Defensible strategy for the client
The defensible strategy for the client is based on the six steps in the tax research process namely establishment of facts, identification of issues, location of the authority, evaluation of the authority, development of conclusions and recommendations, as well as communication of the recommendations (Sawyers, Raabe, Whittenburg & Gill, 2014). The strategy intends to help the client solve the tax problem. Just as the case is with the conventional research process, the tax research would comply with the steps stated above to make the process methodical and cover all aspects of the tax problem to have an effective defense against the internal revenue service (IRS) (Sebastian, 2002). Two points are critical in the strategy. First, I will use various mechanisms in identifying and finding tax authorities associated with the current tax issues. The second point is the application of creativity and reasoning based on professional qualification to solve the problem and defend the client (Rupert, Pope & Anderson, 2014).
Using the six steps, the first one will help in identifying the major issues and clarifying facts to the IRS. Having identified the issues, the second step would facilitate the process of identifying the applicable law and possible areas of reference to provide solutions and respond to counterarguments. Having identified the law information applicable to the current tax problem, a thorough examination assists in identifying potential areas to support the defense argument. Through the fourth step in the research process, the defender is able to develop conclusions focusing on the research on every tax issue affecting the client based on the facts identified in previous steps (Rupert, Pope & Anderson, 2014). From the conclusions, it is possible to develop arguments that are correct according to the law about the tax implications of the facts specified. The facts and conclusions form the results of the research process. Using the fifth step of the tax research process and the results obtained from the fourth step, the defender develops a set of recommendations to the client for the most appropriate course of action. The final step involves the communication of conclusions and outcomes, which form the basis for future prevention of problem occurrence (Sawyers, Raabe, Whittenburg & Gill, 2014).
Fact-based argument to defend client’s position with IRS
The defense of the client is based on five major factual points. First, the defense argument is based on the high-net-worthiness of the client, which drives naturally to venture into new businesses, which accounts for the profit motives of the client. Second, from history, the client had learned that businesses can be profitable or result in losses and this is established after a considerable amount of time, which in this case is insufficient to have an adequate understanding of the business. Third, occasional profits should be a major part of the defense as they form the basis for sustainable profitability for any business and may not necessarily imply tax problems (Rupert, Pope & Anderson, 2014). Fourth, the long haul consideration is a vital point for defense because, with the availability of resources, clients can be involved in non-performing businesses with the long haul in mind. Finally, the defense is based on much involvement of the client in the business, which indicates something more than the profit motivation behind the conduction of the business (Schwartz & Catanach, 2009).
Counter argument by the IRS to validate its position
Considering the case was about schedule C and F of tax shelters, IRs could develop counterarguments that could result in the client flossing the case (Rupert, Pope & Anderson, 2014). Indeed, using schedule C in real estate enables offsetting of maintenance and carrying of the real estate to the time of sale for profit or loss. The counterargument is based on the fact that for real estate to be regarded as business, and not an investment, there should be proof of continuous and regular sales. This may result in an expensive audit and bearing of costs by the client in case of losses. In the counterargument, the IRS may use various legal provisions to separate other activities taking place in the property to validate its position. This results in disallowing losses from activities taking place in real estate. In response to IRS’s counterargument, the defense focuses on the actual intention of the client in the development of the tax problem (Rupert, Pope & Anderson, 2014). The intention is clear and the client intends to use the property for different activities to maximize the profit. This position limits the IRS counterargument and provides the client with time to make corrections and avoid such occurrences again (Sebastian, 2002).
Letter on behalf of the client
Having examined the tax problems raised by the Internal Revenue Service, I wish to clarify to you a few points for your consideration in addressing the problem. It is important to consider the long-term worthiness of the business rather than consider the present only. As history shows, profits rise over time which indicates possible profitability in the future. Furthermore, the business has occasional profits, which is a clear indication of positive times ahead. This is clear with my desire to the business succeed for the long-term benefits.
References
Rupert, T. J., Pope, T. R. & Anderson, K. E. (2014). Prentice Hall’s Federal Taxation 2014 Comprehensive (27th ed.). Upper Saddle River, NJ: Pearson.
Sawyers, R., Raabe, W., Whittenburg, G., & Gill, S. (2014). Federal tax research (10th ed.). Stamford, CT: Cengage Learning.
Schwartz, B. N., & Catanach, A. H. (2009). Advances in accounting education teaching and curriculum innovations. Bingley, UK: Emerald.
Sebastian, S. J. (2002). Internal revenue service: Status of Recommendations From Financial Audits and Related Financial Management Reports. Ft. Belvoir: Defence Technical Information Centre.