Federal tax procedures Flashcards
What are the 2 categories tax authorities belong to?
1) Primary authorities
2) Secondary authorities
What are examples of primary authorities?
- Internal Revenue Code
- Treasury Regulations
These are official sources of tax law
What are examples of secondary authorities?
- 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
What are temporary regulations?
They provide guidance until final regulations are issued and have the same authority as the final regulation
What are treasury regulations?
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
What is the accuracy related penalty for misstatements in a tax return that create a tax underpayment?
20% of the underpayment and is in addition to the tax
How to avoid the accuracy-related penalty for the understatement of tax relating to the disputed tax position?
- Tax positions based on substantial authority will avoid the penalty.
- These tax positions don’t have to be disclosed (substantiated) on the tax return
Tax positions that have a reasonable basis for the position will:
avoid the penalty, but only if they are adequately disclosed in the tax return
What kind of taxpayer will NOT avoid the penalty regardless of the type of tax position?
A taxpayer using a tax position based on a tax shelter
What tax rules are binding on IRS?
- Internal Revenue Code
- Treasury Regulations
- Internal Revenue Bulletin
What tax rules are binding on IRS to specific taxpayer only?
Written determinations
- private letter rulings
- Technical advice memoranda
What tax rules are NOT binding on IRS?
Other IRS publications/info
- forms, publications
- News releases and fact sheets
- FAQs
- Online resources
Tax preparer penalties apply for the:
- failure to disclose any tax shelter or reportable transactions
- arrangements that change the taxpayer’s reportable income by more than $10 million
20% penalty for any tax underpayment relating to
- 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
When a taxpayer needs guidance with a specific tax issue related to a proposed transaction, the taxpayer can ask the IRS for
Private letter ruling
What are the 3 federal trial courts that have original jurisdiction to hear tax disputes?
- US Tax Court
- US District Court
- US Court of Federal Claims (Claims Court)
IRS process for settling tax disputes
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
Is an appeal allowed form the Small Cases Division of the US Tax Court?
NO
A tax return preparer is subject to a penalty for knowingly/recklessly disclosing corporate tax return info if the disclosure is made
To enable a 3rd party to solicit business from the taxpayer
Internal Revenue Code has greater authority than what?
- IRS interpretations *(regulations, revenue rulings, revenue procedures)
- Judicial interpretations, such as Tax Court decisions
Accuracy related penalty
- Encourages TP to file accurate returns
- Applies to negligent mistakes and estimates that result in a substantial tax underpayment
- 20% of tax underpayment
Fraud penatly
- Deterrent for purposely evading tax
- Applies to willful falsification of tax return amounts that results in any tax underpayment
- 75% of tax underpayment
When is an understatement substantial?
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
When disputing a deficiency tax assessment in a 90 day letter:
TP support their tax positions by relying on favorable statutory authority and judicial precedent from courts that decide tax disputes
