Settle Irs Tax Debt - PowerPoint

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•   Organization of the IRS
•   Penalties
•   IRS examinations
•   Tier Isuses
•   Appeals
•   Section 6011 – Reportable transactions
•   Alternative dispute resolution procedural
Organization of the IRS
            Mission of the IRS
• “Provide America’s taxpayers top-quality
  service by helping them understand and meet
  their tax responsibilities and by applying the
  tax law with integrity and fairness to all.”
        Today’s IRS organization
• The IRS Restructuring and Reform Act of 1998
  prompted the most comprehensive
  reorganization and modernization of the IRS in
  nearly half a century.
• The IRS is divided into three commissioner-level
  – Commissioner
  – Deputy Commissioner for Services and Enforcement
  – Deputy Commissioner for Operations Support
             IRS organization chart
                                                                                EEO and
      Chief Counsel

          Appeals                      Commissioner                      Research, Analysis,
                                           Chief of Staff                  and Statistics

   National Taxpayer                                                      Communications
       Advocate                                                             and Liaison
   Office of
 Professional           Services and                            Operations
Responsibility          Enforcement                              Support

             Large and               Small                                      Chief
                                                     Chief Information
              Mid-size           Business /                                   Financial
             Business           Self Employed                                  Officer

                  Wage and      Tax Exempt and        Agency-wide           Human
                 Investment      Gov’t Entities      Shared Services     Capital Officer

              Criminal          Whistleblower                      Mission
            Investigation          Office                         Assurance
• Doug Shulman current IRS Commissioner
• Specialized units report directly to the
  Commissioner’s office:
  – IRS Chief Counsel
  – Appeals
  – Taxpayer Advocate Service
  – Equal Employment Opportunity and Diversity
  – Research, Analysis, and Statistics
  – Communications and Liaison
  What constitutes a valid return
• Who must sign?
  – Corporate returns – president, vice president,
    treasurer, chief accounting officer, or any other officer
    authorized to act (IRC §6062)
  – Partnership returns – one of the partners (IRC §6063,
    Treas. Reg. §1.6062-1)
     • TEFRA – Tax Matters partner
  – LLC returns – one of the members
  – S corporation returns – president, vice president,
    treasurer, chief accounting officer, or any other officer
    authorized to act
      Who must file – IRC §6012
• Individuals with gross income that equals or
  exceeds the exemption amount
  – Special rules for nonresident aliens
• Corporations subject to tax under Subtitle A
  – Special rules for foreign corporations
• Estates with gross income of $600 or more
• Trusts with any taxable income or with gross
  income of $600 or more
• Estates or trusts with nonresident alien
When returns are due – IRC §6072
• Returns for individuals, estates, and trusts
   – If calendar year → April 15
   – If fiscal year → 15th day of the fourth month after
     close of fiscal year
• Corporations
   – Fifteenth day of the third month following the close of
     the corporation’s tax year
• Certain nonresident alien individuals and foreign
   – If calendar year → June 15
   – If fiscal year → 15th day of the sixth month after close
     of fiscal year
  Amended returns – superseding vs.
• Service considers an amended return filed on or
  before due date to be taxpayer’s return for that
   – Really a superseding original return
• If a return has been filed and the due date has
  passed, Service can accept or reject amended
  return, but original return is the operative return
  for purposes of the period of limitations on
   – If original return is fraudulent, taint stays even if
     amended return is filed
When are returns considered filed?
• “Mailbox rule”
• Timely mailed, timely filed
  – Foreign postmarks
• Certified private delivery service
  – Annual Rev. Proc. updates list
    Confidentiality and disclosure of
• IRC §6103 – statutory limitations to IRS
  disclosure of tax return information
• Freedom of Information Act (FOIA) – requires
  IRS to make public certain information
• IRC §7216 – criminal penalty imposed on tax
  return preparer for unauthorized disclosure of
  tax return information
    IRS stated purpose of penalties
• I.R.M. (2-22-2008), Purpose of Penalties
• Penalties exist to encourage voluntary compliance by supporting
  the standards of behavior expected by the Internal Revenue Code.
• For most taxpayers, voluntary compliance consists of preparing an
  accurate return, filing it timely, and paying any tax due. Most
  penalties apply to behavior that fails to meet any or all of these
• Penalties encourage voluntary compliance by:
   – Defining standards of compliant behavior
   – Defining remedial consequences for noncompliance
   – Providing monetary sanctions against taxpayers who do not meet the standard
Failure-to-file/failure-to-pay penalties
• Failure to file tax return (IRC §6651(a)(1))
  – Five% of the amount required to be shown on
    return as tax per month, with a 25% maximum
     • 25% maximum interacts with §6651(a)(2)
  – Reasonable cause exception
Failure-to-file/failure-to-pay penalties
• Failure to Pay (IRC §6651(a)(2))
  – 0.5% of tax shown on return per month with 25%
    maximum penalty if tax not paid by the due date
    (without regard to extension) of that return
     • 25% maximum interacts with §6651(a)(1)
  – Applies to:
     • Income, employment, excise, gift, and estate tax
  – Reasonable cause exception
               Other penalties
• Other penalties apply for failure to file certain
  returns or make payments:
  – Information returns (See IRC §§6721 and 6722)
     • Reasonable cause
  – Payments of estimated tax (See IRC §6655 below)
     • No reasonable cause
  – Partnership returns (See IRC §6698)
     • Reasonable cause
    Penalty for failing to file certain
         information returns
• Sections 6038, 6677 and 6679
  – Forms such as 5471, 5472, 926 and 3520
  – Penalty assessed for failing to file timely,
    regardless of tax liability shown on return
  – Reasonable cause exception applies
    Civil penalties – accuracy-related
           penalties (IRC §6662)
• Accuracy-related penalties (IRC §6662)
  – Negligence or disregard of rules or regulations (IRC
  – Substantial understatement of income tax (IRC
  – Substantial valuation misstatement (IRC §6662(b)(3))
  – Substantial overstatement of pension liabilities (IRC
  – Substantial estate or gift tax valuation understatement
    (IRC §6662(b)(5))
   Civil penalties – accuracy-related
     penalties (IRC §6662) (cont.)
• Penalty amount = 20% of portion of
  – Increases to 40% for gross valuation
• Imposed only once, even if more than one
  violation applies
• Amount of underpayment not reduced by any
  carryback or carryover of an NOL, deduction
  or credit
    Civil penalties – accuracy-related
      penalties (IRC §6662) (cont.)
• Negligence = lack of reasonable basis
   – Reasonably prudent person standard
   – Burden of proof on taxpayer
• Disregard of rules or regulations = failure to follow the
  appropriate law
   – Careless, reckless, intentional
• Substantial understatement
   – Individuals:
      • Greater of 10% of tax required to be shown on return, or $5,000
   – Corporations:
      • Lesser of 10% or $10 million
     Penalty relief requirements
• Reasonable Cause
  – Internal Revenue Manual (IRM) provides some
     • Reliance on written advice of IRS
     • Reliance on qualified advisor
  – Boyle
     • Supreme Court case dealing with reasonable cause
• Substantial Authority
  – No IRC §6662(d) penalty if there is substantial
    authority for the tax treatment of an item or return
    position (objective standard)
     • Special rules for tax shelter items
Penalty relief requirements (cont.)
• Adequate disclosure
  – No substantial understatement penalty if there is
    adequate disclosure and reasonable basis
     • Disclosure not protective for tax shelter items
     • Form 8275 or 8275-R
     Preparer penalties (IRC §6694)
• Section 6694(a) imposes a preparer penalty for an understatement on a
  taxpayer’s federal tax return or refund claim if the federal tax return
  preparer knew or reasonably should have known:
    – that there was not substantial authority for the return position;
    – if the position was disclosed as provided in §6662(d)(2)(B)(ii), that there was
      no reasonable basis for the position; OR
    – if the position related to a tax shelter or a reportable transaction (whether or
      not disclosed), that it was not reasonable to believe that the position would
      more likely than not be sustained
• Preparer bears burden of proof
         • Penalty not assessed under §6694(a) if reasonable cause for the understatement
           and the preparer acted in good faith
• This new standard applies for income tax returns due after 31 December
  Civil penalties – preparer penalties
               (IRC §6694)
• Preparer: any person (including a partnership
  or corporation) who prepares for
  compensation, or who employs one or more
  persons to prepare for compensation, a
  substantial portion of any income tax return
  or claim for refund of income taxes
  – Signing preparer: one who signs a tax return
  – Non-signing preparer: one who gives oral or
    written advice
              Criminal penalties
• Section 7201 – attempt to evade or defeat tax
• Section 7203 – willful failure to file
• Section 7206 – fraud and false statements
• Section 7207 – fraudulent returns, statements, or other
• Section 7215 – offenses with respect to collected taxes
  (e.g. employment)
• Section 7216 – disclosure or use of information by
  preparers of returns
• 18 USC 1001 – false statements to a government
                  Hot interest
• IRC §6621(c) provides for an increased interest
  rate charged on certain large corporate
  underpayments in excess of $100,000
• Trigger date:
  – A balance due notice for more than $100,000 tax
    due may create trigger date.
  – Issuance of a 30-day or 90-day letter for greater
    than $100,000 in tax may set a trigger date.
  – Trigger date not set if amount shown as due is
    paid within 30 days of issuance of notice or letter.
           Restricted interest
• Interest computed where start and/or stop
  dates are other than due date of return to
  payment/refund date
• In general, term applies in situations where
  interest might be statutorily prohibited or
  limited to specific time frames:
  – 45-day rule on overpayments
  – Signing of Form 870 or 870AD
  – Carrybacks
              Interest netting
• The application of a zero-rate of interest to the
  extent that there are overlapping tax
  underpayments and overpayments
• Interest rate differential for corporations
  ranging from one to four and a half percent
            Statute of limitations
• Taxpayer has six years from allowance of a refund
  to receive correct amount of overpayment
   – If not received prior to expiration of six years, suit
     must be filed to protect right to such refund
• Statute of limitations for requesting a refund of
  overpaid underpayment interest is the same as
  for requesting refund of overpaid tax
   – Generally, three years from date the return is filed or
     two years from date interest was paid
             IRS examination
• Enforcement program to promote voluntary
  compliance with tax laws
• Statutory authority
  – IRC §7602 – Authorizes IRS to examine any books,
    papers, records, or other data and to take such
    testimony, under oath, as may be relevant or
    material to such inquiry and to issues summoned
  – IRC §§7604(a) and 7402(b) – US district courts
    have jurisdiction to enforce summons
              Types of exams
1.   Service center
2.   Correspondence
3.   Office
4.   Field
                 Field exams
• Complex issues
• Open-ended
• Revenue agent goes to taxpayer’s residence or
  place of business to examine records
  – Agent asks for items to inspect on Form 4564,
    Information Document Request
• May interview taxpayers
      Types of exams – field exam
• Coordinated industry case (CIC)
   – Large corporate taxpayers (assets greater than $250
   – Primary corporation and controlled entities treated as
     single unit
   – Support by national office (directives)
   – Exam conducted by team
• Industry case (IC)
   – Corporate taxpayers with assets between $10 million and
     $250 million
   – Generally, exam conducted by single agent with specialist
     involvement as needed
LMSB industry issue focus/tier strategy
• Tiered classification designed to require greater national oversight and
  ensure consistency in issue resolution
• Potential compliance issues are identified by the field through
  examinations, Schedule M-3 reviews, etc.
• Issues prioritized and tiered based on prevalence across industry lines and
  level of compliance risk
• Issue management team (composed of Compliance, Counsel, Appeals)
  develops guidance/instructions on how to handle issue
• IOE with nationwide jurisdiction ensures appropriate examination
  coverage and consistent approach to the development, handling, and
  ultimate disposition of the issue.
LMSB industry issue focus/tier strategy
•   Tier I issues are issues of high strategic importance
     – Large number of taxpayers, significant dollar risk,
       substantial compliance risk, and/or high visibility
     – Well established legal positions and/or LMSB direction
•   Tier II issues involve areas of potential high-noncompliance and/or significant
    compliance risk
     – Law is fairly well established, but there is a need for
       further development, clarification, direction and
       guidance on LMSB’s position
•   Tier III issues represent the highest compliance risk for a particular industry
     – Require consistent treatment for taxpayers within the industry
LMSB industry issue focus/tier strategy – tier
1 issues
 • Domestic Production Deduction   • Section 162(f) - Government
 • Research Credit Claims            Settlements*
 • Transfer of Intangibles         • International Hybrid Instrument
   Offshore/Cost Sharing             Transactions*
 • Foreign Tax Credit Generators   • U.S. Withholding Agents - §1441:
 • Foreign Earnings Repatriation     Reporting and Withholding
 • Mixed Service Costs*
 • Section 118 Abuse*              • All “Listed Transactions”
 • Section 936 Exit Strategies     • Two other “Tax Shelters”
                                       – Distressed Asset/Debt
                                       – Redemption Bogus Optional
* Issue or sub-issue moved to            Basis
“monitoring status”
LMSB industry issue focus/tier strategy
           – tier 2 issues
• Backdated stock options*              • Interchange merchant discount
• Casualty loss: single identifiable      fees
  property/capital vs. repairs          • Non-performing loans
• Cost-sharing-stock based              • Specific liability loss, IRC §172(f)
  compensation                          • Super completed contract
• Enhanced oil recovery credit            method
  (§43)                                 • Upfront fees, milestone payments
• Extraterritorial income exclusion       and royalties in the biotech and
  effective date and transition rules     pharmaceutical industries
• Gift cards: deferral of income
• Health care accounting issues:
  contractual allowance
                                            * Issue or sub-issue moved to
                                            “monitoring status”
LMSB industry issue focus/tier strategy
           – tier 3 issues
Communication, Technology, and Media
• Carriage/Launch Fees Paid to Cable/Satellite/Television Operators by
  Programmers/Content Providers
• Amortization of Intangibles - Licensed Program Contract Right

Financial Services
• Real Estate Mortgage Investment Conduits (REMICs)
• Premium Deficiency Reserves

Heavy Manufacturing and Transportation
• Motor Vehicle Dealerships and IRC 263A (Uniform Capitalization/UNICAP)
• Loyalty Programs in Service Industries
LMSB industry issue focus/tier strategy
        – tier 3 issues (cont.)
Natural Resources and Construction
• Delay Rentals
• Section 198 Expensing Of Environmental Remediation Costs (Federal
  Brownfield Tax Incentives)

Retailers, Food, Pharmaceuticals, and Healthcare
• Cost Segregation Studies
• Vendor Allowances
    How the IRS collects information
• Information Document Requests (IDRs) (Form
  4564) – for specific information on an issue under
  Exam (voluntary)
• Interviews of taxpayers/officers/employees or
  other persons (IRC §7602(a)(2))
• Summons
  – To taxpayer for records (IRC §7602(a)(1))
  – Third-party record-keepers (IRC §§7602(a)(2) and
  – John Doe (IRC §§7602(a)(3) and 7609)
   How the IRS collects information
• Summons enforcement (IRC §7604)
  – Department of Justice must file summons
    enforcement petition.
  – Appropriate district court has jurisdiction to
    compel production of documents and/or
  – Failure to comply can result in legal sanctions.
                  Audit management
• Request copy of audit plan early in process
• Participate in joint audit planning process (LMSB taxpayers)
• Protocol should be established for working with the agent such as:
    – Who he/she can deal with
    – Who can bind company
• All discussions should be in writing
    – Maintain a paper trail of all questions and answers
• Establish internal processes to control flow of information to IRS
    – Example: Log of IDRs and responses
               Making adjustments
• Revenue agent applies law to facts
• If appropriate, revenue agent sends Notice of Proposed
  Adjustment (NOPA), Form 5701, to taxpayer
   – If taxpayer agrees – signs, dates copy of NOPA and sends
     back to IRS
   – If taxpayer disagrees, can:
      •   Mail additional information for IRS to consider
      •   Discuss position with examiner or examiner’s supervisor
      •   Request Fast Track (Rev. Proc. 2003-40)
      •   Await Issuance of 30-day letter
      •   Request conference with Appeals (Pub. 3498)
      •   Do nothing and get 90-day letter
     Making adjustments (Cont.)
• If taxpayer disagrees with NOPA, receives a 30-
  day letter:
  – Advises taxpayer of right to appeal
  – If taxpayer agrees, signs Form 870, Waiver of
    Restrictions on Assessment
     • Immediate assessment of deficiency
     • Waive right to go to Tax Court
  – If taxpayer disagrees, can file a protest and go to
• Form 4549: Computations
  – Issued with the revenue agent’s report reflecting a
    deficiency or over assessment as a result of the exam
     Role and mission of appeals
• Appeals’ stated mission is to resolve tax
  – Without litigation
  – On a basis that is fair and impartial to both the
    government and the taxpayer
  – In a manner that will enhance voluntary
    compliance and public confidence in the integrity
    and efficiency of the IRS
    Statute of limitations (§6501)
• General rule: assessment must be made
  within three years from date return was filed
  – Must be a valid return to start SOL
     •   Contains all data necessary to compute and assess tax
     •   Items of gross income, deductions, credits, etc.
     •   Proper accounting period and accounting methods
     •   Properly executed
  – Amended returns have no effect
  – Taxpayer has burden of proof
 Statute of limitations (§6501) (cont.)
• If return timely mailed but received by IRS
  after due date:
  – Filing date = postmark date, NOT received date
• If return sent by registered or certified mail:
  – Mail receipt = proof of mailing
• When due date of tax return is Saturday,
  Sunday, or legal holiday:
  – Return mailed on next business day is timely
 Statute of limitations (§6501) (cont.)
• Tax returns filed before due date are deemed
  filed on the due date
• Tax returns filed after due date, with or
  without extension:
  – Deemed filed when return received by IRS
  – But, if taxpayer has valid extension and return was
    timely filed under timely mailed rule:
     • Deemed filing date = postmark date
 Statute of limitations (§6501) (cont.)
• Exceptions under §6501(c)(4) (no SOL):
  – False return or no return or willful attempt to
    evade tax
  – Extension by agreement
     • For income taxes, Forms 872 or 872-A
        – Form must be signed before expiration of SOL
  – Other exceptions
• Exceptions for certain carryback items
           Types of assessment
• Deficiency: triggered by the statutory notice of
  – See §§6111, 6212 and 6213
  – Before assessing tax, IRS must wait either:
     • Until time for taxpayer to file a Tax Court petition
     • Sixty days after judgment of a Tax Court becomes final
     Types of assessment (cont.)
• Summary
  – Math errors
  – Tentative carryback adjustments
  – Assessment of amount paid
• Jeopardy (§6861)
• Termination (§6851)
         Definition of deficiency
• IRC §6211(a) – the amount by which the tax
  imposed exceeds the excess of:
  – The sum of:
     • The amount shown as the tax by the taxpayer on his return,
       if return was made by the taxpayer and an amount was
       shown as the tax by the taxpayer thereon; plus
     • The amounts previously assessed (or collected without
       assessment) as a deficiency, over
  – The amount of rebates defined in Subsection (b)(2),
• IRC §6211(b)(3) – determination by IRS of correct
  tax liability (if no return filed)
     Statutory notice of deficiency
• Statutory Notice of Deficiency – IRC §6212
   – Ticket to tax court
• Time limit for filing petition with Tax Court
   – If taxpayer inside United States, 90 days
   – If taxpayer outside United States, 150 days
• Purposes for Notice of Deficiency:
   – Gives taxpayer notice that IRS intends to make an
     assessment of additional tax
   – Gives taxpayer opportunity to contest determination in Tax
   – Provides Tax Court with jurisdiction to determine true tax
   – Gives IRS ability to assess and collect deficiency if taxpayer
     does not go to court
Section 6011: Reportable transactions
        Reportable transactions
• Treas. Reg. §1.6011-4
  – Identifies reportable transaction categories
  – Explains taxpayer disclosure requirements
  – Not tax shelter regulations, per se
  – Focus on greater transparency with respect to tax
• August 2007 final regulations are generally
  effective for transactions entered into on or
  before 3 August 2007
  Reportable transactions: categories
• August 2007 final regulations identifies five
  reportable transactions categories and one
  proposed category
  – Listed transactions
  – Section 165 loss transactions
  – Transactions of interest
  – Confidential transactions
  – Contractual protection transactions
  – Patented transactions (Proposed)
                   Listed transactions
• Corporate/Partnership                   • Corporate/Partnership
   –   Foreign tax credit planning           – Inflated partnership basis
   –   BOSS transactions                     – Partnership straddles
   –   Fast-Pay Stock                        – Guam trust
   –   Section 351 contingent liability      – ASA investerings
   –   Intermediary transactions             – Partnership guaranteed
   –   Section 302 basis shifting              payments
   –   CARDS transactions                    – S corp income shifting
• Insurance                                  – S corp securities allocations
   – Section 351 contingent liability     • Leasing
     (as above)                              – Lease in, lease out
                                             – Lease stripping
             Listed transactions (cont.)
•   Compensation/                               •   Financial instruments
    individual planning                              –   Debt straddles
     –   401(k) accelerator                          –   Notional principal contracts
     –   Multiple employer welfare funds             –   Offsetting foreign currency options
     –   Stock compensation transactions             –   Loss Importation Transaction
     –   S corporation ESOPs
                                                •   Trusts
     –   Offshore deferred compensation
                                                     – Charitable remainder trusts
     –   Collectively Bargained Welfare Funds
                                                     – Contested liability trusts
                                                     – Abusive Trust Arrangements Utilizing
     –   Compensatory stock option transfers
                                                       Cash Value Life Insurance Policies
         to related persons
                                                       Purportedly to Provide Welfare
     –   Abusive Roth IRA                              Benefits
     –   Section 412(i) retirement plans             – Distressed Asset Trust (DAT)
     –   Loss importation transaction                  transaction
              Transaction of interest
• A Transaction of Interest is defined as “a transaction that is the same as or
  substantially similar to one of the types of transactions that the IRS has
  identified by notice, regulation or other form of published guidance as a
  transaction of interest.”
• These are transactions that the Treasury and the IRS believe have a
  potential for tax avoidance or evasion, but for which Treasury and the IRS
  do not have enough information to determine whether the transaction
  should be identified specifically as a tax avoidance transaction.
• Taxpayer’s participation in a transaction of interest will be determined in
  the published guidance that identifies the transaction of interest.
• Effective for transactions entered into on or after 2 November 2006.
     Section 165 loss transactions
• Any transaction resulting in the taxpayer claiming a loss
  under §165 above specified minimum amounts:
   – $10 million in any one year or $20 million in any
     combination of taxable years, for corporations and
     partnerships that have only corporate partners
   – $2 million in any one year or $4 million in any combination
     of taxable years for all other partnerships
   – $2 million in any one year or $4 million in any combination
     of taxable years for individuals, S corporations, or trusts
   – $50,000 in any single tax year for individuals or trusts if the
     loss arises with respect to a §988 foreign currency
  Section 165 loss transactions (cont.)
• Cumulative Losses:
   – Losses claimed in the taxable year that the transaction is
     entered into and the five succeeding tax years
   – Losses from sale or disposition transactions (for example,
     loss from a sale or exchange of a partnership interest
     under §741)
• In assessing a §165 loss in a part year or combination
  of tax years, do not take into account offsetting gains
  or other income or limitations (for example, do not
  take into account capital loss limitations or the §165(d)
  limitation relating to wagering losses) but must
  aggregate losses from the same transaction
                   Rev. Proc. 2004-66
• Losses from assets with qualifying bases are not taken into account when
  determining whether a transaction is reportable. Basis is qualifying if it is:
    – Equal to, and determined solely by reference to, cash paid;
    – Determined under §358 by reason of being received in an exchange to which
      §§354, 355, or 361 applies;
    – Determined under §1015;
    – Determined under §1031(d) and any debt instrument issued or assumed by
      the taxpayer is treated as a payment in cash;
    – Adjusted under §961 or Reg. §1.1502-32; or
    – Adjusted under §1272(d)(2) or §1278(b)(4).
• Also, an amount included as compensation under §83 by the taxpayer will
  be treated as an amount paid in cash by the taxpayer for an asset if the
  amount is included in the taxpayer’s basis.
      Rev. Proc. 2004-66 (cont.)
• Eleven types of losses under §165 are not
  taken into account, including:
  – A loss arising from the sale to a person other than
    a related party (within the meaning of §§267(b) or
    707(b)) of property described in §1221(a)(4) in a
    factoring transaction in the ordinary course of
  – A loss arising from the disposition of an asset to
    the extent that the taxpayer’s basis in the asset is
    determined under §338(b).
       Confidential transactions
• A transaction is considered confidential if:
  – The taxpayer’s advisor is paid at least $250,000 in
    fees ($50,000 for certain taxpayers)
  – The advisor limits the taxpayer’s disclosure of the
    US federal tax treatment or the tax structure of
    the transaction
  – Limitation on disclosure protects confidentiality of
    advisor’s tax strategy
  Contractual protection transactions
• Transactions with contractual protections are
  transactions for which:
  – The taxpayer has the right to a full or partial
    refund of fees if the intended US federal tax
    consequences are not sustained
  – Fees are contingent on the taxpayer’s realization
    of US federal tax benefits
• All facts and circumstances are considered
  when determining if fee is refundable or
    Rev. Proc. 2007-20 (modifies and
     supersedes Rev. Proc. 2004-65)
• Provides that certain transactions with contractual
  protection are not reportable transactions
• Disclosure obligation does not apply to:
   – Transactions in which the refundable or contingent fees
     are based on the taxpayer’s liability for taxes other than
     federal income taxes
   – Transactions where fee related to work opportunity credit,
     welfare-to-work credit, Indian employment credit, low-
     income housing credit, new markets tax credit,
     empowerment zone employment credit, renewal
     community employment credit or employee retention
• Section 6707A penalty for failure to disclose a
  reportable transaction
   – Penalty for other than listed transactions
      • $10,000 in case of natural person
      • $50,000 in any other case
   – Penalty for listed transactions
      • $100,000 in case of natural person
      • $200,000 in any other case
   – Strict liability for listed transactions (No reasonable cause
   – SEC reporting requirements
   – Only Commissioner may rescind penalty for reportable
     transactions that are not listed transactions
                        Penalties (cont.)
• Section 6662A accuracy-related penalty on understatements relating to
  reportable transactions
    – Penalty
         • 20% of the amount of understatement if disclosed
         • 30% of the amount of understatement if undisclosed listed and other avoidance
    – Reasonable cause vs. strict liability (§6664)
         • Disclosure
         • Substantial authority for position
         • Reasonable belief that position was more likely than not the proper treatment
    – Disqualified opinion
    – Disqualified tax advisor
    – Material advisor
                          ADR options
                                        Pre-return filing
                           Before the   ►   Compliance assurance process
                             return     ►   Pre-filing agreement
                            is filed    ►   Industry issue resolution
                                        ►   Private letter ruling
Provides value through:                 Audit process (post-filing)
►   Lower admin costs
                                        ►   Limited issue focused exam
►   Speedier resolution
                          Under exam    ►   Accelerated issue resolution
►   More favorable                      ►   Early referral appeals
    settlements                         ►   Fast track settlement

                                        Post-appeals process
                            Appeals     ►   Mediation
                                        ►   Arbitration
  Compliance assurance process (CAP)
• Announcement 2005-87
• Allows taxpayers and the IRS to resolve issues before tax returns
  are filed, through near-real-time auditing of tax returns
• Complements current corporate governance and accountability
  responsibilities by facilitating compliance with Sarbanes-Oxley
  and providing certainty that the return complies with the tax
• Provides greater certainty for financial statement purposes
• The CAP pilot program began in January 2005 and participation
  remains by invitation only.
Industry issue resolution (IIR) program
• Rev. Proc. 2003-36
• Designed to resolve issues common to many
  business taxpayers and establish a consistent IRS
  position on industry issues
• Service collects issues from taxpayers year-round,
  but reviews submissions only semi-annually
• An IIR team of IRS and Treasury personnel gathers
  relevant facts from taxpayers and stakeholders
  for each issue selected, with goal of
  recommending guidance to resolve the issue
                   Letter rulings
• Rev. Proc. 2009-1, Rev. Proc. 2009-3, Rev. Proc.
• Written statement issued to a taxpayer by the IRS
  national office that interprets and applies the tax
  laws to the taxpayer’s specific set of facts
• A taxpayer ordinarily may rely on a letter ruling
  received from the IRS subject to certain
  conditions and limitations, but:
   – May not rely on a letter ruling issued to another
   – May not rely if letter ruling later found to be in error
                  LIFE process
• IR-2002-133
• Limited Issue Focus Examination (LIFE) process is
  a limited scope examination in which taxpayers
  and the IRS sign a memorandum of
  understanding (MOU), agreeing to focus only on
  certain material issues.
  – Presents opportunities for clients under continuous
    examinations from cycle to cycle to partner with the
    IRS to limit scope of audit
  – Effort by LMSB to institutionalize best practices and
    provide consistency in the treatment of taxpayers
      Fast track settlement (FTS)
• Rev. Proc. 2003-40
• FTS uses mediation techniques to help the IRS
  and the taxpayer settle the issue in a 120-day
  – Gives LMSB personnel and LMSB taxpayers an
    opportunity to mediate their disputes with an Appeals
    official acting as a neutral party
• If any issues remain unresolved at the conclusion
  of the FTS process, the taxpayer retains all
  applicable appeal rights.
• Once an agreement through FTS is reached, the
  settlement cannot be modified after the FTS
  session report is signed.
 Accelerated issue resolution (AIR)
• Rev. Proc. 94-67
• Taxpayers in the Coordinated Issue Case (CIC) program
  (formerly CEP) may accelerate the resolution of the
  same/similar issues arising out of the examination by
  extending the examination of the issues from the
  examination periods to more current tax periods
  ending before the date of the agreement.
• AIR does not give the case manager additional
  settlement authority, but it does have definite
  advantages in resolving issues affecting other tax years.
         Early referral appeals
• Rev. Proc. 99-28
• Optional method by which the taxpayer may
  request the early referral of one or more
  unresolved issues from the Examination or
  Collection Division to the Office of Appeals
• Designed to resolve cases more expeditiously
  through the field and Appeals working
   Simultaneous appeals/competent
• This procedure encourages taxpayers to request
  competent authority assistance and the
  participation of Appeals while a case is under the
  Examination division’s jurisdiction.
• Revenue Procedure 2002-52 contains the
  competent jurisdiction and competent authority
• Section 8 of Rev. Proc 2002-52 specifies the
  circumstances under which the simultaneous
  appeals/competent authority procedure may be
  requested and describes the role of Appeals.
• Rev. Proc. 2002-44
• Mediation is a nonbinding process that uses the
  services of a mediator, as a neutral third party, to help
  Appeals and the taxpayer reach their own negotiated
• The mediator acts as a facilitator, assists in defining the
  issues, and promotes settlement negotiations between
  Appeals and the taxpayer.
• Though the mediator has no authority to impose a
  decision, successful mediation can save time and
  money by resolving the case without litigation.
• Rev. Proc. 2006-44
• The procedure allows taxpayers to request
  binding arbitration for factual issues that are
  already in the Appeals administrative process.
• Under the procedure, the taxpayer and Appeals
  must first attempt to negotiate a settlement.
• If those negotiations are unsuccessful, the
  taxpayer and Appeals may jointly request binding
• Binding arbitration will be used only to resolve
  factual disputes.
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Description: Settle Irs Tax Debt document sample