Running Head: APPEAL 1
Appealing the Adjustment
APPEAL 2
Tax Rules and Regulations
The tax laws, and regulations highlighted below are applicable in the current scenario
relating to the NOPA that is issued by IRS:
Internal Revenue Code
IRC § 162 – Under IRC § 162 (a), deductions are allowed for travel or business expenses that
are necessary. a
IRC § 274 – IRC § 274(d) states that deductions are not allowed if the expenses are not
substantial in terms of time, place and amount. It could affect the current business scenario as
there is not major difference between meals, lodging and entertainment expenses.
IRC § 274 (e) (2) – It states that the expenses that are not substantial have to be taxed to
employees as wages that are subjected to withholding tax. According to IRC § 274 (e) (3)
expenses can be regarded for reimbursement if they are not wages. In this scenario, 100 %
deduction has been applied on the meals and entertainment expenses as they were reimbursed.
Treasury Regulation - §1.274-5 a
§ 1.274-5 (c) (7) – As per § 1.274-5 (c) (7), reimbursed expenses do not require substantiation
which is applicable in the current situation.
§ 1.274-5(g) – As per § 1.274-5(g), commissioner may provide rules for reimbursement
arrangements and per diem allowances relating to necessary and ordinary expenses (Internal
Revenue Service, n.d). In the scenario, the travel expenses were reimbursed based on per diem
rates which is similar to substantiation.
§ 1.274-5(h) – Based on § 1.274-5(h), a method may be given by the commissioner so that the
taxpayer can use a specific amount while traveling instead of substantiating the actual cost of
meals, but the remaining expenses have to be substantiated.
Revenue Procedure
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§ 3.01 – According to § 3.01, per diem allowance is something that is paid for necessary and
ordinary business expenses that is incurred for meal, lodging, and incidental or meal and
incidental only; reasonably computed and it does not exceed the expenses amount; and it is
paid at or below the applicable federal per diem. It is applicable in the current scenario because
per diem involved meal, lodging, and incidental elements.
§ 3.02 – As per § 3.02, the federal per diem rate is equal to the aggregate of the applicable
federal M&IE rate for the specific day and locality of travel and the applicable federal lodging
expense rate.
§ 4.01 – As per § 4.01, per diem allowance instead of actual expense reimbursement is
substantiated if every day the per diem allowance is same as whichever is lower of the amount
of the federal per diem rate or per diem allowance. This can be relevant if the client has used
the federal per diem rate.
§ 6.02 – According to § 6.02 a receipt for lodging expenses is not necessary to ascertain the
amount of expenses that is considered deemed substantiated at the federal per diem rate under
section 4.01. This law is helpful as the chief issue that has been raised by the IRS is that there
is no substantiation of lodging, meal and incidental expenses for differentiating between the
two expense types.
§ 6.05 – As per § 6.05, § 274(n) is applicable to restrict the expense of food and beverage
deductibility to 50 %. The section is relevant since out of the amount that has been used by the
client for lodging, meal and incidental expenses, 40 % can be regarded for meals and
incidentals and 60 % can be regarded for lodging.
§7.01 – As per §7.01 adequate accounting and substantiation requirements are met if
employees use the revenue procedure for substantiating their travel expenses and provide it
within a reasonable time This is relevant if the employee provides these requirements.
Appeal Support
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The client must use the following laws, regulations and procedures for appealing to
IRS’ NOPA.
• § 274(e)(3) and § 274(n) – These sections make each other irrelevant and eliminate 50
% limitation.
• § 1.274-5(c)(7) – As per the section, substantiation is not necessary.
• § 3.01 – The client’s per diem is based on combination of lodging, meal and incidental
rate.
• § 3.02 – There is no need for differentiating between lodging and meal and incidental
expenses
• § 6.02 – Lodging receipts are not required for expenses substantiation.
• § 6.05 – Taxpayers can treat 40 % allowance for meals and incidentals and 60 % for
lodging.
• § 7.01 – Substantiation of expenses is not necessary if employees can provide
minimum time, place and business justification for travel.
Materiality
The deduction of $ 10 million can be regarded as substantial if its revenue is more than
$ 10 billion. Hence, it limits the tax that it has to pay. According to Internal Revenue Service,
50 % of per diem is non-deductible and this will reduce the deduction that can be claimed by
the business to $ 5 million. As per the applicable tax rules and procedures, the deduction must
be based on the amount that the business may lose. Pursuing the appeal is essential even if the
CPA charges $ 250,000.
Next Steps
The Appeals officer may handle the case and examine the information presented by the
business and the information submitted by IRS. If he thinks that there is a low possibility of
success, the officer may engage with the client to ascertain whether the business wants to settle
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the issue at a reduced rate. In case an agreement is not reached, a 90-day letter will be sent to
the firm, and it can respond through petition filing with the U.S. Tax Court (Internal Revenue
Service, 2021). As the court does not require payment for filing the suit, it is a bonus for the
client. However, if the final decision is in favor of IRC, the penalties and interest may get
accumulated for the business.
Potential benefits of the appeal
If the business wins the appeal, the claim that it had originally will be treated as
deduction, rather than the proposed adjustment of $ 5 million. It implies that the client can
claim $ 10 million in an entirety. The client will not have to pay any interests or penalties. The
fees of $ 250,000 will be charged and it will include services like defending the business client
before the Internal Revenue Service, drafting of response plan, preparation of the NOPA
response, and defending the client through the appeal.
Reference
4.46.4 executing the examination: Internal Revenue Service. 4.46.4 Executing the
Examination | Internal Revenue Service. (2021).
https://www.irs.gov/irm/part4/irm_04-046-004
Tax code, regulations, and Official Guidance. Internal Revenue Service. (n.d.).
https://www.irs.gov/privacy-disclosure/tax-code-regulations-and-official-guidance
