Income Tax Fundamentals 2010 Gerald E. Whittenburg & Martha Altus-Buller Student’s Copy 2010 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 2010 Cengage Learning

.  This act sought to structurally and operationally change the IRS by creating operating units along functional lines °Service and Enforcement arm collects taxes and audits tax returns °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 2010 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 2010 Cengage Learning

.  When tax return is selected for examination, an agent is assigned  There are three possible results from an audit ◦ 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 2010 Cengage Learning

.  Interest is charged to taxpayer for late taxes ◦ 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: ◦ First quarter % ◦ Second quarter % ◦ Third quarter % ◦ Fourth quarter % 2010 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 ◦ 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 2010 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 ◦ See page for full list of prepare penalties 2010 Cengage Learning

.  In most civil tax cases the IRS has historically placed burden of proof on taxpayer  IRS Restructuring & Reform Act of 1998 changed tax law to shift burden of proof to IRS in many cases ◦ 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 ◦ In certain situations, burden of proof still rests with the taxpayer 2010 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 IRS  Part I – Declaration of Taxpayer Rights ◦ Directs taxpayer to other IRS publications for more details  Part II –Examinations, Appeals, Collections & Refunds Note: See pages – for Taxpayer Bill of Rights 2010 Cengage Learning