IRS Audit and Appeals Process Flashcards
IRS Service Center -
routine review for errors
- failure to sign a return
- failure to report an item
- mathematical error or clerical error
IRS Svc. Center -
mailed a correct tax calculation
- if a deficiency,
a. request to pay additional amount
IRS Svc. Center -
no responce from taxpayer
correspondence or office audit
IRS Svc. Center -
not considered a formal examination return
taxpayer not entitled to administrative remedies available for formal examination
Discriminant Function System
- use of mathematical formulas
- most likely to contain errors and most additional revenue
- random selected returns under Nat’l Research Program
- specific factors used are not disclosed
Additional ways to random selection of returns
- information exchanged in programs with states or foreign agencies
- from an informant
- from return linked to another return being audited
- items exceeds certain thresholds
Types of examinations -
Correspondence
- for few items in question on taxpayer’s return
- by letter, ask about questionable items
- return must be verified by appropriate documentation
Types of examination -
Office
- for complex issues
- at appropriate IRS District Office by tax auditor
- must bring records to support items claimed
- only limited to issues stated in the letter
Types of examination -
Field
- for more complex issues
- a revenue agent goes to taxpayer’s place to examine records
- authorized to take testimony and administer oaths
- is an open-ended examination (investigate any questionable item on return or records)
Audit Process -
IRS required to provide taxpayer
- explanation of the process
- rights available
- that interview can be suspended any time to consult a representative
Audit Process -
Representation before IRS
- himself
- CPA
- attorney
- enrolled agent
- preparer who signed the return
***Form 2848 (Power of attorney and declaration representative) (taxpayer written authority for representation)
Audit Process -
if taxpayer agrees with adjustments…
- Form 870 (Waiver of Restriction on Assessment…)
- by signing this form,
a. taxpayer waives his right to receive statutory notice of deficiency (90-day letter)
b. gives up right to go to IRS Appeals Division (30-day letter)
Audit Process -
if taxpayer doesn’t agree with adjustments…
- a 30-day letter to appeal to IRS Appeals Office
- a 90-day letter, Notice of Deficiency, to file Tax Court petition
Appeals Process -
Oral request
Can be for,
- office examination
- correspondence examination
Appeals Process -
Written request for < $25,000
- for field examination
- file a small case for < $25,000, indicate,
a. adjustment in which disagree
b. reason for disagreement
Appeals Process -
Written request for > $25,000
- list of proposed changes that doesn’t agree and reasons
- tax period
- statement of facts supporting taxpayer’s position
- statement of law or ther authorities that taxpayer relies upon
***Appeals of Division will settle disputes based on hazards of litigating the issues in court
Appeals Process -
if taxpayer agrees to settle the case
- Form 870AD (Offer of Waiver of Restrictions…)
- case will not reopened unless,
a. fraud
b. misrepresentation of material fact
c. material mathematical error
d. other administrative wrongdoing
Appeals Process -
if agreement not reached,
- Notice of deficiency (90-day letter)
- file a petition with Tax Court
Judicial Process - Trial Court
US Tax Court
- only federal tax disputes
- located in Washington, DC
a. judges can travel accross US to hear cases
3. no juries; only one judge
4. deficiency court
a. only hear dispute tax
b. without paying tax deficiency
5. appeals go to US Court Federal Appeals
Judicial Process - Trial Court
US Tax Court - Small Tax Division
- less formal
- cases heard by magistrates
- < $50,000
- no appeal from the decision
Judicial Process - Trial Court
US District Court
- must pay the tax
- then sue government for a refund
- one judge; taxpayer may request a jury trial
- has both tax and nontax cases
- appeals go to US Court of Federal Appeals
Judicial Process -
US Federal Court of Appeals
- file by taxpayer or government
- 3 judges; hear the case and take part in decision
- trial courts are bound to follow the decision
- one Court of Appeals not bound to follow a decision of another Court of Appeals for same issue
- both tax and nontax cases
- appeals to US Supreme Court
Judicial Process -
US Supreme Court
- taxpayer or government
- no appeal as a matter of right in a federal tax case
- file a writ of certiorari
- cases involving,
a. conflict in opinions
b. tax issue impacts large number of taxpayers
c. tax issue involving large amount tax revenue
5. the decision is the final word (unless Cogress acts legislatively)
Tax Return Position - Required Disclosure
Schedule UTP
- when taken a tax position on Inc. Tax return for current or prior tax year
- when recorded a reserve regarding that tax position on audited F/S
- when didn’t reserve for that position because it’s expected to litigate the position
- must be reported, the tax position, regarding whether audited F/S are prepared using GAAP, IFRS, or other version
Tax Return Position - Required Disclosure
Who must file Sched. UTP, a corporation…
- filing IRS forms 1120, 1120L, or 1120PC
- has assets = or > $10M (2014 and after)
- related party issued audited F/S reporting all or portion of corp.’s operations for all or a portion of corp.’s tax year
- has one or more tax positions
- must be attached to inc. tax return
Tax Return Position - Required Disclosures
Policy of Restraint
IRS will use it and forgo seeking certain documents relating uncertain tax positions and the workpapers that document completion of Sched. UTP
Tax Return Position - Req. Disclosure
Policy of Restraint
When document is privileged under
- attorney-client privilege
- tax advice privilege under Sec. 7525 IRC
- work product doctrine
and document provided to independent auditor to audit taxpayer’s F/S,
a. IRS will not assert during examination privilege has been waived by such disclosure
Tax Ret. Position - Req. Disclosure
Policy of Restraint
when privilege not apply…
- taxpayer has engaged in an activity or taken any action that would waive the privilege
- unusual circumstances exist
- taxpayer claimed benefits on one or more listed transactions
Tax Ret. Position - Req. Disclosure
Policy of Restraint
examiners procedures
- request from taxpayer a tax reconciliation of WP as a matter of course
- includes,
a. concise description of tax position reported
b. amount of any reserve of tax position
c. computations to determine that tax position or why that tax position designed as Major Tax Position
3. the requirement of filing Sched. UTP doesn’t affect policy of restraint
Substantiation Requirements
taxpayer must be able to substantiate any item in the tax return
Substantiation Requirements -
Business expenses
- travel away (meals and lodging)
- entertainment
- business gifts
- expenses in connection with use of “listed property” (cars, computers, etc)
***only deducted if adequate records
Substantiation Requirements -
Adequate records
- amount of expense
- time and place of travel, entertainment, or day of gift
- business purpose of expense
- for entertainment or gifts,
a. business relationship
Substantiation Requirements -
Documentary evidence
- not required for expenses < $75
- required for all lodging expenses
Substantiation Requirements -
Per diem allowance
- amount of expense is substantiated if = or < of federal per diem rate for area of travel
- per diem rate is only to substantiate amount of expense; taxpayer must still substantiate place, time and business purpose of expense
Substantiation Req. -
Charitable Contributions
- cancelled check
a. name of charity
b. date and amount
