Feature Story
How To Protect Your Client Against The I.R.S.
By Raul O. Serrano, Jr., C.P.A.

Few acronyms frighten the average American more than“I-R-S.”

Almost 50 percent of all taxpayers are likely to be audited at least once during their lifetime. And for those who practice tax controversies, we know IRS employees are there to protect their employer — the IRS.

The system itself, at its highest levels, is concerned with our rights and perceptions of the system. However, sometimes, IRS employees believe taxpayers are trying to cheat the system. This “us-against-them” attitude sometimes causes IRS staff to become insensitive to taxpayers’ financial problems. It is our responsibility — as advocates for our clients — to know not only taxpayers’ rights before the IRS, but also our rights as practitioners so we may properly represent our clients in their times of need.

The most common taxpayer problem starts with an audit of their tax return.

An audit (or examination) is the process by which the IRS determines whether your clients properly reported their income and took the correct deductions, exemptions and credits on their tax returns.

Through Internal Revenue Code section 7602, Congress has given the IRS wide powers to inspect papers and financial records, and ask about financial affairs.

Section 7602 of the I.R.C. permits the IRS, for any statutorily
authorized purpose, to:

1. Examine any books, papers, records or other data and take testimony under oath, and
2. Summon a taxpayer or any other person, requiring him to appear, produce books and records, and testimony under oath.

The courts have construed Section 7602 very broadly, permitting the IRS to exercise extremely broad discretion in the conduct of tax investigations. The limited constraint placed on the IRS by section 7602 are set in U.S. vs. Powell. Under Powell, (379 U.S. 48(1964), a court will enforce a summons if:

1. The examination is being conducted for a legitimate purpose.
2. The summons seeks information that may be relevant to a determination of a civil tax liability.
3. The IRS is not already in possession of the material.

While Section 7602 gives the IRS the power to summons, most audits are handled on a more informal basis, and only when this informal process fails, does the IRS resort to the use of summonses.

As tax practitioners, we are sometimes faced with the dilemma that government agents will informally request documents or information from us about our clients with the thread of audit or some other enforcement action if not provided.

What do you do?

The IRS has no authority to compel production of documents or testimony other than specifically granted by statute. Therefore, when asked to produce or provide clients’ information, always ask that their request be in writing and make sure the IRS is legally entitled to it.

If you do provide the information and the IRS was not legally entitled to it, you may have not only breached your
duty of privacy and confidentiality to your client, but also provided privileged information.

It is evident that not knowing our clients’ rights before the IRS or our rights as practitioners before the IRS can be very expensive— not only by losing a client but possibly malpractice. Representation before the IRS is not for everyone.

If you or your client receives proper notification of an IRS audit, here are critical steps you should take:

1. Read the audit notice carefully to see what items are being questioned and what you should bring to the audit.

2. Review the questioned information for available documentation and exposure to possible problems.

3. Bring only what is being requested. If you bring other documents, you run the risk of the audit being expanded to other areas.

4. Be prepared. Organize your records so you can easily respond to the auditor.

5. Do not give original documents to the auditor; make copies so the original documents do not get lost.

6. Do not volunteer any information; provide only answers to the questions being asked.

7. Do not antagonize the auditor. Be truthful, courteous and professional even if there are disagreements. If you
find a question you cannot handle, end the conference or delay that question until another time. The auditor may know the answer to the question and may be testing your truthfulness.

8. Know your rights. If there are disagreements with the auditor, request a conference with the supervisor, and if you still cannot resolve the issue and still feel the auditor is wrong, request a conference with the Appeals Division.

If I have learned anything dealing with the IRS, it is that nothing can be taken at face value. Even the simplest things can create problems if not properly handled. Hopefully, this information will help tax professionals in their daily practice.

FICPA TAX/PFP CPE