Got Audit. Help Please!!!

[Unregistered]

maybe bees knees should be required to display a warning sign on his door:

Warning! Prosecuting Agent

[Joe Btfsplk]

I agree with Old Jack

It looks like there is at least a possibility of fraud charges, so you need an attorney. The best thing would be to find an attorney who is also a CPA and who specializes in tax work.

A CPA or EA is OK for normal situations, but attorneys have attorney-client protection which enables the client to "tell all" to the attorney without the attorney being compelled to reveal it all. If it goes to court, a qualified attorney is going to be necessary, but he may also be able to prevent it from going that far.

Not just any attorney will be OK, since you need one with tax expertise.

[Bees Knees]

A CPA or EA is OK for normal situations, but attorneys have attorney-client protection which enables the client to "tell all" to the attorney without the attorney being compelled to reveal it all.

Wrong.

An attorney does not have attorney client privilege concerning the preparation of a tax return. If the client "tells all" and reveals to the attorney the tax is wrong, the attorney cannot hide that fact from IRS if asked.

Circular 230, Subpart B, Section 10.20(a) says:

“(a) To the Internal Revenue Service. No
attorney, certified public accountant,
enrolled agent, or enrolled actuary shall
neglect or refuse promptly to submit records
or information in any matter before the
Internal Revenue Service, upon proper and
lawful request by a duly authorized officer
or employee of the Internal Revenue
Service, or shall interfere, or attempt to
interfere, with any proper and lawful effort
by the Internal Revenue Service or its
officers or employees to obtain any such
record or information, unless he believes in
good faith and on reasonable grounds that
such record or information is privileged or
that the request for, or effort to obtain, such
record or information is of doubtful legality,”

Tax return preparation is not privileged information. Legal advice given to a client can be privileged, but not tax preparation.

Section 10.22 of Circular 230 says:

§10.22 Diligence as to accuracy.
Each attorney, certified public accountant,
enrolled agent, or enrolled actuary shall
exercise due diligence:
(a) In preparing or assisting in the preparation
of, approving, and filing returns,
documents, affidavits, and other papers relating
to Internal Revenue Service matters;
(b) In determining the correctness of oral
or written representations made by him to
the Department of the Treasury; and
(c) In determining the correctness of oral
or written representations made by him to
clients with reference to any matter administered
by the Internal Revenue Service.”

Basically, if the client “tells all” as you suggest, the attorney cannot prepare any tax return or amended return or represent the client in the IRS audit without being forced to reveal that information to the IRS if asked. Attorney client privilege does not prevent the IRS from demanding all the facts with regard to how a tax return was prepared. If the attorney knows the tax is incorrect, and the IRS questions the attorney about the tax, Circular 230 (quoted above) compels that attorney to reveal the truth, or face disbarment from practice before the IRS.

[dyne]

IRS indirect methods to find unreported income

IRS has several indirect methods to find omitted income. Cash T Account,
bank deposit method, source and application of funds and net worth
method. All of these methods simply add all expenditures plus personal living expense then subtract reported and known income with the differance representing unreported income. MANY adjustments must be made such as subtractions for loans borrowed, non-taxable income. THIS is where the agent may make a mistake and fail to enter a subtraction for something like personal yard sale proceeds, etc.
The IRS Manual provides information:
Access www.irs.gov/irm/part9/ and look especially for
9.5.9.6.3 Expenditures method
9.5.9.7 Bank deposits method
9.5.9.5.5.1 Source and Application of Funds Method
9.59.5.4 Net Worth Method

[OldJack]

Section 10.22 of Circular 230 says:

§10.22 Diligence as to accuracy.
Each attorney, certified public accountant,
enrolled agent, or enrolled actuary shall
exercise due diligence:
(a) In preparing or assisting in the preparation
of, approving, and filing returns,
documents, affidavits, and other papers relating
to Internal Revenue Service matters;

The case we were discussing had the tax returns prepared by the taxpayer. What you quote is exactly the reason you as an EA should NOT prepare an amended tax return and should refer the taxpayer to an attorney. If you forge ahead with amended returns you have "made a few dollars" at great expense of the taxpayer. duh!

[Bees Knees]

The case we were discussing had the tax returns prepared by the taxpayer. What you quote is exactly the reason you as an EA should NOT prepare an amended tax return and should refer the taxpayer to an attorney. If you forge ahead with amended returns you have "made a few dollars" at great expense of the taxpayer. duh!

Circular 230 goes beyond preparing the return.

Each attorney, certified public accountant,
enrolled agent, or enrolled actuary shall
exercise due diligence....

(b) In determining the correctness of oral
or written representations made by him to
the Department of the Treasury

[OldJack]

<< Each attorney, certified public accountant,
enrolled agent, or enrolled actuary shall
exercise due diligence....

(b) In determining the correctness of oral
or written representations made by him to
the Department of the Treasury >>

True, but if you (him) don't prepare amended returns and let the IRS agent do his own getting of the numbers there is no need to volunteer any incorrect oral or written representations.

You can read this stuff and interpret it the way you want but truth is in this case the EA should refer to an attorney and let the attorney hire you to do whatever the attorney might want done, if anything. BTW... the attorney may decide to go direct to court where he is not obligated to the IRS circular 230.

You are really beating the dead horse here. Give it up!

[jainen]

the force of law

>go direct to court where he is not obligated to the IRS circular 230<<

An attorney can't go to tax court without exhausting administrative channels first. He can't go to District or Claims court without doing that plus the taxpayer has to pay what the IRS says he owes first!

When he gets to court, he still has to tell the truth and he still doesn't have any privilege concerning the preparation of tax returns even if he didn't prepare the returns. He is also still required to follow the law, and Circular 230 has the force of law.

[OldJack]

When he gets to court, he still has to tell the truth and he still doesn't have any privilege concerning the preparation of tax returns even if he didn't prepare the returns. He is also still required to follow the law, and Circular 230 has the force of law.

Yeah, sure. Attorneys are always straight forward telling the whole truth and never beat around the bush. I have no idea what is the law and what is not... since I am not an attorney. All I know is attorneys have more power to protect the client than a CPA and EA.

On the other hand, if you don't want to help protect the taxpayer go ahead and compile all the information and prepare amended tax returns and then the taxpayer doesn't need an attorney except to sit beside him in court. Or, let the IRS agent conclude his audit and then only check his work and you are not much of a witness.

I get the impression that EA's only want to make a buck and could care less about the taxpayer and their screw-up or circumstances.

Enough on this thread... I am through.

[Bees Knees]

Well, I’m not through.

You think the EA is going to do more damage than good. Well, I think the fastest way to turn this into a criminal case is to get an attorney involved who starts butting heads with IRS. Anything short of full cooperation will for sure turn it into a criminal case.

The best way to keep from blowing this way out of proportion is for the EA to prepare correct tax returns, pay the additional taxes and interest, cooperate with IRS auditors, and apologize for the unintentional errors on the original return.

[BOB W]

Both could be right......

..... (EA or Lawyer). The audit should be handled with the EA first and any sign of IRS action heading toward "F" the EA should stop and have the client enlist assistance of a lawyer. However, this situation should have never gotten that far in the first place.

While doing the pre-audit with the client the EA needs to evaluate risk and if the evaluation does not look good stop the client from revealing issues that need to be protected on a lawyer/client basis. If it looks really bad for the client, the EA should be hired under a lawyer/client agreement. I don't know at what stage the IRS needs to know that relationship exists, (between Lawyer/Client& EA) but I (as an EA) would be nothing more than a bystander at the audit only providing correct tax information and making sure the IRS is completing the audit correctly, or at least allowing a good "give and take" interview.

[Unregistered]

Two comments

Old Jack
I believe that your annoyance with other posts clouded your judgement. You did not distinguish yourself with the following comment:

"I get the impression that EA's only want to make a buck and could care less about the taxpayer and their screw-up or circumstances"

That comment is inappropriate, INCORRECT, and ill-advised. I hope that you would consider a "Kerry" to all the EAs who visit this board. You usually offer thoughtful comments - that was not one of them.

Jainen
You gave incorrect information on the courts. I will concentrate on the TC as that is the path most ordinary taxpayers take. A taxpayer need NOT exhaust all administrative channels before going to Tax Court. A taxpayer simply needs a "ticket" to get into TC. The most common ticket is the Statutory Notice of Deficiency (aka 90 day letter) - other tickets are IRS determination letters involving CDP hearings & innocent spouse cases. A taxpayer gets into TC with his/her "ticket" and a timely petition. The taxpayer does not necessarily need an attorney - many go "pro se". In lieu of pro se, taxpayers can be represented by an attorney or, any enrolled agent or certified public accountant who has been admitted to practice in the TC. Coincidently, the written exam for non-attorneys to gain admission to TC is this Thursday in Washington, DC. (See §7452). The requirement to follow all administrative channels is needed to apply for an award of litigation or administraive fees. (See §7430)

Frank Degen,EA,USTCP
NAEA Immediate Past President

[OldJack]

Two comments

Old Jack
I believe that your annoyance with other posts clouded your judgement. You did not distinguish yourself with the following comment:

"I get the impression that EA's only want to make a buck and could care less about the taxpayer and their screw-up or circumstances"

That comment is inappropriate, INCORRECT, and ill-advised. I hope that you would consider a "Kerry" to all the EAs who visit this board. You usually offer thoughtful comments - that was not one of them.

Frank Degen,EA,USTCP
NAEA Immediate Past President

I apologize to any EA that posted to this thread giving their opinion, but that was only a couple± while the rest of the EA's on this board remained silent thereby giving the "impression" that they could care less about the taxpayer we were discussing. Those that agree, disagree, or think I have, as you said, committed a "Kerry" speak up or shut up. I notice Mr. Degen that you have not offered your opinion.

[Jan]

Those that agree, disagree, or think I have, as you said, committed a "Kerry" speak up or shut up

.I agree with all of the above---personally, I wouldn't handle a client like Mr. Emptyhead, maybe in my earlier life, but now, I just want peace and quite, that’s one reason I don’t get involved in such heated discussion.

[Unregistered]

Old Jack

Posts on tax message boards do not usually follow a linear progression from A to Z. That's both good and bad but it does sometimes make offering an opinion difficult because there are so many divergent comments in a thread like this. So when you ask about my OPINION it is not easy to reply. But, having said that, I will offer a few comments.

You are absolutely correct in your assertion that if there is any evidence of criminal prosecution, a non-attorney practitioner must tell the client to seek legal counsel to protect the client's interest. Whether the attorney hires the practitioner under a Kovell agreement is irrelevant - the client must be protected. However, I also believe given the facts of the original post there is no way (absent other facts, like emptyhead is the mayor of his town or the local TV anchor or some other high profile person like Richard Hatch or Wesley Snipes) the IRS would ever seek a criminal prosecution in this case. Assuming the taxpayer forgot to report the 20K of income in 2003, the taxpayer is probably on the hook for about 8K of income & S/E tax. The IRS will probably assess the 20% accuracy related penaly, collect the tax and move on. It is simply too costly & difficult to do otherwise. That's my OPINION.

I do disagree with Bees in some of his comments about attorney privilege. Once a client engages an attorney, any communication is privileged. Physical evidence & documents are not. If EH engages an attorney and "tells all" there is privilege. Clearly, the attorney could not subsequently prepare any incorrect returns but the attorney can not be compelled to divulge what the client has orally communicated. That's my OPINION.

I also disagree with Jainen who said the IRS doesn't need to actually prove anything to have a civil fraud penalty. That is not true. There are 3 standards of proof the Courts use. A negligence penalty can be upheld under the first standard of proof - the preponderance of the evidence (aka 51% rule). However, a civil fraud penaly can only be upheld under a stricter standard of proof - the clear and convincing standard. Finally, criminal fraud requires the ultimate standard - beyond a reasonable doubt. That's my OPINION.

I'm not sure I've answered you - "I notice Mr. Degen that you have not offered your opinion." - as there are still more thoughts that were expressed in this entire thread.

Frank Degen,EA,USTCP