NEW IRS LINK FOR IDENTITY THEFT

The IRS has taken numerous steps to combat identity theft and protect taxpayers. The IRS is continually looking at ways to increase data security and protect taxpayers' identities with assistance from the IRS Identity Protection Specialized Unit.

Here is a link for more information.

Special Procedure as to Expert Testimony

With the agreement of the parties, the Tax Court directed the experts to testify concurrently. To implement the concurrent testimony, the Court sat at a large table in the middle of the courtroom with all three experts, each of whom was under oath. The parties' counsel sat a few feet away. The Court then engaged the experts in a three-way conversation about ultimate issues of fact. Counsel could, but did not, object to any of the experts' testimony. When necessary, the Court directed the discussion and focused on matters that the Court considered important to resolve. By engaging in this conversational testimony, the experts were able and allowed to speak to each other, to ask questions, and to probe weaknesses in any other expert's testimony. The discussion that followed was highly focused, highly structured, and directed by the Court. See Rovakat LLC et al. v. Commissioner; T.C. Memo. 2011-225 (Judge Laro). See the opinion here.

Watch the Statute of Limitations

In tax controversy matters is it important to be aware of the statute of limitations. Set forth below are some basic rules for dealing with the statute of limitations (SOL). The references are to the applicable sections of the Internal Revenue Code.

A. General Rules

    1. SOL - The IRS has 3 years from the time the tax return is filed to assess. Section 6501.

    2. Notice and Demand- Upon an assessment being made, the IRS has 60 days to notify the taxpayer of the assessment and demand the amount assessed. Section 6303(a).

B. Determination of the SOL

   1. Due Date - The due date of an individual return is April 15th (or the following Monday if April 15th falls on a Saturday or Sunday). Section 6072(a).

     2. When a Return is Deemed Filed - Sections 6501(b) and 7502(a) (2).

         a. A return filed on or before the due date is deemed filed as of the due date.

         b. A return filed after the due date is deemed filed as of the postmark date.

         c. Quarterly returns are deemed filed on April 15th of the following year.

     3. Returns Mailed to the Wrong IRS Service Center - A return must be filed at the service center where the taxpayer has been instructed to file the return, or otherwise probably will not be considered filed, thus causing the SOL to be indefinite. Section 6091.

     4. Unsigned Returns - Unsigned returns are considered not filed with an indefinite SOL, and the IRS has no duty to alert the taxpayer of an unfiled return. Section 6061.

     5. Fraudulent and Unfiled Returns - With intentionally false and fraudulent and unfiled tax returns, the SOL is indefinite. Section 6501.

     6. Partners - Late partnership returns do not affect the filing date of partners' individual tax returns. Section 6229.

C. Suspension of SOL with 90-Day Letters and Tax Court Cases

    1. 90-day Letters - The SOL is suspended from the date of issuance of a 90-day letter, and during that period the IRS cannot assess the deficiency. Section 6503(a)(1).

   2. Pending Tax Court Case - No assessment can be made during the time a Tax Court case is pending. The SOL is suspended during this period. Section 6213(a) and 6503(a)(1).

    3. Final Tax Court Decision

       a. Tax Court decisions are not final until the appeal period has expired. The time to make an assessment is suspended during this period. Section 7481.

       b. The appeal period runs 90 days after the Tax Court decision is entered. Section 7483.

       c. The SOL is suspended an additional 60 days after the appeal period ends. Section 6503(a)(1).

D. Collection SOL - The SOL on collection of an assessment runs 10 years from the assessment date. Section 6502(a).

E. Criminal Cases - The SOL for prosecution of criminal cases is 6 years.

Make Sure Your Clients Have Substantiation to Prove Their Deductions

In the recent case of Stroff v. Commissioner, T.C. Memo. 2011-80, the taxpayer was granted a partial deduction for expenses. Section 162(a) of the Internal Revenue Code allows a deduction for all the ordinary and necessary expenses paid or incurred by the taxpayer during the taxable year in carrying on any trade or business. The taxpayer has the burden to maintain records sufficient to substantiate the amounts and purposes of deductions claimed.

The Court allowed the partial deduction based on the Cohan rule. The Court stated: "Under the Cohan rule, in the event that a taxpayer establishes that he or she has incurred a deductible expense but is unable to substantiate the precise amount, the Court may approximate the amount of the expense. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The Court must have sufficient evidence upon which to make a reasonable estimate to apply the Cohan rule."

We are seeing more and more cases where deductions are being disallowed because the taxpayer does not have the substantiation required by Section 274(d) of the Internal Revenue Code.

AUDIT RECONSIDERATION

Generally, once the IRS makes an assessment the taxpayer must pay the assessment and file suit in order to challenge the assessment. The taxpayer, however, does have other options rather than paying the tax. One option is to request audit reconsideration. Audit reconsideration is available when there has been a communication problem between the taxpayer and the IRS, or the taxpayer has chosen to ignore a statutory notice of deficiency. In some cases, the IRS has permitted audit reconsideration of returns after collection has begun. It is important to gather as much information as possible about the year in question to show a need for audit reconsideration. A taxpayer should always ask for audit reconsideration. The worst that can happen is the IRS denies audit reconsideration. If this happens, the taxpayer should ask for an appeals conference.

The following three requirements must be met to receive audit reconsideration after collection has begun:

1. The taxpayer has changed addresses since the original tax return was filed; therefore, the deficiency notice was not sent to the taxpayer's new address.

2. The taxpayer has not received any notification from the IRS of the assessment or as to how the assessment was determined prior to receipt of the bill.

3. The taxpayer has not had an opportunity to submit any required substantiation to tell his side of the story.

Reasons for Audit Reconsideration Request (IRM 4.13.1.3):

1. The taxpayer did not appear for the audit.

2. The taxpayer moved and did not receive the correspondence from the IRS.

3. The taxpayer has new documentation to present.

4. The taxpayer disagrees with an assessment from an audit of the taxpayer's return and has additional information to be considered.

5. The taxpayer disagrees with an assessment created under the authority of Section 6020(b).

6. The taxpayer has been denied tax credits such as EITC claimed during prior examination.

Old Letterhead and Excessive Postage

Below is the letterhead from a recent IRS letter.  I did not know we still had District Directors.  Also, is a postage mark on a large envelope from an agency, not the IRS this time, that contained a two page letter.  The postage was $1.28 for the two page letter. 

IRS Request Withdrawal of Collection Due Process Hearing - Before the Hearing

Recently in letters from IRS Appeals advising the taxpayer that a hearing has been scheduled, the IRS is enclosing Form 12256, WIthdrawal of Request for Collection Due Process or Equivalent Hearing. We do not understand the purpose of enclosing this form. It is confusing to the taxpayer. The cover letter from Appeals states:

"If you no longer want to pursue the CDP Hearing, I have enclosed Form 12256 for you to sign and withdraw your request. You can fax or mail this back to me prior to the deadline date".

We see no reason for the IRS to include this form. Appeals can certainly discuss a withdrawal with the taxpayer during the hearing. It seems that Appeals should be trying to help the taxpayer, rather than seeking a withdrawal of the hearing request before the hearing takes place. While it is only page, we doubt that many taxpayers sign it. Therefore, it is just a waste of taxpayers’ money.

Will the IRS Listen?

Here is an article titled "How to talk so the IRS will listen".  This article give guidance on how to deal with the IRS.

How Long Should Records Be Kept?

In IRS Tax Tip 2011-71 the IRS has given advise on how long to keep records for tax purposes.  The IRS says the following:


1.  Normally, tax records should be kept for three years.
2.  Some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.
3.  In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return.
4.  Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.
5.  For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at http://www.irs.gov/.  

It is getting more difficult to obtain deductions in an audit, at IRS Appeals, or in court, if records are not available to prove the deduction.  Everyone should keep detailed records and this is especially true for automobile and travel expenses. 

How the IRS Will Operate If There Is A Shutdown

Here is what the IRS Operations Will Be During A Government Shutdown


If the federal government shuts down, IRS operations will be severely limited. However, the underlying tax law remains in effect, and all taxpayers should continue to meet their tax obligations as normal.

Individuals should keep filing their tax returns with the IRS and are required to do so by April 18 unless they obtain a six-month extension. The IRS will be accepting all tax returns. Once they’ve been accepted, the IRS will generally process and issue refunds for electronically filed individual returns.

Individuals are urged to file electronically, because most of these returns are processed automatically and should not be delayed. Because of limited IRS staffing, paper returns will be accepted, but will not be processed in the event of a government shutdown and taxpayers who file paper returns will experience a delay in receiving their refunds. Limited telephone customer service functions will remain available, but IRS walk-in taxpayer assistance centers will be closed.

While the government is closed, people with appointments related to examinations (audits), collection, Appeals or Taxpayer Advocate cases should assume their meetings are cancelled. IRS personnel will reschedule those meetings at a later date.

Here are some basic steps for taxpayers to follow in case of a governnment shutdown:

How Does This Affect Me? What Do I Do?

• You should continue to file and pay taxes as normal.
• The April 18, 2011, tax deadline for filing the 1040 series of tax returns remains in effect.
• Individuals filing the 1040 series of returns can still request a six-month filing extension to Oct. 17 by filing Form 4868. Taxpayers who request a filing extension must still make their tax payments by April 18, 2011.
• The quarterly estimated tax payment due April 18 is unchanged.
• All other tax deadlines remain in effect, including those covering individuals, corporations, partnerships and employers. The regular payroll tax deadlines remain in effect as well.
• You can file your tax return electronically or on paper –– although the processing of paper returns will be delayed until full government operations resume. Payments accompanying paper tax returns will still be accepted as the IRS receives them.
• Tax refunds for most electronically filed returns will continue to be issued. Because of limited IRS staffing, taxpayers who file paper returns will experience a delay in receiving their refunds.
• Tax software companies, tax practitioners and Free File remain available to assist with taxes.
• State tax deadlines are not impacted by the federal government shutdown.

What Will Happen At The IRS If The Government Shuts Down?

Only the most basic functions will remain operating in light of the critical April 18 filing deadline.

Operations Available


During the Government Shutdown

Tax processing operations are continuing at this time for electronically filed 1040 series tax returns.

Tax refunds will be issued as returns are processed, so most tax refunds for electronically filed returns will be issued. Taxpayers should expect longer than normal delays for paper filed tax refunds. IRS e-file and Free File remain the best way of getting tax refunds quickly and are unaffected by the government shutdown.

Tax deposits and payments are being processed, both for electronic and paper tax returns. Taxpayers should continue to make these payments as normal.

The IRS will continue accepting all tax returns during this period. In addition to individual e-file, business e-file will remain open as well and refunds for business e-filers will continue.

For individual taxpayers seeking assistance, the regular 800-829-1040 telephone line remains open. However, this line will not accept calls unrelated to individual tax issues, and taxpayers should anticipate much longer wait times. As an alternative, taxpayers are strongly encouraged to use www.IRS.gov.

The IRS website, www.IRS.gov, will remain available, although some interactive features may not be available. ”Where’s My Refund” will remain available on the IRS website for people to check on the status of their tax refunds.

If people have already filed their return and the IRS has started processing their tax return, they generally will see no delays in their refunds being issued. The best source for information will be checking "Where's My Refund" at www.IRS.gov.

The IRS Free File partners will continue to accept and file tax returns.

Tax software companies will continue to accept and file tax returns.

The IRS Volunteer Income Tax Assistance Program (VITA) and the Tax Counseling for the Elderly (TCE) Programs will remain open in many locations to offer free tax help for taxpayers who qualify. Many Low-Income Taxpayer Clinics will remain open.

Many automated IRS notices will continue to be mailed.

Operations Closed

Or Unavailable During a Government Shutdown

(Partial Listing)

Taxpayer Assistance Centers (TACs) where taxpayers walk-in for service will be closed. People with scheduled appointments during the government shutdown will have to reschedule.

While the government is closed, people with appointments related to examinations (audits), collection, Appeals or Taxpayer Advocate cases should assume their meetings are cancelled. IRS personnel will reschedule those meetings at a later date.

No live telephone assistance will be available for non-1040 series business taxpayers on the 800-829-4933 number.

No live telephone assistance will be available for exempt organizations, retirement plans administrators or governmental entities that use the 877-829-5500 number.

The phone number for victims of identity theft (800-908-4490) will not be available.

The IRS will not be working any paper correspondence during this period.

Most IRS legal counsel services will stop.

Information for Tax Practitioners

• The e-Help Desk will be available for e-file error reject code assistance only -- Monday through Friday from 6:30 a.m. to 5:00 p.m. Central Time.
• The Practitioner Priority Service line will not be available.
• Quick Alerts will be issued as necessary via the normal e-mail process.