R4 - M3 - Federal Tax Procedures and Taxpayer Penalties

Question 1

What is the audit process?

Answer 1

The audit process helps ensure that the payments of taxes is occurring.

Question 2

After the examination of an audit, do you have to agree with the findings?

Answer 2

No, you can agree or appeal the decision.

Question 3

What are the five reasons your return might get selected for an audit.

Answer 3

Statistical models - Look at returns that are more likely to contain errors, or yeild significant amount of tax revenue.

Random selection - Just a random sample

Prior year audits - You were selected in the prior year and had some findings. You might get selected again this year.

Information return discrepancy - W-2’s, 1099’s, etc, do not match what shows on the tax return.

Deductions that exceed established norms - Took more deductions that you normally would.

Question 4

What is the timing of the audits?

Answer 4

They are normally two years from the date of filing of the return.

Returns may also be audited prior to the expiration of the statue of limitations (3 to 6 years). If fraud, they can last forever, no time limit.

Question 5

For the correspondence audit (review for mathematical errors), what is the process for this audit?

Answer 5

Normally IRS catches some error, could be math related or information related.

No meeting with the IRS is needed, revised computation is sent to the taxpayer, explanation of the change, and a bill for the amount due or possibly money back if a refund.

No interest payment required if payment is made timely.

Question 6

What is the difference between a field audit and an office audit?

Answer 6

Office audit - This is normally individual returns with few or no items of business income. This is normally done in an IRS office or via correspondence.

Field Audit - Conducted by IRS representative, either at taxpayers office or taxpayers place of business.

Question 7

What happens after the audit?

Answer 7

Issued Resolved - This happens when the IRS agent finds no issues and issues a “no change report”. Or, they find issues and you accept the issues by signing form 870.

Unresolved issues - Agreement cannot be reached with the IRS, the IRS sends a letter to the taxpayer giving them 30 days to appeal. The appeal is for an appeals office, not the court of appeals.

Fast track remediation - Normally for small business, or self employed individuals. A mediator from the IRS office of appeals is assigned and they try to get a resolution within 60 days. If still unsolved, then the normal appeals process is still available.

Question 8

What is the appeals process when you cannot agree on the issues the IRS found?

Answer 8

The taxpayer receives a 30 day letter for their right to appeal with an appeals officer.

Goal is to resolve without litigation, if agreement is reached form 870-AD is signed by the taxpayer, if not, a 90 day letter will be issued.

Question 9

What is the appeals process with the 90 day letter?

Answer 9

If there was no agreement after the appeal, or you did not agree to the 30 day appeal, then you get sent a 90 day letter to either pay, or file a petition with the US tax court.

Question 10

Once you file a petition after the 90 day letter, do you have to go to the US tax court?

Answer 10

No, in order to get out of going to US tax court, you have to pay the amount the IRS is requesting and then sue them at the US district court or the US court of federals claims.

Jury trial is an option, but only for the US District Court.

Question 11

What are the pros and cons of going to the US tax court after the 90 day letter?

Answer 11

Pros are that you do not have to pay the amount the IRS is requesting right away. You can wait until after the hearing.

The con is that there is no jury and it is held by a tax expert judge.

Question 12

Once you get the 90 day letter and don’t accept the IRS change, what are the three courts you can go to?

Answer 12

You can only go to these three federal courts

US tax court (don’t have to pay first, but no jury)

US District court (pay first and then sue IRS for refund, jury is an option) 16 judges.

US Court of Federal Claims (pay first and sue for a refund, no jury option)

Question 13

If you lose in the federal courts, can you appeal?

Answer 13

Yes, you can go to the federal court of appeals. The appealte court just determines if the lower courts applied the proper law in coming to their decision.

Question 14

Who normally has the burden of proof in the cases? Taxpayer or IRS?

Answer 14

Normally the taxpayer has the burden or proof, but this sometimes switches to IRS. Mainly civil tax cases.

Civil fraud or willfully aiding and abetting others, criminal fraud, other cases where the taxpayer has good books and records, the IRS has the burden or proof.

Civil case - preponderance of evidence. Criminal case - beyond reasonable doubt.

Question 15

Is there any situation where the US tax court decision will not be appealable?

Answer 15

For small cases division, for disputes not exceeding 50,000, that is not appealable.

Question 16

Under US Tax Courts, what is the difference between regular decisions and memorandum decisions?

Answer 16

Regulars decisions - Normally involves new or unusual point of law

Memorandum - Uses existing law or interpreation of facts.

Question 17

When you lose in US tax court or US district court where can you appeal? What about US court of federal claims?

Answer 17

For US tax court and US district court - Court of appeals.

For US court of federal claims - US Circuit court of appeals.

Question 18

If you lose in the court of appeals or the US Circuit court of appeals, can you appeal again?

Answer 18

Yes, under the US Supreme Court, if they want to hear your case.

They have nine judges, and if they agree to consider the case that is called “writ of certiorari”

They normally don’t hear tax cases.

Question 19

What is the earned income credit penalty for taxpayers?

Answer 19

If you negligently claimed the earned income credit on your return, you may not claim this credit for two subsequent years or for up to 10 years if it was fraud.

Question 20

How do you avoid the estimated tax income payment penalty? How does the penalty accrue?

Answer 20

The way you get out of this is;

Less than or equal to 1000 of current year tax

90% of current year tax

or 100% of prior year, or 110% of prior year if your AGI is over 150,000.

The penalty accrues from the date the estimated tax must be paid until the due date without extensions.

Question 21

What is the failure to file penalty for taxpayers?

Answer 21

If you do not file your taxes timely. 5% per month the tax is due, up to 25% max.

If the return is more than 60 days late, than it increases to the lessor of 510 or 100% of tax due.

If both the failure to file and failure to pay penalty are due, the failure to file is reduced by the amount of the failure to pay penalty.

Question 22

What is the failure to pay penalty for taxpayers?

Answer 22

You didn’t pay on time, one half of one percent per month of unpaid tax. Up to 25% of unpaid tax.

Question 23

What is negligence penalty with respect to understatement of tax?

Answer 23

Negligence for disregard of tax rules and regulations which resulted in an understated tax liability.

Penalty is 20% of understatement of tax.

Question 24

What is the difference between significant and not significant accuracy related penalties?

Answer 24

The penalty stays the same 20%. But it is harder to avoid the penalty if the penalty if it is significant.

How is it significant? If the understatement is greater than 10% of the correct tax or 5000.

Question 25

What is penalty for substantial valuation misstatement?

Answer 25

The penalty is 20% of the understatement of tax if the undestatment amount exceeds 5000.

This penalty cannot be imposed in addition to the negligence penalty.

Question 26

What are fraud penalties?

Answer 26

For civil penalties - at least 75% of the understatement of tax due to fraud.

Criminal penalties - up to 100k

Question 27

What is your defense to a frivolous tax return?

Answer 27

This is a tax return that has less than a 20% change of succeeding. An example of this is someone says they have their own country and they do not have to comply with their tax laws. This is frivolous.

Question 28

For non significant errors, do you need disclosure?

Answer 28

No, the reasonable basis standard normally requires disclosure, but for minor errors, you do not need it.

As long as you can prove you acted in good faith, did not have willful neglect, have reasonable cause to support to support the tax return position.

Question 29

How does the substantial authority standard apply to significant errors?

Answer 29

If not disclosed, you still have a greater than 40% chance of succeeding. You can avoid it by tax articles, treaties, etc. disclosing your position in the return.

Question 30

When someone has to report all their foreign bank accounts what what form is this made on?

Answer 30

Filing a report of foreign bank and financial accounts (FBAR)

Question 31

What is the purpose of the FBAR?

Answer 31

It is used to help identify

Illegal activates, unreported income from foreign sources.

Question 32

When does a US citizen have to file the FBAR?

Answer 32

When at any time during the calendar year, the aggregate value of those accounts exceeds 10,000.

Question 33

What is the calculation for FBAR?

Answer 33

The hightest value during the calendar year masured in the foreign currency of the account, which is converted into US dollars using the treasury exchange rates for the last day of the calendar year.