




  • Entities involved in the tax controversy process.


Joint Committee on Taxation (US Congress) writes legislative histories of enacted provisions.
Treasury Department issues regulations interpreting the Internal Revenue Code.
Department of Justice litigates all civil cases except Tax Court and all criminal cases.
§ 1.02 A Self-Assessment System of determining taxes.



  • “The tax gap”—role of withholding/information matching. Opportunities for fraud—cash basis, transfer pricing, complex law, self-interest and dishonesty.

Withholding—form 941, professional payroll processing services


Information Matching—Forms 1099—DIV,INT,Misc,B,R,G Income, Form 1098 Deductions
Review Mutual Fund Redemption and Independent Contractor Examples
§ 1.03 Internal Revenue Service Organization


  • Review Lederman and Mazza Chart on page 6

IRS Chart Goes Here


  • Reorganization Plans—underway since 2000, orientation toward groups of taxpayers Four operating divisions—Wages & Investment; Small Business/Self-employed; Large and Mid Size Business: Tax Exempt and Government Entities. 2001 tax law changes and terrorist activities reduce likelihood reorganization will be complete in the near future.




  • W & I—4 segments, (1) Communication Assistance, Research & Education CARE, (2) Customer Account Services CAS (Returns & Payments), (3) Compliance—commonly encountered issues—filing status dependency exemptions, tax credits and deductions. (4) W & I Headquarters (Atlanta, GA)




  • LMSB—organized into five industry segments—Retailers, Food & Pharmaceutical, Natural Resources, Heavy Manufacturing & Transportation, Communications, Technology & Media.




  • TE/GE—pension plans and tax exempt organizations




  • Internal support services—Agency wide information systems—Web site for forms/publications/technology. Agency wide shared services—facilities, procurement, and personnel




  • Functional Divisions—Chief Counsel (US Treasury, TC Cases). Counsels are present in the operating divisions on the national level and onboth the area and territorial levels, Operating, Appeals—dispute resolution to settle refund/deficiency claims, Criminal Investigation & National Taxpayer Advocate.




  • The Oversight Board—9 members, 3 internal, 6 external


§ 1.04 Rulemaking Authority of the Treasury Department and the IRS


  • § 7805 (a) provides that the Secretary can “prescribe all needful rules and regulation for enforcement of this code. Rules can be procedural § 301. or interpretive § 1 or 20., etc.




  • IRS publishes internal procedural regulations (IRS manual), and guidance:

Rev. Rulings, Rev Procedures, PLR’s, TAM’s.GCM’s, as well as its litigation position.
§ 1.05 Overview of a Federal Tax Controversy


  • Review Overview Chart on page 13. Discuss Revenue Agent’s Report and Form 870, Statute of Limitations. Also point out assessment and collection of the deficiency.


Do Problems 1-2 & 1-3
Overview Chart goes here.

§ 1.06 Ethical Restrictions on Tax Practice


  • Attorneys, certified public accountants, and enrolled agents may all practice before the tax court. Tax practitioners must be sensitive to a number of different types of rules:




    1. Preparer Penalties

    2. Specifically Applicable Rules—Circular 230 Review the highlights on page 29-34, Tax Court rules also apply.

    3. Generally Applicable Ethics Rules—ABA, AICPA




  • Ethical Issues




  1. Tax Planning

False Opinions—one that ignores or minimizes serious legal risks or misstates facts or the law, knowingly or though gross incompetence. The lawyer who knowingly accepts as true the facts which the promoter tells him, when the lawyer should know that a further inquiry would disclose these facts are untrue also gives false opinion. U.S. v Benjamin 328 F 2d. 854 (CA-2, 1964). Attorneys cannot escape criminal liability on a plea of ignorance “when they shut their eyes to what as plainly to be seen.”


In the past lawyers have protected their clients and themselves in litigation by claiming that communications between them were “privileged”’
Review Taxday article on KPMG (1/10/03)
Ethical Considerations--page 16

ABA has set of general guidelines, also AICPA-generally perceived as “toothless”, Circular 230 has its own set of requirements.




  1. Return Preparation

Preparer defined: §7701(a)(36)—“ person who prepares for compensation all or a substantial part of an income tax return or refund claim.” (employer also covered)


Do Problem 1-5
§6694(a) $250 penalty for a tax preparer who knew that there was not a realistic possibility that a reported position would be claimed.

§6694 (b) $1,000 penalty for willful understatement of the client’s tax liability or with intentional disregard of the rules and regulations.


Rev Ruling 86-55 describes other important penalties in the law and analysis section:
§6107(a) Tax return preparer has an obligation to furnish a completed copy of the tax return of the taxpayer.
§6107(b) Prepare has an obligation to retain a copy of the return or a list of taxpayers for whom returns have been prepared
§6695(b) imposes an obligation to sign the return—obligation falls on the individual with primary responsibility for the overall substantive accuracy.
§6109(a)(4) provides that any return or claim for refund prepared by an income tax return preparer shall bear such identifying number for securing proper identification .(including employer)
§6060 any person who employs an income tax return preparers to prepare a return or claim for refund other than for that employer must contain a record concerning each preparer so employed.
§6695(f) penalty of $500 on income tax return prepares who endorse or otherwise negotiate refund checks that are issued to taxpayers.
§7216 imposes a criminal penalty for unlawful disclosure or use of return information by persons who prepare or provide services in connection with preparation of returns.


  1. Tax Controversies



“Practice before the Internal Revenue Service comprehends all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a client’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include preparing and filing necessary documents, corresponding and communicating with the Internal Revenue Service, and representing a client at conferences, hearings and meetings”




  • Subpart B of Circular E presents the duties and prohibitions. Duties include (1) submitting records or information upon a proper request by a duly authorized IRS officer or employee, (2) advising a client promptly of any noncompliance, error, or omission in any tax return, affidavit or other legally required document, if the representative is aware of the noncompliance , error, or omission; and (3) exercising due diligence in preparing or assisting in the preparation of, any documents, in determining the correcting of oral or written representations made by him to clients..

Prohibitions—Review highlights from pages 30 and 31

(1, 6, 7, 8, 9)
Subpart C of Circular 230 provides the rules applicable to disciplinary proceedings and provides for suspension and disbarment proceedings.




Do Problem 1-8.

§ 1.07 Tensions Between Tax Lawyers and Accountants


    1. “Why do Lawyers and Accountants Fight?”

What is the AICPA’s position with regard to the CPA’s role in tax practice? What ethical issues does this position raise? How does the AICPA position raise conflicts with the legal profession?

CPA’s and law firms have been accused of overly aggressive tax planning. Do you feel these criticisms are warranted? What changes may we expect in tax practice?


    1. “What Tax Advice Privilege?”

To what extent does § 7525 extend the attorney-client tax privilege to tax cases? Continuum of services for tax advisers can be seen as continuum between tax return preparation and litigation. Tax planning is in between. Return preparation is not privileged and litigation is protected.


An IRS examination is not litigation and §7525 sent the message that all tax discussions with the IRS are adversarial. Under Circular 230 the Treasury sees the privilege as an exception to the general obligation to turn over all requested records.
Based on the Adlman case a taxpayer who is about to undertake a transaction the IRS may well question can take the position that documents created in analyzing that transaction are a litigation work product and therefore subject to attorney client privilege.
The gray area—between business advice (non protected) and legal advice (protected) Accountants hoped to obtain protection for tax shelter advice but did not achieve it.
Subject Matter Waiver---voluntary disclosure to a third party & materials provided to a taxpayer for use in tax return preparation are not subject to attorney client privilege. This legal right has been waived.




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