Income Tax Fundamentals 2009 Gerald E. Whittenburg & Martha Altus-Buller Student’s Copy 2009 Cengage Learning

.  Congress creates tax law and the IRS enforces 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 2009 Cengage Learning

.  This act sought to structurally and 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  Term of IRS Commissioner limited to five years 2009 Cengage Learning

.  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 2009 Cengage Learning

.  When tax return is selected for examination, an agent is assigned to audit  There are three possible results 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 – Cengage Learning

.  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 %  2 nd quarter %  3 rd quarter %  4 th quarter % 2009 Cengage Learning

.  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 - 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 security is seven years 2009 Cengage Learning

.  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 2009 Cengage Learning

.  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 2009 Cengage Learning

.  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 – Cengage Learning