1. 15-1 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

2. 15-2 ADMINISTRATIVE PROCEDURES (1 of 2)  Role of the IRS  Enforcement and collection  Interpretation of the statute  Audits of tax returns  Requests for rulings  Due dates Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

3. 15-3 ADMINISTRATIVE PROCEDURES (2 of 2)  Failure-to-file/pay-penalties  Estimated taxes  Other more severe penalties  Statute of limitations  Liability for tax  Tax practice issues Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

4. 15-4 Audits of Tax Returns  Percentage of returns selected for audit  Selection of returns for audit  Disclosure of uncertain positions  Alternatives for taxpayers whose return is selected for audit  Burden of proof Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

5. 15-5 Percentage of Returns Selected for Audit Type of Return Audited2009 Individual returns1.1% C corporations1.4% Partnerships0.4% S corporations0.4% Fiduciaryn/a Individuals > $1M inc8.4% Corps w/ assets>$250M25.3% Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

6. 15-6 Selection of Returns for Audit (1 of 2)  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  13,000 returns selected per year Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

7. 15-7 Selection of Returns for Audit (2 of 2)  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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

8. 15-8 Disclosure of Uncertain Tax Positions  New corp reporting requirement beginning in 2010 for uncertain tax positions (UTP)  Requires description for UTP either disclosed in financials or not disclosed due to expected litigation  Corps also must rank UTPs Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

9. 15-9 Alternatives for Taxpayer Whose Return is Audited (1 of 3)  Special relief rule for repeat audits on same item  Taxpayer first meets 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

10. 15-10 Alternatives for Taxpayer Whose Return is Audited (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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

11. 15-11 Alternatives for Taxpayer Whose Return is Audited (3 of 3)  Technical Advice Memoranda  May be requested by revenue agent or appeals officer  Either party may appeal court decision to Circuit Court  Usually final appeal as Supreme Court rarely hears tax cases Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

12. 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

13. 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

14. 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

15. 15-15 Requests for Rulings (2 of 2)  IRS user fee for issuing a ruling in 2011  Ranges from $150 to $50,000  $18,000 for proposed transaction  When rulings are desirable  Transaction is proposed  Potential tax liability is high  Law is unsettled or unclear Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

16. 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

17. 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

18. 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

19. 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

20. 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

21. 15-21 Other More Severe Penalties  Negligence penalty  Substantial understatement  Transactions without economic substance  Civil fraud  Criminal fraud Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

22. 15-22 Negligence Penalty  Due to negligence or disregard of rules or Regs w/o intent to defraud  20% of underpayment  Negligence defined  Failure to make a reasonable attempt to comply with provisions of IRC Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

23. 15-23 Substantial Understatement  Greater of 10% of tax liability or $5,000  $10,000 for a C corp  Additional rule for C corp  If 10% of tax liability > $10M, substantial understatement if > $10M regardless of percentage  Penalty is 20% of underpayment Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

24. 15-24 Transactions without Economic Substance  20% accuracy-related penalty for underpayments that result from t/a lacking economic substance  40% if understatement results from nondisclosed noneconomic substance transaction Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

25. 15-25 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

26. 15-26 Criminal Fraud (1 of 2)  IRS has burden of proof  Prosecution may result from  Willful attempts to evade any tax,  Willful failure to file, or  Willfully making returns t/p does not believe to be true & correct Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

27. 15-27 Criminal Fraud (2 of 2)  Max penalty  $100K ($500K for corp),  up to a year in prison,  or both  Government must prove that taxpayer owes additional tax Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

28. 15-28 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

29. 15-29 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

30. 15-30 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

31. 15-31 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

32. 15-32 Tax Practice Issues (1 of 5)  Two categories of tax preparers  Signing preparers have primary responsibility accuracy of return or refund claim  Non-signing preparer gives advice leading to position that is substantial portion of return  One preparer per position  Multiple preparers may have responsibility for a single tax return Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

33. 15-33 Tax Practice Issues (2 of 5)  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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

34. 15-34 Tax Practice Issues (3 of 5)  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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

35. 15-35 Tax Practice Issues (4 of 5)  Sec. 6694 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%) Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

36. 15-36 Tax Practice Issues (5 of 5)  Circular 230  Rules and regs governing practice before the IRS  Statements on Standards for Tax Services  Ethical guidance for CPAs engaged in tax practice  Professionally enforceable Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

37. Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com 15-37 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall