VOLUNTARY COMPLIANCE BY TAXPAYER - THE TAX RETURN Requirements: l Must use correct form l Must include sufficient information to compute tax liability l Must be signed under penalty of perjury
Filing Return and Payment of Taxes l Must be timely filed l Tax liability must be paid by return due date without regard to extensions
Filing and Payment Requirements l Due dates Individual: 4/15, extend to 8/15 or 10/15 Corporate: 15th day of 3rd month, extend to 15th day of 9th month l Payments are due by ORIGINAL due date. l Late payments TO IRS incur interest. l Refunds paid by IRS within 45 days of filing do not carry interest.
Statute of Limitations l The IRS has three years from the later of statutory due date (4/15) or date actually filed l If the taxpayer omits > 25% of gross income, IRS has six (6) years. l Fraudulent returns are open indefinitely.
The Audit Process l Corporate returns selected mainly by size. l Individual returns are scored by IRS using discriminant function system. l Returns audited more frequently: high income, high deduction personal business (Schedule C)
Types of Audits l Correspondence - routine audits conducted by mail - send in documentation, explanations, etc. l Office exams take place at an IRS district office - limited scope. l Field exams take place at the taxpayer’s place of business - these are broader in scope. l Deficiency is the additional tax owed. If interest is charged, it is deductible if the taxpayer is a corporation, but only for individuals if the liability is related to the operation of the individual’s business.
Procedure When IRS Finds Taxpayer Position Incorrect
Noncompliance Penalties - Negligence l Applies when the IRS determines that the “taxpayer did not make a good faith effort to compute the correct tax.” l Penalty = 20% of any underpayment attributable to the taxpayer’s failure to make this reasonable attempt. l Negligence versus mistake? complexity of issues, taxpayer’s education/experience, cooperation with IRS, advice from professionals
Noncompliance Penalties - Civil Fraud l 75% of tax underpayment due to fraud. l Fraud is the “intent to cheat the government by deliberately understating tax liability.” Systematic omission of substantial amounts of income Deduction of nonexistent expenses 2 sets of books
Noncompliance Penalties - Criminal Fraud l Tax evasion = criminal fraud l Up to $100,000 individual, $500,000 corporation l Prison l IRS must show guilt beyond a reasonable doubt
Tax Return Preparer Penalties l Failure to sign - $50 per failure l Taking a position with no realistic possibility of sustaining on its merit - $250 per return. l Intentional disregard of rules a regulations - $1000 per return. l Provide copy of return to taxpayer
l Failure to do the following will result in the imposition of penalties: Provide copy of return to taxpayer Accurately report amount of tax liability TAX RETURN PREPARER PENALTIES
TAXPAYER PENALTIES l Accuracy- Related Negligence or disregard Substantially understated income tax l Failure to file l Failure to pay tax due l Underpayment due to fraud l Filing a frivolous tax return l Failure to file l Failure to pay tax due
Contesting Audit Results - Appeal l See IRS Problem Resolution department - if this fails, l Appeal is 1st step l See Publication 5, Appeal Rights and Preparation of Protest for Unagreed Case
IRS Collections l IRS can seize property l When corporations are dissolved, shareholders have transferee liability for back taxes up to the value of any assets received on liquidation. l Spouses may not be subject for deficiencies attributable to the other spouse under the innocent spouse rule. Doesn’t apply if spouse received benefit from evaded/avoided taxes.