1. Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2002 Principles of Taxation Chapter 17 The Tax Compliance Process

2. Slide 17-2 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Objectives  Late-filing and late-payment penalties  Statute of limitations  3 types of IRS audits  Negligence or civil fraud, criminal fraud penalties  Trial and appeal courts  Transferee liability and innocent spouse rule

3. Slide 17-3 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Filing and Payment Requirements  Due dates:  Individual: ___/15, extend to ___/15 or ___/15.  Corporate: 15th day of __rd month, extend to 15th day of ___th month.  Payments are due when?  Does the IRS charge YOU interest on late payments?  Does the IRS pay YOU interest on refunds?

4. Slide 17-4 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 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 = ___% of balance due per month late for ___ months, then ___ of 1 percent for up to an additional 45 months.

5. Slide 17-5 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Statute of Limitations  The IRS has _______years from the later of  If the taxpayer omits > ____% of gross income, IRS has _____ years.  What is the statute for fraudulent returns?

6. Slide 17-6 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 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)

7. Slide 17-7 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 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.

8. Slide 17-8 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Noncompliance Penalties - Negligence  What does negligence mean?  Penalty = ____% 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

9. Slide 17-9 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Noncompliance Penalties - Civil Fraud  ____% of tax underpayment due to fraud.  Fraud is the “.”  Evidence includes:  Systematic omission of substantial amounts of income  Deduction of nonexistent expenses  2 sets of books

10. Slide 17-10 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Noncompliance Penalties - Criminal Fraud  Tax evasion = criminal fraud  Up to $___________ individual, $500,000 corporation  Prison  IRS must show guilt beyond a reasonable doubt.

11. Slide 17-11 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Tax Return Preparer Penalties  Failure to sign - $50 per failure.  Taking a position with no realistic possibility of sustaining on its merit - $250 per return.  Intentional disregard of rules a regulations - $1000 per return.

12. Slide 17-12 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 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.

13. Slide 17-13 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Contesting Audit Results - Litigation  Trial Courts  _________________ (single judge or panel of judges) - taxpayer does not have to pay deficiency first.  Taxpayer pays deficiency and sues for refund. Advantage - interest stops accruing should taxpayer lose.  ______________ Court (jury trial) or  U.S. Court ________________ (single judge or panel of judges).

14. Slide 17-14 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Contesting Audit Results - Litigation  Appeal Courts  U.S. Circuit Courts of Appeal  U.S. Supreme Court (hears very few tax cases)

15. Slide 17-15 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 IRS Collections  IRS can seize property.  When corporations are dissolved, shareholders have ___________ __________ 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 __________ ____________ rule.  Doesn’t apply if spouse received benefit from evaded/avoided taxes.