R4 M3 - Federal Tax Procedures & Taxpayer Penalties Flashcards
What is failure-to-pay Penalty?
This is when you pay for your income tax _ after the original date of the return (April 15, 20ZZ)
- There is no penalty if 90% has been paid by the unextended date.
What are the general requirements for a taxpayer to avoid tax penalty?
- Act in good faith
- Did not have willful neglect
- Reasonable cause to support tax return position.
Which represents the correct order of deductions in the individual income formula?
- Adjustments
- Standard Deduction or itemized deduction
- QBI deduction
John Q. Dillinger is the outgoing Commissioner of the Internal Revenue Service. In his final public meeting with IRS employees, he addressed changes that he would like to see made in the IRS audit and appeals process. Which of the following statements that he made at this meeting is correct?
A. Office audits are normally performed at the national office of the IRS in Washington, DC. B. A revenue agent and the Appeals Division can both settle an unresolved tax issue based on the probability of winning the case in court. C. Following an audit, if agreement is reached with the taxpayer, the taxpayer signs Form 870. D. Tax returns are checked for mathematical accuracy, but only if the returns indicate a refund.
Choice “C” is correct. Following an audit, if agreement is reached with the taxpayer, the taxpayer signs Form 870 (Waiver of Restrictions on Assessment and Collection of Deficiency in Tax).
When an agreement is made if there was a disagreement in the tax return the taxpayer will sign Form 870 any interest accumulated on the deficiency 30 days after the form is filed will stop.
John Harper’s individual income tax return was audited by the IRS. The IRS revenue agent determined John owed additional taxes on his previously filed return. John disagrees with the agent’s additional assessment and the matter was not agreed upon at the IRS administrative appeals conference. John has decided to initiate resolution of the disputed tax in the Federal Court System.
Which of the following is a correct statement regarding the Federal Court System?
A. The U.S. Tax Court is the only forum in which the taxpayer may have a claim heard without first paying the disputed tax liability in full. B. If the disputed tax matter was heard at an IRS administrative appeals conference, the matter may not be heard in the Federal Court System. C. Only the IRS may initiate the resolution of a tax dispute to the Federal Court System. D. Tax matters may be heard initially at the appellate court level, bypassing the need to go through the trial court system.
Choice “A” is correct. The U.S. Tax Court is the only federal trial court where taxpayers may have disputes litigated without first paying the disputed tax liability. In other federal trial courts (U.S. District Court and the U.S. Court of Federal Claims), the taxpayer is required to pay the disputed tax and sue the IRS for a refund.
Choice “B” is incorrect. The taxpayer may, but is not required to, request an IRS administrative appeal. If there is not agreement after the appeals conference, the taxpayer is entitled to take the case to the U.S. Tax Court, U.S. Federal Court of Claims, or a U.S. District Court.
Choice “C” is incorrect. Either the IRS or the taxpayer may initiate resolving a tax dispute in the Federal Court System when the taxpayer and the IRS cannot reach an agreement using the administrative appeals process.
Choice “D” is incorrect. The taxpayer or the IRS must first exhaust remedies at the Federal Trial Court System level (U.S. Tax Court, a U.S. District Court, or U.S. Court of Federal Claims) prior to the dispute being heard at the federal appellate court level. Appellate courts only resolve matters involving questions of law, and not questions of fact.
US Tax Court :
US Tax Court: hears only federal tax cases (income tax, estate tax, gift tax, or certain excise taxes).
US District Court: Hear both civil and criminal cases (not just tax cases).
Courts of Appeals and the U.S Court of Appeals for the Federal Circuit: The U.S courts of appeals (or circuit courts) are the first level of federal appellate courts. A court of appeals hears appeal from U.S District court and the U.S Tax courts
The courts of appeals hear appeals from the US Court of Federal Claims
What are the steps a taxpayer must take when the IRS believes he should pay more taxes or the taxpay reject the IRS findings in an audit of taxpayer return?
If the IRS examination is rejected:
1) IRS will issue a 30-day letter (preliminary notice) giving him the right to appeal. This is to avoid litigation. If the taxpayer is able to resolve his differences him would sign 870-D if he does not agree – step 2
2) After that the IRS will issue a 90-day (notice of deficiency) which means that he can pay his tax liability or go to a U.S Tax court to resolve the issue.
An individual taxpayer rejected the IRS examiner’s findings in an audit of the taxpayer’s tax return. What will the IRS do in response to the taxpayer’s rejection?
A. Issue a statutory notice of deficiency. B. Begin immediate collection action. C. Issue a 30-day letter. D. Refer the case to the IRS Independent Office of Appeals.
Choice “C” is correct. If an individual taxpayer rejects the IRS examiner’s findings in an audit of the taxpayer’s tax return, the IRS will issue the taxpayer a 30-day letter (preliminary notice) notifying the taxpayer of the right to appeal. The taxpayer has 30 days to request an administrative appeals conference with the IRS Office of Appeals.
Choice “A” is incorrect. The IRS issues a statutory notice of deficiency (90-day letter) if the taxpayer does not request an administrative appeals conference after receipt of the 30-day letter or if the taxpayer and the IRS still do not agree on the revenue agent’s proposed adjustment after the appeals conference.
Choice “B” is incorrect. The IRS does not begin immediate collection action when an individual taxpayer rejects the IRS examiner’s findings in an audit of the taxpayer’s tax return. The taxpayer is first provided with the right to an administrative appeal (30-day letter), then the right to file a petition with the U.S. Tax Court (90-day letter).
Choice “D” is incorrect. If an individual taxpayer rejects the IRS examiner’s findings in an audit of the taxpayer’s tax return, the IRS will issue the taxpayer a 30-day letter notifying the taxpayer of the right to appeal. However, the taxpayer does not have to request an administrative appeals conference with the IRS Office of Appeals nor does the IRS refer the case to the IRS Office of Appeals.
If a taxpayer wants to litigate a tax position that is not tax-technical but has high emotional appeal, in which of the following courts should the taxpayer choose if he or she wants to request a jury trial?
A. U.S. District Court B. U.S. Tax Court C. U.S. Court of Federal Claims D. U.S. Circuit Court of Appeals
Choice “A” is correct. U.S. District Court is the only trial court where a taxpayer can request a jury trial.
Choice “B” is incorrect. U.S. Tax Court is a trial court, but a jury trial is not available in this court.
Choice “C” is incorrect. U.S. Court of Federal Claims is a trial court, but a jury trial is not available in this court.
Choice “D” is incorrect. U.S. Circuit Court of Appeals is an appellate court that hears appeals from trial courts, not a trial court where litigation originates. An appellate court does not determine the facts and does not have a jury.
What is the various defense to penalties based on the IRC standards of compliance
1) Reasonable Basis standard
- 20% or less chance of defending your tax position. You can avoid negligence penalty if you disclose your tax position, or the underpayment is not substantial.
2) Substantial authority standard
- Between 40 -50% chance of success
3) More-like-than not standard
- Greater than 50% chance of success
When you use the accrual method and you were slight off in your gross income for tax estimates (ex: $5,000 year 1 but the actual amount is $7,000 year) you don’t need to make an amendment in year 1. You would have to include the difference in year 2 income tax return.
