Tax Law and Administration: IRS Audit Defense, Tax Court Strategy, and International Compliance

An IRS examination is limited in scope to the items and years specified in the opening notice, and a taxpayer who volunteers information beyond what was requested can inadvertently open new lines of inquiry that the IRS was not originally investigating. IRS audit defense counsel must review every document before it is produced to the IRS to assess whether it could support additional adjustments or extend the examination to other years.

When the IRS proposes a deficiency and the taxpayer disputes the assessment, the burden of proof in Tax Court generally rests on the taxpayer unless the taxpayer produces credible evidence regarding a factual issue, at which point the burden shifts to the IRS under IRC Section 7491. Tax audits and adjustments counsel must assess each document's evidentiary value before the examination response is submitted, since documents that raise more questions than they answer can signal additional audit risk rather than resolving the proposed adjustment.

A taxpayer who disagrees with an examiner's proposed adjustments may request an Appeals conference by filing a written protest within the deadline in the IRS's thirty-day letter, identifying each disputed issue, the taxpayer's position, and the legal and factual basis for that position. Appeals counsel preparing an Appeals protest must frame each issue in terms of the hazards of litigation facing the IRS, since Appeals Officers are authorized to settle cases based on litigation risk rather than on whether the IRS's position is technically correct.

Penalties for failure to file, failure to pay, and accuracy-related underpayment can be abated when the taxpayer demonstrates that the failure was due to reasonable cause rather than willful neglect. Tax delinquency and penalties counsel submitting a penalty abatement request must document the specific circumstances that prevented compliance, the taxpayer's history of prior compliance, and the dates on which the impediment arose and ceased.

The ninety-day deadline for filing a Tax Court petition after receiving a Notice of Deficiency is a strict jurisdictional requirement that cannot be extended regardless of the reason for the delay, leaving a taxpayer who misses this window with no option but to pay the deficiency and sue for a refund in district court or the Court of Federal Claims. Federal income tax litigation counsel must calendar the deadline immediately upon receiving a Notice of Deficiency, confirm the mailing date on the notice, and file the petition well before the deadline to avoid any risk of jurisdictional dismissal.

The Tax Court reviews certain IRS determinations, including collection due process hearings and innocent spouse relief denials, for abuse of discretion, meaning the IRS's decision is upheld unless it was unreasonable, arbitrary, or contrary to law. Tax laws counsel litigating an abuse of discretion claim must develop the administrative record meticulously before filing the Tax Court petition, since the court typically reviews the IRS's determination based on the administrative record rather than receiving new evidence.

A taxpayer whose bank account has been levied can request a Collection Due Process hearing within thirty days of the notice of intent to levy, and the hearing request triggers an automatic hold on the levy while it is pending. IRS tax levy defense counsel must assess which resolution option, including an installment agreement, an Offer in Compromise, or currently-not-collectible status, produces the best combination of immediate levy release and long-term collection resolution for the taxpayer's financial circumstances.

The IRS evaluates OIC applications based on the taxpayer's reasonable collection potential, calculated from available equity in assets and projected future income over the applicable collection period. Offer in compromise counsel must prepare the application by documenting the taxpayer's full financial picture, including all assets, liabilities, monthly income, and allowable expenses, since an incomplete application will be returned without review rather than negotiated.

A non-willful FBAR violation carries a civil penalty of up to ten thousand dollars per violation, while a willful violation can result in a penalty of up to fifty percent of the account balance per year, with the IRS also able to refer willful violations for criminal prosecution. FBAR and FATCA compliance counsel must assess whether the non-reporting was willful or non-willful before recommending a remediation strategy, since willful violations cannot be resolved through the Streamlined Procedures available for non-willful cases.

The Streamlined Filing Compliance Procedures allow non-willful taxpayers to file amended returns for three years, submit FBARs for six years, and pay a five-percent offshore penalty for domestic filers or no penalty for foreign residents, in exchange for the IRS's agreement not to recommend criminal prosecution. International tax compliance counsel must confirm that the client's non-compliance qualifies as non-willful before a Streamlined submission is made, since a taxpayer who certifies non-willfulness and is later found to have been willful faces both the original penalties and potential criminal prosecution for the false certification.