As your tax attorneys, we at Williams & Coleman, P.A., will help you resolve your tax controversies or disputes in the most efficient and effective manner. With the insight and experience provided by attorney Robert S. Williams, a former IRS agent, we provide representation that helps to resolve your immediate issue and avoid future problems.
Voluntary Tax System – Tax Disputes
This is an overview of our voluntary tax system and its various stages. Our tax laws generally operate on the specific facts of a given financial transaction. Once the transaction occurs, the facts are established, and then it is time to report the transaction on the appropriate tax return. The transaction may or may not then be audited by the IRS to determine compliance with our tax laws. Should the IRS examining agent disagree with the reporting of the transaction, there are a number of ways to try and reach a resolution of the dispute with the IRS, up to and including litigating the matter before various federal courts.
Private Letter Ruling
Before you even engage in a financial transaction with tax consequences there are ways to confirm the tax results. First, you can speak with your tax professional about the proposed transaction and get an idea of the tax results. A verbal discussion with your tax professional can be helpful, but may not preclude the imposition of certain penalties if you happen to be wrong about the tax reporting and the ultimate tax consequences.
If you are worried about the potential of adverse tax consequences from a given transaction or the imposition of penalties, you can request that your tax professional give you an opinion letter about the proposed transaction and its related tax consequences. This will add to the costs of the transaction but will enable you to confirm the potential tax consequences of a proposed transaction before you consummate the transaction.
Where there is a significant issue or amount of money at stake, you can have your tax professional ask the government to confirm the taxes on a proposed transaction before the transaction takes place. You do this by requesting a private letter ruling from the government. Under any of the above scenarios, you can obtain some comfort level of the tax consequences of a proposed or prospective transaction before it is even concluded.
Planning out a financial transaction or a series of transactions, is usually a good idea depending on the extent of the tax implications. Assuming that it is cost-efficient to add the additional costs of tax planning for a transaction or series of transactions, you will have the added benefit of minimizing the tax costs.
Remember, the tax results for a given transaction or series of transactions depends on the underlying facts surrounding the transaction(s). Sometimes, a slight change in the facts can have a serious impact on the tax results. So if you plan ahead, you can make sure that your facts match the tax treatment you are looking to establish. Once the transaction(s) is complete, there is no changing the underlying facts.
The next step is to file the appropriate tax return or tax returns disclosing the transaction and its tax implications. This is where your tax professional gets to report the transaction in a light most favorable to your tax position.
Of course, your facts and reporting position must follow the tax laws, but some laws may be more favorable than others. If you received an opinion from your tax professional, you should make certain disclosures with respect to the transaction(s) so that you can avoid the imposition of penalties if necessary. Also, it is important to note that any professional advice (legal or otherwise) that goes into the reporting of an item or items on a tax return is generally not protected by the attorney-client privilege.
If your tax return is selected for examination, you may then need to defend the position taken with respect to the transaction(s). If you requested and received a favorable Private Letter Ruling, reported the transaction(s) consistent with the Private Letter Ruling, and your facts are as set forth in the private letter ruling request, the tax treatment of the transaction(s) will not be subject to challenge in the audit. The private letter ruling will be binding on the IRS examiner.
If your facts are different than your request, then the auditor will be free to make his or her own determination as to the proper tax treatment of the transaction(s). Similarly, if you relied on your tax professional’s opinion, whether verbal or written, the auditor is free to make his or her own determination with respect to the tax treatment of the transaction(s).
Depending on the nature of the transaction, and the examiner’s position with respect to the tax treatment, you may wish to seek the IRS’ National Office’s position with respect to the proper tax treatment of the transaction. In other words, if the examiner disagrees with your tax reporting for the transaction, you should consider asking the National Office to give their opinion on the proper tax treatment for the transaction. The National Office is usually more taxpayer-friendly than the Examination personnel. However, there must be some indication (for example, other revenue rulings in your favor) before this avenue makes any economic sense to pursue.
If you and the examiner do not agree on the proper tax treatment for the transaction, you should consider some of the mediation programs established by the IRS. Depending on the nature of the dispute, this forum really offers the taxpayer another decision-maker to assist with resolving the dispute.
A lot of tax professionals like to involve the examiner’s manager when there is a disagreement over the proper tax treatment of a particular transaction. This is usually not a good time to involve a manager. The manager will generally support the examiner’s position. Involving the manager is usually a good idea when you have a reasonable examiner who just needs a nudge in a certain direction to resolve a matter.
If you have this circumstance, you should request a meeting with the manager by asking the examiner for the meeting. Tell the examiner what issues will be discussed and make sure the examiner will be at the meeting. Hopefully, you can then convince the manager to nudge the examiner so the matter can be resolved.
Efficiently managing a tax dispute usually means that you should really attempt to resolve the open issues at the lowest possible level – the examiner. As you continue through the different avenues for resolving a tax dispute, the costs associated with the dispute continue to increase. This process is very different than most commercial litigation and needs to be handled accordingly. So if you can’t reach any sort of reasonable resolution with the examiner, you can then appeal the matter to the IRS Appeals Office.
Appeals Officers are usually very seasoned professionals who approach disputes in a reasonable way. Do not think that they are indifferent or that they are more taxpayer friendly. They are not. What they are is more practical in the way they approach the tax dispute, and can consider the potential hazards of litigation should you continue on in the process.
Assuming you still cannot reach a reasonable resolution with the appeals officer, you can always resort to litigation. Depending on the type of tax involved, there is a choice of court forums to choose from. You may have to pay the tax and sue for a refund to get into some of the forums, but you should consider the specific case law for each forum before deciding which one to choose.
Even if you decide to litigate, and file suit, you should then spend some time trying to reach a reasonable resolution with the government lawyer assigned to the case. Most tax disputes can be reasonably resolved well before you have to present the matter to a judge to decide the matter.
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