IRS Audit Overview
Pre-audit Analysis
An in-depth pre-audit analysis is essential to conducting a quality examination. IRS Examiners, Revenue Agents, should prepare a comparative analysis of the taxpayer’s returns for multiple years to assist in the identification of:
• large, unusual and questionable items,
• missing schedules, statements and/or elections
• inconsistencies between different years, and
• audit potential.
A successful IRS taxpayer audit depends upon what is done before the interview. The IRS examiner should obtain as much information about the taxpayer, be organized, and prepare an interview outline that is tailored to the taxpayer under examination. As preliminary information is gathered, it should be carefully reviewed and documented for the IRS tax audit.
Information may be obtained by the use of internal sources such as IDRS, CFOL, MACS/CDE, IRP transcripts and YK-1 to assist in the examination. External electronic sources of information such as Accurint, Google, Yahoo, and Altavista should also be searched. Although these sources may not be completely factual, this information should be compared with the taxpayer’s return.
Examiners should perform any preliminary research including reviewing applicable code sections, regulations, court cases, revenue rulings and procedures, and ATGs.
As preliminary information is gathered, it should be carefully reviewed and documented.
Information Document Request
The initial Information Document Request (IDR), Form 4564, for an architecture business should be tailored to the specific taxpayer under examination but will more than likely be the same as for a typical case. In addition to the usual documents requested from taxpayers on the initial IDR, the examiner may want to consider requesting:
1. Sales – Prepare a schedule showing the breakdown, by project, of reported sales. Have all project/job files, billing invoices, cash and sales journals/logs, bid sheets, change orders, addendums, notices of completion and any other documents used to record sales available for inspection.
2. Subcontractors/Consultants – Prepare a schedule with the following information on each consultant paid:
a. Name
b. Telephone number and contact person
c. The amount of money paid during the year
d. Form of business (corporation, sole proprietorship, etc.)
e. Federal identification number (for sole proprietors list the social security number)
f. Description of the work/service provided
3. Copies of all information returns filed (including, but not limited to Forms 1099 and W-2).
4. Copies of contracts, change orders, and any addendums – these contracts will spell out what services are to be provided, the fee amount, payments to be received, etc.
5. Bonding information (including company name, address, telephone, account statements, bonding agreements, etc.). Please provide copies of any financial statements or reports provided to the bonding company.
Subsequent IDR’s should address other needed information to complete the examination.
Initial IRS Audit Interview
The purpose of an interview is for the examiner to secure an overall financial picture of the taxpayer and to familiarize the examiner with the business activities.
The business history should be developed and documented in the examiner’s workpapers. Interviews provide information about the taxpayer’s financial history, business/activity operations, and accounting records. Interviews should be used to obtain information needed to reach informed judgments about the scope of an examination and the resolution of issues. Interviews can be used to obtain leads, develop information and establish evidence.
Examiners should use short questions that can be easily understood and in a logical order. Sufficient questions should be asked to give a clear understanding of the taxpayer’s operations. Follow-up questions should be used to clarify questionable areas. If both the taxpayer and preparer/authorized representative are present for the interview, direct the questions to the taxpayer. Listen to the answers and follow up on any answers that are incomplete or unclear.
Appendix C contains sample key interview questions the examiner may wish to ask at the initial interview.
The examiner should consider preparing a Memorandum of Interview summarizing information obtained and statements made. This will become part of the case file to aid in the case development.
Authority to conduct interviews
The authority to conduct interviews and request information is granted by IRC § 7602.
Every attempt should be made to schedule the initial appointment with the taxpayer. IRC § 7521(c) permits a representative authorized by the taxpayer to represent the taxpayer at any interview. Although a request for the taxpayer’s voluntary presence should be made through his/her representative, the taxpayer’s presence will not be mandated as long as the person being interviewed has first hand knowledge of the taxpayer’s business, business practices, bookkeeping methods, accounting practices and the daily operation of the business. That person must commit to having first hand knowledge of the information requested and affirm that the examiner can rely upon the information provided.
A representative may claim to have first hand knowledge, but when questions are asked it is clear he/she is unable to give adequate answers. If an examiner determines that the representative does not have sufficient knowledge of the taxpayer and his/her business to provide factual information, the examiner should request a subsequent interview with the individual who possesses that information. The examiner should not conduct the audit with someone who will serve as a courier, shuffling back and forth between the examiner and the taxpayer with IRS questions and client answers.
If the taxpayer’s representative does not comply with the request to interview someone more knowledgeable, including the taxpayer, the examiner should consider management involvement, issuing an administrative summons to the taxpayer (IRC § 7521(c)) and/or by-passing the representative. More information can be found in IRM 4.11.55.2, Power of Attorney Rights and Responsibilities.
Place of Examination
IRC § 7605(a) states, in part, that “the time and place of examination shall be such time and place as may be fixed by the Secretary and as are reasonable under the circumstances.”
For office examination cases the examination will be conducted in the office of the IRS closest to the taxpayer’s residence in the assigned area.
For field examinations an examination will be conducted at the location where the original books, records and source documents are maintained. This is usually the taxpayer’s principal place of the business/activity being examined.
On a case-by-case basis, examiners should consider requests by the taxpayer or representative to change the place of the examination (Treas. Regs. § 301.7605-1(e)). In considering these requests, the following factors should be considered:
• The location of the taxpayer’s current residence and location of the business/activity.
• The location where the books and records and source documents are maintained.
• The physical restrictions at the activity which could cause disruption of taxpayer’s daily operations.
Business/Activity Tour
Viewing the facilities and observing the activities is an opportunity to acquire an overview of the operation, establish that books and records accurately reflect operations, observe and test internal controls, clarify information obtained through interviews, and identify potential audit issues.
Treas. Regs. § 301.7605-1 states “regardless of where an examination takes place, the Service may visit the taxpayer’s place of business or residence to establish facts that can only be established by direct visit, such as inventory or asset verification.” The visit can show evidence of financial status, equipment usage, undisclosed aspects of the operation, etc.
Tours should be conducted after the initial interview and early in the examination process. Examiners should be alert to the physical surroundings and confirm that assets identified on the tax return are physically present and identify assets that are physically present but are not represented on the return. Examiners should ask questions to confirm an understanding of what is observed.
When determining the validity of office in the home deductions, the office or activity should be toured.
Examiners should document that a tour was completed and describe the results, including observations and resolution of any questions. If a tour of the business/activity is not conducted, the reason(s) for not conducting the tour should be documented in the workpapers.
A Tax Compliance Officer (TCO) does not always have the opportunity to perform a physical tour of the taxpayer’s activity. However, the TCO can inspect any photographs that the taxpayer may have of the activity.
Factual Development
Like any other IRS audit examination, the examiner should evaluate each large, unusual or questionable item to determine its deductibility as a business expense.
IRC § 6201 provides examiners with the authority to resolve issues and to make determinations of tax liability. It also provides broad authority to exercise professional judgment to weigh conflicting factual information, data, and opinions on issues of law to determine the correct tax liability.
Income
Generally, the general architectural firm may be paid about 10 percent of the project cost for small jobs. For larger jobs, the percentage may drop to 4 percent or 5 percent of the project cost.
Landscape architectural firms may be paid between 10 and 15 percent of the project costs for small jobs. For larger jobs, the percentage may drop to between 6 and 8 percent of the project cost.
Unless the job is small, the taxpayer will generally have progress billings rather than lump sum payments. They often will be tied to the completion of various phases of the service provided by the architect. The phases include: schematic design, design development, construction documents, bidding or negotiation, and construction. The architect plans represent the only real leverage the architect has to secure the payment of fees. Therefore, the firm will normally have billed 80 percent to 90 percent of their fee by the start of the construction phase. Collection for all work done prior to the supervision of construction should be completed early in the construction phase.
The firm may have problems collecting the last amounts billed to clients. The client may be running low on funds; disagreements may arise on the pricing for changes or any number of other problems may occur. Some architects may choose to “walk away” rather than create ill will or litigation by sending a collection agency after their clients. Amounts not collected should only be a small percentage of the contract price. If it is a large amount or percentage, the architect may be receiving noncash payments for their services. If in doubt, the examiner should make a third party contact asking the client for verification.
Architectural firms need to have good records due to possible litigation; but more importantly, they need to know the status and profitability of each job that they work on to make good business decisions. Therefore, the job files and other records are normally well kept. Missing or incomplete job files are strong indicators of possible unreported income, which would require an expansion of the audit.
The examiner should review the contract between the client and the architect. The contract spells out the services that will be provided by the architect, the fee amount, and when payment is due. A review of the contract and any addendums of a sample of project will alert the examiner to the amount and character of the payments to be received from the project. The billing invoices should tie in to the contract amount. All payments received should be traceable to a bank deposit. Any exceptions should be fully investigated. As a minimum check of gross income, a few projects should be tested to ensure that all funds are being deposited.
Generally, architects will keep a copy of all plans bearing their stamp either in the office or in storage due to possible litigation and/or as a basis for additional work. If they are stored in chronological order, a listing of plans completed just prior to, during, and just after the year(s) of audit can be made and compared with sales.
IRC § 6050M and Treas. Regs. § 1.6050M-1 require certain federal executive agencies to file a Form 8596, Information Return for Federal Contracts, for contracts in excess of $25,000 and longer than 120 days (with some exceptions). A contract is defined in this instance as an obligation of a federal executive agency to pay money or other property to a person in return for the sale of property, the rendering of services, or other consideration. A contract includes a written agreement between the agency and the contractor, an award or notice of award, a job order or task letter issued under a basic ordering agreement, a letter contract, an order that is effective only on written acceptance or performance, or certain increases in the amount obligated.
If a noncorporate architect acts as a subcontractor, a Form 1099-MISC should have been filed by the firm. Both a Form 8596 and a 1099-MISC will be listed on the information returns processing transcript (IRPTR) or the information returns processing on-line (IRPOL) for more current years.
Expenses
Architectural firms generally have the same types of expenses as other professional businesses.
IRC § 162 allows the deduction of ordinary and necessary expenses paid or incurred to carry on any trade or business. Examiners should be alert for personal expenses which may be disguised as business deductions.
Items which may be unique would include global position system (GPS) handheld devices, digital cameras, laptop computers, computer scanners, specialized copiers. Examiners should expect to find the following expenses claimed by the typical architectural firm:
• Pens;
• Compasses;
• Drafting kits;
• Colored pencils;
• Sketch paper;
• Drafting boards;
• Specialized computer aided design (CAD) software;
• Project management software;
• Document management software;
• Desktop publishing software;
• Graphics or photo imaging software;
• Office suite software; and
• Video creation and editing software.
The contracts between the client and the architectural firm may contain expenses which are to be reimbursed by the client. Such expenses may include transportation, travel, blueprint copies, etc. The architectural firm will either expense these items as they pay them, reporting any income or reducing claimed expenses for any reimbursements, or create an asset (advance) account. Since these reimbursable expenses are in effect loans to their clients, an asset account should have been created. However, since most costs are usually reimbursed within a short period of time, it may not be material enough to warrant adjustment.
The American Society of Landscape Architects (ASLA) stated that their members report that reimbursable costs may be paid at the same billing schedule as are manpower costs and it is not unusual for accounts receivable to run as much as 120 days or more with some clients.
Professional liability insurance is normally expensive due to the frequency of litigation (many firms will have rules specifically stating that their employees are not allowed to “moonlight,” thus shielding the firm from another possible source of litigation.) The insurance company depends on the insured to disclose those jobs being litigated. The insured’s incentive is lower premiums. As one would expect, increasing claims translates to increasing premiums. The insurer may require a listing of all (or some) of the projects that the taxpayer is working on to determine the premium level to charge. This list can be compared with sales to ensure that all income is being reported.
Due to the nature of the construction business there can be a lot of litigation. In some years legal fees may be extremely large. The examiner should ensure that payments are for current services and not for possible future litigation (an asset rather than an expense).
Education may be a deductible expense under IRC § 162. This is one area in the audit of architects where an examiner might discover otherwise nondeductible personal expenses couched as education expenses and claimed as deductible trade or business expenses under IRC § 162.
In general, under IRC § 162, a taxpayer may deduct, as an ordinary and necessary business expense, certain work-related educational expenses for education undertaken for the purpose of:
• maintaining or improving skills required in the taxpayer’s employment or trade or business, or
• meeting the express requirements of his employer, or the requirement of applicable law or regulations imposed as a condition to the retention by the taxpayer of an established employment relationship status, or rate of compensation.
However, education may meet these requirements and still be considered a nonqualifying education for which expenses are not deductible, if the education is to meet the minimum educational requirements (for qualification in his present employment or other trade or business) or to enter a new trade or business. Dierker vs Comm’r, TC Memo 1994-422, held that education expenses incurred by an unregistered landscape architect were not deductible because the course work qualified him for a new trade or business.
Subcontractors and/or consultants will probably be the largest nonpayroll deduction on the return. Generally they will be engineering firms, interior design firms, landscape architects, or surveyors. They usually will not be paid for their work until the client pays the architect. The examiner should ask the taxpayer to provide a schedule of their subcontractors/consultants showing the payee name, Federal identification number, dollar amount paid, telephone number, contact person, and a description of the work performed. This schedule can be used as the basis for third party checks of this expense or to pinpoint any “unusual” payees that the examiner may wish to pursue further.
In reviewing the subcontractor expenses, the examiner needs to be alert that some independent contractors might actually be employees instead. This becomes more common when firms seek to cut costs in business downturns. For further assistance regarding employment tax issues contact an employment tax specialist.
Other potential examination areas include (but are not limited to);
• Related party transactions.
• Bartering
• Inadequate officer compensation (S corporations and C corporations)
• Personal travel being deducted as a business expense
• Illegal kickbacks or payments to secure contracts
IRC § 162(a) authorizes a deduction for trade or business expenses only if they are ordinary and necessary. An ordinary expense is one that is normal, customary, and usual within a particular trade, business or industry under the circumstances of the situation. A necessary expense is one that is appropriate and helpful for the business. Last the expense must be reasonable. Under IRC § 262(a), personal, living, or family expenses are generally not deductible. Comm’r v. Heininger, 320 U.S. 467 (1943) (holding that legal fees to contest a charge of mail fraud, that if allowed to stand, would destroy taxpayer’s business were ordinary under the circumstances); Deputy v. duPont, 308 U.S. 488 (1949) (holding that a taxpayer/stockholder’s acquisition of corporation’s stock and ultimate sale to that corporation’s executive committee, because the corporation itself was not legally able to do so, was not proximate to the taxpayer’s business but to the corporation’s.)
The IRS has authority under IRC § 7805(a) to establish rules and regulations in order to effectively administer and enforce the tax laws (Title 26 of the United States Code). A taxpayer seeking a deduction must be able to point to an applicable statute and show that he comes within its terms. Deductions are a matter of legislative grace and strictly construed. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934), INDOPCO Inc. v. Comm’r , 503 U.S. 79, 84 (1992); Rockwell v. Comm’r , 512 F.2d 882, 886 (1975), affg. TCM 1972-133. A taxpayer bears the burden of proving that he or she may deduct the claimed expense; Rule 142(a), Welch v. Helvering, 290 U.S. 111, 115 (1933).
To take any deduction, the taxpayer must be able to cite an authority: Code, regulations, revenue rulings, notices. This includes the burden of substantiating the amount and purpose of the deduction claimed. IRC § 6001 imposes a broad recordkeeping responsibility on all taxpayers, requiring them to maintain adequate records to substantiate their tax liability. IRC § 6001 gives the IRS authority to require whatever records it deems necessary. If the taxpayer proves that a portion of the expenditure was made for a deductible purpose, the taxpayer may allocate that portion to the deductible purpose when the record contains sufficient evidence for a reasonable allocation. See Dillon v. Comm’r , 902 F.2d 406 (5th Cir. 1990).
An examiner may wish to use the following language in the revenue agent report:
You have failed to provide any statutory authority for your position. Therefore, the loss/deduction has been disallowed. It is not IRS’s burden to provide statutory authority for not permitting a deduction. It is the taxpayer’s burden to provide authority in Code or in regulations or in other administrative pronouncements (tax provisions) that permits a deduction. Where there is explicit statutory authority not permitting a deduction, IRS cites that authority. However, sometimes the Government’s position is simply that there is no authority in law for permitting the deduction claimed by the taxpayer.
Note: If explicit statutory authority denies the claimed loss/deduction, it may be preferable to begin the suggested paragraph by stating so. On the other hand, if there is no tax provision for permitting the claimed loss/deduction, it may be preferable to begin the paragraph noting this.
In certain circumstances, the taxpayer must meet specific substantiation requirements to be allowed a deduction under IRC § 162. See, e.g., IRC § 274(d). The heightened substantiation requirements of IRC § 274(d) apply to:
(1) Any traveling expense, including meals and lodging away from home;
(2) any item with respect to an activity in the nature of entertainment, amusement, or recreation;
(3) any expense for gifts; or
(4) the use of “listed property”, as defined in IRC § 280F(d)(4), including any passenger automobiles.
In order to deduct such expenses, the taxpayer must “substantiate by adequate records or by sufficient evidence corroborating the taxpayer’s own statement”:
(1) The amount of the expense or other item;
(2) the time and place of the travel, entertainment, amusement, or recreation
(3) the business purpose of the expense or other item; and
(4) the business relationship to the taxpayer of the persons entertained or receiving the described gift. IRC § 274(d).
To satisfy the adequate records requirement of IRC § 274, a taxpayer must maintain records and documentary evidence that in combination are sufficient to establish each element of an expenditure or use. Temp. Treas. Reg. § 1.274-5T(c)(1). Although a contemporaneous log is not required, corroborative evidence created at or near the time of the expenditure to support a taxpayer’s reconstruction “of the elements …of the expenditure or use has a high degree of probative value to elevate such statement” to the level of credibility of a contemporaneous record. Temp. Treas. Reg. § 1.274-5T(c)(1). However, corroborative evidence “not made at or near the time of the expenditure must have a high degree of credibility.”
An architect was denied deductions for travel expenses and telephone costs he claimed he incurred in connection with his architecture profession. He failed to substantiate the cost and the business needs. Shafir v. Comm’r, TC Memo 2008-280.
Penalties
When proposing audit adjustments, penalties should always be considered. All penalties including the accuracy-related and fraud penalties are important deterrents to non-compliance.
The IRS asserts the accuracy related penalty under IRC § 6662 for negligence or disregard of rules or regulations and/or a substantial understatement of income tax in appropriate cases.
Whether the accuracy related penalty applies must be determined on a case-by-case basis and will depend on the specific facts and circumstances of each case. It is the examiner’s responsibility to develop the facts and circumstances.
Inadequate Books and Records
IRC § 6001 contains the requirements for taxpayers to maintain and keep records.
Deductions are a matter of legislative grace, and the taxpayer must maintain adequate records to substantiate the amounts of their income and entitlement to any deductions or credits claimed. IRC § 6001 (the taxpayer “shall keep such records”); INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 (1992); Treas. Regs. § 1.6001-1(a).
Treas. Regs. § 1.6001-1(a) provides that taxpayers must keep permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown in the taxpayer’s returns.
Treas. Regs. § 1.6001-1(e) provides that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees, and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law.
If the taxpayer has not kept adequate books and records this should be documented in the examiner’s workpapers
Whenever the taxpayer’s books and records are deemed inadequate for purposes of an examination of income, the examiner should consider the issuance of an inadequate records notice at the conclusion of the examination. The procedures for issuance of an inadequate records notice can be found in IRM 4.10.8, Examination of Returns.
Architects are comprised of two specific areas; general architects and landscape architects.
General architectural businesses are described in North American Industry Classification System (NAICS) code 541310 as:
• establishments primarily engaged in planning and designing residential, institutional, leisure, commercial, and industrial buildings and structures by applying knowledge of design, construction procedures, zoning regulations, building codes, and building materials.
Landscape architectural businesses are described in NAICS code 541320 as:
• establishments primarily engaged in planning and designing the development of land areas for projects, such as parks and other recreational areas; airports; highways; hospitals; schools; land subdivisions; and commercial, industrial, and residential areas, by applying knowledge of land characteristics, location of buildings and structures, use of land areas, and design of landscape projects.
General Architects – Background
An architectural business may provide a variety of services to their clients. These services generally include consultation, design, and supervision of design of commercial, governmental, and residential structures or buildings. The plans, specifications, and other related documents that are produced in the design phase are called construction documents.
People need places in which to live, work, play, learn, worship, meet, govern, shop, and eat. Architects are responsible for designing these places, whether they are private or public; indoors or out; rooms, buildings, or complexes.
Architects are licensed professionals trained in the art and science of building design who develop the concepts for structures and turn those concepts into images and plans.
Architects create the overall look of buildings and other structures. Buildings also must be functional, safe, and economical and must suit the needs of the people who use them. Architects consider all these factors when they design buildings and other structures.
Architects may be involved in all phases of a construction project, from the initial discussion with the client through the final delivery of the completed structure. Their duties require specific skills – designing, engineering, managing, supervising, and communicating with clients and builders. Architects spend a great deal of time explaining their ideas to clients, construction contractors, and others.
The architect and client discuss the objectives, requirements, and budget of a project. In some cases, architects provide various predesign services: conducting feasibility and environmental impact studies, selecting a site, preparing cost analysis and land-use studies, or specifying the requirements the design must meet. For example, they may determine space requirements by researching the numbers and types of potential users of a building. The architect then prepares drawings and a report presenting ideas for the client to review.
After discussing and agreeing on the initial proposal, architects develop final construction plans that show the building’s appearance and details for its construction. Accompanying these plans are drawings of the structural system; heating, ventilation and air conditioning systems (HVAC); electrical systems; communications systems; plumbing; and, possibly, site and landscape plans. The plans also specify the building materials and, in some cases, the interior furnishings. In developing designs, architects follow building codes, zoning laws, fire regulations, and other ordinances, such as those requiring easy access by people who are disabled. Computer-aided design and drafting (CADD) and building information modeling (BIM) technology has replaced traditional paper and pencil as the most common method for creating design and construction drawings. Continual revision of plans on the basis of client needs and budget constraints is often necessary.
Architects may also assist clients in obtaining construction bids, selecting contractors, and negotiating construction contracts. As construction proceeds, they may visit building sites to make sure that contractors follow the design, adhere to the schedule, use the specified materials, and meet work quality standards. The job is not complete until all construction is finished, required tests are conducted, and construction costs are paid and a Certificate of Occupancy has been issued. Sometimes, architects also provide post construction services, such as facilities management. They advise on energy efficiency measures, evaluate how well the building design adapts to the needs of occupants, and make necessary improvements.
Often working with engineers, urban planners, interior designers, landscape architects, and other professionals, architects spend a great deal of their time coordinating information from, and the work of, other professionals engaged in the same project.
They design a wide variety of buildings, such as office and apartment buildings, schools, churches, factories, hospitals, houses, and airport terminals. They also design complexes such as urban centers, college campuses, industrial parks, and entire communities.
Architects sometimes specialize in one phase of work. Some specialize in the design of one type of building–for example, hospitals, schools, or housing. Others focus on planning and predesign services or construction management and do minimal design work.
There is an increase in demand for architects with knowledge of ‘green’ design. Green design, also known as sustainable design, emphasizes the efficient use of resources such as energy and water, waste and pollution reduction, conservation, and environmentally friendly design, specifications, and materials. Rising energy costs and increased concern about the environment has led to many new buildings being built ‘green.’
Architects spend most of their time in offices consulting with clients, developing reports and drawings, and working with other architects and engineers. However, they often visit construction sites to review the progress of projects.
Architectural firms sometimes outsource the drafting of construction documents and basic design for large-scale commercial and residential projects to architecture firms overseas.
Landscape Architects – Background
People enjoy attractively designed gardens, public parks and playgrounds, residential areas, college campuses, shopping centers, golf courses, and parkways. Landscape architects design these areas so they are not only functional but also beautiful and harmonious with the natural environment. They plan the location of buildings, roads, and walkways, and the arrangement of flowers, shrubs, and trees. They also design and plan the restoration of natural places disturbed by humans, such as wetlands, stream corridors, mined areas, and forested land.
Working with building architects, surveyors, and engineers, landscape architects help determine the best arrangement of roads and buildings. They also collaborate with environmental scientists, foresters, and other professionals to find the best way to conserve or restore natural resources. Once these decisions are made, landscape architects create detailed plans indicating new topography, vegetation, walkways, and other landscaping details, such as fountains and decorative features.
In planning a site, landscape architects first consider the purpose of the project and the funds available. They then analyze the natural elements of the site, such as the climate, soil, slope of the land, drainage, and vegetation. They also assess existing buildings, roads, walkways, and utilities to determine what improvements are necessary. At all stages, they evaluate the project’s impact on the local ecosystem.
After studying and analyzing the site, landscape architects prepare a preliminary design. To address the needs of the client, as well as the conditions at the site, they frequently make changes before a final design is approved. They also take into account any local, state, or federal regulations, such as those protecting wetlands or historic resources. In preparing designs, computer-aided design (CAD) has become an essential tool for most landscape architects. Many landscape architects also use video simulation to help clients envision the proposed ideas and plans. For larger scale site planning, landscape architects also use geographic information systems (GIS) technology, a computer mapping system.
Throughout all phases of planning and design, landscape architects consult with other professionals, such as civil engineers, hydrologists, or building architects, involved in the project. Once the design is complete, they prepare a proposal for the client. They produce detailed plans of the site, including written reports, sketches, models, photographs, land-use studies, and cost estimates and submit them for approval by the client and by regulatory agencies. When the plans are approved, landscape architects prepare working drawings showing all existing and proposed features. They also outline in detail the methods of construction and draw up a list of necessary materials. Landscape architects then monitor the implementation of their design, while general contractors or landscape contractors usually direct the actual construction of the site and installation of plantings.
Some landscape architects work on a variety of types of projects. Others specialize in a particular area, such as street and highway beautification, waterfront improvement projects, parks and playgrounds, or shopping centers. Still others work in regional planning and resource management; feasibility, environmental impact, and cost studies; or site construction. Increasingly, landscape architects work in environmental remediation, such as preservation and restoration of wetlands or abatement of storm water run-off in new developments. Historic landscape preservation and restoration is another area where landscape architects increasingly play a role.
Landscape architects who work for government agencies do site and landscape design for government buildings, parks, and other public lands, as well as park and recreation planning in national parks and forests. In addition, they may prepare environmental impact statements and studies on environmental issues such as public land-use planning.
Landscape architects spend most of their time in offices creating plans and designs, preparing models and cost estimates, doing research, or attending meetings with clients and other professionals involved in a design or planning project. The remainder of their time is spent at the site. During the design and planning stage, landscape architects visit and analyze the site to verify that the design can be incorporated into the landscape. After the plans and specifications are completed, they may spend additional time at the site observing or supervising the construction. Those who work in large national or regional firms can spend considerably more time out of the office traveling to sites
General Architects – Training, Other Qualifications and Advancement
There are three main steps in becoming an architect: completing a professional degree in architecture; gaining work experience through an internship; and attaining licensure by passing the Architect Registration Exam.
In most states, architects must hold a professional degree in architecture from a school of architecture that has a degree program accredited by the National Architectural Accrediting Board (NAAB).
Each jurisdiction sets its own requirements for initial registration, examination, and corporate practice. The National Council of Architectural Registration Boards (NCARB) has information on each individual jurisdiction.
Most architects earn their professional degree through a five-year Bachelor of Architecture degree program which is intended for students with no previous architectural training. Others earn a master’s degree after completing a bachelor’s degree in another field or after completing a pre-professional architecture program. A master’s degree in architecture can take 1 to 5 years to complete depending on the extent of previous training in architecture.
The choice of degree depends on preference and educational background. A five-year Bachelor of Architecture offers the most direct route to the professional degree. A typical program includes courses in architectural history and theory, building design with an emphasis on CADD, structures, technology, construction methods, professional practice, math, physical sciences, and liberal arts.
Many schools of architecture also offer post professional degrees for those who already have a bachelor’s or master’s degree in architecture or other areas. Although graduate education beyond the professional degree is not required for practicing architects, it may be useful for research, teaching, and certain specialties.
All state architectural registration boards require architecture graduates to complete a training period – usually at least 3 years – before they may sit for the licensing exam. Every state follows the training standards established by the Intern Development Program, a program of the American Institute of Architects (AIA) and the NCARB. These standards stipulate broad training under the supervision of a licensed architect. Most new graduates complete their training period by working as interns at architectural firms. Some states allow a portion of the training to occur in the offices of related professionals, such as engineers or general contractors. Architecture students who complete internships while still in school can count some of that time toward the 3-year training period.
Interns in architectural firms may assist in the design of one part of a project, help prepare architectural documents or drawings, build models, or prepare construction drawings on CADD. Interns also may research building codes and materials or write specifications for building materials, installation criteria, the quality of finishes, and other related details.
All states and the District of Columbia require individuals to be licensed (registered) before they may call themselves architects and contract to provide architectural services. During the time between graduation and becoming licensed, architecture school graduates generally work in the field under the supervision of a licensed architect who takes legal responsibility for all work.
Licensing requirements include a professional degree in architecture, a period of practical training or internship, and a passing score on all divisions of the Architect Registration Examination. The eligibility period for completion of all divisions of the exam varies by state.
A roster of all licensed architects may be obtained from the appropriate state licensing authority.
Most states also require some form of continuing education to maintain a license. Requirements vary by state but usually involve the completion of a certain number of credits annually or biennially through workshops, formal university classes, conferences, self-study courses, or other sources.
Architects must be able to communicate their ideas visually to their clients. Artistic and drawing ability is helpful, but not essential, to such communication. Computer skills are also required for writing specifications, for two-dimensional and three-dimensional drafting using CADD programs, and for financial management.
A number of architects voluntarily seek certification by the NCARB. Certification is awarded after independent verification of the candidate’s educational transcripts, employment record, and professional references. Certification can make it easier to become licensed across states. It is the primary requirement for reciprocity of licensing among state boards that are NCARB members. In 2009, approximately one-third of all licensed architects had this certification.
In large firms, architects may advance to supervisory or managerial positions. Some architects become partners in established firms, while others set up their own practices. Some graduates with degrees in architecture also enter related fields, such as graphic, interior, or industrial design; urban planning; real estate development; civil engineering; and construction management.
Architects held about 141,200 jobs in 2008. Approximately 68 percent of jobs were in the architectural, engineering, and related services industry. A small number worked for residential and nonresidential building construction firms and for government agencies responsible for housing, community planning, or construction of government buildings, such as the U.S. Departments of Defense and Interior and the General Services Administration. About 21 percent of architects are self-employed.
Per the Bureau of Labor Statistics 2010-11 Occupational Outlook Handbook, the median annual wages of wage-and-salary architects were $70,320 in May 2008. The middle 50 percent earned between $53,480 and $91,870. The lowest 10 percent earned less than $41,320, and the highest 10 percent earned more than $119,220. Those just starting their internships can expect to earn considerably less.
Earnings of partners in established architectural firms may fluctuate because of changing business conditions. Some architects may have difficulty establishing their own practices and may go through a period when their expenses are greater than their income, requiring substantial financial resources.
Many firms pay tuition and fees toward advanced degree programs and continuing education requirements for their employees.
Landscape Architects – Training, Other Qualifications and Advancement
Almost every state requires landscape architects to be licensed. While requirements vary among the states, they usually include a degree in landscape architecture from an accredited school; work experience; and a passing score on the Landscape Architect Registration Examination (LARE).
A bachelor’s or master’s degree in landscape architecture is usually necessary for entry into the profession. Sixty-seven colleges and universities offered undergraduate or graduate programs in landscape architecture that were accredited by the Landscape Architecture Accreditation Board of the American Society of Landscape Architects in 2009. There are two undergraduate professional degrees: a Bachelor of Landscape Architecture (BLA) and a Bachelor of Science in Landscape Architecture (BSLA). These programs usually require four or five years of study for completion. Those who hold an undergraduate degree in a field other than landscape architecture can enroll in a Master of Landscape Architecture (MLA) graduate degree program, which typically takes three years of full-time study to complete. Those who hold undergraduate degrees in landscape architecture can earn their MLA in two years.
Courses required in these programs usually include subjects such as surveying, landscape design and construction, landscape ecology, site design, grading, drainage, storm water management, and urban and regional planning. Other courses include history of landscape architecture, plant and soil science, geology, professional practice, and general management. Whenever possible, students are assigned real projects, providing them with valuable hands-on experience.
Many employers recommend that prospective landscape architects complete a summer internship with a landscape architecture firm during their formal educational studies.
As of 2011, all 50 states required landscape architects to be licensed. Licensing is based on the LARE, sponsored by the Council of Landscape Architectural Registration Boards. Applicants wishing to take the exam usually need a degree from an accredited school plus one to four years of work experience under the supervision of a licensed landscape architect, although standards vary by state. For those without an accredited landscape architecture degree, most states provide alternative paths to qualify to take the LARE, usually requiring more work experience. Currently, 13 states require that a state examination be passed in addition to the LARE to satisfy registration requirements. State examinations focus on laws, environmental regulations, plants, soils, climate, and any other characteristics unique to the state.
Because requirements for licensure are not uniform, landscape architects may find it difficult to transfer their registration from one state to another. National standards include graduating from an accredited program, serving three years of internship under the supervision of a registered landscape architect, and passing the LARE can satisfy requirements in most states. By meeting national requirements, a landscape architect can also obtain certification from the Council of Landscape Architectural Registration Boards which can be useful in obtaining reciprocal licensure in other states.
In states where licensure is required, new hires may be called “apprentices” or “intern landscape architects” until they become licensed. Their duties vary depending on the type and size of the employing firm. They may do project research or prepare working drawings, construction documents, or base maps of the area to be designed. Some are allowed to participate in the actual design of a project. However, interns must perform all work under the supervision of a licensed landscape architect. Additionally, all drawings and specifications must be signed and sealed by the licensed landscape architect, who takes legal responsibility for the work. After gaining experience and becoming licensed, landscape architects usually can carry a design through all stages of development.
A majority of states require some form of continuing education to maintain a license. Requirements usually involve the completion of workshops, seminars, formal university classes, conferences, self-study courses, or other classes.
Landscape architects must be able to convey their ideas to other professionals and clients and to make presentations before large groups. Landscape architects must also be able to draft and design using CAD software. Knowledge of computer applications of all kinds, including word processing, desktop publishing, and spreadsheets is also important. Landscape architects use these tools to develop presentations, proposals, reports, and land impact studies for clients, colleagues, and superiors.
After several years, landscape architects may become project managers, taking on the responsibility for meeting schedules and budgets, in addition to overseeing the project design. Later, they may become associates or partners of a firm, with a proprietary interest in the business.
Those with landscape architecture training also qualify for jobs closely related to landscape architecture, and may, after gaining some experience, become construction supervisors, land or environmental planners, or landscape consultants.
Per the Bureau of Labor Statistics 2010-11 Occupational Outlook Handbook, the median annual wages for landscape architects were $58,960 in May of 2008. The middle 50 percent earned between $45,840 and $77,610. The lowest 10 percent earned less than $36,520 and the highest 10 percent earned more than $97,370. Architectural, engineering, and related services employed more landscape architects than any other group of industries, and the median annual wages were $59,610 in May 2008.
Legal Structure
In 2009, more than 72,000 returns with architectural services were filed in the United States. Of those filings,
• 65 percent were Form 1040 Schedules C;
• 23 percent were Form1120 S Corporations;
• 7 percent were Form1120 C Corporations; and
• 5 percent were Form 1065 Partnerships.
An architecture firm is regulated by state law. Some states do not permit an architecture firm to operate as general business corporations. This may be to ensure that only licensed architects own and control architectural firms or to make sure the public is aware of individual architects’ professional liability.
Generally, architects are personally liable for their professional acts and may not transfer or otherwise assign the liability to any other party. Some states may allow (or even require) architects to organize their businesses as professional corporations. Professional corporation laws in states may set ownership restrictions to ensure that licensed architects own (or control) the business and require P.C. in the corporate name to distinguish it from a general business corporation.
Several states do not allow professional firms to organize as limited liability companies or partnerships. Other states allow the formation of professional limited liability companies (PLLCs) or professional limited liability partnerships (PLLPs)
Restrictions vary from state to state and any architectural business conducting business in a state generally must comply with the laws of that state whether or not the business maintains an office in that state.
Participants in the Construction Industry
There are numerous participants that take part in the construction process. The key participants are listed below and are discussed in depth in Appendix A.
• Contractors
• General/Prime Contractors
• Construction Managers
• Commercial Contractors
• Commercial Project Owners
• Residential Construction Developers
• Subcontractors
• Highway Contractors
• Heavy Construction Contractors
• General Architects
• Landscape Architects
• Engineers
• Material Suppliers
• Construction Lenders
• Surety Companies
Each of the above participants can and often do have multiple roles in the construction process. For example, the owner could also be the general contractor (builder/developer). The general contractor in addition to providing supervision may also do specialty work that would typically be subcontracted (for example, concrete work). Construction lenders frequently hold an equity position in a development partnership in order to participate in the management decisions and to share in the profits. Anchor tenants, such as major department store chains participate in the development partnership in exchange for signing long-term leases. Contractors and material suppliers can obtain rights in the project by filing mechanics liens against the property.
The Contracting Process
When the owner/client determines that the project is feasible and that construction financing is available, the owner will solicit bids from general contractors and/or specialty contractors. Owners will use trade publications and newspapers to invite contractors to bid for the construction contract. The notice will provide the contractors with the procedures to be followed in submitting a bid.
The bidding contractor obtains a copy of the plans and specifications prepared by the architect from the owner to prepare for the formal bid. The bidding contractor solicits bids from subcontractors, estimates direct material and labor costs, and evaluates the ultimate profit potential of the contract. The amount of the bid covers the estimated costs and profit for the construction project.
The owner evaluates the submitted bids and will award the contract to the successful bidder. The contract document contains the contract amount, project start and completion dates, progress billing procedures, insurance requirements, and other pertinent information.
In many cases, the landscape architect will oversee the bidding process on behalf of the project’s owner for landscape site work that does not include extensive roadway or building work. The owner typically will then evaluate the bids after receiving review and recommendations by the landscape architect.
A few architectural firms will act as the general contractor. These general contractors make bids on the project (as described above). The architect reviews the bids and recommends one or more of the general contractors to do the job. The owner/client selects and contracts with the general contractor(s) of their choice. There may be more than one general contractor selected for different phases of the project.
Chapter 2 – Issues Common to Architects and Landscape Architects
This chapter discusses specific issues applicable to the architect and landscape architect industries. In addition to the general examination issues, there are several issues which are frequent or unique to the architectural business.
These issues are discussed in more detail below.
Personal Service Corporation
Many individuals in the business of performing personal services choose to operate as a corporation in order to gain tax advantages not otherwise available to sole proprietors or partners. Some of these advantages include the ability to deduct business expenses that would otherwise be subject to the limitations on miscellaneous itemized deductions, the graduated corporate tax rate, or the use of corporate retirement and fringe benefit plans.
Congress, concerned that personal service corporations (PSCs) were being used to shield income from the employee-owners’ higher individual tax rates, made the decision to deny the benefits of the graduated tax rates to a PSC for tax years after 1987.
IRC § 11(a) imposes a tax on the taxable income of every corporation. Although for federal income tax purposes corporations generally are taxed at graduated income tax rates under IRC § 11(b)(1), qualified PSCs as defined in IRC §448(d)(2) are taxed at a flat 35-percent income tax rate under IRC § 11(b)(2).
It is possible for a C corporation engaged in the architectural business to be a qualified PSC. A qualified PSC is one that meets the function and ownership tests of IRC § 448(d)(2).
IRC § 448(a) generally prohibits C corporations, partnerships with C corporations as partners, and tax shelters from using the cash receipts and disbursements method of accounting (cash method) if the corporation’s three prior taxable years average annual gross receipts exceed $5 million. IRC § 448(b) provides an exception to this general rule if a qualified PSC meets the function and ownership tests; in this case the qualified PSC may use the cash method of accounting even if it has average gross receipts in the three prior taxable year exceeding $5 million.
A cash basis PSC that fails to meet either the function or ownership test for any taxable year must change its method of accounting for that year from the cash basis to some other basis and is then taxed at a graduated income tax rate. The only exception is where the corporation meets the gross receipts test if the average annual gross receipts for the three taxable years ending prior to the taxable year in question are less than or equal to $5 million (Temp. Treas. Reg. § 1.448-1T(f)).
The function test requires that substantially all of the corporation’s activities involve the performance of services in the fields of “health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting” (qualifying field), IRC § 448(d)(2)(A). Section 1.448-1T(e)(4)(i) provides:
(4) Function test – (i) In general – A corporation meets the function test if substantially all the corporation’s activities for a taxable year involve the performance of services in one or more of the following fields –
A. Health,
B. Law,
C. Engineering (including surveying and mapping),
D. Architecture,
E. Accounting,
F. Actuarial science,
G. Performing arts, or
H. Consulting
Substantially all of the activities of a corporation are involved in the performance of services in any field described in the preceding sentence (a qualifying field), only if 95 percent or more of the time spent by employees of the corporation, serving in their capacity as such, is devoted to the performance of services in a qualifying field. For purposes of determining whether the 95 percent test is satisfied, the performance of any activity incident to the actual performance of services in a qualifying field is considered the performance of services in that field. Activities incident to the performance of services in a qualifying field include the supervision of employees engaged in directly providing service to clients, and the performance of administrative and support services incident to such activities.
A corporation meets the ownership test if at all times during the taxable year substantially all of the corporate stock, by value, is held directly or indirectly by any of the following (Treas. Reg. § 1.448-1T(e)(5)):
• Employees performing services for the corporation in connection with the activities involving the fields of health, engineering, architecture, accounting, actuarial science, performing arts, consulting, or law.
• Retired employees who had performed the services.
• An estate of the employees or retirees described above.
• Any person who acquired the stock of the corporation as a result of the death of an employee or retiree (but only for the two-year period following the date of death).
The term “substantially all” means an amount equal to or greater than 95 percent.
Stock held indirectly includes:
• Interests owned by an individual in a partnership, S corporation, or qualified personal service corporation that owns such stock.
• Stock held by a trust if and to the extent that the individual is treated under grantor trust rules (located in Subchapter J of the Internal Revenue Code) as owner of part of the trust holding such stock.
• Stock held by any qualified pension, profit-sharing, or stock bonus plan described in IRC § 401(a) that is exempt under IRC § 501(a) (Temp Treas. Reg. §§1.448-1T(e)(5)(iii) and (v)).
IRS Audit hint: It is important to verify that a PSC is correctly using the 35 percent tax rate and that when audit adjustments are proposed, Report Generation Software (RGS) correctly computes the 35 percent rate on all adjustments.
IRS audit representation for architects and landscape architects in all 50 states including Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Guam, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming.