1 Chapter 15: Administrative Procedures. 2 ADMINISTRATIVE PROCEDURES (1 of 2) n Role of the IRS n...

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Chapter 15:Administrative

Procedures

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ADMINISTRATIVE ADMINISTRATIVE PROCEDURESPROCEDURES (1 of 2) (1 of 2)

Role of the IRS Audits of tax returns Requests for rulings Due dates Failure-to-file/pay-penalties Estimated taxes

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ADMINISTRATIVE ADMINISTRATIVE PROCEDURESPROCEDURES (2 of 2) (2 of 2)

Severe penalties Statute of limitations Liability for tax Tax practice issues

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Role of the IRSRole of the IRS(1 of 2)(1 of 2)

Enforcement of tax laws Collection of taxes due Interpretation of Internal Revenue

Code

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Role of the IRSRole of the IRSOrganization of the IRS (2 of 2)Organization of the IRS (2 of 2)

C h ie f C o un c il N a t' l O ff ice S ta ff

A g en cy -W ideS ha red S erv ices

A pp ea lsT ype t i t le he re

W a ge & In ve s t.In com e

S M a ll B us &S e lf-E m p lo yed

L a rg e & M id -sizeB u s in e ss

T axE xem pt

O pe a rtingD iv is io ns

C IOT ype t i t le he re

N at' l T a xp ayerA dv o ca te

C o m m iss ion e r/D e p u ty C om m .

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Audits of Tax ReturnsAudits of Tax Returns(1 of 2)(1 of 2)

1999 statistics of returns audited– Individual returns: 0.49% – C corporations: 1.12% – Partnerships: 0.33%– S corporations: 0.55%– Fiduciary: 0.22%– Individuals w/ > $100K income: 0.84%– Corps w/ assets > $250M: 31.4%

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Audits of Tax ReturnsAudits of Tax Returns(2 of 2)(2 of 2)

Returns selected for audit by discriminant function & other means

Types of audits– Correspondence audit– Office audit– Field audit

Appeals process Burden of proof

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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

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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

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Appeals Process(3 of 3)

Either party may appeal court decision to Circuit Court– Usually final appeal as Supreme Court

rarely hears tax cases

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Burden of Proof(1 of 2)

In civil court cases burden of proof on factual matters shifts to IRS if taxpayer does following:– Introduces “credible evidence”

– Complies w/ recordkeeping & substantiation requirements of IRC

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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

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Requests for RulingsRequests for Rulings

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

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Due DatesDue Dates

Returns for individuals, fiduciaries and partnerships are due on or before fifteenth day of fourth month following year-end of entity

Extensions for filing deadline available, but tax must be paid by original due date to avoid penalties

Interest due on tax not timely paid

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Failure-to-File/Pay-Failure-to-File/Pay-PenaltiesPenalties

Failure to file penalty – 5% per month or fraction thereof of net tax due w/ a

25% maximum– Fraudulent failure to file is 15% per month or fraction

thereof w/ a maximum of 75% Failure to pay incurs a penalty of 0.5% per month

up to 25% See Topic Review C15-1

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Estimated TaxesEstimated Taxes

Taxpayers receiving income other than salaries & wages should pay quarterly estimated tax installments– Payments should equal lesser of 90% of tax

due or 100% of last year’s tax– Penalty for underpayment of ES taxes based

on interest on underpayment times amount of time outstanding

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Severe PenaltiesSevere Penalties(1 of 3)(1 of 3)

Penalty for underpayment due to negligence or disregard of rules or regulations is 20% of underpayment

Penalty for substantial understatement exceeding greater of 10% of tax liability or $5,000 ($10,000 for a C corp) is 20%

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Severe PenaltiesSevere Penalties(2 of 3)(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

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Severe PenaltiesSevere Penalties(3 of 3)(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 $100,000, five years in jail or both.

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Statute of LimitationsStatute of Limitations(1 of 2)(1 of 2)

Normal time limit is three years from later of due date or date filed

For substantial omissions, time limit is six years

No statute of limitations for fraud No statute of limitations if a tax return is

not filed

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Statute of LimitationsStatute of Limitations(2 of 2)(2 of 2)

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

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Liability for TaxLiability for Tax

If spouses file a joint return, liability for taxes is joint and several– Government can collect from either spouse

regardless of who has income– Innocent spouse provision may protect a naive

taxpayer– Tax may be collected from transferees and

fiduciaries

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Tax Practice IssuesTax Practice Issues(1 of 2)(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

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Tax Practice IssuesTax Practice Issues(2 of 2)(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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