R6 Federal tax procedure

Question 1

Audit Process

Answer 1

• federal income tax based on “self assessment taxes” (voluntary)
• Selection of Audit
  1) Statistical Models:
  Discriminant Inventory Function System (DIF)- select tax returns that are most likely to contain errors
  AND
  yield significant amount of additional tax rev upon audit

2) RAndom selection
3) Prior year Audit

4) Information return Discrepancy
Info forms such as W1, 1099 do not match the amount reported on a return

5) Deductions that exceed established norms
itemized deduction excess of norms established

…………………………
Timing of audit
most individuals are audited within 2 years from the date of filling

but can be audited at any point prior to the expiration of the statute of limitations

Question 2

Review for mathematical error (Correspondence Audir)

Answer 2

• No issues
• there are review for the following
  info errors
  matching issues
  mathematical errors

##taxpayers are sent a revised computation with a brief explanation 
no formal meeting with the IRS representative

Question 3

Formal Examination (Office or Field Audit)

After the Audit

Answer 3

1. Office Audit
   IRS office or by correspondence
2. Field Audit
   taxpayers office or home or at the place of business of the taxpayers representative

…………………………………………….
3. After the Audit

3. 1 Issue Resolved
   - No change report ( either accept the return or recommend certain changes)
   - IF taxpayers agrees then sign Form 870 ( waive the right to go to tax court and appeal process)

3.2 Unresolved Issues
- Individuals receive a 30-days letter (preliminary notice )
to go to administrative appeal with appeal officer ( not court of appeals)

…………………..

4) Administrative Appeal process
- if agreement is reached Form 870-AD

• if an agreement is not reached gets 90-DAys letter ( notice of deficiency )

5) 90 days letter
- Can either pay in these 90 days or go to court

3 courts

1) US tax court (does not need to pay first but no jury)
US District Court ( need to pay first)
US court of federal courts (need to pay first)

Question 4

3 courts

1) US tax court (does not need to pay first but no jury)
US District Court ( need to pay first)
US court of federal courts (need to pay first)

Answer 4

1) US tax court
- just takes federal tax cases
- (does not need to pay first but no jury)
- has small claim disputes ( for 50k or less)
- two type of decision: regular and memorandum
regular decision: new or unusual point of law
memorandum decision: application of existing law

2) US District Court
- ( need to pay first), sure IRS for refund
- can request a jury

3) US court of federal claim courts
- (need to pay first)
- no jury
- usually big cases

If lost of tax court or district court go to US court of Appeals
If lost in US court if federal claims go to US court of Appeals for the Federal Circuit

---
US supreme court 
- highest court 
- panel of 9 justice ( nojury) 
- tax cases are rare

Question 5

Taxpayers Penalties

Answer 5

• can be both civil or criminal
  1) penalty for negligently claiming earned income credit
  2) penalty for failure to make sufficient estimated income tax payments

penalty exceptions
- less than or equal to $1000 of current year tax
or at least 90% of the current year tax
or at least 100% of the last year’s tax

3) Failure to file penalty
- 5% per month of the amount of tax due
- if no tax due no failure to file penalty
- if both failure to file and pay, then file penalty is reduced by the pay penalty

4) Failure to pay a penalty
- 1/2 of 1% per month

5) Negligence penalty ( not substantial, accuracy-related penalty) ) (not fraud )
- 20% of the understatement of tax

6) Substantial understatement of tax ( accuracy-related penalty)
- 20% of the understatement of tax
- same as above but harder to avoid the penalty

7) Substantial valuation misstatement
- 20% of the understatement of tax

8) Fraud penalties
- both civil and criminal 75%
- its must prove willful and deliberate attempt to evade tax

Question 6

Avoid or reduce penalties

Answer 6

1) frivolous tax return
- no defense need to pay in full

2) reasonable basis standard>20%
- if not substantial reasonable basis is enough
- if substantial need to disclose in tax return to use a reasonable basis

3) substantial authority standard (40-50%)
- most undisclosed

4) more likely than not standard >50%
- tax shelters, listed, reportable - identified by secretary of US treasury

5) Disclosure of uncertain tax positions
- disclosure statement form 8275

.................................................
The general rule to avoid penalty 
- reasonable basis 
- acted in good faith 
- did not have willful neglect 

Doesnt apply if

1) tax shelter >50% OR
2) substantial “undisclosed” 40-50%