6.5 - Federal Tax Procedures Flashcards
The federal income tax system is based on:
The self assessment of taxes
This helps ensure that this “voluntary” assessment and payment is actually occurring:
The audit process
Why might a return be examined/audited?
For a number of reasons
What are some ways a return might be selected for audit?
Statistical models
Random selection
Prior year audit
Information return discrepancy
Deductions that exceed established norm
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:
Statistical models (in the form of discriminate inventory function)
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:
Information return discrepancy
When are most individual returns audited?
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
A correspondence audit arises as a result of IRS review for the following:
Information errors
Matching issues
Mathematical errors
In the case of mathematical, matching, or information errors, what happens?
The taxpayer is sent a revived computation with a bill for the additional amount due or check for a refund
If a formal examination is necessary, there may be what 2 types of audits?
Field or office audit
Conducted by an IRS revenue agent, either in an IRS office or by correspondence:
Office audit
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:
Field audit
Following an Audi, the revenue agent may either accept the return or recommend certain changes. If agreement is reached with the taxpayer, what happens?
The taxpayer signed Form 870
If agreement cannot be reached at the revenue agent level, what happens?
The taxpayer receives a copy of the revenue agents report and a 30 day letter notifying the taxpayer of the right of appeal
Who can resolve their tax disputes through a fast track remediation process?
Small businesses and self-employed individuals
The goal of the appeals process handled by the IRS office of appeals is to:
Resolve tax controversies without litigation
If an agreement is reached with the appeals division, what happens?
The taxpayer signs for 870-AD
If the taxpayer and the IRS still do not agree on the proposed adjustment after the appeals conference, what happens?
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
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?
Pay the tax deficiency and then sue the IRS for refund
What cases does the U.S. tax court hear?
Only federal tax cases
What is the advantage of going to the U.S. Tax Court? What is the disadvantage?
Advantage: no payment required to petition
Disadvantage: trial by judge (no jury)
The U.S. Tax Court issues two types of decisions:
Regular and memorandum
What does a regular decision involve?
What does a memorandum decision involve?
Regular: new or unusual point of law
Memorandum: concerns only the application of existing law or an interpretation of facts
What types of cases does the U.S. District Courts hear?
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.
What are the advantages or disadvantages of filing with the U.S. District Court?
Advantage: one judge and a jury trial is optional
Disadvantage: taxpayer must first pay disputed tax liability and sue IRS for refund
What is the U.S. Court of Federal Claims?
Nationwide court that has jurisdiction over most claims for money damages against the U.S. and is located in D.C.
Is there a jury trial and does the taxpayer have to pay first before going to the U.S. Court of Federal Claims?
There is no jury trial, instead 16 judges
The taxpayer must first pay the tax disputed and sue the IRS for refund
The first level of federal appellate courts that hears appeals from the U.S. District Courts and the U.S. Tax Court:
The U.S. Court of Appeals
Hears appeals from the U.S. Court of Federal Claims:
The U.S. Circuit Court of Appeals
The highest court in the nation and is the last level of appeal:
U.S. Supreme Court
What is the penalty for taxpayers who negligently claim the earned income credit?
They may not claim the credit for 2 years (or 10 if fraudulent)
Exceptions to the penalty for failure to make sufficient estimated income tax payments include withholding and timely estimated payments that are:
- Less than or equal to 1,000 of current year tax
- 90% of current year tax
- 100% of last years tax (110% if PY AGI exceeds 150,000)
- Equal to estimated current year tax based upon the annualization of income method
What is the penalty for a taxpayer to fail to file their tax return?
5% of the amount of tax due for each month the return Is late (max of 25%)
If both the failure to file penalty and the failure to pay penalty are due for a taxpayer, what happens?
The failure to file penalty is reduced by the amount of the failure to pay penalty
What is the penalty for a taxpayer who fails to pay their taxes?
.5% per month the tax is unpaid (up to 25%)
This penalty is an accuracy-based penalty:
Negligence penalty with respect to an understatement of tax
What is the penalty for negligence with respect to an understatement of tax?
20% of the understatement of tax
What is the penalty for substantial understatement of tax?
20% of the understatement of tax
An understatement is substantial if:
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
What is the penalty for a substantial valuation misstatement?
20% of the understatement of tax
What must the IRS prove for the taxpayer to receive a fraud penalty?
That the taxpayer willfully and deliberately attempted to evade tax beyond a reasonable doubt
What penalties are incurred if a taxpayer receives a fraud penalty?
75% of the understatement of tax due to fraud
And
Criminal penalties as high as 100,000 (individual) 500,000 (corporations)
Have no basis in law or other authority:
Frivolous positions
What tax forms are used to disclose uncertain tax positions and can help taxpayers avoid understatement penalties?
Disclosure statement (form 8275)
Regulation disclosure statement (form 8275-R)
Reportable transaction disclosure statement (form 8886)
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:
Disclosure statement (form 8275)
There are three parts of the disclosure statement (form 8275):
- General information
- Detailed explanation
- Information about pass-thru entity
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:
Regulation disclosure statement (form 8275-R)
Any taxpayer that participates in a reputable transaction and is required to file a federal tax return or information return must file this form:
Reportable transactions disclosure statement (form 8886)
The categories of reportable transactions include:
Listed transactions
Confidential transactions
Transactions with contractual protection
Loss transactions
A taxpayer can generally avoid any penalty by showing that the taxpayer:
- Had reasonable cause to support the tax return position
- Acted in good faith
- Did not have willful neglect
The following are authority for purposes of determining whether there is substantial authority for the tax treatment of an item:
- Provisions of the IRC and other statutory provisions
- Proposed, temporary, and final regulations construing such statues
- Revenue rulings
- Court cases
What are not considered authority for purposes of determining whether there is substantial authority for the tax treatment of an item:
Conclusions reached in treaties, legal periodicals, legal opinions, or opinions rendered by tax professionals
