1. The Tax Compliance Process
Chapter 18
The Tax Compliance Process

2. Filing and Payment Requirements
Due dates
Individual: 4/15, extend to 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.

3. 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.

4. 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.

5. 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)

6. 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.

7. 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

8. 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

9. Noncompliance Penalties - Criminal Fraud
Tax evasion = criminal fraud
Up to $100,000 individual, $500,000 corporation
Prison
IRS must show guilt beyond a reasonable doubt

10. Tax Return Preparer Penalties
Failure to sign - $50 per failure
Taking a position with no realistic possibility of sustaining on its merit - $1,000 per return up to 50% of preparer compensation.
Intentional disregard of rules a regulations - $5,000 per return up to 75% of the compensation for the return.

11. 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

12. 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.