1. Chapter 12 Tax Administration & Tax Planning
Income Tax Fundamentals 2013
Student Slides
Gerald E. Whittenburg
Martha Altus-Buller
Steven Gill
2013 Cengage Learning

2. Internal Revenue Service (IRS)
Congress creates tax law and the IRS is charged with enforcing it
Includes assessment and collection departments
Is a branch of the Treasury Department
Is headquartered in Washington DC
Commissioner of IRS is appointed by president and approved by Congress
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3. IRS Restructuring Act of 1998
This act sought to structurally and operationally change the IRS by creating operating units along functional lines
Service & Enforcement arm collects taxes and audits tax returns, including two factions:
Small Business/Self-Employed (SB/SE) unit serves SB/SE customers
Wages & Investment (W&I) division helps taxpayers that primarily pay taxes through withholdings comply with applicable laws
See Figure 12.1 on page 12-3 for complete IRS organizational chart
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4. Back Tax Debt Payment Options
IRS wants to help taxpayer work towards resolution and compliance
Can ask for short administrative extension of time to pay debt
Can pay in installments over time
Can craft “offer in compromise” – used when it is unlikely that taxpayer will ever pay debt in full
Note: IRS can also place lien on taxpayer’s
assets if debt is more than $10,000
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5. Selection of Returns for Audits
Tax returns are selected for audit based upon a multitude of factors
Correspondence audit – handled by mail and usually involves questions about W-2s/1099s, certain itemized deductions or the earned income credit
Office audit – conducted when individual taxpayer (usually without business involvement) is required to take records to district office to substantiate income, deductions and/or credits
Field audit – conducted when records too extensive to take to IRS office (usually involves taxpayer engaged in business), generally for taxpayers with substantial business activities
Note: Most common process for selecting returns for audit is based on
statistical sampling, called DIF (Discriminant Function) score
2013 Cengage Learning

6. Failure to File Penalties
If a tax return is not filed by its due date (with extensions), IRS will impose penalties
Penalty of 5% of tax is due per month or 15% if fraudulently failing to file
Limited to 25% in total (or 75% in total if fraudulent)
No penalty if no tax due or refund forthcoming
If tax return is not filed within 60 days of due date (with extensions), minimum penalty is lesser of $135 or total amount of taxes due with return
The failure-to-file penalty is reduced by failure-to-pay penalty, if both penalties apply
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7. Statute of Limitations
A taxpayer may not amend, nor may the IRS assess additional taxes, on a tax return for which the three year statute of limitations has expired
Exceptions to three year statute
No statute of limitations if it is a fraudulent tax return
There is six year statute of limitations if amount of gross income omitted exceeds 25% of total gross income
Statute of limitations for deduction of a bad debt or worthless security is 7 years
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8. Tax Confidentiality Privilege
The attorney-client privilege has been extended in limited circumstances to nonattorneys who are authorized to practice in front of the IRS
CPAs and enrolled agents
This may be asserted only in a noncriminal tax proceeding before the IRS or federal courts
This privilege does not extend to written communications between tax practitioner and a corporation in connection with promotion of tax shelter
Does not automatically extend to state tax situations
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9. Taxpayer Bill of Rights
Document addresses taxpayers rights
Requires the IRS to inform taxpayers of their rights and remedies when dealing with the Service
It provides remedies for resolving disputes with IRS
Has been amended several times since issuance
Part I – Declaration of Taxpayer Rights
Directs taxpayer to other IRS publications for more details
Part II –Examinations, Appeals, Collections & Refunds
Note: See pages and for Taxpayer Bill of Rights
2013 Cengage Learning

10. Tax Planning
Tax planning refers to arranging one’s financial affairs so as to minimize tax liability
There are two types of financial transactions
In an “open” transaction, tax planning may still occur as transaction has not been culminated
In a “closed” transaction, tax consequences are already finalized and presentation to the IRS is limited to identifying facts in the most favorable light possible
Tax planning based on marginal tax rate
This is the rate applied to the “next dollar of income” or the “next dollar of deduction” and should be used when engaging in tax planning (not the average tax rate)
If illegal methods are used, this is called ‘tax evasion’
2013 Cengage Learning