Federal tax procedures

Question 1

What are the 2 categories tax authorities belong to?

Answer 1

1) Primary authorities
2) Secondary authorities

Question 2

What are examples of primary authorities?

Answer 2

• Internal Revenue Code
• Treasury Regulations

These are official sources of tax law

Question 3

What are examples of secondary authorities?

Answer 3

• Tax articles
• Law reviews

These are unofficial explanations and interpretations of primary authorities and should not be cited as support.

A conclusion reached in a legal periodical and an opinion rendered by a tax professional are both considered secondary sources (sources not written by IRS) and cannot be cited as authoritative sources

Question 4

What are temporary regulations?

Answer 4

They provide guidance until final regulations are issued and have the same authority as the final regulation

Question 5

What are treasury regulations?

Answer 5

They are regulations that are binding on the IRS and have a higher level of authority than a private letter ruling, which is binding on the IRS only with respect to the specific taxpayer

Question 6

What is the accuracy related penalty for misstatements in a tax return that create a tax underpayment?

Answer 6

20% of the underpayment and is in addition to the tax

Question 7

How to avoid the accuracy-related penalty for the understatement of tax relating to the disputed tax position?

Answer 7

• Tax positions based on substantial authority will avoid the penalty.
• These tax positions don’t have to be disclosed (substantiated) on the tax return

Question 8

Tax positions that have a reasonable basis for the position will:

Answer 8

avoid the penalty, but only if they are adequately disclosed in the tax return

Question 9

What kind of taxpayer will NOT avoid the penalty regardless of the type of tax position?

Answer 9

A taxpayer using a tax position based on a tax shelter

Question 10

What tax rules are binding on IRS?

Answer 10

• Internal Revenue Code
• Treasury Regulations
• Internal Revenue Bulletin

Question 11

What tax rules are binding on IRS to specific taxpayer only?

Answer 11

Written determinations
- private letter rulings
- Technical advice memoranda

Question 12

What tax rules are NOT binding on IRS?

Answer 12

Other IRS publications/info
- forms, publications
- News releases and fact sheets
- FAQs
- Online resources

Question 13

Tax preparer penalties apply for the:

Answer 13

• failure to disclose any tax shelter or reportable transactions
• arrangements that change the taxpayer’s reportable income by more than $10 million

Question 14

20% penalty for any tax underpayment relating to

Answer 14

• Negligence or disregard for tax rules/regulations
• Any substantial understatement of income tax
• Any substantial valuation misstatement for calculating taxes
• Any substantial overstatement of pension liabilities
• Any substantial estate/gift tax valuation understatement

Question 15

When a taxpayer needs guidance with a specific tax issue related to a proposed transaction, the taxpayer can ask the IRS for

Answer 15

Private letter ruling

Question 16

What are the 3 federal trial courts that have original jurisdiction to hear tax disputes?

Answer 16

• US Tax Court
• US District Court
• US Court of Federal Claims (Claims Court)

Question 17

IRS process for settling tax disputes

Answer 17

1) IRS assesses a deficiency
2) TP is sent a 30 day letter along with a copy of audit exam report (this letter gives TP 30 days to decide whether to accept the proposed change, or request conference with appeals officer)

If TP doesn’t respond to 30 day letter, IRS issues a notice of deficiency (90-day letter for within US taxpayers, and 150 days for outside the US taxpayer)
- This letter gives TP 90 days to pay deficiency or dispute in court

Question 18

Is an appeal allowed form the Small Cases Division of the US Tax Court?

Answer 18

NO

Question 19

A tax return preparer is subject to a penalty for knowingly/recklessly disclosing corporate tax return info if the disclosure is made

Answer 19

To enable a 3rd party to solicit business from the taxpayer

Question 20

Internal Revenue Code has greater authority than what?

Answer 20

• IRS interpretations *(regulations, revenue rulings, revenue procedures)
• Judicial interpretations, such as Tax Court decisions

Question 21

Accuracy related penalty

Answer 21

• Encourages TP to file accurate returns
• Applies to negligent mistakes and estimates that result in a substantial tax underpayment
• 20% of tax underpayment

Question 22

Fraud penatly

Answer 22

• Deterrent for purposely evading tax
• Applies to willful falsification of tax return amounts that results in any tax underpayment
• 75% of tax underpayment

Question 23

When is an understatement substantial?

Answer 23

If the tax underpayment is more than the greater of either 10% of the tax that should have been shown on the return, or $5,000 for individuals/$10,000 for corp

Question 24

When disputing a deficiency tax assessment in a 90 day letter:

Answer 24

TP support their tax positions by relying on favorable statutory authority and judicial precedent from courts that decide tax disputes

Question 25

Statutory authority (tax regulations, revenue rulings) is:

Answer 25

binding on the IRS

Question 26

Most court decisions involving tax disputes have precedential value. What does this mean?

Answer 26

• The legal decision made by a court functions as an authoritative rule in similar future cases
• A TP will seek favorable, similar cases with precedential value to support its position

Question 27

Why can’t decisions by the Small Claims Division of the Tax Court be used as a precedent?

Answer 27

Because they are not considered primary authority and cannot be used as substantial authority

Question 28

Small Claims Division decides IRS cases in which taxes and penalties do not exceed what amount for any 1 tax year?

Answer 28

$50,000

Question 29

IRS jurisdiction covers what taxes?

Answer 29

Federal taxes including income taxes, excise taxes, payroll taxes, and gift and estate taxes

Question 30

What taxes are collected at the state and local level and fall under separate jurisdictions of each state?

Answer 30

Sales tax