2 Understand the types of IRS audits. Pg 44+. The student should be able to:Understand the requirements for practicing before the Internal Revenue Service. Pg. 40.Understand the process by which the IRS issues rulings in response to requests from taxpayers or IRS agents, and the use of those rulings. Pg. 41+.Understand the types of IRS audits. Pg 44+.Understand the appeals process, within the IRS and in the court system. Pg. 47+.Understand the statute of limitations and how it affects audits and refunds. Pg. 53+
3 The student should be able to: Understand the most important penalties that may apply to taxpayers, and how to compute them. Pg. 54+Understand the penalty for underpayment estimated income tax. Pg. 58+.Understand penalties that may apply to tax preparers, and how to compute them. (Please make a note to update your textbook and your codebook for changes made recently in code section See document below homework on web page) Pg. 59+.Understand ethical requirements and professional responsibilities placed on CPAs by the IRS, the AICPA, and state boards of accountancy. Pg. 60+
4 Administrative Procedures (1 of 2) Role of the IRSAudits of tax returnsRequests for rulingsDue datesFailure-to-file/pay-penaltiesEstimated taxes
5 Administrative Procedures (2 of 2) Severe penaltiesStatute of limitationsLiability for taxTax practice issues
6 1. Understand the role of the IRS in our tax system.
7 Role of the IRSEnforcement of tax lawsCollection of taxes dueInterpretation of Internal Revenue Code
8 Organization of the IRS Not on the test in this course
9 2. Discuss how returns are selected for audit and the alternatives available to tax payers whose returns are audited.
10 Selecting Returns for Audit Information Document Matching ProgramComputerized matching of information on return with data from 3rd parties (W-2 from employer)Mathematical/Clerical Error ProgramUnallowable Items Program
11 Audits of Tax Returns (2 of 3) Returns selected for audit by discriminant function & other means39% of returns selected by using DIFNRP exams less intrusive than TCMP
12 Audits of Tax Returns (3 of 3) Types of auditsCorrespondence auditOffice auditField auditAppeals processBurden of proof
13 Types of AuditsCorrespondence audit – verify one or two items in question by mailOffice audit – requires some analysis & IRS judgment through interviewField audit – typically limited to examination of business returnsLarge corporations provide office for IRS to audit year-round.
14 Appeals Process (1 of 3)Taxpayer first meets w/ revenue agent (and supervisor)If taxpayer disagrees w/ findings, IRS sends thirty-day letterTaxpayer has 30 days to request a conference w/ appeals officerTaxpayer meets with appeals officer
15 Appeals Process (2 of 3)If no agreement with appeals officer, IRS issues 90-day letterTaxpayer has 90 days to file petition w/ Tax Court or pay the taxTaxpayer must pay tax first to litigate in either District Court or U.S. Court of Federal Claims
16 Appeals Process (3 of 3)Either party may appeal court decision to Circuit CourtUsually final appeal as Supreme Court rarely hears tax cases
17 Introduces “credible evidence” Burden of Proof (1 of 2)In civil court cases burden of proof on factual matters shifts to IRS if taxpayer does all of the following:Introduces “credible evidence”Complies w/ recordkeeping & substantiation requirements of IRC Sec. 7491
18 Burden of proof (continued) Cooperates w/ reasonable requests Burden of Proof (2 of 2)Burden of proof (continued)Cooperates w/ reasonable requestsQualifies as a natural person or legal person w/ net worth $7 million
19 Which of the following types of IRS audits involves the least extensive audit procedures? a. Office auditb. Field auditc. Correspondence audit.
20 After an audit, a taxpayer who does not agree with the audit findings will receive a: a. Letter Rulingb. 30-day letterc. 90-day letterd. Revenue Ruling
21 The examination of Greta’s’ tax return for 2005 resulted in adjustments creating a tax liability in the amount of $30,000. Greta does not believe she owes anything. A Notice of Proposed Income Tax Deficiency is issued to Greta, who wants to appeal the Revenue Agent’s adjustments to the IRS Office of Appeals. Greta must file a written protest letter no later than which of the following periods?a. 10 days. b. 30 days. c. 90 days.d. 120 days e. None of these
22 If a taxpayer and IRS disagree about a proposed tax assessment after an Appeals conference, the taxpayer can take his case to the following court without first paying the tax:a. United States Tax Courtb. United States Court of Federal Claimsc. United States District Courtd. Any of the above (IRS 1999)
23 When the IRS and the taxpayer disagree about a proposed assessment at the conclusion of an audit, the taxpayer will receive:A 30-day letter that gives the taxpayer 30 days to file a petition with the Tax Court.b. A 30-day letter that gives the taxpayer 30 days to request a conference with an IRS Appeals Officer.c. A 90-day letter that gives the taxpayer 90 days to file a petition with the Tax Court. d. A notice and demand that the tax liability is due and owing.
24 After the issuance of a Statutory Notice of Deficiency, failure to timely file a petition with Tax Court will result in which of the following?a. The Internal Revenue Service will issue a 30-day letter.b. The Internal Revenue Service will assess the tax it says the taxpayer owes. c. The Internal Revenue Service will issue a 90-day letter. IRS-2004
25 [Sec. 6213(a), Sec. 7463] Nicholas wants his income tax case to be handled under the Tax Court’s “small tax case procedure.” All of the following statements regarding the “small tax case procedure” are correct except:a. The amount in the case must be $50,000 or less for any one-tax year.b. The amount does not need to be paid before going to Tax Court. c. The taxpayer must file a petition with the Tax Court within 90 days of the day on which a statutory notice of deficiency was mailed to the taxpayer. d. The decision can be appealed to the United States Court of Appeals.
26 In deciding whether to carry a case to the Tax Court or District Court, the following advantage of the District Court should be considered:a. the IRS cannot appeal a District Court decisionb. payment of the tax deficiency before trial is not required in the District Courtc. a jury trial may be available in the District Courtd. in case of inadequate accounting records of the taxpayer's income,e. the burden of proof will be on the IRS in the District Court
28 Requests for RulingsAllows taxpayer to learn how IRS will treat a particular transaction before the transaction is completedRequest made in writingIRS has option whether or not to respond
29 A taxpayer who is uncertain about how a prospective future transaction should be reported may request from the IRS a:a. Letter Rulingb. Revenue Rulingc. Regulation
30 4. Identify the due dates for tax returns and penalties associated with not abiding by such dates. Sec. 6075
31 Filing DeadlinesReturns for individuals, partnerships, estates, and trusts due 15th day of 4th month (April 15)Corporate returns due 15th day of 3rd month (March 15)Extensions of time to fileIndividuals: 6 months (new)Corporations: 6 monthsExtensions for filing deadline available, but tax must be paid by original due date to avoid penaltiesInterest due on tax not timely paid
32 Filing DeadlinesBig Company, a corporate taxpayer, has a fiscal year ending October 30. The due date, excluding extension, for filing their return is:a. January b. November 15.c. December 1. d. December 15.(Sec. 6072, 6081, 6151)
34 Failure-to-File/Pay-Penalties Failure to file penalty5% per month or fraction thereof of net tax due w/ a 25% maximumFraudulent failure to file is 15% per month or fraction thereof w/ maximum of 75%Failure to pay incurs a penalty of 0.5% per month up to 25%
35 Filing Penalties Failure-to-pay penalty ½ percent for each month (or part of month) payment is late (maximum 25%)Failure-to-file penalty5 percent per month (or partial month) return is late (maximum 25%)If both apply, rate is combined 5 percent for first 5 months and ½ percent thereafter (47½ percent maximum)
36 Filing Penalties No failure-to-file penalty if no tax is owed Minimum $100 failure-to-file penalty if return more than 60 days lateFraudulent failure-to-file can increase latefiling penalty to 15% a month (75% maximum)Installment agreement possible if unable to pay tax when due (late payment penalties apply)
37 6651(a) ADDITION TO THE TAX. -In case of failure- (1) to file any return … on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause …, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate:
38 6651(a) ADDITION TO THE TAX. -In case of failure – (2) to pay the amount shown as tax … on or before the date prescribed for payment of such tax (determined with regard to any extension …), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount shown as tax on such return 0.5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 0.5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate;
39 FINAL-REG §301.6651-1. Failure to file.. (b) Month defined(1) If the date prescribed for filing the return or paying tax is the last day of a calendar month, each succeeding calendar month or fraction thereof during which the failure to file or pay tax continues shall constitute a month for purposes of section 6651.(2) If the date prescribed for filing the return or paying tax is a date other than the last day of a calendar month, the period which terminates with the date numerically corresponding thereto in the succeeding calendar month and each such successive period shall constitute a month for purposes of section 6651.
40 Filing PenaltiesTaxpayer filed 2005 tax return on May 5, 2006, without requesting an extension.What is the total amount of his failure to file and failure to pay penalties if his total tax is $10,000 and he paid $7,500 through timely withholding and $2,500 with return filed on May 5, 2005?a. $ b. $ c. $750.00d. $ e. None of these
43 6. Calculate the penalty for not paying estimated taxes.
44 Estimated TaxesTaxpayers receiving income other than salaries & wages should pay quarterly estimated tax installmentsPayments should equal lesser of 90% of tax due or 100% (110% if AGI > $150K) of last year’s taxPenalty for underpayment of ES taxes based on interest on underpayment times amount of time outstandingSec. 6654
45 Estimated TaxesWe won’t calculate the underpayment penalty in class or on the test because that involves detailed “interest” type computations for the number of days of underpayment (late payment) for each quarterly payment. (Incidentally, quarterly payments are not quarterly: April 15, June 15, September 15, January 15)
46 Interest on Unpaid Taxes We won’t calculate interest on underpayments (late payments) in class or on the test because that involves detailed interest computations for the period of underpayment.Late payment interest applies to payments made after due date (generally April 15).Estimated tax penalties apply to period before due date of return.
47 [Sec. 6654(d)] A taxpayer had AGI of $98,000 and a total tax liability in 2005 of $20,000. In 2006, the taxpayer has a tax liability of $25,000. Withholding in 2006 $23,500. He will file his tax return for 2006 on April 10, To avoid the underpayment of estimated tax penalty for 2005, the taxpayer must:a. Pay the additional $1,500 due by April 15, 2007.b. Pay an additional $1,500 by January 15, c. File an annualized estimated tax computation. d. Do nothing, as he has satisfied the minimum tax payment requirements. IRS-2003
48 [Sec. 6654(d)] Repeat the preceding slide [Sec. 6654(d)] Repeat the preceding slide. Suppose his total tax for 2005 was $40,000 and his 2006 tax liability will be $50,000. His withholding will be $23,500.It is now November, Should she make estimated payments or increase withholding?
49 7. Describe more severe penalties, including the fraud penalty.
50 Severe PenaltiesPenalty for underpayment due to negligence or disregard of rules or regulations is 20% of underpaymentPenalty for substantial understatement exceeding greater of 10% of tax liability or $5,000 ($10,000 for a C corp) is 20% of underpaymentSec. 6662
51 Severe Penalties Civil fraud IRS has burden of proof Systematic omission from gross income or fictitious deductions or dependency claims...Civil fraud penalty is 75% of portion of underpayment attributable to fraudSec. 6663
52 Severe Penalties Criminal fraud IRS has burden of proof Prosecution may result from willful attempts to evade any tax, willful failure to file or willfully making returns taxpayer does not believe to be true and correct ...Maximum penalty is a fine of $100,000 ($500K for corp), 5 years in jail or both.Sec. 7201
53 [Sec. 6663] Ron’s tax returns were examined for 2006, and the agent proposed adjustments increasing income reported on Schedule C of the returns. The agent determined that the failure to report the income was intentional. The agent proposed a fraud penalty. The adjustment for 2006 was in the amount of $100,000. The fraud penalty should be:a. $50,000 b. $75,000c. $18,800 d. $28, IRS-2002
56 Statute of Limitations (1 of 2) Normal time limit is three years from later of due date or date filedFor substantial omissions, time limit is six yearsNo statute of limitations for fraudNo statute of limitations if a tax return is not filed
57 Statute of Limitations (2 of 2) Refund claimsTaxpayer not entitled to refund for overpayments unless claim for refund filed by later ofThree years from date original return is filed, ORTwo years from date they pay tax [This protects you when the IRS assesses more taxes near end of SOL period.]
58 Statute of Limitations Period of time beyond which legal actions or changes to the tax return cannot be made by taxpayer or IRS3 years from date of filing or due date of return (whichever is later)6 years if more than 25% of gross income inadvertently omitted (not excess deductions)No time limit for fraudulent returns (Burden of Proof on IRS)
59 Statute of Limitations Statute of Limitations. Jennifer did not file a tax return for 2000 because she honestly believed that no tax was due. In 2007, the IRS audits Jennifer and the agent proposes a deficiency of $500.What is the tax issue?
60 Statute of Limitations Solution: Will Jennifer be required to pay the $500 deficiency?Does the statute of limitations apply when no tax return is filed?
61 Statute of Limitations. On his 2004 tax return, Stewart inadvertently overstates deductions in excess of 25 percent of the adjusted gross income on the return. In 2005, the IRS audits Steward and the agent proposes a deficiency of $1,000.What is the issue?
62 Statute of Limitations. Solution: Can the IRS collect the deficiency of $1,000?Does the statute of limitations prohibit the assessment of the additional tax?
63 [Sec. 6502] Generally, the statute of limitations for the collection of income taxes is (Sec. 6502): a. Three years after the due date of the returnb. Three years after the tax is assessed c. Ten years after the tax is assessed d. Ten years from the last day of the tax period (calendar or fiscal) for which the return is filed IRS-2001
64 [Pg. 26] [Sec. 6501] Jackson Corp [Pg. 26] [Sec. 6501] Jackson Corp., a calendar-year corporation, mailed its 2003 tax return to the Internal Revenue Service by certified mail on Friday, March 11, The return, postmarked March 11, 2004, was delivered to the Internal Revenue Service on March 14, The statute of limitations on Jackson's corporate tax return begins on:a. December 31, b. March 11, 2004c. March 15, d. March 14, 2004CPA Nov. 1994
65 [Sec. 6511] Joe, a calendar year taxpayer, filed his federal income tax return, with a refund due, for tax year 2006 on April 1, 2007.he last day to timely file a claim for refund with respect to that return is:a. April 1, b. April 15, 2009.c. April 1, d. April 15, 2010.
66 [Sec. 6501(e)] Keen, a calendar‑year, individual taxpayer, reported a gross income of $100,000 on his 2005 income tax return. Keen inadvertently omitted from gross income was a $40,000 commission that should have been included in Keen filed his 2005 return on March 15, To collect the tax on the $40,000 omission, the Internal Revenue Service must assert a notice of deficiency no later thana. March 15, b. April 15, 2009.c. March 15, 2012 d. April 15, 2012
67 9. Explain from whom the government may collect unpaid taxes.
68 Liability for TaxIf spouses file a joint return, liability for taxes is joint and severalGovernment can collect from either spouse regardless of who has incomeTax may be collected from transferees and fiduciaries
69 Liability for Tax Innocent spouse relief -- if all met: Innocent spouse (IS) files a joint returnUnderstatement due to other spouse’s erroneous item(s) of filing returnIS did not know or had no reason to know of understatementInequitable to hold IS liableIS elects relief w/in two years after IRS begins collection efforts
70 10. Understand government imposed practice standards for tax practitioners.
71 Professional Responsibilities Tax professionals have responsibilities to both tax system and to clientsSources of GuidanceCircular 230AICPA Code of Professional ConductStatements on Standards for Tax Services
72 Tax Practice Issues (1 of 2) Tax preparer penaltiesIRS may impose various penalties on tax return preparers for misconductTreasury Department Circular 230Regulates the practice of attorneys, CPAs, enrolled agents, and enrolled actuaries before the IRS
73 Tax Practice Issues (2 of 2) Tax accounting and lawAccountants must be careful to avoid the unauthorized practice of lawAccountant-client privilegeSimilar to attorney-client privilege, but it only applies in very limited circumstances
74 Penalties may not be covered by malpractice insurance Professional ResponsibilitiesAvoidance versus evasionPreparer penaltiesPenalties may not be covered by malpractice insurancePenalties are not deductiblePenalties may result in an IRS review of the preparer’s entire practiceCriminal tax evasion penalties include fines and prison
75 [Sec. 6695] If you are a tax preparer, which of these penalties may be assessed to you? a. $50 per return for failure to furnish a copy of the return to the taxpayerb. $50 per return for failure to furnish preparer’s identifying number to the taxpayer c. $50 per return for failure to maintain copies of returns prepared or maintain a listing of clients d. All of these
76 [Sec. 6694(a)] Willie is the owner of a CPA accounting firm [Sec. 6694(a)] Willie is the owner of a CPA accounting firm. Willie prepared an income tax return for a client and opined that a deduction can be claimed for a bad debt. If the return is examined and the deduction is disallowed, Willie will not be subject to a penalty for an unrealistic position if at a minimum:a. The position on the return had a 10% probability of being sustained on the merits.b. The position on the return had at least a one-in-three chance of being sustained on its merits. c. The position will “more likely than not” be sustained. d. All of these IRS-2001
77 [Pg. 34] (Circular 230) Mike is an enrolled agent. Widget, Inc [Pg. 34] (Circular 230) Mike is an enrolled agent. Widget, Inc. is an accrual basis taxpayer. In 2006, while preparing Widget’s 2005 return, Mike discovered that Widget failed to include income on its 2004 return that Widget received in 2005, but that should have been included in income in 2004 under the accrual method of accounting. What must Mike do?a. Advise Widget of the error and the consequences of the error.b. Include the income on the 2005 return. c. Refuse to prepare Widget’s 2006 return until Widget agrees to amend its 2000 return to include the amount in income. d. Change Widget to the cash method of accounting. IRS-2003
78 Sources of Guidance.Name three sources of guidance for tax professionals.
79 Answer.Treasury Circular 230: Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Actuaries and Appraisers before the Internal Revenue Service, and the AICPA’s Code of Professional Conduct and Statements on Standards for Tax Services all contain guidelines for tax professionals.
80 SSTS. Statement on Standards for Tax Services No SSTS. Statement on Standards for Tax Services No. 4 states that a CPA may use estimates in completing a tax return.When would using estimates be appropriate in tax return preparation?
81 Solution:Estimates are appropriate when records are missing (for example, a flood or fire destroying records) or precise information is not available at the time of filing the tax return.
82 Georgia researched a major tax plan for a client. Evaluating Authority.Georgia researched a major tax plan for a client.She discovered a case in a circuit that is not the client’s circuit that is unfavorable to the client.She has also found a revenue ruling that appears to have facts similar to her client’s that sanctions the preferred alternative.
83 Evaluating Authority.Solution:Can Georgia recommend the tax plan to her client without possible adverse consequences?Does the plan meet the requirement of having a realistic possibility of being sustained on its merits?