1. 15-1 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

2. 15-2 ADMINISTRATIVE PROCEDURES (1 of 2)  Role of the IRS  Audits of tax returns  Requests for rulings  Due dates  Failure-to-file/pay-penalties  Estimated taxes ©2010 Pearson Education, Inc. Publishing as Prentice Hall

3. 15-3 ADMINISTRATIVE PROCEDURES (2 of 2)  Other more severe penalties  Statute of limitations  Liability for tax  Tax practice issues ©2010 Pearson Education, Inc. Publishing as Prentice Hall

4. 15-4 Role of the IRS (1 of 2)  Enforcement of tax laws  Collection of taxes due  Interpretation of Internal Revenue Code ©2010 Pearson Education, Inc. Publishing as Prentice Hall

5. 15-5 Role of the IRS Organization of the IRS (2 of 2) ©2010 Pearson Education, Inc. Publishing as Prentice Hall

6. 15-6 Audits of Tax Returns (1 of 3) Type of Return Audited20062005 Individual returns1.00% C corporations1.30%1.20% Partnerships0.40% S corporations0.50%0.40% Fiduciary0.10% Individuals > $1M inc9.30%n/a Corps w/ assets>$250M27.0%44.1% ©2010 Pearson Education, Inc. Publishing as Prentice Hall

7. 15-7 Audits of Tax Returns (2 of 3)  Document matching  100% audit rate  E.g., wages, interest, state income taxes, real estate taxes, home mortgage interest  Returns selected for audit by discriminant function & other means  27% of returns selected in 2006 w/DIF  NRP exams less intrusive than TCMP ©2010 Pearson Education, Inc. Publishing as Prentice Hall

8. 15-8 Audits of Tax Returns (3 of 3)  Large and mid-sized business division  Ranks issues that might arise in an audit  Lifestyle audits  Types of audits  Correspondence audit  Office audit  Field audit  Appeals process  Burden of proof ©2010 Pearson Education, Inc. Publishing as Prentice Hall

9. 15-9 Appeals Process (1 of 3)  Taxpayer first meet w/ revenue agent  If taxpayer disagrees w/ findings, IRS sends thirty-day letter  Taxpayer has 30 days to request a conference w/ appeals officer  Taxpayer meets with appeals officer ©2010 Pearson Education, Inc. Publishing as Prentice Hall

10. 15-10 Appeals Process (2 of 3)  If no agreement with appeals officer reached, IRS issues ninety-day letter  Taxpayer has 90 days to file petition w/ Tax Court or pay the tax  Taxpayer must pay tax first to litigate in either District Court or U.S. Court of Federal Claims ©2010 Pearson Education, Inc. Publishing as Prentice Hall

11. 15-11 Appeals Process (3 of 3)  Either party may appeal court decision to Circuit Court  Usually final appeal as Supreme Court rarely hears tax cases ©2010 Pearson Education, Inc. Publishing as Prentice Hall

12. 15-12 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 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

13. 15-13 Burden of Proof (2 of 2)  Burden of proof (continued)  Cooperates w/ reasonable requests  Qualifies as a natural person or legal person w/ net worth  $7 million ©2010 Pearson Education, Inc. Publishing as Prentice Hall

14. 15-14 Requests for Rulings (1 of 2)  Allows taxpayer to learn how IRS will treat a particular transaction before the transaction is completed  Request made in writing  IRS has option whether or not to respond ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15. 15-15 Requests for Rulings (2 of 2)  When rulings are desirable  Transaction is proposed  Potential tax liability is high  Law is unsettled or unclear ©2010 Pearson Education, Inc. Publishing as Prentice Hall

16. 15-16 Due Dates (1 of 2)  Returns for individuals, fiduciaries and partnerships  Fifteenth day of fourth month following year-end of entity  C corporations and S corporations  Fifteenth day of third month following year-end of entity ©2010 Pearson Education, Inc. Publishing as Prentice Hall

17. 15-17 Due Dates (2 of 2)  Extensions available  Automatic 6-mo extension generally available  May request additional time if out of country  Some entities only get a 5-mo extension  Tax must be paid by original due date to avoid penalties even if on extension  Interest due on tax not timely paid ©2010 Pearson Education, Inc. Publishing as Prentice Hall

18. 15-18Failure-to-File/Pay-Penalties  Failure to file penalty  5% per month of net tax due; 25% max  Fraudulent failure to file is 15% per month; 75% max  Failure to pay incurs a penalty of 0.5% per month up to 25%  Failure to pay + failure to file = 5%/mo  See Topic Review 1 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

19. 15-19 Estimated Taxes (1 of 2)  Taxpayers receiving non- wages/salary income should pay quarterly estimated tax installments  E.g., interest, flowthrough income, dividends  Payments should equal lesser of 90% of tax due or 100% (110% if AGI > $150K) of last year’s tax ©2010 Pearson Education, Inc. Publishing as Prentice Hall

20. 15-20 Estimated Taxes (2 of 2)  Penalty for underpayment of ES taxes based on interest on underpayment times amount of time outstanding  Exceptions to penalty  <$1,000 underwithheld  No taxes owed during prior year ©2010 Pearson Education, Inc. Publishing as Prentice Hall

21. 15-21 Other More Severe Penalties (1 of 4)  Negligence penalty (underpayment)  Due to negligence or disregard of rules/regs w/o intent to defraud  20% of underpayment  Substantial understatement  > of 10% of tax liability or $5,000  $10,000 for a C corp  20% of underpayment ©2010 Pearson Education, Inc. Publishing as Prentice Hall

22. 15-22 Other More Severe Penalties (2 of 4)  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 fraud ©2010 Pearson Education, Inc. Publishing as Prentice Hall

23. 15-23 Other More Severe Penalties (3 of 4)  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 $100K ($500K for corp), five years in jail or both. ©2010 Pearson Education, Inc. Publishing as Prentice Hall

24. 15-24 Other More Severe Penalties (4 of 4)  Willful failure to pay any tax or file a return  Max penalty $25K ($100K for corp), up to a year in prison, or both  Government must prove that taxpayer owes additional tax ©2010 Pearson Education, Inc. Publishing as Prentice Hall

25. 15-25 Statute of Limitations (1 of 2)  General 3-year rule  3 yrs from later of due date or date filed  6-year rule for substantial omissions  Applies if gross income omitted >25% of gross income shown on return  Fraud  No statute of limitations ©2010 Pearson Education, Inc. Publishing as Prentice Hall

26. 15-26 Statute of Limitations (2 of 2)  No limitation period if return not filed  Refund claims  Taxpayer not entitled to refund for overpayments unless claim for refund filed by later of  Three years from date original return is filed, OR  Two years from date they pay tax ©2010 Pearson Education, Inc. Publishing as Prentice Hall

27. 15-27 Liability for Tax (1 of 2)  If spouses file a joint return, liability for taxes is joint and several  Government can collect from either spouse regardless of who has income  Tax may be collected from transferees and fiduciaries ©2010 Pearson Education, Inc. Publishing as Prentice Hall

28. 15-28 Liability for Tax (2 of 2)  Innocent spouse relief available if all met:  Innocent spouse (IS) files joint return  Understatement due to other spouse’s erroneous item(s) of filing return  IS did not know or had no reason to know of understatement  Inequitable to hold IS liable  IS elects relief w/in two years after IRS begins collection efforts ©2010 Pearson Education, Inc. Publishing as Prentice Hall

29. 15-29 Tax Practice Issues (1 of 4)  Tax preparer penalties  IRS may impose various penalties on tax return preparers for misconduct  Treasury Department Circular 230  Regulates the practice of attorneys, CPAs, enrolled agents, and enrolled actuaries before the IRS  Lists best practices for tax advisors ©2010 Pearson Education, Inc. Publishing as Prentice Hall

30. 15-30 Tax Practice Issues (2 of 4)  Tax accounting and law  Accountants must be careful to avoid the unauthorized practice of law  Accountant-client privilege  Similar to attorney-client privilege, but it only applies in very limited circumstances ©2010 Pearson Education, Inc. Publishing as Prentice Hall

31. 15-31 Tax Practice Issues (3 of 4)  Sec. 6694 preparer penalty  Max of $1,000 or 50% of income derived from the return if she lacked substantial authority for the position  Less stringent than the “more likely than not” standard (>50%) ©2010 Pearson Education, Inc. Publishing as Prentice Hall

32. 15-32 Tax Practice Issues (4 of 4)  Statements on Standards for Tax Services  Ethical guidance for CPAs engaged in tax practice  Professionally enforceable ©2010 Pearson Education, Inc. Publishing as Prentice Hall

33. Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com 15-33 ©2010 Pearson Education, Inc. Publishing as Prentice Hall