15-1 ©2010 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 ©2010 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 ©2010 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 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-5 Role of the IRS Organization of the IRS (2 of 2) ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-6 Audits of Tax Returns (1 of 3) Type of Return Audited Individual returns1.00% C corporations1.30%1.20% Partnerships0.40% S corporations0.50%0.40% Fiduciary0.10% Individuals > $1M inc9.30%n/a Corps w/ assets>$250M27.0%44.1% ©2010 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 in 2006 w/DIF  NRP exams less intrusive than TCMP ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-8 Audits of Tax Returns (3 of 3)  Large and mid-sized business division  Ranks issues that might arise in an audit  Lifestyle audits  Types of audits  Correspondence audit  Office audit  Field audit  Appeals process  Burden of proof ©2010 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 thirty-day letter  Taxpayer has 30 days to request a conference w/ appeals officer  Taxpayer meets with appeals officer ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-10 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 ©2010 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 ©2010 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 ©2010 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 ©2010 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 ©2010 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 ©2010 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 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-17 Due Dates (2 of 2)  Extensions available  Automatic 6-mo extension generally available  May request additional time if out of country  Some entities only get a 5-mo extension  Tax must be paid by original due date to avoid penalties even if on extension  Interest due on tax not timely paid ©2010 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 1 ©2010 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, flowthrough income, dividends  Payments should equal lesser of 90% of tax due or 100% (110% if AGI > $150K) of last year’s tax ©2010 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 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-21 Other More Severe Penalties (1 of 4)  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 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-22 Other More Severe Penalties (2 of 4)  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 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-23 Other More Severe Penalties (3 of 4)  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), five years in jail or both. ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-24 Other More Severe Penalties (4 of 4)  Willful failure to pay any tax or file a return  Max penalty $25K ($100K for corp), up to a year in prison, or both  Government must prove that taxpayer owes additional tax ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-25 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 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-26 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  Three years from date original return is filed, OR  Two years from date they pay tax ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-27 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 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-28 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 two years after IRS begins collection efforts ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-29 Tax Practice Issues (1 of 4)  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  Lists best practices for tax advisors ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-30 Tax Practice Issues (2 of 4)  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 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-31 Tax Practice Issues (3 of 4)  Sec preparer penalty  Max of $1,000 or 50% of income derived from the return if she lacked substantial authority for the position  Less stringent than the “more likely than not” standard (>50%) ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15-32 Tax Practice Issues (4 of 4)  Statements on Standards for Tax Services  Ethical guidance for CPAs engaged in tax practice  Professionally enforceable ©2010 Pearson Education, Inc. Publishing as Prentice Hall

Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business ©2010 Pearson Education, Inc. Publishing as Prentice Hall