Aug./Sept. 2009

No Substitute for Experience in Tax Research ... Know When to Dig Deeper

By T. Steel Rose and Cindy Pickett

Tax research is where the fun takes place in a tax practice. It's more fun when you have terrific resources. The river is wide, so to speak, so choosing the right tools will save valuable time. The consensus among three of the Top 40 Tax Practitioners selected for this year is that years of experience with intriguing tax assignments is the best preparation for tax research. What you already know is a huge jumping-off point to get to the best answer based on the facts known at the time.

Another strong piece of advice is to dig deeper to get the answer. Once I was ready to settle with the IRS during an audit, simply because the time invested was becoming cost-prohibitive. I felt sure the position I took on re-investing the gain on a home sold was correct, but the IRS would not budge despite the analysis and interpretation of regulations I provided. The next step was to head to Tax Court, so I was ready to acquiesce. I visited the law library at the University of Texas in Austin one last time the afternoon before the settlement meeting with the IRS.

I came upon a case that was almost identical, except that in the documented case, the IRS used my position to defeat a taxpayer in Tax Court. I informed the IRS auditor, the third one assigned to the case, that I was unable to settle. I hated to disappoint him; he was such a nice guy, but several thousand dollars were at stake with the added penalties and interest. I showed him the case. He reluctantly understood, and we moved on to Tax Court. The week before the Tax Court judge would be in Texas to hear my case, I got a call from the IRS. At this point, the auditor agreed. More importantly, as Robert Teuber mentions in the Appeals story this issue, the IRS had to consider the consequences of litigation.

The bottom line: If the IRS went to Court and my position prevailed, that would mean one more precedent for able tax researchers to cite for their clients. So, although the IRS prevails in a majority of tax cases, it is judicious in not litigating the cases it might lose. Ultimately, when it comes to tax research, digging deeper is great advice if your experience tells you that the position should be right.

Our esteemed group of tax researchers has the experience to know where to begin and where to spend time most effectively to support a defensible position. Meet our contributors: Nancy Hyde, CPA of Hyde & Company CPAs PC in Oklahoma City, OK; Houston D. Smith Jr. from Decatur, GA; and Joseph W. Walloch, CPA of Walloch & Associates, CPAs in Redlands, CA.

CPA Magazine: How did you get involved in tax research, and how long have you been doing tax research?

Nancy Hyde: I started learning about income tax in college. I worked part-time for the IRS in a program that allowed me to learn the areas of the IRS by working in each division. I later joined the IRS as an auditor. I learned tax law and acquired my tax research skills through an excellent training program offered by the IRS.

After leaving the IRS, I worked for BDO Seidman, an international CPA firm that had a strong tax training program. I have expanded my knowledge in this area over the years by continuing to spend approximately 120 hours each year on live CPE, reading updated tax materials on a daily basis, serving as an instructor and participating in a tax luncheon group. I have worked with small business clients with tax research needs for more than 30 years.

Houston D. Smith Jr.: I've been a public practitioner since 1963 and have a BBA from University of Georgia (Atlanta division) and a MBA from Emory University. I am a former faculty member for Georgia State University as well as an author and lecturer. After the two-year apprenticeship to become a CPA, I became the Senior Tax Examiner for the Georgia Department of Revenue. I then  taught at Georgia State University. I left teaching to become senior partner at my firm, Smith and Raab, P.C. I have been doing tax research since 1953, when I passed the CPA exam, and have been immersed in it throughout my career.

Joseph Walloch: I have been involved in tax research for 44 years, beginning in 1965 when I worked as an IRS agent intern while attending college. I was often assigned to do tax research to support the lead agent's position. This was an invaluable experience as I was fortunate enough to work with some of the top IRS agents in California.

CPA Magazine: What tools do you need to be proficient in tax research? Which Web sites are helpful?

Nancy Hyde: At least one good tax service, daily news tax update, Master tax or desk guide. We use BNA and Checkpoint (RIA) tax services. Don't overlook IRS Web sites for understandable information, which can be useful for communicating to clients in simple terms. State tax Web sites, DOL and AICPA also are useful.

Houston D Smith Jr.: Our indispensible tools are (1) recognition of potential issues/opportunities, and (2) the ability to think like those who index tax publications ("What is the key word or phrase?"). Beyond those skills, one needs an adequate library and professional colleagues to serve as sounding boards and advisors. The bulk of the Web sites we use are purchased from publishers. The principal free Web site that we use is that of the IRS.

Joseph Walloch: For research, the most important tool is a creative and inquisitive mind open to an abundance of possibilities. Another valuable tool is networking. Connections with tax practitioners who have tax expertise beyond your area are priceless. Join the AICPA Tax Division to enhance your networking possibilities.
My favorite sites for tax research are CCH, BNA, Warren Gorham & Lamont (WG&L), Taxprofblog and Google. I use educator tax research resources, such as CCH and West's, in my capacity as a tax professor. The IRS Web site, www.irs.gov, also is useful.

CPA Magazine: How do you plan a tax research engagement?

Nancy Hyde: Determine the reason for the engagement, outline the question, develop facts in detail, and know what your best conclusion answer or goal is. Then, start to locate sources and dig deeper. The answers often come from continuing to look at the subject in more depth.

Houston D. Smith Jr.: First, define the problem. Second, study. Read the most broadly based texts in the library on the subject. (We use PPC publications for this level of research). If that fails to reveal the answer, use more detailed analytic tools (We usually turn to RIA Federal Tax Coordinator for this level). Having located the commentary on the subject, consider reading the source documents (revenue rulings, Tax Court cases, etc.). We read source data in probably no more than 2% to 5% of our tax research. Finally, document the findings in work papers. The documentation helps us remember why we took a position and shows the IRS agent that we used consultation and were not simply "winging it."

Joseph Walloch: The tax person's favorite answer — "it depends" — applies. If the area is new to me, I review an applicable overview such as is provided in BNA or in a WG&L text. If the area is of my expertise, I use existing resources supplemented by pinpoint research on unique aspects of the research project.

CPA Magazine: How do you begin helping clients research beyond their tax returns?

Nancy Hyde: Be proactive. Tax season is the time to learn more about clients' future plans. We prepare projections for the upcoming year, schedule quarterly sessions and update projections when changes occur.

Tax season is a great time to determine tax planning needs. Make plans to look at entity selection, reorganize the company, do estate planning and decide what work will need to be done after tax season. Remind clients that tax planning is best done when the event happens. It is tough to change a transaction after the fact. Call us now, not later.

Houston D. Smith Jr.: The most common example is helping clients decide whether to pay state income tax before or after December 31st. That is often heavily influenced by the presence, or absence, of Alternative Minimum Tax. We make AMT projections for the current and succeeding year. We make the calculation using BNA tax planning software and share the printed output with our client. In some instances, we simply tell the client that they will, or will not, be in AMT and the implication that has on when to pay state income tax.

Joseph Walloch: By encouraging planning with clients and their planning team (usually at least their attorney) and by educating clients about the importance of pre-planning major transactions. I also try to be readily available night or day to answer client tax questions, big or small — thus overwhelming them with good service.

CPA Magazine: How do you charge for and deliver a tax research engagement?

Nancy Hyde: Based on time spent. Try to give them a memo, projection, letter — something in writing. Charge for all of your time; don't discount your knowledge.

Houston D. Smith Jr.: We generally charge by the hour. In some instances, we value bill, but that is uncommon. We would deliver all advice in writing if we had the choice, but clients are not willing to pay for that. In those cases, we deliver our results verbally and document the file regarding the advice offered.

Joseph Walloch: I estimate the cost of the engagement and require a retainer of 50% or more for a new engagement. I usually do not require a retainer from an existing client. I "deliver" the tax research assignment via verbal communication with the client — generally in a face-to-face meeting, sometimes telephonically depending on the magnitude of the case. I provide a written summary of the tax research results in the "standard" tax research format.

CPA Magazine: What is different for a tax researcher in light of Circular 230?

Nancy Hyde: Take the time to prepare a written memorandum of facts, discussions and conclusions in the tax area. Avoid giving tax advice without a thorough understanding of the facts. Give the advice and use a disclosure notice as necessary.

Houston D. Smith Jr.: We expect a sharp upswing in preparer penalties. Assuming that's a fair assumption, strong documentation in the file will be more valuable than ever.

Joseph Walloch: You need to engage in defensive accounting to make sure you alert clients to potential risks, consideration of substantial authority and required Circular 230 disclosures. Most importantly, you need to prepare "CYA" documentation. Need I say more?

CPA Magazine: Have you ever had to defend a research position before the IRS? What helps in that situation?

Nancy Hyde: Sure. Take the time to get the facts in detail, especially what makes your client's situation comparable or different. Research both sides. You need to present and argue why cases are similar or not. Look at committee reports, original code and why there were changes. Understand the intent of the law and use it in your case. Set out detailed facts and authority for your position and conclusion. Don't forget to develop all the facts by discussing them in-depth with the client.

Houston D. Smith Jr.: Yes. We have researched the case of an emergency room physician renting a condominium in a neighboring state for Continuing Medical Education study (in light of his being on call 24/7). A Tax Court case that was on point (a business executive from Chicago) was invaluable to winning the agent's confidence and to offering authoritative support for our position.

Joseph Walloch: Yes, many times. The best way to defend a research position before the IRS is to simplify the jobs of the agents. Make it easy for them to accept your findings and use your presentation in their reports. Making them look good and saving them time is a big part of success.

CPA Magazine: What advice do you have for a small accounting firm about tax research?

Nancy Hyde: Have the necessary tools — a minimum of one professional tax service. Develop facts. Start with what you want your answer to be and work backwards to support it. Don't stop too soon. Research your first answer, then dig deeper. Check the facts of related cases and look at the intent of the original law; always carefully consider the weight of authority. Find a tax group for networking and discussing complex tax questions.

Houston D. Smith Jr.: Learn to distinguish between  problems and opportunities. It is OK not to know the answer; it is not OK not to find out. Use tax software with strong diagnostics and acquire as much tax library as you can afford.

Joseph Walloch: From a low-cost standpoint, become tax aware by obtaining e-alerts from various sources, including the AICPA and IRS. Keep up-to-date at irs.gov and taxprofblog. Join the AICPA Tax Division and subscribe to an online tax research service.
CPA Magazine: What interesting tax research assignments have you done?

Nancy Hyde: Art donation of famous artwork to a foreign art museum, wrongful death damages, reorganization of companies and support for a non-S/E treatment of income for an active LLC member.

Houston D. Smith Jr.: Probably the case of the emergency room physician that I mentioned earlier.

Joseph Walloch: I have planned a successful IRC Sec. 355 spin-off, including obtaining a favorable private ruling to achieve a tax-free division of corporation between two shareholders who had become adversaries.

I have done tax research for an expert witness assignment for a criminal tax matter regarding an investment in a tax shelter that reached a successful outcome.

I have researched the sale of intangibles as part of a sale of assets and achieved major tax savings as a result.

The especially interesting ones are tax research projects others have given up on. You arrive in the ninth inning to pitch with two outs and the bases loaded, and you win the day. It certainly gives you a jump-up-and-click-your-heels kind of feeling.

CPA Magazine: What are you passionate about outside of accounting and tax research?

Nancy Hyde: I love to travel, particularly to foreign destinations. This year, we went to Costa Rica and plan to take a Mediterranean cruise. Last year, we went to Paris, London and Rome. Italy is my favorite country. We have traveled to Rome, Florence, Venice, Verona, Sorrento and the Amalfi Coast.

I also enjoy hosting international students. We have had students from Thailand, Taiwan and Japan. This August, we will host a business woman who has an accounting firm in Afghanistan. She will work with me in my business.

Houston D. Smith Jr.: Baseball. I love studying the statistical data available on the game: Does the probability of scoring increase if the batter sacrifices the runner on first to second base? On a 3-2 pitch, what is the probability the next pitch will be a foul ball?

Joseph Walloch: I am passionate about my family, traveling (especially to Hawaii), teaching and once-in-a-lifetime adventures. I have flown in an aerobatic airplane doing a dead-man's stall, gone river rafting through the Grand Canyon, rode on the Goodyear blimp, attended the Kirov Ballet in Russia and served as a visiting professor in the People's Republic of China.