6.5 - Federal Tax Procedures

Question 1

The federal income tax system is based on:

Answer 1

The self assessment of taxes

Question 2

This helps ensure that this “voluntary” assessment and payment is actually occurring:

Answer 2

The audit process

Question 3

Why might a return be examined/audited?

Answer 3

For a number of reasons

Question 4

What are some ways a return might be selected for audit?

Answer 4

Statistical models
Random selection
Prior year audit
Information return discrepancy
Deductions that exceed established norm

Question 5

This is used to select tax returns that are the most likely to contain errors and yield significant amounts of additional tax revenue upon audit:

Answer 5

Statistical models (in the form of discriminate inventory function)

Question 6

This is used to select tax returns if information forms such as W-2s and 1099s do not match the amounts reported on a return:

Answer 6

Information return discrepancy

Question 7

When are most individual returns audited?

Answer 7

Within 2 years from the date of filing the return however, they may be audited at any point prior to the expiration of the statute of limitations

Question 8

A correspondence audit arises as a result of IRS review for the following:

Answer 8

Information errors
Matching issues
Mathematical errors

Question 9

In the case of mathematical, matching, or information errors, what happens?

Answer 9

The taxpayer is sent a revived computation with a bill for the additional amount due or check for a refund

Question 10

If a formal examination is necessary, there may be what 2 types of audits?

Answer 10

Field or office audit

Question 11

Conducted by an IRS revenue agent, either in an IRS office or by correspondence:

Answer 11

Office audit

Question 12

Conducted by an IRS revenue representative either at the taxpayer’s office or home or at the place of business of the taxpayer’s representative:

Answer 12

Field audit

Question 13

Following an Audi, the revenue agent may either accept the return or recommend certain changes. If agreement is reached with the taxpayer, what happens?

Answer 13

The taxpayer signed Form 870

Question 14

If agreement cannot be reached at the revenue agent level, what happens?

Answer 14

The taxpayer receives a copy of the revenue agents report and a 30 day letter notifying the taxpayer of the right of appeal

Question 15

Who can resolve their tax disputes through a fast track remediation process?

Answer 15

Small businesses and self-employed individuals

Question 16

The goal of the appeals process handled by the IRS office of appeals is to:

Answer 16

Resolve tax controversies without litigation

Question 17

If an agreement is reached with the appeals division, what happens?

Answer 17

The taxpayer signs for 870-AD

Question 18

If the taxpayer and the IRS still do not agree on the proposed adjustment after the appeals conference, what happens?

Answer 18

A 90-day letter is issued and the taxpayer has 90 days to pay the deficiency or file a petition with the U.S. Tax Court

Question 19

If the taxpayer would like to litigate the case but prefers the case to be heard in the U.S. District Court or the U.S. Court of Federal Claims, what must the taxpayer do?

Answer 19

Pay the tax deficiency and then sue the IRS for refund

Question 20

What cases does the U.S. tax court hear?

Answer 20

Only federal tax cases

Question 21

What is the advantage of going to the U.S. Tax Court? What is the disadvantage?

Answer 21

Advantage: no payment required to petition
Disadvantage: trial by judge (no jury)

Question 22

The U.S. Tax Court issues two types of decisions:

Answer 22

Regular and memorandum

Question 23

What does a regular decision involve?
What does a memorandum decision involve?

Answer 23

Regular: new or unusual point of law
Memorandum: concerns only the application of existing law or an interpretation of facts

Question 24

What types of cases does the U.S. District Courts hear?

Answer 24

General this court of the us that hears both civil and criminal cases (not just tax cases). There is at least one district court in each state.

Question 25

What are the advantages or disadvantages of filing with the U.S. District Court?

Answer 25

Advantage: one judge and a jury trial is optional
Disadvantage: taxpayer must first pay disputed tax liability and sue IRS for refund

Question 26

What is the U.S. Court of Federal Claims?

Answer 26

Nationwide court that has jurisdiction over most claims for money damages against the U.S. and is located in D.C.

Question 27

Is there a jury trial and does the taxpayer have to pay first before going to the U.S. Court of Federal Claims?

Answer 27

There is no jury trial, instead 16 judges
The taxpayer must first pay the tax disputed and sue the IRS for refund

Question 28

The first level of federal appellate courts that hears appeals from the U.S. District Courts and the U.S. Tax Court:

Answer 28

The U.S. Court of Appeals

Question 29

Hears appeals from the U.S. Court of Federal Claims:

Answer 29

The U.S. Circuit Court of Appeals

Question 30

The highest court in the nation and is the last level of appeal:

Answer 30

U.S. Supreme Court

Question 31

What is the penalty for taxpayers who negligently claim the earned income credit?

Answer 31

They may not claim the credit for 2 years (or 10 if fraudulent)

Question 32

Exceptions to the penalty for failure to make sufficient estimated income tax payments include withholding and timely estimated payments that are:

Answer 32

1. Less than or equal to 1,000 of current year tax
2. 90% of current year tax
3. 100% of last years tax (110% if PY AGI exceeds 150,000)
4. Equal to estimated current year tax based upon the annualization of income method

Question 33

What is the penalty for a taxpayer to fail to file their tax return?

Answer 33

5% of the amount of tax due for each month the return Is late (max of 25%)

Question 34

If both the failure to file penalty and the failure to pay penalty are due for a taxpayer, what happens?

Answer 34

The failure to file penalty is reduced by the amount of the failure to pay penalty

Question 35

What is the penalty for a taxpayer who fails to pay their taxes?

Answer 35

.5% per month the tax is unpaid (up to 25%)

Question 36

This penalty is an accuracy-based penalty:

Answer 36

Negligence penalty with respect to an understatement of tax

Question 37

What is the penalty for negligence with respect to an understatement of tax?

Answer 37

20% of the understatement of tax

Question 38

What is the penalty for substantial understatement of tax?

Answer 38

20% of the understatement of tax

Question 39

An understatement is substantial if:

Answer 39

For individuals: It exceeds the greater of 10% of the correct tax or $5,000
For corporations: it exceeds the lesser of $10,000,000 or the greater of $10,000 or 10% of correct tax

Question 40

What is the penalty for a substantial valuation misstatement?

Answer 40

20% of the understatement of tax

Question 41

What must the IRS prove for the taxpayer to receive a fraud penalty?

Answer 41

That the taxpayer willfully and deliberately attempted to evade tax beyond a reasonable doubt

Question 42

What penalties are incurred if a taxpayer receives a fraud penalty?

Answer 42

75% of the understatement of tax due to fraud
And
Criminal penalties as high as 100,000 (individual) 500,000 (corporations)

Question 43

Have no basis in law or other authority:

Answer 43

Frivolous positions

Question 44

What tax forms are used to disclose uncertain tax positions and can help taxpayers avoid understatement penalties?

Answer 44

Disclosure statement (form 8275)
Regulation disclosure statement (form 8275-R)
Reportable transaction disclosure statement (form 8886)

Question 45

This form is used to avoid the understatement penalty. It is used to disclose positions take on a tax return that are contrary to revenue railings, revenue procedures, or their statutory provisions:

Answer 45

Disclosure statement (form 8275)

Question 46

There are three parts of the disclosure statement (form 8275):

Answer 46

1. General information
2. Detailed explanation
3. Information about pass-thru entity

Question 47

This form is almost identical to form 8725 except it is used to disclose positions taken on a tax return that are contrary to treasury regulations:

Answer 47

Regulation disclosure statement (form 8275-R)

Question 48

Any taxpayer that participates in a reputable transaction and is required to file a federal tax return or information return must file this form:

Answer 48

Reportable transactions disclosure statement (form 8886)

Question 49

The categories of reportable transactions include:

Answer 49

Listed transactions
Confidential transactions
Transactions with contractual protection
Loss transactions

Question 50

A taxpayer can generally avoid any penalty by showing that the taxpayer:

Answer 50

1. Had reasonable cause to support the tax return position
2. Acted in good faith
3. Did not have willful neglect

Question 51

The following are authority for purposes of determining whether there is substantial authority for the tax treatment of an item:

Answer 51

1. Provisions of the IRC and other statutory provisions
2. Proposed, temporary, and final regulations construing such statues
3. Revenue rulings
4. Court cases

Question 52

What are not considered authority for purposes of determining whether there is substantial authority for the tax treatment of an item:

Answer 52

Conclusions reached in treaties, legal periodicals, legal opinions, or opinions rendered by tax professionals