Ch 26

Question 1

Accuracy-related penalty

Answer 1

Major civil taxpayer penalties relating to the accuracy of tax return data, including misstatements stemming from taxpayer negligence and improper valuation of income and deductions, are coordinated under this umbrella term. The penalty usually equals 20 percent of the understated tax liability.

Question 2

Circular 230

Answer 2

A portion of the Federal tax Regulations that describes the levels of conduct at which a tax preparer must operate. Circular 230 dictates, for instance, that a tax preparer may not charge an unconscionable fee or delay the execution of a tax audit with inappropriate delays. Circular 230 requires that there be a reasonable basis for a tax return position, and that no frivolous returns be filed.

Question 3

Closing agreement

Answer 3

In a tax dispute, the parties sign a closing agreement to spell out the terms under which the matters are settled. The agreement is binding on both the IRS and the taxpayer.

Question 4

Determination letter

Answer 4

Upon the request of a taxpayer, the IRS will comment on the tax status of a completed transaction. Determination letters frequently are used to clarify employee status, determine whether a retirement or profit sharing plan qualifies under the Code, and determine the tax-exempt status of certain nonprofit organizations.

Question 5

E-filing

Answer 5

The process of submitting tax returns and other documents by the taxpayer to the IRS using a computer or other electronic equipment. Large businesses are required to file their income tax returns electronically, and the IRS receives about 80 percent of Forms 1040 through an e-filing option.

Question 6

Enrolled agent (EA)

Answer 6

A tax practitioner who has gained admission to practice before the IRS by passing an IRS examination and maintaining a required level of continuing professional education.

Question 7

Fraud

Answer 7

Tax fraud falls into two categories: civil and criminal. Under civil fraud, the IRS may impose as a penalty an amount equal to as much as 75 percent of the underpayment [? 6651(f)]. Fines and/or imprisonment are prescribed for conviction of various types of criminal tax fraud (?? 72017207). Both civil and criminal fraud involve a specific intent on the part of the taxpayer to evade the tax; mere negligence is not enough. Criminal fraud requires the additional element of willfulness (i.e., done deliberately and with evil purpose). In practice, it becomes difficult to distinguish between the degree of intent necessary to support criminal, rather than civil, fraud. In either situation, the IRS has the burden of proof to show that the taxpayer committed fraud.

Question 8

Frivolous return

Answer 8

A tax return that included a position that has no more than a 5 percent chance of being sustained upon review. Taxpayer and tax preparer penalties are assessed if a frivolous position is included in a filed tax return.

Question 9

Letter ruling

Answer 9

The written response of the IRS to a taxpayer’s request for interpretation of the revenue laws with respect to a proposed transaction (e.g., concerning the tax-free status of a reorganization). Not to be relied on as precedent by other than the party who requested the ruling.

Question 10

Negligence

Answer 10

Failure to exercise the reasonable or ordinary degree of care of a prudent person in a situation that results in harm or damage to another. A penalty is assessed on taxpayers who show negligence or intentional disregard of rules and Regulations with respect to the underpayment of certain taxes. ? 6651. See also accuracy-related penalty.

Question 11

Ninety-day letter

Answer 11

Commonly referred to as the 90-day letter, this notice is sent to a taxpayer upon request, upon the expiration of the 30-day letter, or upon exhaustion by the taxpayer of his or her administrative remedies before the IRS. The notice gives the taxpayer 90 days in which to file a petition with the U.S. Tax Court. If such a petition is not filed, the IRS will issue a demand for payment of the assessed deficiency. ?? 62116216.

Question 12

Offer in compromise

Answer 12

A settlement agreement offered by the IRS in a tax dispute, especially where there is doubt as to the collectibility of the full deficiency. Offers in compromise can include installment payment schedules, as well as reductions in the tax and penalties owed by the taxpayer.

Question 13

Reasonable cause

Answer 13

Relief from taxpayer and preparer penalties often is allowed where there is reasonable cause for the taxpayer’s actions. For instance, reasonable cause for the late filing of a tax return might be a flood that damaged the taxpayer’s record-keeping systems and made difficult a timely completion of the return.

Question 14

Revenue Agent’s Report

Answer 14

A Revenue Agent’s Report, which reflects any adjustments made by the agent as a result of an audit of the taxpayer. The RAR is mailed to the taxpayer along with the 30-day letter, which outlines the appellate procedures available to the taxpayer.

Question 15

Statute of limitations

Answer 15

Provisions of the law that specify the maximum period of time in which action may be taken concerning a past event. Code ?? 65016504 contain the limitation periods applicable to the IRS for additional assessments, and ?? 65116515 relate to refund claims by taxpayers.

Question 16

Substantial authority

Answer 16

Taxpayer and tax preparer understatement penalties are waived where substantial authority existed for the disputed position taken on the return.

Question 17

Tax preparer

Answer 17

One who prepares tax returns for compensation. A tax preparer must register with the IRS and receive a special ID number to practice before the IRS and represent taxpayers before the agency in tax audit actions. The conduct of a tax preparer is regulated under Circular 230. Tax preparers also are subject to penalties for inappropriate conduct when working in the tax profession.

Question 18

Technical advice memorandum (TAM)

Answer 18

An interpretation of the tax law with respect to a disputed item, issued by the IRS, in response to a request from an agent, appellate conferee, or IRS executive. Often used to reconcile perceived differences in the application of the law among taxpayers or to identify an IRS position where no pertinent Regulations or rulings exist.

Question 19

Thirty-day letter

Answer 19

A letter that accompanies an RAR (Revenue Agent’s Report) issued as a result of an IRS audit of a taxpayer (or the rejection of a taxpayer’s claim for refund). The letter outlines the taxpayer’s appeal procedure before the IRS. If the taxpayer does not request any such procedure within the 30-day period, the IRS issues a statutory notice of deficiency.

Question 20

Unreasonable position

Answer 20

A tax preparer penalty is assessed regarding the understatement of a client’s tax liability due to a tax return position that is found to be too aggressive. The penalty is avoided if there is substantial authority for the position, or if the position is disclosed adequately on the tax return. The penalty equals the greater of $1,000 or one-half of the tax preparer’s fee that is traceable to the aggressive position.

Question 21

Whistleblower program

Answer 21

An IRS initiative that offers special rewards to informants who provide evidence regarding tax evasion activities of businesses or high-income individuals. More than $2 million of tax, interest, and penalty must be at stake. The reward can reach 30 percent of the tax recovery that is attributable to the whistleblower’s information.