On the current Notre Dame Tax and Property Planning Institute, Lou Harrison of Harrison LLP in Chicago gave some tricks to practitioners who’re tasked with defending purchasers in opposition to an Inner Income Service audit of their property and reward tax returns. Lou began off by noting that issues have modified on the IRS for the reason that COVID-19 pandemic. The IRS is presently transitioning and including employees (maybe leaving fewer accessible brokers to deal with audits); there are lots of newly employed brokers who could not but be acquainted or skilled with the complexities of the property and reward tax statutes; and there are brokers who at the moment are working from dwelling could not give every audit the identical quantity of consideration as they might give in the event that they have been working from the workplace.

Among the many uncommon post-Covid occasions that Lou has additionally observed: misplaced checks submitted with property and reward tax returns, leading to penalties assessed in opposition to the shopper (finally the penalties are eliminated, however not with out effort; a miscalculation of the property tax due; a misinterpretation of the principles concerning portability; audits on the first partner’s passing with no property tax due; elevated variety of audits of grantor-retained annuity trusts and different idiosyncratic objects; and weird arguments concerning the stage of reductions.

The underside line isn’t to foretell what might be audited, however to know that lately, any objects may very well be audited, even these famous under. And forewarning purchasers that an audit is feasible will typically soften the emotional blow to the shopper if an audit have been to happen.

What’s Being Challenged?

Lou says that the most typical IRS challenges continues to be with stage of reductions taken for lack of marketability, and general valuations and parts in a valuation. His community hasn’t seen many audits involving Inner Income Code Part 2701 (particular valuation guidelines within the case of transfers of sure pursuits in firms and partnerships); certified private residence trusts (QPRTs), post-term QPRT lease preparations, grantor retained annuity trusts and credit score shelter belief funding. This doesn’t imply, nonetheless, that  you shouldn’t be ready for a majority of these challenges. All planning needs to be achieved with the identical stage of diligence and scrutiny as all the time; simply don’t lie awake at 2 a.m. worrying that each place and planning that one has achieved might be reviewed intimately (or in any respect).

Know Your Agent

Lou recommends that you just study as a lot concerning the agent assigned to your audit as you possibly can. Ask round to see if anybody has expertise with that specific agent and discover out what method that agent usually takes.  Data is energy, and due diligence is a vital step right here.

Three Audit Approaches

Lou outlined three approaches he’s seen practitioners take to audits. The method you’re taking could rely on what you’ve realized concerning the agent, or maybe what you’re most comfy with.

1. Slash and burn. Are available in with weapons blazing, letting the agent know you’re acquainted with the regulation and the agent shouldn’t waste their time on this. Clarify why the regulation is in your favor.
2. Dragnet: Simply the Info. This could work typically in a foul information, sophisticated case with a variety of paperwork. That is the place one gives the paperwork being requested, with out justifying why the taxpayer’s desired result’s the right one. That’s, leaving it to the agent to agree or not agree and maybe the transaction is simply too sophisticated for an unusual mortal to untangle or need to untangle. However he’s seen this method utilized in a case by which the extra paperwork offered with out clarification, the extra the IRS was fascinated by unravelling the thriller; the IRS was keen to dig again 10 years to come back to a harmful taxpayer outcome.
3. Respect and honesty. That is Lou’s method. Brokers are attorneys, so respect their intelligence and attempt to be truthful. This method demonstrates that the taxpayer is performing in good religion. The atmosphere of the audit isn’t about successful or dropping, however conveying to the agent that the objective is to achieve a good and affordable outcome or to appropriately apply the regulation, for each side.  Discussions in an audit could also be one thing like: “Right here’s what I see as vital elements or the related regulation on this case, What do you suppose?” This method instills a very good working relationship and truthful outcomes.

In line with Lou, although threat of an audit of the property and reward return is low, it is best to put together your shopper for that risk. Additionally, each the shopper and their legal professional should be open and sincere. If the IRS agent feels the agent is being handled unfairly or that information or occasions are being portrayed incorrectly, that might result in poor audit outcomes and efficiency.