Tax attorney uses knowledge of IRS to aid in tax disputes

As a former IRS attorney, Eric Swenson might be a lawyer you want on your side when the taxing agency comes looking for an audit.

He gleaned helpful tips about the inner workings of the Internal Revenue Service and what its agents are looking for during his tenure from 1992-98.

"I can't necessarily say that I can always read what they're thinking," said Swenson, now a senior counsel for Procopio, Cory, Hargreaves & Savitch LLP, "but certainly that background has been extremely valuable to me.

"Knowing and understanding what their jobs were at the IRS helped me immensely because I knew exactly what those individuals at the government need to resolve their case. And obviously, if you can get them what they need to resolve their case, the quicker the case gets resolved, the better for everyone."

Seventy percent of Swenson's practice involves tax controversy and tax disputes. He represents individuals, partnerships, corporations and nonprofits before the IRS or any other taxing authority.

When a dispute arises, he said it's best to resolve it as soon as possible and at the lowest level possible, beginning with the examination process. A case can be appealed before it ultimately ends up in tax court, a worst-case scenario.

He also said it's a good idea to get a tax attorney involved as soon as possible. While many may be concerned about giving off the wrong perception, Swenson said hiring a lawyer won't raise suspicions as to guilt or innocence.

"Everyone's entitled to legal representation," he said. "And, in fact, I'd think that a lot of the examiners at the IRS would want a fast resolution to the case. And I think they probably believe that if they actually have someone assisting them, hopefully that will quicken the finalized audit."

For individuals and small companies, the odds of getting chosen for an audit are less than 1 percent, depending on what the IRS wants to focus on in any particular year - - whether individuals, partnerships or businesses.

Most audits are chosen on the basis of a DIF (discriminate function) score, a computer-generated statistical profile that compares tax returns nationwide. The higher the score, Swenson said, the greater the chance of receiving an audit. Individuals with a sole proprietorship who have to file a Schedule C, for example, will score higher, he said, and most likely be audited.

The IRS also performs a "reality" audit, Swenson said, which determines if a tax return makes sense considering where the person lives. For example, someone living in an expensive area such as La Jolla should be reporting a high income or lots of savings on his or her return.

If not, an examiner might wonder, "How can they afford where they're living based on what the return is telling you," Swenson said. "It's a red flag."

There are exceptions, of course, including if money comes from an untaxed source in the form of a gift or a loan.

Large companies, those with $250 million or more of assets, usually will be chosen for an audit. Swenson said most Fortune 500 companies are audited continuously during three-year cycles. Those companies, who basically have an IRS auditor planted in their offices permanently, can plan and budget for it accordingly. It's the smaller business, he said, that can run into a budgetary problem.

"(Audits are) the cost of doing business, and when it happens you need to deal with it," Swenson said. "And the best way to deal with it is to get organized, have a plan and get it resolved at the lowest cost possible, which means getting it resolved at the lowest level possible."

In this era of increased scrutiny on corporate compliance, Swenson is acutely aware of the trappings of tax shelters.

"We're always wanting to run from anything that looks, smells or feels like a tax shelter," he said. "That is a certain recipe for disaster. The federal government, IRS and the state of California have hit tax shelters, including tax shelter promoters, really hard.

"Nothing will give you more exposure than giving a favorable opinion of a tax shelter."

The Sarbanes-Oxley Act and similar corporate guideline haven't drastically changed the life of a tax attorney, Swenson said, at least not for the worse.

"I do believe that, as an attorney, it probably has made our life a little bit easier in that we can rely more on what our clients have done," Swenson said, "because they've got so many checks and balances. We know they've got the SEC looking over their shoulder.

"It's good in that you do have comfort that there's more consideration that goes into the financials. The financials and the accounting records really drive the tax return."

Businesses undergoing an audit should always be in control of their information, Swenson advised.

One person at the company -- likely the chief financial officer or the controller -- should be assigned to speak to the IRS representative. They can keep track of all the responses and compile a chronological file of information that has been provided to the IRS.

"Information is power," Swenson said. "And if you don't know what you've given to the IRS, you have no idea what the basis of their adjustment or determination will be, and you'll be in the dark."

Keeping one person in charge of the information, he said, enables the information to be correct and consistent. The time and exposure to a client increases if an IRS agent wastes time being led in different directions by different people.

"I usually want the agent in one spot, so they're not wandering the halls," Swenson said. "It's (about) taking control of the audit, and making sure that the IRS agent is getting everything that they need, and it's correct information and consistent information."

He said the best advice is to get any dispute resolved before it goes to tax court, which involves discovery, witnesses, pretrial briefs and other proceedings.

"Most taxpayers, once you get to the level where you're actually in tax court, it becomes very expensive and very time consuming," he said.

"In order to get the case resolved, you have to be very organized, you have to know exactly what the issue is and you have to answer the IRS' concerns in a satisfactory way."