Chapter 9-Filing Requirements & Preparers Penalties Flashcards
what are the requirements of a corporation in regards to quarterly tax payments?
they are required to make quarterly tax payments during the tax year and are subject to a penalty for underpayment of taxes if the tax liability has not been paid in four equal installments over the course of a tax year. they are due by the 15th of the following months:
April, June, Sept, Dec and its filed on form 1120-ES.
remember a tax return must be filed each year by march 15 (by corporations with a calendar year) even if there is no taxable income.
what are the exceptions for a penalty not to apply for not paying quarterly taxes
- small balance (the total underpayment is less than 500)
- annualized income (the installments each quarter cover the tax on the income to date, assuming total income will,m for the full 12 months, be in proportion to the income to date ex. the income for the first 3 months will be divided by 3/12 to estimate the full year income in determining the first quarter estimated payment)
- seasonal method (the installments each quarter cover the tax on the income to date, assuming total income will, for the full 12 months, bear the same relationship to the income to date as it has, on average, in the previous 3 fiscal years ex. if the income during the first quarter has averaged 40% of the total annual income over the previous 3 years, the income for the first three months of this year will be divided by 40% to estimate the full year income in determining the first quarter estimated payment.)
- previous year (the payments equal at least 100% of the prior year tax liability; this may not be used to escape a penalty, however if either there was no tax liability in the previous year or the corporation had taxable income exceeding 1 million in any of the preceding 3 tax years
what happens if a tax liability is not paid by the original due date?
interest will be owed to the IRS on the unpaid balance. In addition if the amount paid by the original due date is less than 90% of the total tax liability a monthly delinquency penalty will be owed in addition to the interest charges.
what are the rules for claiming a refund?
you would do it by filing an amended tax return and the limit is the later of:
-3 years after original tax return was filed (if the filed late, then 3 years from the date the return was due including the extensions)
or
-2 years after actual tax was paid
are individuals generally required to make estimate tax payments?
individual tax payers generally have withholdings from salaries and wages so they do not need to make estimated tax payments to the IRS. If estimated payments are required, they are due by the 4th, 6th, & 9th months of the taxable year and by the 15th of January on form 1040-ES.
an individual is only subject to an underpayment penalty if the balance due on the tax return is greater than $1,000
for an individual, what are the exceptions for not having to be subject to a penalty for not paying estimated taxes?
- prior year tax liability (no penalty is assessed if the withholding and estimated payments totaled at least 100% of the prior year tax liability, unless the taxpayer had more than $150,000 of AGI in the prior year. in the last case, payments must exceed 110% of the prior year tax liability in order to utilize this exception in the current year)
- annualized income method (no penalty is assessed if the cumulative payments for each quarter cover the tax on the income to date assuming it continues at the same rate for the remainder of the year)
- current tax liability (no penalty is assessed if the payments covered at least 90% of the current tax liability.
what are the penalties for individuals paying their income tax liability after April 15?
.5% per month for late payment, and 5% per month for filing late or not filing at all. both penalties have a maximum of 25% of the net tax owed. there are additional civil penalties related to negligence and substantial understatement of tax liability on the return, and civil and criminal penalties for fraud on the return. both penalties are based on the amount of net tax due.
what is the accuracy related penalty of 20%?
it is a penalty of underpayment that applies if the underpayment of tax is attributable to negligence or disregard of rules and regulations, any substantial overstatement of pension liabilities, or any substantial gift or estate tax valuation under statement.
when is an individual not required to file a tax return?
if the gross income during the year is clearly insufficient for any tax liability to result. this is the case if the gross income of the taxpayer for the year does not exceed the sum of:
- personal exemptions for the taxpayer and spouse
- the basic standard deduction based on filing status
- the additional standard deductions based on age >= 65
The tax payer cannot consider dependent exemptions nor the additional standard deductions based on blindness, since these are not automatically available without supporting evidence.
what are the requirements for self employment taxes as to when a return has to be filed?
even if the taxpayer does not have gross income exceeding the calculated limit, a return must be filed if the taxpayers income from self employment exceeds $400 since self employment taxes may be owed even though income taxes are not.
what is the statue of limitations for the IRS to give an individual notice of deficiency?
it is the later of the following:
- when the return is due (including extensions)
- when it is actually filed
- **this means that the if you actually file your tax return after April 15 but before the extension in October, you have 3 years from the October date.
the length of the statute of limitations is ordinarily 3 years, but it has increased to 6 years if the IRS asserts an under statement of gross income that exceeds 25% of the gross income reported on the return.
there is no statute of limitation for fraudulent returns or when a return hasn’t been filed at all
what are the rules for the IRS in regards to the statute of limitations?
- 3 years for errors
- 6 years for gross negligence or 25% or more income not included in tax return (understate income)
- unlimited for fraud or lies or failure to file if you are required to file
what are the rules for a taxpayer to claim a refund?
- it must be filed on 1040x by the taxpayer (which is the form for an amended return) and the limit is the LATER of:
- *3 years after the original tax return was filed (if filed late, 3 years from the date the return was due (including the extension remember it would be the later of the two dates)
- *2 years after actual tax was paid
what happens in the case where the taxpayers is not required to file a tax return because his/her income was too low?
the only applicable statue of limitation would be 2 years from the payment of tax since there is no due date for the return.
what is the process involved in changes in the tax law?
- a tax bill is introduced in the house of representatives and given to a committee considered appropriate based on the nature of the bill
- those few bills that are approved by the committee are presented to the full house of representatives for vote
- upon passage, the bill is introduced to the senate, which will generally pass its own version of the bill. it will then be sent to a conference committee having the responsibility of merging the two bills
- the merged bill will be put to a final vote and if passed, it is presented to the president of the united states who will either sign it into law or decide not to which is called a veto, in which case a 2/3 senate vote will be required to override the veto.
what are some of the reasons a tax return can be selected for examination?
- a high score on the IRS computerized discriminant inventory function system will not only cause a return to be selected for examination, but also indicates a high likelihood that the examination will result in a change in the tax liability
- returns are selected when information does not agree with that received from third parties in the for of W-2’s or 1099’s
- returns are examined when source , including newspaper articles, public records, and individuals, provides information to the IRS regarding potential noncompliance.
how is the taxapayer notified when a return will be examined by the IRS?
by letter & at that time the examination begins. a taxpayer may wish to be represented in the examination proceeding, in which case a form 2848 is completed.
upon completion of an examination there will be a closing conference with the examiner or a supervisor, after which the taxpayer will receive a 30-day letter with a copy of the examination report. this gives the taxpayer 30 days to accept or appeal proposed changes.
if an agreement is not reached or if the taxpayer does not respond to the 30-day letter a notice of deficiency often referred to the 90 day letter is sent. the taxpayer has 90 days to file a petition with the tax court.
what happens if a taxpayer does not agree with a proposed adjustment that results from an examination?
one alternative is fast track mediation, which is often used to resolve disputes involving examinations, offers in compromise, trust fund recovery penalties and other collection actions.
offers in compromise can be filed by a taxpayer to obtain a reduction in the amount of tax owed.
when will the irs consider an offer in compromise?
- if one of the following applies:
- *the amount owed, or whether it is owed is in doubt
- *the taxpayer’s ability to pay the amount owed is in doubt
- *the taxpayer would suffer an economic hardship if required to pay the entire amount
- *the irs determines that the case presents compelling reasons that are a sufficient basis for compromise.
what are the alternatives to tax court?
- IRS Appeals office (which is one level of appeal within the IRS.
- if agreement is not reached the taxpayer may be eligible to take the matter to a court such as the United States Tax Court, the United States Court of Federal Claims, or the United States District Court.
- *The US Tax Court will generally NOT hear a case until after it has been considered for settlement by an Appeals Office.
what type of cases does a tax court hear?
**if the petition is not filed on a timely basis the taxpayer forfeits the opportunity to go to tax court and will be billed.
cases related to income, estates, gifts or certain excise taxes of private foundations, public charities, qualified pension and other retirement plans or real estate investment trusts.
you can pay the taxes before you go to court but it is NOT required
when will district courts and federal claims courts generally hear cases?
not until after the tax has been paid and you are requesting a credit or a refund that has been filed. a suit may be filed anytime within 2 years after a claim has been rejected and as early as 6 months after a claim has been filed if the IRS has not delivered a decision. The federal claims will not hear a case involving a claim for a refund of a penalty related to an abusive tax shelter or to aiding and abetting the understatement of tax on someone else’s return.
when is the burden of proof on the IRS to prove that the taxpayers owes as it relates to an individual?
as long as the taxpayer has done the following:
- introduced credible evidence supporting the position being taken
- complied with IRS substantiation requirements
- maintained required records and
- cooperated with all reasonable requests for information.
when is the burden of proof on the IRS to prove that the taxpayers owes as it relates to corporation, partnership, or trust?
-the burden of proof will be on the IRS provided net worth did not exceed 7 million and the entity had no more than 500 employees at the time a tax liability is being contested in a court proceeding.
what happens if an unfavorable decision is made in any of the 3 courts?
it maybe brought before the United States court of appeals.
circuit courts of appeals will retry cases from lower courts. if there is a conflict between different circuit courts of appeals, the case may be taken before the United States Supreme court.
who enforces the rules on tax preparers
AICPA’s Statements on Standards for Tax Services SSTS
what are the obligations for PAID TAX PREPARERS?
- the preparer must sign the preparers declaration on the tax return and provide their tax identification number
- the return must be timely filed and a copy of the completed return must be provided to the tax payer
- the preparer must retain either documentation of the taxpayers name and tax identification number or a copy of the prepared return for 3 years
- the preparer need NOT obtain from the taxpayer documentation of information provided to prepare the return BUT MUST make reasonable inquiries about the existence of such support where appropriate.
ex. the preparer should ask the client if travel and entertainment costs are supported by a log and if charitable contributions exceeding $250.00 are supported by receipts from the charities.
