Chapter 18 - The Tax Compliance Process Flashcards
1
Q
Which federal taxes are self assessed? 4
A
Income
Payroll
Self-Employment
Transfer
2
Q
What must every person do that has to pay or collect the self assessed taxes?
A
- Must compute the amount of tax due
- Fule the proper return
- Maintain adequate records supporting the calculations presented on the return.
3
Q
If an individual reports income on the basis of a calendar year when are they required to file their Form 1040 for the current year?
A
By April 15 of the following year
4
Q
If an individual has adopted a fiscal year when are they required to file their Form 1040 for the current year?
A
By the 15th day of the fourth month following the close of the taxable year.
Ex - Fiscal year July 1 - June 30 must file by October 15
5
Q
When must Corporations who file their taxes either on the basis of a calendar year or fiscal year file their taxes?
A
By the 15th day os the third month following the close of their taxable year.
6
Q
What form must individuals file for their taxes?
A
Form 1040
7
Q
What form must corporations file for their taxes?
A
Form 1120
8
Q
How long is the extension that individual and corporate tax payer may apply for to file their return?
A
6 months.
9
Q
What must taxpayers have to do to get an extension to file their tax return?
A
Submit an application for extension with the IRS. They are automatic, they do not have to explain why they want/need the extension.
10
Q
By what date must taxpayers submit their application for extension?
A
By the due date of their return.
11
Q
What does an automatic extension of time for filing a tax return NOT do?
A
Extend the time for payment of any tax due.
12
Q
If a taxpayer hasn’t finished his return by the original due date and needs an extension, how would they know what to pay the IRS in taxes owed that are due by the original due date.
A
They don’t know exactly, but must pay any estimated balance of tax due.
13
Q
When are taxes due?
A
By the UNEXTENDED due date of the return.
14
Q
What must taxpayers do that pay any amount of income tax after the required payment date do?
A
Pay the interest charged by the federal government.
15
Q
What is the interest that is charged on late payments of income tax charged by the federal government based on?
A
The number of days from the required payment date to the actual payment date.
16
Q
What is the Underpayment Rate?
A
Another name for the annual interest rate that is charged on income taxes paid past their original due date.
17
Q
How is Underpayment Rate calculated?
A
= (Federal Short-Term Rate) + 3% on amount of underpayment, compounded daily.
18
Q
How often is interest on underpayment of income taxes compounded?
A
Daily
19
Q
How often is the Federal Short Term Rate adjusted?
A
Quarterly.
20
Q
How is the underpayment rate for corporate underpayments exceeding $100,000 determined?
A
=(Federal Short-Term Rate) + 5%
21
Q
When is the IRS not required to pay interest on any income tax overpayment.
A
During the first 45 after the filing date of the return.
22
Q
What is the interest rate the government pays to individuals on overpayment who don’t received their refund within the given time? (i.e - How is it calculated)
A
= (Federal Short-Term Rate ) + 3%
23
Q
What is the interest rate paid on corporate overpayment of $10,000 or less? Greater than $10,000?
A
- (Federal Short-Term Rate) + 2%
- (Federal Short Term Rate) + 0.5%
24
Q
Who must pay a late-filing and late-payment penalty?
A
A taxpayer who fails to file an income tax return by the required due date and can’t provide a good excuse for such failure.
25
What is the Late-Filing and Late Payment Penalty equal to?
5% of the balance of the tax due with the return for each month (or portion thereof) that the return is delinquent.
26
What would the IRS waive if a taxpayer files his return later than due but can show reasonable cause for his tardiness? What won't they waive.
The IRS may waive the penalty (Late-Filing and Late-Payment Penalty).
The will not waive the interest.
27
What is the maximum time and % the 5% penalty can run for the Late-Filing and Late-Payment Penalty?
-5 months (until the penalty equals 25% of the balance due).
28
After five months, what does the Late-Filing and Late-Payment Penalty rate drop to?
0.5% of the balance due.
29
How long can the reduced rate of the Late-Filing and Late-Payment Penalty last?
An additional 45 months past the time the 5% rate ran for.
30
Why when a taxpayer uses a tax preparer can they still be charged a late penalty if the tax preparer files the return late?
A taxpayer has an affirmative nondelegable duty to ensure the appropriate dorms--whether a tax return or an extension request--are actually filed by the statutory deadline.
31
When can the government not charge a penalty on a return filed after the due date?
When it is found that the taxpayer is owed a refund.
32
What are you doing in essence when you are due a refund but are late filing a return?
Giving the government an interest-free loan from the taxpayer that it does not need to repay until the taxpayer finally decides to file.
33
What happens when a tax return arrives at one of the 10 IRS service centers?
They are checked for mathematical accuracy and logged into the IRS's computer system.
34
What happens to a return when it is input into the IRS's computer system?
It is cross-checked against information returns filed with respect to the taxpayer, such as Form W-2s filed by employers; Form 1099s filed by payers of interest, dividends, rent, or other types of income; and Schedule K-1s filed by partnerships and S Corporations.
35
What happens when a return reflects a math error or a discrepancy is found with an information return?
The service mails a letter to the taxpayer explaining the problem and calculating the additional tax or refund.
36
Who/what is responsible for depositing checks or money orders with the U.S. Treasury and for authorizing refund checks to be mailed.?
The IRS Service Centers
37
What do the facts of the government cashing a taxpayers tax check or mailing a refund signify? What do they not signify?
- They signify the return was processed.
| - They do not signify that the IRS has accepted the accuracy of the return.
38
What does the Statute of Limitations do for the IRS?
Gives them three years from the later of the original due date of the return or the date on which the return was actually filed to examine that return for mistakes and to assess any additional tax.
39
What happens to the Statute of Limitations if a taxpayer files a return and omits an amount of gross income exceeding 25% of the gross income reported on the return?
The normal 3-year statute of limitations is extended to 6 years.
40
How long does the Statute of Limitations last on a tax return that the IRS determines to be fraudulent?
The return remains open (subject to audit) indefinitely.
41
How long should taxpayers keep all supporting paperwork such as receipts and canceled checks that relate to a tax return? Why?
- At least three years after the return is filed
| - Because of the possibility of an audit.
42
What records should be retained permanently? 3
- Records substantiating the tax basic of property
- Any legal document containing tax information (Divorce decree, closing statement on a property sale, etc)
- A copy of the tax return
43
What is the primary way the IRS selects corporate tax returns for audit?
On the basis of the size of the business, measured in terms of taxable income and net worth as reported on Form 1120.
44
How are individual tax returns selected for audit?
Based off the DIF score the return receives.
45
What is a Discriminate Function System (DIF) score?
A numeric score assigned to individual tax returns that measures the return's potential for generating additional tax on audit. The higher the score the higher the likelihood of an audit.
46
What do tax practitioners assume to inflate a tax return's DIF score?
- Highly speculative investment activities
- Unusually large itemized deductions
- Deductions that are prone to manipulation or abuse (Nonbusiness bad debts, travel and entertainment expenses, losses generated by a secondary business, etc)
- High income returns
47
What are the three types of audits?
- Correspondence Examination
- Office Examination
- Field Examination
48
What is a Correspondence Examination?
The simplest type of audit that can be handled by telephone or through mail. Usually very specific in scope.
49
What is an Office Examination?
An audit conducted by a tax auditor at an IRS district office.
50
What is a Field Examination
An audit conducted by a revenue agent at the taxpayer's place of business.
51
What do office audits focus on?
A few questionable items on a return.
52
What do field audits focus on?
They are the broadest in scope and may involve a complete analysis of the taxpayer's books and records for the year or years under investigation.
53
What is an Enrolled Agent?
A person that receive certification to practice before the IRS by passing an exam on tax law written and administered by the IRS itself.
54
Who can represent the taxpayer in an audit?
The Taxpayer
A lawyer
A CPA
An enrolled agent
55
What is a deficiency?
The underpaid amount of tax based of a mistake on a return.
56
Who may deduct interest paid on federal income tax deficiencies? Who may not?
Corporations may deduct it as a business expense.
An individual cannot, it is nondeductible personal interest "regardless of the source of the income generating the tax liability."
57
What is the Taxpayer Bill of Rights?
Enacted by Congress in 1989, it requires the IRS to deal with every citizen and resident in a fair, professional, prompt, and courteous manner and to provide the technical help needed by taxpayers to comply with the law. It ensures personal and financial confidentiality.
-It does have a disclaimer that it can share tax return information with state tax agencies., the Department of Justice, other federal agencies, and foreign governments under tax treaty provisions.
58
What is IRS Publication 910?
A free booklet, Guide to Free Tax Services, is a catalog describing the many types of assistance offered.
59
If the IRS requests information, what does the taxpayer have the right to know?
How the information will be used and the nature of any consequences if the taxpayer refuses to provide the information.
60
What is the purpose of the office of National Taxpayer Advocate?
To assist taxpayers in resolving problems and to help taxpayers who suffer hardship because of IRS actions.
It heads a team of local Taxpayer Advocates who operate independently of the IRS's audit, assessment, and collection functions.
61
What does the Code use to attempt to discourage taxpayers from neglecting their legal responsibilities?
By imposing a variety of penalties.
62
What is the IRS's retaliation for the filing of a frivolous tax return?
$5,000 penalty.
63
How is a frivolous tax return generally defined?
One that is blatantly incorrect or incomplete on the basis of a legal argument with absolutely no merit.
64
When can the IRS impose a Negligent penalty? How is it calculated?
- When, during the course of an audit, a revenue agent may conclude that the taxpayer failed to make a reasonable attempt to prepare a correct return or intentionally disregarded the tax rules and regulations.
- 20% of any tax understatement attributable to the taxpayer's negligent actions.
65
What subjective factors does a person's exposure to the negligence penalty depend upon? 4
- Complexity of the issue in question
- The individuals's education and business experience.
- The existence of supporting documentation
- The individual's degree of cooperation during the audit
66
What is the burden of proof for that the IRS needs to present in court to charge a taxpayer with negligence?
Burden of production - Must present a preponderance of evidence (prove the facts and claims it asserted in the complaint) establishing negligence.
67
What is the burden of proof for that the IRS needs to present in court to charge a taxpayer with civil fraud?
The IRS must show clear and convincing evidence.
(the evidence presented by a party during the trial must be highly and substantially more probable to be true than not and the trier of fact must have a firm belief or conviction in its factuality)
68
What is the burden of proof for that the IRS needs to present in court to charge a taxpayer with criminal fraud?
Beyond a Reasonable Doubt (proof having been met if there is no plausible reason to believe otherwise)
69
What is the harshest administrative penalty that the IRS may impose? How is it calculated?
- Civil Fraud
| - 75% of the portion of a tax underpayment attributable to fraud.
70
What is Civil Fraud?
The intent to cheat the government by deliberately understating tax. It is characterized by the systematic omission of substantial amounts of income from the tax return or by the deduction of nonexistence expenses or losses.
71
What are some ways the IRS is alerted to fraud? 4
- Taxpayer keeps two sets of financial records, one for tax purposes and one reflecting the taxpayer's true income.
- The taxpayer altered or destroyed business records and documents
- Taxpayer concealed assets
- Taxpayer cannot account for large cash receipts or deposits
72
What is Criminal Fraud?
AKA - Tax Evasion. A particularly egregious incident of fraud.
73
What happens when the IRS uncovers criminal fraud?
The IRS may turn the matter over to its Criminal Investigation Office.
74
What is a Special Agent?
An agent assigned by the IRS's Criminal Investigation office whose job it is to determine if the government has enough evidence to indict the taxpayer for criminal fraud.
75
What is Tax Evasion? How is it punishable?
- A felony offense of tax fraud
- By monetary fines (up to $100,000 in the case of an individual and $500,000 in the case of a corporation) and by imprisonment in a federal penitentiary.
76
Who is a Tax Return Preparer
ANY person who prepares returns (or employs other people to prepare returns) for COMPENSATION, regardless of whether the person is an attorney, CPA, or enrolled agent. They must make every effort to prepare accurate returns that report their clients' correct tax.
77
What are tax return preparers required to do? 4
- Sign the tax returns prepared for their clients
- Include their identifying number on such returns
- Furnish clients with copies of their completed returns
- Retain copies of all returns or a list of the names and identifying numbers of all clients.
78
What are tax return preparers prohibited from doing?
Endorsing or negotiating tax refund checks.
79
What is the penalty assessed to a tax return preparer who fails to sign a tax return?
$50 for each failure.
80
What is the maximum penalty with respect to returns filed during any calendar year limited to?
$25,000
81
What is the penalty assessed to a tax return preparer who takes an unreasonable legal position and that position results in an understatement of the clients' tax liability.
The greater of $1,000 or 50% of the preparer's compensation with respect to the return.
82
How can a tax return prepared who takes an unreasonable legal position and that position results in an understatement of the clients' tax liability avoid the penalty?
Demonstrate that there was a reasonable cause for the understatement and that the preparer was acting in good faith.
83
What is the penalty assessed on tax return preparer when the IRS determines that they willfully understated a client's tax liability or intentionally disregarded the tax law in preparing a return (willful and reckless conduct)?
The greater of $5,000 or 50% of the compensation for the return.
84
What can a taxpayer do if they disagree with all or any part of the outcome of an audit (including penalties)?
- May appeal the disputed issue to the Appeals Office of the IRS.
- If there is failure to resolve the issues, the taxpayer can take the case to a federal court (U.S Tax Court, U.S. District Court, or U.S Court of Federal Claims) for judicial review.
- If they still don't like the outcome they can appeal (1 appeal guaranteed) to the U.S Circuit Court of Appeals.
- If they still don't agree, they can ask (not guaranteed to be heard) the U.S. Supreme Court to hear the case.
85
What does a taxpayer's appeal to the Appeals Office of the IRS lead to? What is the purpose?
- An administrative conference between the taxpayer (or more typically the taxpayer's representative) and a specially trained IRS appeals officer.
- The purpose of the conference is to resolve the controversy in a fair and impartial manner.
86
What can a taxpayer do who refuses to pay the deficiency determined by the IRS? What if they disagree put pay the deficiency?
- File a petition with the U.S Tax Court to hear the case.
- Pay and then immediately sue the government for a refund in either the local U.S. District Court or the U.S. Court of Federal Claims.
87
What is the U.S. Tax Court?
- Courts that adjudicates only federal income, gift, and estate taxes issues
- Comprised of judges who are acknowledged experts in the tax law.
88
What is the advantage of using the U.S. Tax Court?
They get judges that are tax expert and can be used to not only make determinations of fact, but determinations of law (interpret the law)
89
What is the benefit of a taxpayer using the U.S. District Court?
They get a jury trial. Their peers may be sympathetic, being taxpayers themselves.
90
Who pay appeal the verdict of the trial court to the U.S. Circuit Court of Appeals.
The losing party at the trial court.
91
What differs about how the U.S Circuit Court of Appeals hears a case?
They generally do not review findings of fact by a lower court but instead will consider if the lower court properly applies the relevant law to the facts.
92
What is it called when the U.S. Supreme Court agrees to hear a case? When it doesn't?
- Grant Certiorari
| - Deny Certiorari
93
Who may appeal to have the case heard at the U.S. Supreme Court?
The losing party at the U.S Circuit Court of Appeals.
94
What happens if the U.S Supreme Court denies certiorari?
The decision of the appellate court is final.
95
Why would the U.S. Supreme Court agree to hear a case?
Either
- The case involves a significant principle of law, or
- Two or more appellate courts have rendered conflicting opinions on the proper resolution of the tax issue.
96
What did Congress do make the legal system more accessible to the average person?
Established a Small Tax Case Division of the Tax Court.
97
Who may use the Small Tax Case Division of the Tax Court? How does it work?
- A taxpayer who is disputing a deficiency of $50,000 or less.
- The taxpayer may request an informal hearing presided over by an officer of the court. The taxpayer may plead his own case without an attorney. The presiding officer, after hearing the case, renders judgement and the matter is settled--neither taxpayer nor government may appeal the case to any other court. Taxpayers who win may be entitled to recover litigation expenses from the government (court costs, attorney fees, fees paid to expert witnesses, and payments for technical studies, analyses, tests, and reports necessary for the case).
98
When, after winning a case against the IRS, would a taxpayer not get back litigation related expenses?
If the IRS can convince the court that its position in the case was substantially justified.
99
What does the Code authorize the Tax Court to do to a taxpayer who takes frivolous or groundless position before the court or institutes a case primarily for delay?
Impose a monetary penalty up to $25,000 on the taxpayer.
100
What must taxpayers do who have exhausted every avenue of appeal do?
Must finally pay their tax deficiency (including interest and penalties) to the government.
101
What is the IRS authorized to do to collect a tax deficiency?
- Seizing the taxpayer's assets and selling them at auction
- Levying bank accounts
- Garnishing the taxpayer's salary or wage.
102
What is an Installment Agreement?
Requested by taxpayer who lacks the current resources to pay a tax bill, it provides for monthly payments over a reasonable period of time.
103
How does the average installment agreement get approved? What are the terms
-For an individual that owes no more than $10,000, automatically, requiring full payment within three years, if the IRS determines that the individually is is financially unable to make immediate payment.
104
What is an Offer In Compromise?
Used when the IRS determines that a taxpayer owing a deficiency's financial condition is so bad it is unlikely that a tax bill will ever be paid it full, it is an acceptance of a lesser amount to settle the taxpayer's bill. The goal os such is to collect the most feasible amount at the earliest possible time and at the least cost to the government.
105
What is Transferee Liability?
-A liability of unsatisfied debts (including federal taxes) that was initially that of a corporation, that passed to the shareholders, that arises when the corporation no longer exists, to the extent of the value of any assets received on liquidation of the corporation.
106
When does a person become liable for any tax deficiency with respect to that return?
When they (individuals) sign their Form 1040s.
107
What is the liability for spouses in the case of a joint return?
Jointly and severally liable.
108
What is the Innocent Spouse Rule?
When used, it relieves a person of liability when that liability is a real hardship on that person and they had signed the return without any knowledge of the information on the return.
109
What three conditions does the relief from the Innocent Spouse Rule depend upon?
1. The deficiency must be attributable to erroneous items (such as omitted income or bogus
deductions) of the person’s spouse.
2. The person must establish that in signing the return he or she did not know, and had no
reason to know, that the return understated the correct tax.
3. Taking into account all the facts and circumstances, it is inequitable to hold the person liable for the deficiency.
110
What is one factor that the court's weigh very heavily upon in analyzing the condition of 'Taking into account all the facts and circumstances, it is inequitable to hold the person liable for the deficiency.' when deciding whether to use the innocent spouse rule? What is another?
- Whether the person significantly benefited, directly or indirectly, from any income omitted from the return.
- Whether the person seeking relief has been deserted by or is divorced from his or her spouse.
