It is extremely important to have a working knowledge and appreciation for the administrative process in which tax returns are fi led, reviewed and examined. This knowledge allows the practitioner an opportunity to provide an efficient, invaluable service to his clients and to the system of tax administration. The administrative process should not be abused merely because of the taxpayer’s desire to delay the determination and collection of any potential liability. Collection-related issues should be sorted out through an installment payment arrangement that would be negotiated through the normal collection process following conclusion of the audit.
ISSUE SPOTTING. A practitioner cannot know everything that one’s client will expect the practitioner to know. However, a practitioner should be able to “issue spot” matters within his field of expertise and, to a lesser extent, matters outside his field of expertise. The internet may be a practitioner’s best initial resource. There is a tremendous amount of information available on the Internet for the IRS and various state taxing authorities. Get comfortable accessing their sites.
Tax people need to be sensitive to non-tax issues. Otherwise, resolution of a tax dispute might inadvertently set up a securities case, a money-laundering structuring case, etc. against one’s client.
IRS AUDIT TECHNIQUES GUIDES. Be familiar with IRS Audit Technique Guides (ATG) when providing tax advice, preparing tax returns, preparing for an IRS examination and when preparing a client for an interview with the government. There are many publicly available ATGs that have been prepared by the IRS. Each ATG instructs the examining agent on typical methods of auditing a particular group of taxpayer, including typical sources of income, questions to be asked of the taxpayer and his representative during the audit, etc. These groups have been defined by type of business (i.e., gas stations, grocery stores, etc.), technical issues (passive activity losses), types of taxpayer (i.e., returns lacking economic reality) or method of operation (i.e., cash businesses).
A practitioner should not blindly proceed with an examination without being generally familiar with any potentially relevant IRS ATGs. Effective representation requires the ability to utilize all available resources, including the ATGs. Often, it may be beneficial to review relevant ATGs earlier in the process…perhaps while preparing the return. Preparers representing clients in an industry or having issues covered by an ATG should consider thoroughly reviewing the ATG with the client, before the return is filed.
ENGAGEMENT LETTERS. Engagement letters for tax-related matters should specify the scope and terms of the engagement. Services rendered should be within the scope of the engagement as clearly set forth in the engagement letter. If additional services are to be provided, additional engagement letters should be obtained. If a client relationship is terminated for any reason, written confirmation of the termination should be promptly provided to the client and the opposition. If the government has been involved, the government should also be clearly advised of the termination of the client relationship.
EXTENSIONS OF THE STATUTE OF LIMITATIONS. It is often a good practice to provide an extension of the applicable statute of limitations during the course of any audit or examination. However, it is also good practice to have extensions signed by the client, rather than the client’s authorized representative (even though authorized by a power of attorney). Years later, the client may not recall having given authorization to extend the statute of limitations. If their signature is on the extension (Form 872), the situation will not likely escalate. Further, it is almost always preferred to sign a limited extension with a specified expiration date (Form 872) rather than an indefinite extension for an unspecified term (Form 872-A).
FREEDOM OF INFORMATION ACT REQUESTS. It is often advisable to submit a request under the Freedom of Information Act (FOIA) following the unagreed resolution of a federal tax examination. It should also help tailor discussions at the next administrative level while providing insight into what the next government representative assigned to the case will be reviewing. The process is relatively simple and inexpensive. Relevant information regarding the submission of a FOIA request is readily available at irs.gov by searching “FOIA.”
TAXPAYER ADVOCATE SERVICE. If an examination problem seems overwhelming, consider contacting the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels or who believe that an IRS system or procedure is not working as it should.
RESPOND TIMELY AND SEEK RESOLUTION AT THE EARLIEST OPPORTUNITY. Throughout, treat all government representatives with respect and act like the professional that you want others to know and respect. Cooperate within your client responsibilities and respond timely to all requests, even if the response is a request for additional time to respond.
It is generally advisable to attempt to resolve any civil tax dispute at the earliest opportunity. A lengthy examination may be costly from the perspective of the expenditure of time and effort involved, as well as the taxpayer’s degree of frustration with the normal administrative process. Further, a prolonged audit is more likely to uncover potentially sensitive issues that could generate increased tax deficiencies, penalties or the possibility of criminal sanctions.
WHEN IN DOUBT . . . GET A DOG! A busy tax practice can be surrounded by minefields. Never underestimate the IRS’s ability, desire and resources to examine tax returns and collect taxes. Document your client advice in writing, limit the nature and scope of services to be provided in your engagement letter, establish a system of checklists (and follow the system) and use your best judgment.
If the taxpayer is unwilling to accept and follow your advice, strongly consider terminating the engagement. Life is short and the headaches of trying to convince someone to do the right thing may simply not be worth your effort. There is a reason many people become clients, and it is not because they routinely coordinate all relevant information necessary to the preparation of a return nor do they routinely provide such information in a timely manner. If you encounter an undeserving or possibly disrespectful taxpayer-client, let them go and move on with your practice.
Lastly, you cannot be all things to all people, regardless of the effort and personal sacrifice. Perhaps most importantly, remember that the taxpayer is your client, not your friend . . . if you feel the need for friends . . . get a dog!