| Home Online Publications Online Issues TTA Home Table of Contents Tax Practice & Procedures | |
Editor:
TEAMs • Collection FTM • Attorney-Client Privilege • Restaurateurs and Tips
Editor's note: Mr. Ely is former chair of the AICPA Relations with the IRS Committee. Messrs. Van Deveer, Black, Welty and Blair are members of that committee.
New Pilot Program to Expedite Technical Advice Process The IRS instituted a new pilot program for issuing Technical Expedited Advice Memoranda (TEAMs), in Rev. Proc. 2002-30. Its goal is to issue TEAMs within 60 days. The program is testing new procedures for streamlining the Technical Advice Memoranda (TAMs) process and eliminating requirements that may cause delays. The TEAM pilot program is limited to issues originating only in the Office of Examinations (Examinations) or Appeals (Appeals), and submitted to the Associate Chief Counsel, Income Tax & Accounting (IT&A).
Eligibility All IT&A issues are eligible for the TEAM program, unless a case requires coordination outside IT&A. During the test period, all TAM requests to IT&A should be submitted using the presubmission procedures outlined in Rev. Proc. 2002-30. A TEAM request may be made by a taxpayer, Examinations, Appeals or IRS field counsel, as long as it goes through the appropriate supervisory chain. If IT&A denies a request, the denial can be appealed to an operating division's commissioner or an Appeals Deputy Director. The TEAM process will be available only if after a presubmission conference the taxpayer, Examinations, Appeals or IRS field counsel agree that it is appropriate. However, the National Office can remove a case if it later determines that the issue is too complex to be timely resolved under the TEAM guidelines.
Procedures and Timeline In general, the same procedures for requesting a TAM are followed for a TEAM, with some modifications to expedite the process. Examinations or Appeals (with the assistance of field counsel) prepares a statement of facts and submits it to the taxpayer, who has 10 days to respond. If the taxpayer disagrees and the differences cannot be resolved within another 10 days, both sets are sent to IT&A. IT&A will attempt to issue the TEAM to the field within 60 days of receipt. For cases with two sets of facts, it will issue two TEAMs, based on each set. However, if the difference in facts is immaterial, IT&A will issue only one TEAM. If it issues more than one, the field will not be required to process the case on the basis of either TEAM's conclusions. The field has 30 days after the TEAM's issuance to request reconsideration. If none is requested by field counsel, Examinations or Appeals, the TEAM takes effect at the end of the 30-day period following its issuance. If either field counsel, Examinations or Appeals requests TEAM reconsideration, the TEAM will become effective five days after IT&A's ruling on the reconsideration. IT&A does not provide the taxpayer with a TEAM (or advise the taxpayer of a proposed resolution or conclusion) until after the later of IT&A's issuance of a ruling on a reconsideration request or, if no reconsideration is requested, after the expiration of the 30-day period to request reconsideration. Although the pilot program includes a procedure for field counsel, Examinations or Appeals to request reconsideration before a TEAM becomes final, taxpayers have no such right. Moreover, reconsideration is limited to overlooked or misconstrued points, not to issues previously argued in the initial TEAM request.
Conclusion If the TEAM pilot program proves successful, the Chief Counsel's Office expects to expand the program to cover additional issues and all Chief Counsel offices. The program may also be made permanent in Rev. Proc. 2003-2 or in later guidance. Taxpayer and practitioner comments on the TEAM program can be submitted online at www.irs.gov/prod/tax_regs/comments.html . From Mark A. Van Deveer, Thatcher & Benson PC, Virginia Beach, VA
Collection Fast Track Mediation Mediation in Office of Collection (Collection) cases is an effective tool for taxpayers and practitioners to use in streamlining the case resolution process. Fast Track Mediation (FTM) is now available nationwide to Small Business/Self-Employed Division (SBSE) taxpayers; see IRS News Release IR-2002-80. By virtue of FTM pilot programs conducted in four strategic locations (Denver; Houston; Hartford, CT; and Jacksonville, FL), the Office of Appeals (Appeals) and the SBSE demonstrated successfully that FTM timely resolves Collection disputes. Although FTM is also available in the Office of Examinations cases, this item only focuses on SBSE Collection cases. The FTM process is consistent with Appeals' vision of becoming the premier dispute resolution organization, focused on meeting its customers' needs. Collection FTM is handled within Appeals' General Appeals branch, where highly experienced Collection-trained Appeals and Settlement officers reside (see Tax Practice & Procedures, "Appeals Collection Developments," TTA, July 2001, p. 487, on Appeals Officer training).
The Collection Workload Collection cases are now a major portion of Appeals' workload, accounting for roughly 75% of Appeals' current total inventory of about 55,000 cases. This is a departure from the traditional Appeals' caseload and (as discussed below) presents unique planning opportunities for practitioners. As a result, Appeals implemented an initiative to effectively address the continuously increasing Collection case inventory. The Collection Currency Initiative focuses on increasing the overall effectiveness of Appeals personnel to timely resolve Collection cases. Handling the Collection workload has apparently become a major Appeals' priority.
Typical FTM Case Types The following types of Collection cases are appropriate for FTM:
During the FTM process, these cases remain under the jurisdiction of the Office of Compliance. If FTM is unsuccessful, taxpayers can resort to normal appeal rights. Several types of cases are not available for FTM, including issues without legal precedents, service center penalty appeals and industry specialization issues; IRS Pub. 3605, Fast Track Mediation, lists all cases excluded from FTM.
Appeals Officer Mediation Training Senior Appeals Officers receive specialized training to serve as Appeals Mediators. Several newly trained Appeals Officers are Settlement Officers, with extensive backgrounds in Collection cases. The Appeals Officer serves as a neutral party, working directly with taxpayers, practitioners, Revenue Officers and Compliance Managers to resolve cases designed by the parties involved. Appeals Mediators do not have settlement authority; thus, they cannot propose a resolution. They can review cases from each party's perspective and discuss the parties' points of view to facilitate a resolution acceptable to both parties. Ultimately, the taxpayer and the IRS have to agree on the proposed resolution.
Why Mediate? Mediation affords valuable alternatives to traditional avenues of case resolution. It brings an independent, objective party to the process. This is key to an effective assessment by both the IRS and taxpayer of an issue's merits, clarifying the facts and their respective authoritative support. As a knowledgable and trained professional, an Appeals Mediator assists the parties in designing their own resolution. This can help diffuse built-up conflicts between the parties that evolved during the case's overall determination stage. It can also be extremely valuable in resolving personality issues. Mediation offers a potential win-win opportunity for everyone involved. Key Collection FTM features in-clude:
Timeline The anticipated timeline to mediate a case using FTM is about 40 days, a substantial saving over the traditional approach, which can take over a year. If a taxpayer is not satisfied with FTM, he or she can withdraw from the expedited process and pursue a traditional appeals process; a new, independent Appeals Officer will be assigned the case. Currently, within Appeals, approximately 75% of taxpayers do not have professional representation:
The trend correlates closely with the increase in the Collection workload. This presents an opportunity for practice development, given that historically taxpayers have been represented by professionals in over half of the cases considered by Appeals.
Summary The availability of FTM to resolve Collection cases has great potential. It presents a unique opportunity for practitioners to be directly involved in timely case resolution, especially in light of Appeals' long-standing reputation for objective and fair dispute resolution. FTM is a significant milestone in enhancing tax processes that directly benefit taxpayers and is consistent with Appeals' mission to serve as a premier dispute resolution organization. The Collection case workload available for FTM is substantial and the time saving is tremendous from a practical standpoint. The Appeals and SBSE partnership is a key overall improvement to tax administration and will provide taxpayers with future dividends. From Daniel L. Black, Jr., CPA, Former National Chief–Appeals, IRS, Washington, DC
IRS Aggressively Challenges Privilege IRS Chief Counsel B. John Williams has stated publicly that the IRS intends to aggressively challenge the assertion of privilege in response to a request for tax shelter information. True to his word, the government filed summons enforcement actions on July 9, 2002, against two national accounting firms, requesting, among other things, that the courts find the firms' assertion of privilege as to information or documents improper. Who will prevail in these disputes is less than clear; however, the answers will be based on judicial judgment calls as to the application of highly specific facts to deceptively complicated rules of law. Basically, the attorney-client privilege protects from disclosure communications that a client makes to an attorney for the purpose of obtaining legal advice. In 1998, Congress extended the privilege to communications made to a Federally authorized tax practitioner (which generally includes CPAs) to the extent the communication would be considered privileged if it were between a taxpayer and an attorney; see Sec. 7525. The privilege does not apply to written communications with a corporation about a corporate tax shelter. (For a discussion, see Mendelson, Herskovitz and Einhorn, "The New CPA-Client Confidentiality Privilege," TTA, Oct. 1998, p. 676.) In the context of IRS summonses for tax-shelter-related information, the question is whether client identity, opinion letters and related documentation are privileged, and, if so, whether the privilege was waived. Generally, courts have held that the attorney-client privilege does not extend to client identity, because identity generally is not communicated for the purpose of obtaining legal assistance, and disclosure of the identity does not normally reveal a communication's content. Client identity, however, might be deemed privileged if the substance of the client's activities or communications with the attorney was already known and its disclosure would effectively expose client confidences. In its purest form, the attorney-client privilege appears to extend only to communications that a client makes to an attorney. The extent of protection afforded to attorney-to-client communications has been much litigated, with differing results. Despite the language in some cases, it is fairly well settled that the privilege applies to communications from an attorney to a client, especially if disclosure of the attorney's communications might reveal the client's confidential communications. Several courts have held unqualifiedly that the privilege protects communications of legal advice and opinions, regardless of whether they reveal client confidences or respond to a client's specific request for advice. The privilege would not protect communications from third parties, even if made specifically for a client's benefit. Further, it does not protect all of an attorney's activities on a client's behalf; an attorney's communications with persons other than the client, even if made on the client's behalf, generally would not be privileged. It is well established that documents that are not confidential attorney-client communications would not become privileged if transmitted to an attorney. Conversely, if a document is privileged in the client's hands prior to a transmittal, the transmittal would not destroy the privilege if the document was transmitted to obtain additional legal advice. The difficult question is the extent to which facts and information gathered from third-party sources by a tax practitioner are privileged when incorporated into legal advice rendered to a client. The courts generally sort this out by weighing the competing policy considerations of protecting attorney-client communications against the law's general bias against preventing disclosure of relevant information. Even if information and documents sought by the IRS are privileged, the privilege can be waived easily. Most courts have held that material communicated to an attorney for incorporation into a return is either not privileged because it was never intended to be kept confidential, or the privilege was already waived via disclosure to a third party–the IRS. However, even this issue has been less than clear, as some courts have held that the privilege has to be waived as to information actually incorporated into a return and filed with the IRS, including underlying details. Thus, a taxpayer may have to provide detailed components of reported figures and calculations, but may not have to disclose other privileged information not forwarded to the IRS.
Conclusion The relatively simple question of privilege often leads to complex answers. Certainly, the answers are not as clear as some in the IRS would have practitioners believe. From M. Todd Welty, J.D., CPA, Meadows, Owens, Collier, Reed, Cousins & Blau, L.L.P., Dallas, TX
Restaurateurs, Count Your Tips! In a highly controversial and closely watched case, the Supreme Court decided that the IRS can use an aggregate-estimation method in assessing a restaurant's portion of FICA tax owed, based on total receipts. As a result, employers of employees who receive tips must now develop procedures that will reasonably estimate total tip income, suitable to their situation. Unfortunately, tip employees tend to give employers an inaccurate accounting. As a result, the IRS faces a challenge in determining or estimating correct tip amounts. The circuits have been in conflict over the scope of the Service's authority to use the aggregate-estimation method for tips; see Fior D'Italia, 242 F3d 844 (9th Cir. 2001); 330 West Hubbard Restaurant Corp., 203 F3d 990 (7th Cir. 2000); Bubble Room, Inc., 159 F3d 553 (Fed. Cir. 1998) and Morrison Restaurants, Inc., 118 F3d 1526 (11th Cir. 1997). The issue before the Supreme Court was whether, in the absence of a reasonably accurate estimate, a statute or another procedure authorizes the IRS to assess an employer's FICA taxes on tips, based on estimates made under the Service's examination guidelines. In Fior D'Italia, Inc., 122 S.Ct. 2117 (2002), the Supreme Court, in reversing the Ninth Circuit, held that the IRS was authorized by law (Secs. 3101, 3111 and 3121(q)) to base an assessment of employer FICA taxes on tips, using an aggregate estimate of all tips that employees may have received, but did not report. Fior D'Italia reported tips for FICA tax purposes based on employees' tips reported to it. This amount was far less than the total tips charged on credit cards. Due to the discrepancy, the Service computed total tips received by employees on credit card sales to determine the average tip rate (14.49% and 14.29%, in 1991 and 1992, respectively), then applied that rate to cash sales as well, resulting in an aggregate estimate. Sec. 45B provides employers with an income tax credit that equals the FICA taxes paid on each employee's tips to the extent that the amount paid exceeds the tax due on each employee's Federal minimum wage. Thus, the only advantage the IRS seems to have achieved in Fior D'Italia is forcing employers to monitor their employees' tips more closely. However, in 330 West Hubbard, in which the issue and decision were similar, the taxpayer argued that without individual assessments, the Service cannot determine the amount of Sec. 45B credit entitlement. The Seventh Circuit flatly rejected this argument, holding that the taxpayer bears the burden of proving its entitlement to the credit.
Supreme Court's Opinion In summary, the Supreme Court held: 1. The IRS is authorized by law to assess FICA tax based on total employee wages, rather than on an estimate of tips each individual employee received. 2. The Service's aggregate-estimation method did not fall outside the bounds of reasonableness. 3. The IRS's aggregate-estimation method is not required in similar situations. 4. The IRS need not use Fior D'Italia's suggested method of estimating each individual employee's tips. 5. The Court did not say that Fior D'Italia's method was not acceptable and did not rule out the use of other reasonably accurate methods for estimating tips, leaving employers to develop other methods more suitable to their particular situation.
The Taxpayer's Position Fior D'Italia did not dispute the IRS's facts, estimates or determinations, but simply challenged the Service's authority to use an aggregate estimate of tips for FICA tax purposes. The Court reasoned that the "assessment" is tantamount to an IRS determination that a taxpayer owes a certain amount of unpaid Federal taxes, and that the assessment is entitled to a legal presumption of correctness. Fior D'Italia argued that this principle did not apply. It contended primarily that the definitional language of Sec. 3121(q) precludes the use of an aggregate estimate, specifying that "wages" include tips, but only those received by an employee in the course of his or her employment, with emphasis on the employer's liability for each individual employee's tips, not on total employee tips. The Court, however, looked to Sec. 3111(a) and (b), in which the tax is calculated as a percentage of the "wages" paid to the "individuals," including the tips that each individual employee earns. The Court concluded that the statutory language does not preclude use of an aggregate estimation. Fior D'Italia also pointed out several "unreasonable" features of the aggregate-estimation method. First, the method includes tips that should be excluded under Sec. 3121(a)(12)(B), as totaling less than $20 per month. Second, it fails to account for (1) cash customers who tend to leave a lower percentage tip (or no tip at all); (2) credit card customers who put a high tip on their card, taking back change and (3) restaurants that deduct a credit card company's fee from a tip, leaving the employee with a lower tip than the customer intended. The Supreme Court rejected these arguments as not illustrative of how the aggregate method falls outside the bounds of reasonableness, considering that Fior D'Italia stipulated that it would not challenge the IRS's calculation.
What Are the Options? The Ninth Circuit approved the individual-estimation method suggested by Fior D'Italia. The Supreme Court cited with favor other courts' decisions, in which (1) estimates were based on a "reasonable foundation;" (2) estimates of tax liability for a 77-day period were made by extrapolating information based on actual results over a five-day period; and (3) estimates using extrapolation of income over a one-year period were based on two-day's gross receipts. In the end, whichever method an employer adopts for estimating tips, it must be reasonable.
Tip Rate Determination/Education Program The Tip Rate Determination/ Education Program was developed by the Service "to improve the compliance of tipped employees in the food service industry." Under this program, the employer determines an accurate tip rate, validated by the IRS, then executes a "Tip Rate Determination Agreement." Three quarters of the restaurant's tip employees must sign a "Tipped Em-ployee Participation Agreement." The rate agreed on is then used in subsequent periods by tip employees and the restaurant. In the absence of such an agreement, the IRS may conduct an employment tax audit.
Employment Tax Examination Procedure The Service's examination procedures for corporations require IRS Examiners to verify employment taxes, including Forms 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and 941, Employer's Quarterly Federal Tax Return. If a taxpayer has not entered into a Tip Rate Determination Agreement, the IRS might conduct a tip examination. According to Market Segment Specialization Program procedures, if such an examination is made, its foundation is the "McQuatters Formula" (McQuatters, TC Memo 1973-240), which is a "statistically valid computation of unreported tips based on a 28 day sample" of a restaurant's credit card tip receipts. Under this indirect method, the charge tip rate is first established. Following extensive interviews with restaurant management and tip employees, a cash tip rate is then determined, typically 0.5%—2% less than the charge tip rate. (See also Hurd, Tax Clinic, "Employer FICA Tax on Unreported Tip Income," p. 640, this issue.) From Ronald J. Blair, CPA, MBA, Director of Financial Affairs & Lecturer in Federal Tax, School of Management, The University of Texas at Dallas, Dallas, TX |
|||||||||||||||
