1. ©2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Chapter 12 Tax Administration & Tax Planning Income Tax Fundamentals 2007 Gerald E. Whittenburg & Martha Altus-Buller

2. ©2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Internal Revenue Service [IRS]  Congress creates tax law and the IRS enforces it. IRS Includes assessment and collection departments Is branch of the Treasury Department Is headquartered in Washington DC  Commissioner of IRS is appointed by President and approved by Congress

3. ©2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. IRS Restructuring Act of 1998  This act sought to structurally & operationally change the IRS by creating operating units that serve particular groups of like-kind taxpayers  Created independent Oversight Board  Created independent National Taxpayer Advocate

4. ©2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Examination of Records  IRS has authority to examine taxpayers’ accounting records and books in a process called an audit  IRS can summon taxpayers and require them to appear before the IRS and produce necessary accounting records IRS may also summon taxpayer records from third parties [CPAs, brokers, etc.] Taxpayer should enlist professional tax advice if IRS summon records

5. ©2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Appeals Process  When tax return is selected for examination, an agent is assigned to audit  There are three possible results from an audit Agent determines that there are no changes Agent and taxpayer agree that there is a change in tax liability Agent and taxpayer disagree on outcome  In this scenario, taxpayer may appeal through established appeals procedures See Figures 2 and 3 on pp. 12-6 – 12-7

6. ©2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Interest  Interest is charged to taxpayer for late taxes For example, prior year audit reveals tax due Interest paid is nondeductible consumer interest  Interest is paid to the taxpayer for refund Prior year audit reveals refund due Interest received from IRS is income Interest rate is adjusted quarterly based on the short-term federal rate plus 3 percentage points Sample of recent rates:  1 st quarter 2006 7%  2 nd quarter 2006 7%  3 rd quarter 2006 8%  4 th quarter 2006 8%

7. ©2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Statute of Limitations  A taxpayer may not amend, nor may the IRS assess additional taxes, on a tax return for which the statute of limitations has expired, generally this is three years from due date  Exceptions No statute of limitations if it is a fraudulent tax return Becomes six years if amount of gross income omitted exceeds 25% of total gross income Statute of limitations for deduction of a bad debt or worthless securities is seven years

8. ©2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Statute of Limitations  If IRS and taxpayer agree, Form 872 may be signed that allows for extension of statute of limitations  If tax deficiency has been assessed by the IRS within the period of the statute, then government has ten years from the date of assessment to collect the tax due

9. ©2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Tax Practitioners  The IRS does not prescribe any minimum level of education for tax preparation  Only CPAs, attorneys or enrolled agents may represent clients at IRS proceedings  There are a multitude of preparer penalties For example, if tax preparer does not exercise due diligence, tax returns are not signed, or copy is not provided to clients, the tax preparer may be assessed a penalty

10. ©2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Burden of Proof  Historically, IRS placed burden of proof on taxpayer in most civil tax cases  IRS Restructuring & Reform Act of 1998 changed tax law to shift burden of proof to IRS in many cases When corporation, trust or partnership has net worth > $7 million, burden of proof rests with taxpayer Burden of proof automatically shifts to IRS in two situations  IRS uses statistics to reconstruct an individual’s income  Court proceeding against an individual taxpayer involves penalty/addition to tax

11. ©2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Taxpayer Bill of Rights  Document addresses taxpayers rights  Requires the IRS to inform taxpayers of their rights when dealing with the Service It provides remedies for resolving disputes with the IRS  Part I – Declaration of Taxpayer Rights Directs taxpayer to other IRS publications for more details  Part II –Examinations, Appeals, Collections & Refunds  See pp. 12-17 – 12-18