1. Chapter 15: Administrative Procedures

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

3. ADMINISTRATIVE PROCEDURES (2 of 2)
Severe penalties
Statute of limitations
Liability for tax
Tax practice issues

4. Role of the IRS (1 of 2) Enforcement of tax laws
Collection of taxes due
Interpretation of Internal Revenue Code

5. Role of the IRS Organization of the IRS (2 of 2)

6. Audits of Tax Returns (1 of 2)
Type of Return Audited
2000
1999
Individual returns
0.58%
0.49%
C corporations
0.95%
1.12%
Partnerships
0.25%
0.33%
S corporations
0.43%
0.55%
Fiduciary
0.29%
0.22%
Individuals > $100K inc.
0.69%
0.84%
Corps w/ assets > $250M
32.1%
31.4%

7. Audits of Tax Returns (2 of 2)
Returns selected for audit by discriminant function & other means
Types of audits
Correspondence audit
Office audit
Field audit
Appeals process
Burden of proof

8. 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

9. 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

10. Appeals Process (3 of 3)
Either party may appeal court decision to Circuit Court
Usually final appeal as Supreme Court rarely hears tax cases

11. 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

12. 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

13. Requests for Rulings
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

14. Due Dates
Returns for individuals, fiduciaries and partnerships are due on or before fifteenth day of fourth month following year-end of entity
Extensions for filing deadline available, but tax must be paid by original due date to avoid penalties
Interest due on tax not timely paid

15. Failure-to-File/Pay-Penalties
Failure to file penalty
5% per month or fraction thereof of net tax due w/ a 25% maximum
Fraudulent failure to file is 15% per month or fraction thereof w/ a maximum of 75%
Failure to pay incurs a penalty of 0.5% per month up to 25%
See Topic Review C15-1

16. Estimated Taxes (1 of 2)
Taxpayers receiving income other than salaries & wages should pay quarterly estimated tax installments
Payments should equal lesser of 90% of tax due or 100% (110% if AGI > $150K) of last year’s tax

17. Estimated Taxes (2 of 2)
Penalty for underpayment of ES taxes based on interest on underpayment times amount of time outstanding

18. Severe Penalties (1 of 3)
Penalty for underpayment due to negligence or disregard of rules or regulations is 20% of underpayment
Penalty for substantial understatement exceeding greater of 10% of tax liability or $5,000 ($10,000 for a C corp) is 20% of underpayment

19. 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

20. 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 $25,000 ($100K for corp), five years in jail or both.

21. Statute of Limitations (1 of 2)
Normal time limit is three years from later of due date or date filed
For substantial omissions, time limit is six years
No statute of limitations for fraud
No statute of limitations if a tax return is not filed

22. Statute of Limitations (2 of 2)
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

23. 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

24. Liability for Tax (2 of 2)
Innocent spouse relief available if all met:
Innocent spouse (IS) files a 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

25. 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

26. 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

27. End of Chapter 15
Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business