The IRS has been on a mission to find $345 billion of the hypothetical tax gap, which theoretically includes substantial under-reporting by small business. The Small Business Administration has recently disputed this theory, but the IRS has become more efficient. Based on a reorganization in 1999, they now have separate divisions and a correspondence audit process that extends their auditors reach.
Our three experts in IRS Representation include Jack Allgood, Tim J. Bubel, CPA, and Bryan C. Skarlatos.
Allgood is a tax partner at Anton Collins Mitchell, LLP in Denver, CO. Allgood is active within the Colorado Society of Certified Public Accountants (CSCPA) and is a frequent speaker on income tax and public accounting subjects.
Bubel is the owner of Tim Bubel, CPA, in Dallas, TX. Bubel specializes in IRS Representation in Dallas and surrounding cities of Texas.
Skarlatos is a partner at Kostelanetz & Fink, LLP in New York, NY. Skarlatos is co-chair of the New York University Annual Tax Controversy Forum and the co-chair of the Compliance Practice and Procedure Committee of the New York State Bar Association Tax Section.
Each of the three All-Stars interviewed this issue agreed that, “the deals are in Appeals,” as Skarlatos summed it up. They also provide advice for other CPAs in dealing with the IRS exemplified by Bubel’s adage, “Be prepared, be polite, be persistent and be honest.”
Continue reading to find out more about what our All-Stars had to say about IRS Representation.
CPA Magazine: How did you get your start in IRS Representation?
Allgood: My first IRS representations date back to the 1970s, representing individual income tax clients with IRS office audits.
Bubel: My father was a small business owner; he recommended working for the IRS. I started my career there. I have been in private practice since 1986 preparing tax returns and representing clients ever since.
Skarlatos: I started my legal career in the tax department of a large Wall Street law firm where I worked on corporate reorganizations, leveraged leases and cross-border financings. After a few years, I grew tired of reviewing endless documents late at night in my office. I wanted to work more directly with clients in win or lose situations where I actually could make a difference in the outcome of a matter. At the same time, I enjoyed the intellectual challenge presented by the tax law. I was lucky to find a firm that combined my interests perfectly, and I have been practicing tax controversy at Kostelanetz & Fink, LLP ever since.
CPA Magazine: What do you see the IRS targeting on audits lately?
Allgood: Foreign reporting and international activities, corporate reorganizations, business deductions and officer/stockholder compensation and independent contractor issues.
Bubel: I represent small businesses, so I am seeing schedule Cs with losses, large auto expenses, large itemized deductions (i.e. medical and employee business expenses).
Skarlatos: The IRS definitely is more focused on international issues in its audits. Every agent is on the lookout for foreign bank accounts and interests in foreign entities. Agents also are more focused on penalty issues. They have been trained to consider the assertion of penalties in every case and that shows in the greater number of penalties being assessed.
CPA Magazine: What is the most significant difference with IRS Representation today?
Allgood: The process, from taxpayer notification is often what appears to be a random phone call to a signing officer or a TMP, to modes of communication (e-mail vs. fax; electronic files vs. paper copies), to time delayed closing letters (and shortage of agents), and the administrative review appeals process (IRS Office of Appeals) — sole function of this appeals conference is to review examination reports and provide an impartial platform for taxpayers and their representatives to plead their cases to a higher position within the IRS.
The purpose is to avoid litigation when possible by resolving tax disputes internally in a way that encourages future voluntary taxpayer compliance with the tax laws. The downside is the additional representation fees and the possible introduction of new issues that can result in an additional tax assessment. Dealing with IRS designated specialists (i.e. international examiners, Sec 263 experts, etc.).
Bubel: The agents are newly trained and very inflexible. Dotting Is and crossing Ts is important. The new agents seem to believe you need a log detailing mileage with odometer readings, instead of reasonable proof, like calendars and MapQuest logs.
Skarlatos: Maybe tax problems just have gotten more complicated, but it seems to me that revenue agents have gotten more sophisticated. They are better trained to find and follow through on issues, to challenge assertion of privilege or claims of reliance on counsel and to assert penalties where appropriate.
I think that the IRS reorganization into separate business divisions, which occurred in the late 1990s, is starting to produce results today. Revenue agents tend to be more specialized and better trained to address the issues raised by the particular taxpayers they are auditing, whether the taxpayers are individuals, small business or large multi-national entities.
Bryan C. Skarlatos
CPA Magazine: What is the first thing you do when a client informs you they have received an audit letter from the IRS?
Allgood: I arrange a meeting to inform the client of the process (from notice to appeals), what to expect, my experiences with audit representation, and to discuss areas of concern, if any.
Bubel: Request a copy of the audit letter and get a power of attorney to work with the IRS. Figure out what the issues are to determine a strategy to work on the audit.
Skarlatos: The very first thing I do is to make sure that I, or some other tax professional, is in place to handle all communications with the IRS. Things rarely go well when a taxpayer, whether it is an individual or corporation, deals directly with an IRS agent during an audit.
Next, it is essential to drill down on the facts, so that I can understand exactly what the issues are, what the taxpayer reported on the tax return and why and what support there is for the taxpayer’s position. The strategy for the rest of the audit will depend very much on the types of issues involved and the strength of the taxpayer’s position.
CPA Magazine: Tell us about an interesting tax client story, without naming names, of course.
Allgood: A client documented substantial meals and entertainment expenses in his diary. The agent asked for the client’s diary and opened it to the month of December, for which there was a large amount of expenses recorded.
It turns out the client’s daughter’s wedding took place out of the country during the same dates where the taxpayer had reported entertainment expenses and was to have been in the U.S.
Bubel: My client sent in a cashier’s check with the 2008 extension. This client banked at Washington Mutual. The IRS lost the check and sent us a notice that we owed the extension payment amount plus penalties and interest.
We sent them a copy of the check, front and back. The IRS responded that they could not read the back of the check.
We sent another copy of the check, but they still claimed they could not read it.
We went back to the bank, which was now Chase, and asked for proof of payment to the Treasury. They said WAMU process their cashier’s checks through Bank of America. After asking three times, we never received proof from Bank of America. During this time, we were still asking the IRS to find the payment.
Finally, we received a letter from IRS saying they found the money. The next letter we received was the intent to levy letter on the amount in question. We took copies of all of the documentation to Taxpayer Advocates office, and they finally helped us resolve this matter.
Skarlatos: There are so many interesting cases in my line of work that it is hard to pick. One case that comes to mind resulted in two Second Circuit Court of Appeals decisions regarding the scope of the Kovel Privilege and the Work Product Doctrine.
I represented a corporation in an audit. The revenue agent focused on a large restructuring transaction that generated a multi-million dollar loss and huge tax savings.
The agent issued an information document request and then a summons for a memorandum the outside accountants had prepared at in-house counsel’s request analyzing the transaction. We asserted the Kovel Privilege and Work Product Doctrine to avoid producing the document. The case was litigated and went up to the Second Circuit Court of Appeals twice.
In the first decision, the court rejected the Kovel Privilege, but in the second decision, the court accepted the Work Product Doctrine and wrote an opinion making new law regarding the scope of the Work Product Doctrine and how it applies to workpapers used in connection with preparing a tax return. The case is United States v. Adelman, 134 F3d 1194 (2nd Cir. 1998).
CPA Magazine: In your opinion, how effective has going to Appeals been?
Allgood: For most disagreements with the auditor, success has been accomplished at the group manager level, with no need to move the audit to the Office of Appeals.
Bubel: I have had good luck with going to appeals. Appeals agents are more experienced and understand the issues better. These agents are also allowed to consider Court costs in making their decisions.
Skarlatos: The Appeals Division of the IRS is very effective. The mission of the Appeals Division is to resolve cases, so it rarely makes sense for a taxpayer to skip the opportunity to go to Appeals. As they say, “the deals are in Appeals.”
CPA Magazine: What other settlement procedures have been effective with the Tax Court?
Allgood: Informing the agent of the taxpayer’s intent to appeal and not settle.
Bubel: The Taxpayer’s Advocate office has been helpful in several cases.
Skarlatos: Getting a good settlement takes preparation. It is important to understand the evidence and to separate the strong issues from the weak issues. Look at the case from the IRS’ perspective, so you can understand and work with the government’s concerns.
The key is to be as objective as possible, so you know what the government’s bottom line will be, yet at the same time, focus on those issues that are strongest for the taxpayer. By understanding and approaching the issues from all perspectives, you are most likely to get to a good settlement.
CPA Magazine: What is the best advice you can give other CPAs concerning representing clients before the IRS?
Allgood: Be knowledgeable of the representative and appeals procedures.
Bubel: Be prepared, be polite, be persistent and be honest. Keep your cool — the IRS agent is only trying to do a hard job. Help them reach the right conclusion — your client’s conclusion.
Skarlatos: As I mentioned, it is essential to insert oneself between the client and the IRS in order to facilitate clear communication and prevent misunderstandings.
Next, it is important to be as prepared as possible when dealing with the agent. The agent is more likely to accept your position if it appears simple and well organized.
Finally, it is important to see the case from the government’s perspective. When you understand what is really motivating the agent, you are better able to convince the agent to see the case from the taxpayer’s perspective as well, so that you can get the best possible result for the taxpayer.
CPA Magazine: What changes would you make to the IRS audit and tax review process?
Allgood: Formalize a strict IRS notification process — require notice by mail to taxpayer (no phone calls).
Mandate the IRS to follow their “repetitive exam policy.”
Bubel: I would like the agents to have more understanding of how life in the real world works.
Skarlatos: I think that the IRS does a good job with the resources it has. A big problem is that the IRS constantly is struggling with limited resources. Congress consistently asks the IRS to administer more tax laws of ever-increasing complexity and to take on other tasks, such as health care overhaul, within the same budget.
If the IRS were able to get more money in the budget, and then deploy that money effectively, I believe that would increase the efficiency of the tax system overall.
CPA Magazine: What do you enjoy doing in your free time?
Allgood: I enjoy golf, fly-fishing, and camping with my family.
Bubel: I like to do things with my family, like playing golf or going on vacation with them.
Skarlatos: What free time? Seriously, when I am not working, I enjoy exercising, cooking and entertaining friends and hanging out with my family.