More On Tax Planningfrom The Advisor's Professional Library
As we enter the final quarter of 2007, it is a good time for tax advisors, and financial planners who work with tax advisors on behalf of their clients, to review and understand some of the post-filing functions of the Internal Revenue Service (IRS), particularly those activities relating to appeals and examinations, that can impact clients throughout the year.
Tax Talk Today, the monthly IRS-sponsored Webcast for tax professionals, recently examined the role of appeals in the resolution of tax disputes and the operations of the IRS's Campus Compliance Services, as well as a few other tips on recent or future changes of which tax pros need to be aware.
Understanding the Role of the Appeals division
The purpose of the IRS's Appeals Division is to give the tax practitioner and the taxpayer an authority who will provide a fresh, independent look at an unresolved tax dispute. An Appeals Officer examines all of the facts of the case, considers all available information, viewpoints, and perspectives, and conducts an analysis of the litigation hazards in order to predict the outcome if the case were to continue on to court.
"We're charged with doing it in a way that is impartial and fair, with bias towards neither the government's position nor the taxpayer's position," said Sarah Hall Ingram, chief, Appeals, IRS.
The Appeals Division reviews approximately 100,000 cases annually, and resolves an average of 80% of those cases. The IRS estimates that about one quarter of Appeals cases are addressed in face-to-face meetings, while the rest are resolved via telephone or correspondence. As the last stop before a case proceeds to tax court, the Appeals Division can offer a more flexible viewpoint than a judge, who will only rule in terms of right and wrong according to the point of law.
"[Appeals] can recognize that there are gray areas," said Tax Talk Today panelist Daniel J. Wiles, managing director, Washington National Tax Service, PWC.
Industry professionals on the July Tax Talk Today panel cautioned tax practitioners about the complex nature of most of the tax disputes that come before the Appeals Division. Tax pros must prepare carefully for the rigors of the appeals process and have a clear understanding of the decision-making procedures involved.
"A practitioner advising his or her client needs to have a very clear line of sight," recommended Eli J. Dicker, chief tax counsel, Tax Executives Institute, Inc.
One critical component of the appeals process is the statute on ex parte communications. This law allows no oral or written communication about a particular case between the Compliance and Appeals divisions without the express knowledge of the taxpayer. The only exception to this statute would be administrative communication, such as requests for documentation. If ex parte communication does occur, the IRS can either share the communication and all related content to give the taxpayer the opportunity to discuss or even rebut the communication, or the case can be reassigned to a new Appeals Officer to maintain the integrity of the process.
How Campus Compliance Services works
Tax practitioners and their clients have probably interacted with the IRS' Campus Compliance Services without even realizing it. These IRS locations focus on post-filing services and are tasked with reducing taxpayer burden and increasing voluntary taxpayer compliance through exam and collection programs. Unlike IRS field offices, Campus Compliance Services have no walk-in services and do not conduct face-to-face meetings with taxpayers or tax practitioners.
Most likely, the tax pro's experience with Campus Compliance Services has come in the form of correspondence examinations and the automated under-reporter program. Both programs are administered via mail and telephone and represent an audit or request for justification of usually just one or two issues with a particular federal tax return.
Correspondence exams: In a correspondence exam, Campus Compliance Services identifies one or two items on a return that require further examination. The taxpayer (and the tax practitioner, if an applicable power of attorney is already on file) then receives an official IRS notice in the mail, which includes a request for detailed information in support of what was reported on the return in question. Publication 3498-A is also included with the notice and explains the taxpayer's appeal and advocacy rights.
One correspondence examination heads-up for tax practitioners: the IRS has initiated a number of Telephone Excise Tax Refund (TETR) audits; it seems that those taxpayers electing to claim the actual amount for the refund had a tendency to incorrectly claim the amount of their total telephone bills, instead of claiming just the excise tax on those bills.
Of TETR claims, however, about 99.4% of individual filers claimed the standard amount, and the IRS began examining the rest in February of this year.
Automated under-reporter program: Campus Compliance Services also administers the automated under-reporter program., which uses a computerized matching program to compare information returns with taxpayer returns in order to identify discrepancies. Once a mismatch is identified, the IRS sends a Notice CP-2000 to the taxpayer, who can either pay the tax or explain the difference to the IRS. The two most common causes of a Notice CP-2000 are failure to report unemployment compensation and problems with interest reporting. Soft notices for under-reporters, a relatively new tool from Campus Compliance Services, advise the taxpayer of the precise problem and request an amended return. Tax practitioners should note that this soft notice comes with possible consequences: failure to respond to these soft notices can result in examination of the next year's tax return.
"If you did it this year, you better be careful," said panelist Keith Huebel, CPA, Huebel & Associates CPAs, LLC. "They're looking for it to happen again."
The IRS generates approximately 4.2 million CP-2000s per year, and sends them out year-round--even during filing season.
"You can imagine what it would be like if we didn't stagger the mailing of 4.2 million notices," said Jane Looney, director, Reporting Compliance, Wage and Investment, IRS. "Not only would the practitioners receive a tremendous number of notices, but we in the IRS would not be able to respond to the correspondence."
For any Campus Compliance Services examinations, it is important to send all responses to the address shown on the notice received by the taxpayer. There are different Campus Compliance Services locations across the country, and tax pros need to ensure that all correspondence goes to the correct address.
"Misrouted responses from the taxpayer are one of the major contributors to our inability to respond quickly to the information that is sent in to us," said Tax Talk Today panelist Charlestine Hardy, director, Campus Compliance Operations, Memphis IRS.
In the end, It's All About Communication
Your client always has the right to request a face-to-face meeting with the IRS, even when the initial notice
originated with Campus Compliance Services. However, since this would require Campus Compliance Services to refer the case to a field office, such a request can result in significant delays for a case that could be resolved via mail or telephone.
"It does mean extra time on the audit, both for the taxpayer and the IRS," said Looney. For these and other issues, the key is communication between the tax practitioner and the client.
Keeping clients informed about changes and new federal tax initiatives can help, as well as consistently reminding clients to notify their practitioner right away if they receive a notice or other IRS correspondence. David Mellem, an Enrolled Agent and partner with Ashwaubenon Tax Professionals in Green Bay, Wisconsin, recommends practitioners send out regular reminders in newsletters and include this tip to help their clients remember this important step.
"We want to save [clients] the interest and penalty of being late," said Mellem. "So the sooner they can contact us, the better."
Tax Talk Today moderator Les Witmer served with the IRS for 23 years, and is currently a communications consultant in Atlanta. For additional information, please visit the IRS at www.IRS.gov, or Tax Talk Today at www.taxtalktoday.tv.