ALLAN HANCOCK COLLEGE INTRODUCTION TO TAX LAW STEPHEN A. WAGNER Allan Hancock College Fall 2018

OVERVIEW OF TAX CONTROVERSIES AND ADMINISTRATION Please read the following slides for a basic outline of the law pertaining to tax disputes in the United States. We will be discussing these next week.

PLAYERS IN TAX ADMINISTRATION LEGISLATIVE BRANCH: CONGRESS ENACTS TAX STATUTES (CODE); JOINT COMMITTEE ON TAX MUST APPROVE REFUNDS > $2,000,000 EXECUTIVE BRANCH: IRS IS AN EXECUTIVE AGENCY WITHIN TREASURY DEPARTMENT; SETS PROCEDURES FOR COMPLIANCE WITH TAX LAWS, PROCESSES RETURNS, AUDITS TO ENSURE COMPLIANCE, INTERPRETS TAX LAWS, COLLECTS TAXES TAX PREPARERS AND TAXPAYERS WHO “VOLUNTARILY” COMPLY WITH REPORTING AND PAYMENT REQUIREMENTS

PLAYERS IN TAX CONTROVERSY PROCESS JUDICIAL BRANCH: TAX COURT, U.S. DISTRICT COURTS, COURT OF FEDERAL CLAIMS, U.S. CIRCUIT COURTS OF APPEALS, SUPREME COURT IRS: AUDITS, ASSESSES AND COLLECTS DEFICIENCIES, RESOLVES DISPUTED TAXES, LITIGATES IN TAX COURT TAX PROFESSIONALS AND TAXPAYERS: CHALLENGES IRS ASSERTION OF DEFICIENCIES AND PROSECUTES REFUND CLAIMS

IRS OPERATING DIVISIONS WAGE AND INVESTMENT DIVISION: DEALS WITH TAXPAYERS WHO HAVE INCOME REPORTED BY 3RD PARTIES (W2, 1099) SMALL BUSINESS/SELF-EMPLOYED: DEALS WITH BUSINESS WITH < $10,000,000 IN ASSETS AND SELF-EMPLOYED INDIVIDUALS LARGE BUSINESS AND INTERNATIONAL: DEALS WITH ENTITIES WITH > $10,000,000 IN ASSETS TAX-EXEMPT/GOVERNMENT ENTITIES: DEALS WITH EMPLOYEE PENSION PLANS AS WELL AS GOVERNMENT AND EXEMPT ENTITIES

IRS ADMINISTRATIVE FUNCTIONS EXAMINATION FUNCTION: CONDUCTS AUDITS AUDITS HANDLED BY REVENUE AGENTS APPEALS FUNCTION: PROVIDES “INDEPENDENT” REVIEW OF AUDITS AND COLLECTIONS HANDLED BY APPEALS OFFICERS CHIEF COUNSEL: DRAFTS REGULATIONS AND RULINGS LITIGATES IN TAX COURT LEGAL ADVICE TO IRS COLLECTION FUNCTION: COLLECTS TAX AFTER ASSESSMENT COLLECTIONS HANDLED BY REVENUE OFFICERS A/K/A COLLECTIONS OFFICERS CRIMINAL INVESTIGATION: INVESTIGATES TAX CRIMES REFERS CASES TO DOJ HANDLED BY SPECIAL AGENTS TAXPAYER ADVOCATE: ASSISTS TAXPAYERS IN RESOLVING PROBLEMS WITH IRS

OVERVIEW OF TAX CONTROVERSY PROCESS

ETHICAL ISSUES IN TAX PRACTICE DIFFERENT ROLES OF TAX PRACTITIONER: (1) TAX PLANNING (2) RETURN PREPARATION (3) REPRESENTATION BEFORE IRS (AUDIT, APPEALS, COLLECTION) (4) REPRESENTATION IN COURT (5) AT ALL STAGES, IS THE PRACTITIONER A RULE ENFORCER OR AMBIGUITY EXPLOITER?

PRACTICE BEFORE THE IRS WHO MAY PRACTICE BEFORE IRS: (1) ATTORNEYS; (2) CPAs; (3) ENROLLED AGENTS. IRS OFFICE OF PROFESSIONAL RESPONSIBILITY (“OPR”) REGULATES PRACTICE BEFORE IRS; MAY SUSPEND OR “DISBAR” PRACTITIONER FROM IRS PRACTICE. TREASURY CIRCULAR 230 IS A REGULATION WHICH PROVIDES RULES OF IRS PRACTICE. RETURN PREPARATION IS NOT “PRACTICE BEFORE IRS” AND THEREFORE NOT SUBJECT TO OPR REGULATION. SEE LOVING V. IRS, 742 F.3D 1013 (D.C. CIR. 2014); IRS CAN’T FORCE PREPARERS TO TAKE TEST OR CONTINUING EDUCATION CLASSES IRS RETURN PREPARER OFFICE (“RPO”) HAS SOME REGULATORY POWER OVER PREPARERS THROUGH OVERSIGHT OF E-FILE AND REQUIREMENT THAT PREPARERS REGISTER AND PAY A FEE FOR TAX ID NUMBER (PTIN); AT LEAST 1 COURT HAS INVALIDATED FEE REQUIRMENT. SEE STEELE, 2017 U.S. Dist. LEXIS 207585. IRS HAS A VOLUNTARY PROGRAM; PREPARERS WHO COMPLETE COURSES PUT ON A LIST THAT IS PUBLISHED IN AN ONLINE DIRECTORY

HIGHLIGHTS OF CIRCULAR 230 MUST EXERCISE DUE DILIGENCE IN SUBMISSIONS TO IRS MUST HAVE NECESSARY COMPETENCE TO HANDLE THE MATTER AVOID CONFLICTS OF INTEREST CANNOT SIGN RETURN OR ADVISE CLIENT TO SIGN IF RETURN HAS A POSITION THAT: (1) HAS NO REASONABLE BASIS; (2) IS AN UNREASONABLE POSITION PER CODE § 6694(A)(2); (3) IS A WILLFUL ATTEMPT TO UNDERSTATE TAX LIABILITY OR RECKLESS DISREGARD OF RULES/REGULATIONS; (4) IF SUCH A POSITION IS TAKEN, PRACTITIONER MUST ADVISE AS TO PENALTIES MUST BASE WRITTEN ADVICE ON REASONABLE ASSUMPTIONS AND REASONABLE EFFORT TO DETERMINE FACTS PRACTITIONER MUST ADVISE CLIENT AS TO ANY NON-COMPLIANCE WITH TAX LAWS OF WHICH PRACTITIONER IS AWARE MUST RESPOND TO ALL PROPER IRS REQUESTS FOR INFORMATION NOT SUBJECT TO PRIVILEGE MUST HANDLE MATTERS PROMPTLY AND MEET OWN PERSONAL TAX OBLIGATIONS

PRACTICE BEFORE THE COURTS ATTORNEYS, CPAs, & ENROLLED AGENTS MAY PRACTICE AT THE TAX COURT; CPAs AND ENROLLED AGENT MUST TAKE A TEST TO BE ADMITTED TO TAX COURT BAR. SEE TAX COURT RULE 200. ONLY ATTORNEYS MAY PRACTICE IN OTHER U.S. COURTS. MUST BE ADMITTED TO A STATE BAR AND THEN SEEK ADMISSION TO PRACTICE IN PARTICULAR FEDERAL COURT. COURTS GENERALLY HAVE A SUSPENSION AND DISBARMENT PROVISION IN THEIR RULES. SEE, E.G., TAX COURT RULE 202

ETHICAL QUESTIONS TO CONSIDER SHOULD I TAKE THE CASE? HOW AGGRESSIVE A POSITION AM I WILLING TO TAKE? DO I FOLLOW CLIENT’S WISHES OR TRY TO STEER TOWARD A POSITION I THINK IS THE CORRECT, MORAL PATH? TO WHAT EXTENT CAN I CONSIDER MY OWN RISK OF PENALTIES, REPUTATION, FUTURE BUSINESS PROSPECTS? CAN I ADVISE CLIENT ABOUT THE CHANCES OF BEING AUDITED AND COUNSEL AN AGGRESSIVE POSITION IF THE RISK OF AUDIT IS LOW?

ANSWERS NOT ALWAYS CLEAR WELL SETTLED THAT PRACTITIONER CANNOT: (1) TAKE A POSITION THAT IS HAS NO REASONABLE BASIS OR IS ILLEGAL, FRAUDULENT OR INVOLVES MISREPRESENTATION; (2) WILLFULLY ATTEMPT TO UNDERSTATE TAX LIABILITY OR RECKLESSLY OR INTENTIONALLY DISREGARD RULES OR REGULATIONS; (3) BASE ADVICE ON PROBABILITY OF BEING AUDITED OR ISSUE RAISED IN AUDIT; (4) PUT PERSONAL INTEREST ABOVE CLIENT’S MOST PRACTITIONERS WOULD SAY: (1) CAN DISCUSS AUDIT PROBABILITY WITH CLIENT AS PART OF CLIENT’S DECISION; (2) IDENTIFY FOR CLIENT POSITIONS THAT LIKELY WOULD NOT BE SUSTAINED, PROVIDING RISKS (PENALTIES, INTEREST) AND REWARDS (TAX SAVINGS); (3) INCLUDE NON-TAX CONSIDERATIONS FOR CLIENT CONSIDERATION (BAD P.R., CUSTOMER RELATIONS) PRESSURES FROM A NUMBER OF SOURCES: (1) CLIENT RETENTION/DEVELOPMENT; (2) STANDING IN FIRM; (3) REPUTATION AND PENALTY EXPOSURE

CONFLICTS OF INTEREST TAX COURT RULE 24(g); CIRCULAR 230, § 10.29; AND ABA MODEL RULES 1.7 ALL PROHIBIT REPRESENTATION WHICH RESULTS IN A CONFLICT OF INTEREST T.C. RULE 24(g): COUNSEL MUST SECURE INFORMED CONSENT OF CLIENT OR WITHDRAW IF COUNSEL: (1) WAS INVOLVED IN PLANNING, PROMOTING TRANSACTION OR OPERATING AN ENTITY CONNECTED TO ISSUE IN CASE: (2) REPRESENTS MORE THAN 1 PERSON WITH DIFFERING INTERESTS; (3) IS A POTENTIAL WITNESS POTENTIAL SITUATIONS: (1) HUSBAND AND WIFE WHO FILED JOINT RETURN; (2) TAXPAYER AND ACCOUNTANT IN AUDIT; (3) CORPORATION AND ITS PRESIDENT, CEO OR OTHER MANAGER