Lauren A Rinsky of Royse Law Firm, discusses how to handle a federal tax dispute, and the processes of the audit, appeal, and litigation.

1. How to Handle a Federal Tax Dispute:
Audit, Appeal and Litigation
Lauren A. Rinsky
Royse Law Firm, PC
Direct Dial: (650) 521‐5724
lrinsky@rroyselaw.com

2. Overview
Court of
Federal
Claims
District
Court
Tax Court
IRS AppealsIRS Audit
Notice of
Deficiency
Claim for
Refund
Federal
Circuit
Circuit
Court
Supreme
Court
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3. Selection for Audit
• Returns may be selected for a variety of
reasons, such as:
–Random selection
–Computer screening
–Document matching program
–Related Examinations
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4. IRS Audit
• IRS process for examining a return to
determine its correctness
• Three Types:
–Office audit
–Correspondence audit
–Field audits
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5. Representation During Audit
• Taxpayer can act on own behalf or
• Be represented by a “federally authorized tax
practitioner,” such as:
– an attorney, CPA, enrolled agent, or enrolled
actuary.
• If the taxpayer filed joint return, then one or
both spouses can meet with the IRS
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6. Power of Attorney “POA”
• To act as the taxpayer’s representative, you
must have proper written authorization from
the taxpayer
– IRS Form 2848
– For married couples – one form per person
• Existing POAs that the taxpayer does not want
to revoke, must be attached to any new POA.
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7. Attorney‐Client Privilege
• Only an attorney can give the taxpayer the
attorney‐client privilege, meaning that the
attorney is exempt from testifying against the
taxpayer should the case go to trial.
• CPA or tax preparer could be made to testify
against the taxpayer.
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8. Tax Advisor’s Privilege
Under IRC § 7525
• Statutory “tax practitioner‐client privilege”
provided by IRC §7525(a)(1). Very narrow in
scope, and is entirely inapplicable to criminal
tax cases. Also:
– Applies only to provision of “tax advice”
– Does not provide any protection for the tax
practitioner’s work product.
– Does not apply to written tax advice to corporate
type clients concerning their corporations’
involvement in tax shelters.
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9. Kovel Engagement
• Originated in United States v. Kovel, 296 F.2d
918 (2d Cir. 1961)
• Attorney retains non‐legal professional, such
as a CPA, to assist the attorney in rendering
legal advice to the attorney’s client.
• Properly executed, it extends attorney‐client
privilege to CPA’s work and communications.
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10. During IRS Audit
• Keep copies and good records of what you provide
• Ask IRS for an audit plan and timetable
• Ask IRS to send its requests for information in writing
• Be as brief as you can; do not volunteer information
• Do not give original documents to auditor
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11. To Preserve Privileged or Protected
Information and Documents
• Taxpayer can decline to disclose the privileged
material, and instead submit a “privilege log”
• The log should state:
–Privilege or protection being claimed, and
–Describe the material in a manner that,
without revealing the information, enables
the IRS or court to assess applicability of the
claimed privilege or protection
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12. Results of Audit
• No Change:
–IRS accepts return as filed, and taxpayer
receives a “no change letter” stating that
the examiner proposed no changes! Yay!
• Refund:
– Taxpayer is due a refund and gets interest
on the refund!! Woo hoo!!
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13. Results of Audit (continued)
• Agreed:
–IRS proposed changes and taxpayer agrees
with the changes.
• If money is owed, there are several payment
options available (i.e., pay in full, installment
agreement, offer in compromise)
• Disagreed:
–IRS proposed changes and the taxpayer
disagrees with those changes...
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14. Results of Audit (continued)
• Disagreed (continued)
–The IRS will issue a notice to the taxpayer
called a “30‐day Letter” that states the
findings of the examiner and the taxpayer’s
appeal rights.
Note: The 30‐day Letter could also be
received if taxpayer ignores the IRS audit
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15. Appeal within the IRS
(30‐day Letter)
• To appeal the examiner’s proposed
adjustments, the taxpayer has 30 days to
file an appeal (i.e., a “Protest”) and
request a conference with IRS Appeals
Office to discuss the disputed issues
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16. Appeal within the IRS
(30‐day Letter)
• If taxpayer does nothing, then the IRS will
issue a 90‐day Letter (Statutory Notice of
Deficiency) discussed later.
Note: Since the 30‐day Letter is an administrative
letter, and not a statutory notice, the IRS may grant
taxpayer’s request for an extension of time to reply
to the 30‐day Letter
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17. Statute of Limitations (“SOL”)
for Assessment
• IRS typically gets 3 years from the date the
return was filed to make an assessment. See
IRC §6501
• 6 years in the case of “substantial omission”
– An omission of 25% or more of gross income
stated in the return
• Unlimited for unfiled or fraudulent returns!!
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18. Extending the Statute of Limitations
for Assessment
• The assessment period can be extended by
agreement. IRC §6501(c)(4)
– If only legal issues remain, then it does not make
much sense to extend the SOL
– If there are factual issues, then extending SOL
might make sense
• For example, substantiation, where taxpayer needs
more time to provide documents and information
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19. Distinguish Between
Factual and Legal Issues
• To distinguish between factual and legal
issues, ask where you must look to reach a
conclusion.
–If you consult only the law, then the issue is
legal in nature
–Otherwise, it is a factual issue that must be
resolved though gathering additional
information
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20. Statutory Notice of Deficiency
(90‐day Letter)
• If:
– Taxpayer does not respond to 30‐day Letter; or
– Is unable to reach an agreement with the Appeals
Office following a protest; or
– SOL for assessment is about to expire;
• Then:
– IRS will send the taxpayer a Statutory Notice of
Deficiency, commonly referred to as a “90‐day
Letter.” IRC §6212.
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21. Statutory Notice of Deficiency
(“Ticket to Tax Court”)
• Gives the taxpayer 90 days within which to
petition the U.S. Tax Court to redetermine the
liability that is proposed by the IRS.
– 150 days if the letter is mailed to the taxpayer
outside of the U.S.
• Since the 90‐day period is prescribed by
statute, it cannot be extended!
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22. Statutory Notice of Deficiency
(90‐day Letter)
• During the 90‐day period, the IRS is
barred from making an assessment or
collection activity.
• Failure to file a timely petition with the
U.S. Tax Court will result in the deficiency
being assessed by the IRS!!
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23. Appeals to the Federal Courts
(Judicial Review)
• Taxpayers may request judicial review of
IRS determinations by filing a petition
with the:
–U.S. Tax Court
–U.S. District Court
–U.S. Court of Federal Claims
• These courts are independent of the IRS
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24. U.S. Tax Court
• Federal court of limited jurisdiction,
established by Congress under Article I of the
U.S. Constitution.
• Located in Washington, D.C., and the judges
travel around the country to designated cities
to hear cases
• Does not require the taxpayer to first pay the
amount in dispute. IRC §6213(a)
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25. U.S. Tax Court (continued)
• No jury trials; case is tried before a judge
• Has its own rules and procedures that
supplement the Federal Rules of Civil
Procedure
• Except for “S cases”, decisions are appealable
to the appropriate Circuit Court.
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26. U.S. Tax Court Judges
– Regular judges
• The 19 regular judges appointed by the President, after
confirmation by the Senate, for a term of 15 years
– Senior judges
• Presidentially appointed judges who have reached
mandatory retirement age of 70 and are recalled by the
Chief Judge to assist in disposition of cases
– Special trial judges
• Equivalent of magistrates in federal district courts,
serve at the discretion of the Chief Judge
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27. U.S. Tax Court (continued)
Generally, a case petitioned to U.S. Tax Court will
be considered for settlement by an IRS Appeals
Officer before the U.S. Tax Court hears case.
• However, it will be a “docketed appeal,”
meaning any settlement will need IRS
counsel’s approval
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28. Golsen Rule
• The U.S. Tax Court is bound by the precedent
of the Circuit Court in the geographic
jurisdiction in which the taxpayer is located.
Golsen v. Comm’r, 54 T.C. 742 (1970)
– Thus, sometimes the U. S. Tax Court will reach different
rulings for different taxpayers on same facts
Example: If taxpayer is domiciled in San Francisco, which is in
the 9th Circuit, then the U.S. Tax Court would be bound by
precedent of the 9th Circuit.
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29. Federal Courts Circuit Map
29http://www.uscourts.gov/about‐federal‐
courts/court‐role‐and‐structure
Federal Courts Circuit Map
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courts/court-role-and-structure
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ROYSE LAW

30. Small Cases
(“S cases”)
• For tax disputes involving $50,000 or less for
any one year, taxpayers may elect to have case
designated as a small tax case (“S case”)
• Heard by a Special Trial Judge.
• Less formal procedure than regular cases
Note: Decisions in S cases are final and not
appealable!
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31. U.S. Tax Court (continued)
• The Statutory Notice of
Deficiency has a presumption of
correctness.
• Taxpayer generally has burden of
proving that the IRS’s
determination is improper
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32. U.S. Tax Court (continued)
• The case is commenced by the filing of a
timely Petition.
• Also,
– Filing fee ($60)
– Statement of Taxpayer(s) Identification
Number(s)
– Request for place of trial
– Ownership Disclosure Statement (required for
certain taxpayers). See Tax Court Rule 20(c)
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33. U.S. Tax Court (continued)
• After the Petition, IRS Answer, and (if
required) the Taxpayer’s Reply are filed,
– The case is considered “at issue” and pretrial
discovery can begin
• This is typically where the IRS administrative
file is sent (back) to the Appeals Office to be
considered for settlement.
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34. U.S. Tax Court (continued)
• Tax Court rules permit the IRS to
amend its Answer “when justice so
requires”
• Burden of proof on any new matter
or increase in deficiency raised in the
Amended Answer falls on IRS.
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35. U.S. Tax Court
Pretrial Discovery
• U.S. Tax Court’s rules reflect:
– An abbreviated discovery process
– A strong preference for stipulation of facts and
documents over testimony
– A desire to reduce burdens and expenses associated
with litigation in other judicial forums
• Court expects parties to attempt to attain
objectives of discovery through informal
consultation or communication before utilizing
formal discovery procedures
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36. U.S. District Court
• Taxpayer may challenge IRS’s determination in
District Court, but with procedural prerequisite!!
– Taxpayer must first pay the disputed tax liability and
file a claim for refund of the tax paid prior to filing
the lawsuit
• Option for judge or jury trial
• Bound by the legal precedent in the geographic
jurisdiction of the taxpayer
• Appeals made to the Circuit Court in the
geographic jurisdiction of the taxpayer
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37. Time for Filing Claim for Refund
• Generally, taxpayer must file claim for a refund
within 3 years from the date the original tax return
was filed or 2 years from the date the tax was paid,
whichever is later.
• Taxpayer generally must file suit for a refund no later
than 2 years after the IRS has rejected the claim.
– However, taxpayer can file suit if it has been 6
months since the refund claim was filed and the
IRS has not yet delivered a decision.
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38. U.S. Court of Federal Claims
• Court of limited jurisdiction created by Congress
under Article I of the U.S. Constitution
• No jury trials
• Taxpayer must first pay the disputed tax liability
and file a claim for refund of the tax paid prior to
filing the lawsuit.
• Bound by precedent of the former Court of
Claims, Federal Circuit, and U.S. Supreme Court
• Appeals go to the Federal Circuit
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39. U.S. Court of Federal Claims
• Taxpayer cannot file suit in the U.S. Court
of Federal Claims if Taxpayer’s claim is for
credit or refund of a penalty that relates:
–To promoting an abusive tax shelter
–Or to aiding and abetting the
understatement of tax liability on someone
else’s return
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