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Zhanna Ziering Comments on IRS Auditing High-Income Taxpayers in Law360

July 29, 2020, Law360

The Internal Revenue Service has begun examining global high-wealth individuals by drawing on personnel from divisions across the agency — an approach that could greatly increase the number of related entities placed under a microscope.

. . .

The IRS' letters can be overwhelming, and while the human tendency is sometimes to bury one's head in the sand, "I would not sit on these," said Zhanna Ziering, a member at Caplin & Drysdale.

"It's better to take the bull by the horns rather than waiting until the last week and then taking steps," she said.

. . .

Beyond the GHW program, the IRS has faced criticism for its perceived shortcomings regarding audits of high-income taxpayers.

Exams of individual returns showing more than $1 million in income have declined every year since 2010, according to the agency's 2019 data book. Budget cuts, hiring freezes and training issues at the IRS likely led to this decline in complex audits, which are "by no means a low-hanging fruit," Ziering said. 

. . .

Under IRC Section 7525, privilege applies to a taxpayer's communications with a federally authorized tax practitioner, or FATP, to the extent those communications would be considered privileged if they were with an attorney.

However, FATP privilege applies only for tax advice rendered, not to return preparation, said Ziering at Caplin & Drysdale.

When individuals start talking to their accountants, especially in the midst of an audit, there's "a serious concern" that if the adviser is interviewed at some point, anything told to that accountant could be preserved, she said.

"It is a very gray area, in particular when the accountant wears two hats: They provide tax advice, but they also prepare the return," Ziering said. "It becomes very difficult in audits to separate the two."

If there are issues or concerns, she suggested the possibility of a so-called Kovel agreement, in which an attorney hires a forensic accountant directly.

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