R6 - Federal Tax Procedures

Question 1

Selection of Returns

Answer 1

Variety of ways:

1. Statistical model
2. Random Selection
3. PY Audit
4. Info Return Discrepancy
5. Deductions that exceed established norms

Question 2

Statistical Model

Answer 2

a. Returns that mostly contain errors

b. Errors that return favorable to IRS (they can get money).

Question 3

Info Return Discrepancy

Answer 3

• When W2 does not match what you put in 1040.

Question 4

Deductions that exceed established norms

Answer 4

• Itemized deductions are too much. i.e. JCPA

Question 5

Timing of the Audit

Answer 5

• 2 years from the date of filing or at any point before SOL expires.

Question 6

Correspondence Audit

Answer 6

• Information errors
• Matching issues
• Mathematical errors
  Results in bill or refund check. Black & white.

Question 7

Formal Examination

Answer 7

a. Office Audit (IRS HQ)

b. Field Audit (Home, CPA’s office, or place of business)

Question 8

What happens after audit?

Answer 8

• Issue Resolved

- Unresolved Issues

Question 9

Issue Resolved

Answer 9

• RA may accept return and file a “no change report”.
  OR
• Recommend some changes and if agreement is reached, TP signs Form 870 and pays.
  By signing Form 870, you waive your right to appeal or go to court and fight.

Question 10

Unresolved Issues

Answer 10

If agreement can’t be reached with RA, the TP would get 30-day letter saying you can request appeal. Thisis an admin appeal, not appeals court.

Question 11

Office of Appeals

Answer 11

Goal = Not go to court.

If you reach an agreement here, then TP signs Form 870-AD.

Question 12

90 Day-Letter

Answer 12

• If you did not request admin appeal, or reach an agreement at office of appeals, you get 90-day letter.
• You go to US court (no jury and tax expert judge) to fight, and don’t need to pay the bill.
• You can go to US District Court, or US Federal Court of Appeals, but you must pay tax first and fight for refund.

Question 13

Burden of Proof

Answer 13

• In most civil tax cases, burden of proof is on the TP. Very rarely, it would be on the IRS.

Question 14

US Tax Court

Answer 14

• Can go without paying tax bill.
• No jury.
• Only dedicated to federal tax cases.
• You get tax expert judge.

Question 15

US Tax Court Decisions

Answer 15

2 types:

1. Regular
2. Memorandum

Question 16

Regular Decision

Answer 16

Involves a new or unsual point of law.

Question 17

Memorandum Decision

Answer 17

Involves application of an existing law or an interpretation of facts.

Question 18

US District court

Answer 18

• Trial court
• Civil and criminal court
• Must pay first, and then fight for refund.
• Jury trial (pity advantage).
• At least one court per state.

Question 19

US Court of Federal Claims

Answer 19

• No jury and 16 judges.
• Must pay first, and then fight for refund.
• Nationwide court.
• Can claim money damages.

Question 20

What happens if you lose?

Answer 20

You go to:

• Court of Appeals: when lose at US Tax Court or US District court.
• Circuit Court of Appeals: when lose at US Court of Federal Claims

Question 21

US Supreme Court

Answer 21

• Highest US court, last stop.
• 9 justices, no jury.
• Tax cases are rare.

Question 22

Taxpayer Penalties

Answer 22

2 types:

• Civil
• Criminal

Question 23

EIC Penalty

Answer 23

• When you negligently claim EIC and you shouldn’t have.

Question 24

Underpayment Penalty Exceptions

Answer 24

• When payments are less than $1K
• At least 90% of CY tax is paid
• At least 100% of PY tax is paid. (110% if AGi is >$150K)
• Payments are bases on annualized income.

Question 25

Failure to File Penalty

Answer 25

5% of tax due per month.

• If you don’t owe tax, no penalty.
• Failure to file penalty is reduced by failure to pay penalty. Reduction applies only to period applicable to failure to file penalty.

Question 26

Failure to Pay Penalty

Answer 26

0.5% unpaid tax per month (up to 25% of total tax).

Question 27

Accuracy Related Penalty

Answer 27

a. Substantial = 20% easier to avoid

b. Non-Substantial = 20% harder to avoid

Question 28

Substantial Valuation Penalty

Answer 28

20%

Question 29

Fraud Penalties

Answer 29

• 75% and criminal penalties up to $500K

- For Jail, IRS must prove evasion beyond reasonable doubt.

Question 30

Substantiation of Disclosure of Tax Positions

Answer 30

6 factors to consider to avoid or reduce penalties:

1. Frivolous Tax Return.
2. Reasonable Basis.
3. Substantial Authority
4. More Likely Than Not
5. UTP
6. Gral Avoidance

Question 31

1.Frivolous Tax Return

Answer 31

< 20% chance of winning, no defense and pay full penalty.

- keys: Patently improper, merely arguable

Question 32

2. Reasonable Basis

Answer 32

> 20% chance of winning in court
- You can avoid penalty with not substantial understatement even if you do not disclose position.
OR
- You can avoid penalty with substantial understatement ONLY if you disclosed position.

Question 33

3. Substantial Authority

Answer 33

• Most undisclosed positions need substantial authority.

- >33% but <50%

Question 34

4. More-Likely-Than-Not

Answer 34

> 50% chance of winning in court

i. e. Tax Shelters
- Listed Transactions
- Confidential Transactions
- Transactions with contractual protection
- Loss transactions
- Reportable Transactions

Question 35

5. UTP

Answer 35

• Disclosure Statement - Form 8275
• Reg Disclosure Statement - Form 8275-R
• Reportable Transaction - Form 8886

Question 36

6. Gral Avoidance of Penalty

Answer 36

You can avoid penalties by showing that you:

1. Hada reasonable basis (not more likely than not or substantial undisclosed positions)
2. Acted in good faith
3. Did not have willful neglect (fraud)

Question 37

Substantial Authority

Answer 37

1. Primary sources

2. Secondary sources

Question 38

Primary Sources

Answer 38

a. IRC and Statutory Provisions
b. Proposed, temporary and final regs
c. Revenue Rulings
d. Court Cases