15-1 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-2 ADMINISTRATIVE PROCEDURES (1 of 2)  Role of the IRS  Audits of tax returns  Requests for rulings  Due dates  Failure-to-file/pay-penalties  Estimated taxes ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-3 ADMINISTRATIVE PROCEDURES (2 of 2)  Other more severe penalties  Statute of limitations  Liability for tax  Tax practice issues ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-4 Role of the IRS (1 of 2)  Enforcement of tax laws  Collection of taxes due  Interpretation of Internal Revenue Code ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-5 Role of the IRS Organization of the IRS (2 of 2) ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-6 Audits of Tax Returns (1 of 3) Type of Return Audited Individual returns1.00%0.93% C corporations1.20%1.24% Partnerships0.40%0.33% S corporations0.40%0.18% Fiduciary0.10%0.12% Individuals > $100K inc1.41% Corps w/ assets>$250M44.1% ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-7 Audits of Tax Returns (2 of 3)  Document matching  100% audit rate  E.g., wages, interest, state income taxes, real estate taxes, home mortgage interest  Returns selected for audit by discriminant function & other means  27% of returns selected by using DIF  NRP exams less intrusive than TCMP  Lifestyle audits ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-8 Audits of Tax Returns (3 of 3)  Types of audits  Correspondence audit  Office audit  Field audit  Appeals process  Burden of proof ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-9 Appeals Process (1 of 3)  Taxpayer first meet w/ revenue agent  If taxpayer disagrees w/ findings, IRS sends 30-day letter  Taxpayer has 30 days to request a conference w/ appeals officer  Taxpayer meets with appeals officer ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-10 Appeals Process (2 of 3)  If no agreement with appeals officer reached, IRS issues 90-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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-11 Appeals Process (3 of 3)  Either party may appeal court decision to Circuit Court  Usually final appeal as Supreme Court rarely hears tax cases ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-12 Burden of Proof (1 of 2)  In civil court cases burden of proof on factual matters shifts to IRS if taxpayer does all of the following:  Introduces “credible evidence”  Complies w/ recordkeeping & substantiation requirements of IRC ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-13 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-14 Requests for Rulings (1 of 2)  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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-15 Requests for Rulings (2 of 2)  When rulings are desirable  Transaction is proposed  Potential tax liability is high  Law is unsettled or unclear ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-16 Due Dates (1 of 2)  Returns for individuals, fiduciaries, and partnerships  Fifteenth day of fourth month following year-end of entity  C corporations and S corporations  Fifteenth day of third month following year-end of entity ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-17 Due Dates (2 of 2)  Extensions available  Automatic 6-month extension generally available  May request additional time if out of country  Tax must be paid by original due date to avoid penalties even if on extension  Interest due on tax not timely paid ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-18Failure-to-File/Pay-Penalties  Failure to file penalty  5% per month of net tax due; 25% max  Fraudulent failure to file is 15% per month; 75% max  Failure to pay incurs a penalty of 0.5% per month up to 25%  Failure to pay + failure to file = 5%/mo  See Topic Review C15-1 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-19 Estimated Taxes (1 of 2)  Taxpayers receiving non- wages/salary income should pay quarterly estimated tax installments  E.g., interest, flow-through income, dividends  Payments should equal lesser of 90% of tax due or 100% (110% if AGI > $150K) of last year’s tax ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-20 Estimated Taxes (2 of 2)  Penalty for underpayment of ES taxes based on interest on underpayment times amount of time outstanding  Exceptions to penalty  < $1,000 underwithheld  No taxes owed during prior year ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-21 Other More Severe Penalties (1 of 3)  Negligence penalty (underpayment)  Due to negligence or disregard of rules/regs w/o intent to defraud  20% of underpayment  Substantial understatement  > of 10% of tax liability or $5,000  $10,000 for a C corp  20% of underpayment ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-22 Other More Severe Penalties (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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-23 Other More Severe Penalties (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 $100K ($500K for corp), 5 years in jail or both ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-24 Statute of Limitations (1 of 2)  General 3-year rule  3 yrs from later of due date or date filed  6-year rule for substantial omissions  Applies if gross income omitted >25% of gross income shown on return  Fraud  No statute of limitations ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-25 Statute of Limitations (2 of 2)  No limitation period if return not filed  Refund claims  Taxpayer not entitled to refund for overpayments unless claim for refund filed by later of  3 years from date original return is filed, OR  2 years from date they pay tax ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-26 Liability for Tax (1 of 2)  If spouses file a joint return, liability for taxes is joint and several  Government can collect from either spouse regardless of who has income  Tax may be collected from transferees and fiduciaries ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-27 Liability for Tax (2 of 2)  Innocent spouse relief available if all met:  Innocent spouse (IS) files joint return  Understatement due to other spouse’s erroneous item(s) of filing return  IS did not know or had no reason to know of understatement  Inequitable to hold IS liable  IS elects relief w/in 2 years after IRS begins collection efforts ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-28 Tax Practice Issues (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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15-29 Tax Practice Issues (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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

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