Read the following hypothetical and respond to the questions posed:

"You are an accountant or attorney in private practice. You recently were retained by Fred Jones to handle his tax work. Fred resides in Texas, and he owns and operates a small bar or lounge near Dallas, Texas. Fred hasn't bothered to incorporate the business. Each year, he reports on Schedule C of his Form 1040 the tax results of operating the bar. Fred's business has six to ten employees, working various jobs in various shifts. Fred's returns each year are prepared by Ralph Friendly, an accountant who is not an employee of Fred's.

When you return to your office this morning, your secretary tells you that Fred dropped by while you were out. Your secretary says that Fred was very agitated and barely coherent. Your secretary was able to gather that Fred has received a letter from the IRS stating that his 2019 return is going to be examined. Your secretary made an appointment for you and Fred to meet tomorrow afternoon.

Thinking about the upcoming meeting, you ponder whether to contact Fred before the meeting. Would this be a good idea? If you decide to do so, what would you say to Fred? What, if anything, would you ask Fred to do in advance of the meeting tomorrow?

When you meet with Fred, you discover the following additional information. For year 2019, Fred reported on his Schedule C a small net loss as to the bar. The loss arose in part because of very large expenses claimed for business travel and telephone.

Fred acknowledges to you that, throughout 2019, he was romantically involved with Natalie Imber, a resident of Los Angeles. Fred flew to Los Angeles frequently in 2019 to meet Natalie, and he telephone her often. The costs of such travel and telephone were included in the Schedule C deductions that Fred claimed on his 2019 return.

However, Fred tells you that these deductions were proper, and he is quite adamant on this point. Fred explains that Natalie is an importer and distributor of foreign beer, wine, and alcohol products. Fred and Natalie met for the first time at a trade convention, and Fred considers Natalie an expert on the products she deals in. Fred says that he always is reviewing his product stock and inventory, seeking to add spirits that could be popular with his customers and give his business an edge over the competition. Fred says Natalie was his expert as to new products. He discussed such products at length with her. Fred insists that all of his travel to Los Angeles, and many of the telephone calls, would not have taken place but for his need to consult with Natalie on such matters, thus the costs were legitimate business expenses. Further, Fred says, Ralph Friendly knew about Fred's relationship with Natalie but still included these expenses as Schedule C deductions on the 2019 return, so they must be have been proper. Nonetheless, Fred fears that the IRS might misinterpret his contacts with Natalie.

Fred asks you how he should prepare for the IRS examination and what he should do during it. Develop a strategy. Part of your thinking should include these questions: (1) If the IRS becomes interested in the travel and telephone deductions, how might the IRS learn of or develop the facts as to them, including the nature and amounts of the expenses involved? What options are available to the IRS in this regard? (2) How can Fred protect himself? Specifically, if he does not wish to cooperate in the IRS's development of these facts, what can he legally refuse to do and what can affirmatively be done to oppose the IRS's information gathering? What would or could the IRS do in response?

Think comprehensively. What are all the steps or measures you would recommend in audit defense? In addition, what would be your "end game" strategy? That is, what might you do if the audit does not result in agreement? What options would the taxpayer have? How satisfactory or desirable would the various options be? Speaking practically, what approach would be the best for your client on these facts?

In devising the above strategy, there may be factual omissions or ambiguities that you would need to explore. What additional facts would you want from Fred? Why would they matter and how would they influence your strategy?

(Source: Richardson, Borison, Johnson, Civil Tax Procedure, LexisNexis Graduate Tax Series, 2nd Edition, pages 133-134).