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Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P.

901 Main Street, Suite 3700
Dallas, TX 75202

Phone: (214) 744-3700
Fax: (214) 747-3732
Toll Free: (800) 451-0093

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Practical Suggestions for Effectively Representing a Taxpayer in an IRS Examination

By Joel N. Crouch and William R. Cousins III on June 27, 2017

Through the years we have developed, or adopted from other practitioners, suggestions about dealing with the IRS in exams. The suggestions below are generalizations, to which there are substantial exceptions. Practitioners that deal with the IRS are bound not only by their individual professional ethics but also by Circular 230. It is important to recognize the significance and import of those rules and to apply not only their letter but also their spirit. The goal of any representative is to get a client out of an IRS examination as quickly as possible. 

 1.  Be Prepared. You should meaningfully review all the records and information so you know
      the clients tax return, transactions and documents better than the IRS agent. You also
      should identify in advance any potential issues on the tax return and be prepared to

        a.  Verify taxpayer factual claims, especially those claims that appear to be too
             good to be true.
  You do not want to lose the trust of the IRS agent and it can be
             embarrassing and frustrating to make a great argument only to be shown that the facts
             on which the argument are based are not true.
        b.  Review the documents and look for any gaps or inconsistencies. Be prepared
             to explain any issues with the documents.
        c.  Always calculate the dollar effect of any given issue or concession. This is
             especially true where an issue can impact multiple tax returns or tax years.
        d.  Review the IRS manual. ee if there is guidance if you are dealing with unusual issues
             or if there is a specialized audit manual covering your client’s type of business.

  2.  Keep the Client Away from the IRS Agent. Although a Form 2848 Power of Attorney
       allows you to represent the taxpayer, most IRS agents now insist on a taxpayer interview.
       The issues being discussed will ultimately effect the amount of tax a client will pay which
       tends to bias the client’s judgment and sometimes skews their responses. There are
       rare exceptions to the taxpayer/agent contact rule. These tend to be cases where
       the taxpayer’s quality as a potential witness or their personal knowledge of the
       subject matter forms part of the issue before the agent. For example a client interview
       may helpful in a hobby loss or innocent spouse case. Other than these rare
       situations, taxpayers and IRS agents do not mix well. If  the agent insists on an
       interview, ask for the questions in writing or attempt to delay the interview until the
       issues are crystalized and the interview can be more focused.

  3.  Dealing with the Examining Agent.
         a.  Be courteous. The examining agent is doing his job just like you are. By having a
              pleasant conversation with the agent you might pick up some useful information.
              Ultimately, you might have to be confrontational but wait for the right moment. If
              the relationship becomes contentious, draw conflict toward you and away
              from the taxpayer.
        b.   Keep notes on all agent calls and contacts. The agent will maintain a log of
              all calls and contacts. If there is a dispute regarding what was discussed, it is
              good to have contemporaneous notes.
        c.   Keep records of materials requested and produced or copied. Ask the agent to
              produce an Information Document Request (IDR) at the conclusion of each day asking
              for materials for the following working day. This produces a useful record of what they
              have asked to see, and can be notated to show what has been produced, and when
              returned. It may be necessary to make copies of everything produced so that you
              can keep a record. If you do so, then “bates” stamp the documents and use a
              receipt format with the agent.
        d.   Maintain evidentiary privileges, especially the accountant-client privilege.
        e.   Never interpose your personal/professional reputation or veracity on
              behalf of a client.

        f.    Avoid personal attacks on the agent. Treat the agent professionally. Our experi-
              ence is that a personally-attacked agent works the case harder and “poisons” the file
              at appeals. A similar concern is to avoid embarrassing an inexperienced agent.
        g.   Understand the limitations under which the agent works. Understand precisely
              how the agent is motivated and his or her manager’s criteria for measuring success or
        h.   If you are going to complain about an agent, do it in writing, with exhibits.
             Complaining to management within the IRS about an abusive agent can be highly
             productive, if done correctly. Unfortunately, most taxpayers and representatives,
             infuriated by an agent, simply vent to his or her supervisor without result. Telephone
             calls may or may not become part of the administrative file and as such, lack weight.
             On the other hand, a written complaint becomes a part of the administrative file
             and therefore can be helpful as the case progresses through the system.
             Most complaints deal with delays and/or ever broadening audits with no resolution.
             The suggestion that materials requested and provided be documented (as
             discussed above) is important because in the complaint process it gives you
             ammunition to show that the agent is taking too long or is being indecisive about
             the scope of the audit. A complaint for delay is much more persuasive if you can
             attach to it IDRs that have been complied with, dates and times to show
             taxpayer cooperation in the process.
         i.  Do not lie or mislead the agent. Do not create or back date documents. If the
             client has a problem, do not make it your problem.

   4.   Be Wary of Filing Returns Through the Agent. If there are unfiled tax returns or if it
         an extended examination, the IRS agent may request that all tax returns be filed with
         him or her. There are court cases that hold that giving a tax return to an IRS agent is
         not a filing. File the tax returns as required and give a copy to the IRS agent.
   5.   Keep Quiet. If a return has multiple soft spots, resist the temptation to define them
         and engage the agent. Let the agent tell you what he/she thinks is an issue; other-
         wise you run the risk of spotlighting a previously undetected problem. As such, a
         passive approach is advisable until you know the agent’s probable area of interest;
         once defined, you can move forward aggressively. The only exception is where an
         issue is obvious from a simple review of the tax return and bringing it to the
         agent’s attention may be used to resolve the examination on a quicker and better basis.

 6.     Always Have a Single Spokesperson for Your Taxpayer. Nothing undermines             
         negotiations like the confusion of multiple voices – so pick a lead representative and
         stick with him/her. The only exception to this is a good cop/bad cop strategy which
         should be selectively used and well planned.

  7.    Know When to Shoot Your Bullets. Save your arguments for a right moment.
         An argument surfaced prematurely may give the agent additional time to build his/her
         case or simply fall flat without effect.

   8.   Do Not Give Away Loser Issues Too Quickly. All issues are potential bargaining
         chips and should not be discarded casually. Remember that your weighing of an issue
         may be different from that of the IRS agent. A completely worthless position may have
         sufficient import to the agent to merit a concession.

   9.   Beware of Dangerous Cases. As representatives, we occupy a difficult niche as a
         buffer between the taxpayer and the IRS. That role is difficult enough in a typical case,
         so beware of cases that offer peculiar risks. These would include clients who have
         unrealistic expectations i.e., they expect to pay no tax, or to have interest waived on
         a deficiency and generally enter your office blaming the tax return preparer for what-
         ever problems might be on the return or the audit itself. In addition, be wary of cases
         where the taxpayer has committed some species of civil or criminal fraud and you
         are conducting a “eggshell audit”. Know and recognize the signs of a criminal referral.

 10.   Do not Invest Time in Issues the Agent has Already Fixated Upon or Where
         You Recognize that Negotiation is Impossible for Other Reasons. It is difficult
         to persuade an agent to drop an issue they have discovered, especially where it
         is somewhat exotic. In addition, certain designated litigation issues are beyond the
         agent’s control.

11.    Be Cautious in Extending the Statute of Limitations. Do so only if you believe
         it will lead to a faster resolution of the examination. If not, the client may be better
         served by having the examination transferred to the IRS Appeals division.

12.    Never Forget the Power of Protective Refund Claims.

If you have any questions related to this any other civil tax or criminal tax-related matter, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com or Trey Cousins at (214) 744-3700 or tcousins@meadowscollier.com