Federal Taxation Procedures

Question 1

What does the audit process consist of?

Answer 1

1. matching w2 and 1099s to TRs
2. assign a score
3. scores used to decide which return is audited

Question 2

How is a return chosen for audit?

Answer 2

1. Match w2 and 1099s to TR.
2. Return is assigned a score.
3. TRs selected by score.

Question 3

How long does the IRS have to audit a return?

Answer 3

1. 3 years from the date filed.
2. 3 years from date return was due.
3. 6 years if 25% or more of gross income was omitted.
4. Indefinite if return is fraudulent or illegal.

Question 4

What happens after audit is complete?

Answer 4

1. IRS agent reports audit findings in Income Tax Examination Changes report.
2. Then, there’s the negotiating period, where TP agrees or disagrees with findings.
   a. If TP agrees, signs “Revenue Agent’s Report.” Once this is done, it’s done. Neither the TP or the IRS can come back to each other for the same situation.
   b. If TP disagrees, there’s the appeals process:
   i. TP receives a 30 day letter that they do not have to reply to. If don’t reply:
   ii. TP receives a 90-day letter:
   
   • Must file a petition to the US Tax Court within 90 days. Once it’s been filed and an agreement made, only then can the IRS enforce it’s assessment/agreement - after final court decision.
   • if TP doesn’t file petition within 90 days, the IRS audit findings will be binding and TP will only be able to fight it after paying the additional tax assessed and through the US District Court or US Claims Court.

Question 5

What are the 4 tax positions, their IRS support percentage, and if disclosure is needed?

Answer 5

1. More likely than not: >50%; doesn’t need disclosure.
2. Substantial Authority: approximately 40%; typically doesn’t need disclosure, except for tax shelters.
3. Realistic Possibility: about 33%; all must disclose.
4. Reasonable Basis: about 20%; all must disclose.

Question 6

What is appropriate disclosure?

Answer 6

Must include a description of position being taken, the amount of tax involved, and the basis for the position. If there’s a form for specific disclosures, use that form. If there are specific administrative guidances for the disclosures, use those.

Question 7

How long does the IRS have to select a return for audit or to impose additional tax?

Answer 7

1. 3 years from the date return filed
2. 3 years from date return was due
3. 6 years if gross income omitted is over 25% of gross income claimed on return
4. NO LIMITATION on fraudulent and/or criminal returns

Question 8

What happens after audit is complete?

Answer 8

1. audit findings in Income Tax Examination Changes report.

2. negotiation period - if taxpayer agrees or disagrees with this report

Question 9

Agreements

Answer 9

1. agent issues a “revenue agent’s report” that will be signed by taxpayer
2. once signed and agreed upon, taxpayer may not appeal further and IRS may not come back with additional judgements, unless it’s a separate item

Question 10

Disagreements

Answer 10

1. 30 day letter, which taxpayer is not required to respond to.
2. 90 day letter
   a. taxpayer has 90 days to respond and include position for each item
   b. if agreement reached at this point, appeal process over
   c. if taxpayer does not respond after 90 days, must go through Tax Court petition with the US Tax Court or US Claims Court and IRS can’t enforce until after final judgement; however, deficiency will have to be paid first

Question 11

Authoritative Hierarchy

Answer 11

Congress
IRC (Internal Revenue Code)
US Treasury Regs
Judicial Authority
  -US Supreme Court
  -US Circuit Court of Appeals
  -US District Courts
  -US Tax Court
  -US Court of Federal Claims
IRS Positions
  -Revenue Rulings
  -Revenue Procedures
  -Private Letter Rulings or Determination Letters
  -IRS forms, publications, or FAQs