15-1 ©2008 Prentice Hall, Inc.

15-2 ©2008 Prentice Hall, Inc. 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

15-3 ©2008 Prentice Hall, Inc. ADMINISTRATIVE PROCEDURES (2 of 2)  Other more severe penalties  Statute of limitations  Liability for tax  Tax practice issues

15-4 ©2008 Prentice Hall, Inc. Role of the IRS (1 of 2)  Enforcement of tax laws  Collection of taxes due  Interpretation of Internal Revenue Code

15-5 ©2008 Prentice Hall, Inc. Role of the IRS Organization of the IRS (2 of 2) Commissioner/ Deputy Commissioner Shared Services Agency Wide Shared Services 4,900 employees Agency Wide Info Systems Services 7,000 employees Functional Units Appeals 1,900 employees Taxpayer Advocate Service 1,600 employees Criminal Investigation 4,500 employees Operating Divisions Wage & Investment Income 21,000 employees Small Business & SE 39,000 employees Large & Mid-size Business 9,500 employees Tax Exempt & Gov’t Entities 2,800 employees Chief Council 2,600 employees National Office Staff 1,000 employees

15-6 ©2008 Prentice Hall, Inc. Audits of Tax Returns (1 of 3) Type of Return Audited Individual returns0.93%0.77% C corporations1.24%0.71% Partnerships0.33%0.26% S corporations0.18%0.19% Fiduciary0.12% Individuals > $100K inc1.41%0.99% Corps w/ assets>$250M44.1%20.0%

15-7 ©2008 Prentice Hall, Inc. 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  29% of returns selected by using DIF  NRP exams less intrusive than TCMP  Lifestyle audits

15-8 ©2008 Prentice Hall, Inc. Audits of Tax Returns (3 of 3)  Types of audits  Correspondence audit  Office audit  Field audit  Appeals process  Burden of proof

15-9 ©2008 Prentice Hall, Inc. 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

15-10 ©2008 Prentice Hall, Inc. 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

15-11 ©2008 Prentice Hall, Inc. Appeals Process (3 of 3)  Either party may appeal court decision to Circuit Court  Usually final appeal as Supreme Court rarely hears tax cases

15-12 ©2008 Prentice Hall, Inc. 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

15-13 ©2008 Prentice Hall, Inc. 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

15-14 ©2008 Prentice Hall, Inc. 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

15-15 ©2008 Prentice Hall, Inc. Requests for Rulings (2 of 2)  When rulings are desirable  Transaction is proposed  Potential tax liability is high  Law is unsettled or unclear

15-16 ©2008 Prentice Hall, Inc. 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

15-17 ©2008 Prentice Hall, Inc. Due Dates (2 of 2)  Extensions available  Automatic 6-month extension generally available  May request additional time if out of country  Tax must be paid by original due date to avoid penalties even if on extension  Interest due on tax not timely paid

15-18 ©2008 Prentice Hall, Inc.Failure-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 C15-1

15-19 ©2008 Prentice Hall, Inc. 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

15-20 ©2008 Prentice Hall, Inc. 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

15-21 ©2008 Prentice Hall, Inc. Other More Severe Penalties (1 of 3)  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

15-22 ©2008 Prentice Hall, Inc. Other More Severe Penalties (2 of 3)  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

15-23 ©2008 Prentice Hall, Inc. Other More Severe Penalties (3 of 3)  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 $25,000 ($100K for corp), five years in jail or both.

15-24 ©2008 Prentice Hall, Inc. 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

15-25 ©2008 Prentice Hall, Inc. 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

15-26 ©2008 Prentice Hall, Inc. 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

15-27 ©2008 Prentice Hall, Inc. 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

15-28 ©2008 Prentice Hall, Inc. Tax Practice Issues (1 of 2)  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

15-29 ©2008 Prentice Hall, Inc. Tax Practice Issues (2 of 2)  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

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