IRS Interviews of Taxpayers and Return Preparers
Requests to interview the taxpayer and/or return preparer during an otherwise normal IRS examination have become somewhat common. During the examination, the examining agent is auditing the return for accuracy and the taxpayer’s representative is typically trying to determine the nature and scope of the examination, gather responsive documents and information, etc.
It is nearly impossible for the representative to be able to determine why an examination commenced but a good starting point is to simply ask the examining agent. A typical response may be that the return was randomly selected for examination. However, there are actually few random audits. Examinations are typically focused on issues, areas, or industries having a historically high rate of non-compliance. Other examinations begin because the IRS received information from a related examination of another taxpayer or, perhaps, someone purposely provided information to the IRS relating to the taxpayer. Informants usually include disgruntled employees, ex-spouses or business partners, competitors or financial mercenaries seeking a whistleblower reward.
Interviews of the taxpayer serve a dual purpose: (i) to further the tax examination and (ii) to identify potential violations by a tax return preparer. During the initial interview and throughout the examination process, the examiner can be expected to ask questions regarding the return preparation as appropriate to the case and issues being developed. Whether through the interview process or other documentation, the examiner will also be determining whether return preparer penalties might be appropriate to the situation.
QUESTIONS WHICH MAY BE ASKED. Interview questions are often tailored to the individual taxpayer and situation. Did you meet with the preparer? What documentation was provided to the preparer? Did you receive a copy of the return or claim? How was the preparer compensated? Are you aware of any errors, omissions or mistakes on the return under examination? Did you disclose this transaction on your tax return? Why? Why not? Were there any concerns about how the transaction was reported? What sort of process is used to address those concerns and on what basis are decisions made? Was there any discussion regarding potential penalties? Was there any discussion regarding whether the transaction is subject to disclosure?
When interviewing the taxpayer or preparer the agent may ask if any other services have been provided by the return preparer’s firm and how long the preparer has been preparing returns for the taxpayer? These questions provide insight into the extent of the preparer’s knowledge regarding the taxpayer’s financial situation/status and may alert the agent to the applicability of penalties. A tax return preparer who has been preparing a client’s return for a number of years is more knowledgeable than a firm that is preparing a client’s return for the first time.
Examining agents are aware that, no matter how important the question, it is irrelevant if the response is not accurately understood. As such, they are to demonstrate an interest in the responses from the taxpayer and make sure that their non-verbal communication contributes to a comfortable atmosphere. If they appear overly relaxed and are not looking at the taxpayer, the taxpayer may believe they are not interested and will respond accordingly. Agents are not to interrupt the taxpayer and should allow a brief pause at the end of a response.
IRS INTERVIEW AUTHORITY. A taxpayer has the right to resist an examining agent’s request for an interview. Code Sec. 7602 authorizes the IRS to examine books and records and to take testimony under oath. Pursuant to Code §7521(c) the taxpayer’s representative may represent the taxpayer before the examining agent and is not required to produce the taxpayer for questioning, unless an administrative summons is served on the taxpayer. There are several considerations that the taxpayer’s representative should weigh before allowing the taxpayer to submit to an interview, especially if potential fraud issues are involved.
A question often presented is whether the taxpayer and others should consent to interviews,force the issuance of Summonses or invoke various Constitutional protections. There are several considerations that the taxpayer’s representative should weigh before allowing the taxpayer to submit to an interview, especially if potential fraud issues are potentially involved.
TIMING OF THE INTERVIEW. Agents usually seek to conduct an initial interview as soon as possible after opening a case and schedule subsequent interviews if all requested information is not provided, more detailed explanations are required or to review the progress of the examination. The representatives pre-audit analysis should include preparation for the taxpayer interview. The representative should attempt to obtain as much information about the issues, the information within the agent’s possession, and the agent’s position with regard to the issues, before agreeing to submit the taxpayer to an interview. Ideally, the interview should occur toward the end of the audit, possibly with an understanding that if the taxpayer submits to an interview and answers the questions, the agent will proceed to close the audit. However, the representative must take extreme caution, since such an understanding is probably not a basis for challenging the use of statements from the interview in a subsequent civil or criminal proceeding.
PREPARATION FOR THE INTERVIEW. The representative should try to obtain actual questions, or areas that the agent will question, in advance of the interview. This will substantially assist the representative in preparing the taxpayer for the interview, especially for the “hard questions.” The taxpayer should be strongly cautioned about making truthful responses, not speculating if the taxpayer is uncertain about a particular response, etc.
PLACE OF THE INTERVIEW. The location of interviews will typically be set by the examining agent. The taxpayer’s representative should attempt to have the interview at the representative’s office. This is a much more supportive environment for what could be an extremely agonizing experience for the taxpayer. Conversely, the taxpayer should be less intimidated and should hold up better under the pressure of the agent’s questioning if the taxpayer is not in the unfamiliar confines of an Internal Revenue Service office. Also, the representative should in most instances attempt to keep the interview from occurring at the taxpayer’s place of business, to help ensure the taxpayer is better focused for the interview and also to avoid the intrusion in the taxpayer’s daily activities.
RECORDING THE INTERVIEW. All participants must consent to the recording of the interview. Taxpayers may request to tape record an interview proceeding as long as 10 calendar days advance notice of intent to record is provided to the IRS. In addition, the taxpayer must supply his recording equipment. The IRS has the right to simultaneously produce its own recording and has the right to reschedule the interview if the IRS does not or will not have equipment in place. The IRS can initiate an audio recording provided it notifies the taxpayer 10 calendar days in advance of the interview. The Field Territory Manager must approve all IRS initiated recordings.
TYPES OF INTERVIEW QUESTIONS. The types of questions should be varied to establish a conversational atmosphere. When developing questions, agents are to focus on four types of questions: open-ended, closed-ended, probing, and leading described as:
- Open-ended questions are framed to require a narrative answer. They are designed to obtain a history, a sequence of events, or a description and are often asked regarding the taxpayer’s business, employment, education, and sources of income which may not be reflected on the return. The advantage of this type of question is that it provides a general overview of some aspect of the taxpayer’s history. The disadvantage is that this type of question can lead to rambling;
- Close-ended questions are specific and direct intended to identify definitive information such as dates, names, and amounts. They are frequently asked for personal background information such as the number of dependents or current address and are useful to help focus the taxpayer when they have difficulty giving a precise answer. They are also useful to clarify a response to an open-ended question. The disadvantage to close-ended questions is that the response is limited to exactly what is asked and can make the taxpayer uncomfortable;
- Probing questions combine the elements of open and close ended questions and are used to pursue an issue more deeply. For example, when questioning a taxpayer’s travel expense, the agent may ask “How many miles is it from your residence to your practice and where do you first travel to in the morning?” The advantage of this type of question is that the taxpayer’s response is directed, but not restricted;
Leading questions suggest that the interviewer has already drawn a conclusion or indicate what the interviewer wants to hear. Agents are to limit the use of leading questions and typically will only use them when looking for confirmation, since the answer is stated in the form of a question. For example: “So you did not keep a log or other written record of your auto expenses?
COMMON INTERVIEW TECHNIQUES — IRS examining agents have been instructed on various interview techniques. These interview techniques are generally designed to put the person being interviewed at ease but to also ask pointed questions as the interview progresses. Many of these techniques include:
- Make eye contact.
- Put the taxpayer at ease.
- Use appropriate types of questions (probing, leading, open-ended, etc.).
- Use “silence” appropriately.
- Paraphrase or restate.
- Pace the interview.
- Know when to move on to the next question.
- Maintain a calm manner.
- Have the taxpayer demonstrate the flow of transactions.
- Read the taxpayer’s non-verbal language (body language).
- Be aware of the Examiner’s non-verbal language.
- Be conscious of note taking so as not to distract the taxpayer.
- Use humor when appropriate.
- Be courteous, business-like, and firm.
- Consider issues in the proper order (volatile vs. non-volatile).
- Schedule the interview at a convenient time and allow adequate time for completion.
- Appear interested.
- Control the interview.
- Appear confident.
- Maximize the value of what you know. (Audit Technique Guidelines – ATGs)
- Adapt your appearance to be appropriate for the circumstances.
- Give feedback to the taxpayer.
- Be observant.
- Feign when appropriate (act dumb).
- Be prepared.
- Use spontaneous follow-up questions (react when you receive new information).
- Be yourself.
- Know yourself and your limitations.
- Read the taxpayer (know when you have lost their attention).
- Read the taxpayer’s perception of you.
- Dispel any negative image.
- Be on time.
- Use appropriate small talk.
- Use easily understood language.
- Don’t anticipate answers.
- Clarify responses.
- Use reflection.
- Ask for examples.
- Recognize your biases.
- Be assertive and persistent.
- Avoid debate or argument.
- Give the taxpayer an opportunity to ask questions.
- Express appreciation.
- Verbally pin down the taxpayer when appropriate.
- Have an open mind.
- Maintain composure.
- Adapt questions to the situation.
- Have the taxpayer explain their terminology.
- Be precise, come from a position of knowledge. (MSSP Guidelines)
- Work to establish rapport with the taxpayer.
- Respect the taxpayer’s views.
- Know your authority.
- Make a positive first impression.
- Maintain an inquisitive mind.
- Contain your excitement (and surprise).
- Note unusual hostility or irritability on the part of the taxpayer.
- Consider the need to question both spouses.
- Don’t interrupt the taxpayer.
- Be methodical.
- Refresh the taxpayer about important points in prior interviews.
The foregoing list is not to be followed in every interview. However, it provides insight into the nature of “humanizing” the interview process. Representatives must always remember that the interview is designed to elicit statements and understandings directly from the person being interviewed. There are no “off the record” comments and even casual conversations can provide information that would have been better provided or explained in a more thoughtful environment.