Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Principles of Taxation Chapter 17 The Tax Compliance Process

Slide 17-2 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Objectives  Late-filing and late-payment penalties  Statute of limitations  3 types of IRS audits  Negligence or civil fraud, criminal fraud penalties  Trial and appeal courts  Transferee liability and innocent spouse rule

Slide 17-3 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Filing and payment requirements  Due dates  Individual: 4/15, extend to 8/15 or 10/15  Corporate: 15th day of 3rd month, extend to 15th day of 9th month  Payments are due by ORIGINAL due date.  Late payments TO IRS incur interest.  Refunds paid by IRS within 45 days of filing do not carry interest.

Slide 17-4 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Late-Filing and Late-Payment Penalties  Penalty is a function of taxes OWED. If taxpayer is due a refund, there is no late filing penalty.  Combined penalty = 5% of balance due per month late for 5 months, then 1/2 of 1 percent for up to an additional 45 months.

Slide 17-5 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Statute of Limitations  The IRS has three years from the later of  statutory due date (4/15) or  date actually filed  If the taxpayer omits > 25% of gross income, IRS has six (6) years.  Fraudulent returns are open indefinitely.

Slide 17-6 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 The Audit Process  Corporate returns selected mainly by size.  Individual returns are scored by IRS using discriminant function system.  Returns audited more frequently:  high income,  high deduction  personal business (Schedule C)

Slide 17-7 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Types of audits  Correspondence - routine audits conducted by mail - send in documentation, explanations, etc.  Office exams take place at an IRS district office - limited scope.  Field exams take place at the taxpayer’s place of business - these are broader in scope.  Deficiency is the additional tax owed. If interest is charged, it is deductible if the taxpayer is a corporation, but only for individuals if the liability is related to the operation of the individual’s business.

Slide 17-8 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Noncompliance penalties - Negligence  Applies when the IRS determines that the “taxpayer did not make a good faith effort to compute the correct tax.”  Penalty = 20% of any underpayment attributable to the taxpayer’s failure to make this reasonable attempt.  Negligence versus mistake?  complexity of issues, taxpayer’s education/experience, cooperation with IRS, advice from professionals

Slide 17-9 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Noncompliance penalties - Civil Fraud  75% of tax underpayment due to fraud.  Fraud is the “intent to cheat the government by deliberately understating tax liability.”  Systematic omission of substantial amounts of income  Deduction of nonexistent expenses  2 sets of books

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Noncompliance penalities - Criminal Fraud  Tax evasion = criminal fraud  Up to $100,000 individual, $500,000 corporation  Prison  IRS must show guilt beyond a reasonable doubt

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Tax return preparer penalties  Failure to sign - $50 per failure  Taking a position with no realistic possibility of sustaining on its merit - $250 per return.  Intentional disregard of rules a regulations - $1000 per return.

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Contesting audit results - Appeal  See IRS Problem Resolution department - if this fails,  Appeal is 1st step  See Publication 5, Appeal Rights and Preparation of Protest for Unagreed Case

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Contesting audit results - Litigation  Trial Courts  U.S. Tax Court (single judge or panel of judges) - taxpayer does not have to pay deficiency first  taxpayer pays deficiency and sues for refund. Advantage - interest stops accruing should taxpayer lose.  U.S. District Court (jury trial) or  U.S. Court of Federal Claims(single judge or panel of judges)

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Contesting audit results - Litigation  Appeal Courts  U.S. Circuit Courts of Appeal  U.S. Supreme Court (hears very few tax cases)

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 IRS Collections  IRS can seize property  When corporations are dissolved, shareholders have transferee liability for back taxes up to the value of any assets received on liquidation.  Spouses may not be subject for deficiencies attributable to the other spouse under the innocent spouse rule.  Doesn’t apply if spouse received benefit from evaded/avoided taxes.