REG 5 Flashcards
Primary authoritative sources
1) Internal Revenue Code (IRC)
2) Proposed, temporary, and final regulations construing such statues
3) US Treasury department: Revenue rulings and revenue procedures, tax treaties, and regulations
4) Court cases
*IRS publications are not primary authoritative sources
Negligence
The term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return.
Also, means any failure by the taxpayer to keep adequate books and records.
Standards for Tax positions
Reasonable Basis: greater than 20% that the tax position will be upheld
Substantial Authority: greater than 33% but less than 50%, is an objective standard involving an analysis of the law and application of the law to relevant facts. The substantial authority standard is less stringent than the “more likely than not” standard.
More likely than not: Greater than 50% likelihood a tax position being upheld by the courts. This standard is more stringent than the “substantial authority” standard.
Reportable Transaction
Means any transaction which requires information to be included in the return or statement. Because this type of transaction has been identified by the US Treasury department to have a potential for either tax avoidance (legal use and use applicable tax laws to reduce the amount of tax due) or tax evasion (by illegal means and methods to not pay tax).
Tax shelter
An investment that is planned (partnership, entity, plan or arrangement) to result in tax-favored treatment. The IRS has placed restrictions on tax shelters when the principal purposes of the activity appears to be avoidance or evasion of taxes or when the activity might result in more deductible expenses than the investors have at risk.
Tax Preparer: Understatement of Taxpayer’s liability due to an “Unreasonable Position” by the Tax Return Preparer
A position is deemed unreasonable unless:
1) there is “substantial authority” for the position (whether or not the position is disclosed/ undisclosed), and not a tax shelter or reportable transaction; or
2) the position is disclosed, and there is a “reasonable basis” for the position and not a tax shelter or reportable transaction; or
3) with respect to a tax shelter or reportable transaction, it is reasonable to believe that the position would “more likely than not” be sustained on its merits. (highest standard is the “more likely than not”)
Sarbanes-Oxley Act of 2002: Audit committee
1) Public companies are responsible for establishing an audit committee that is directly responsible for the appointment, compensation, and oversight of the work of the audit
(i) auditor reports directly to the audit committee
(ii) audit committee is responsible for resolving disputes between the auditor and management
2) Audit committee members are members of the issuer’s board of directors, but are otherwise independent
1) Financial expert: The issuer’s audit committee must have at least one financial expert or disclosure why that role is not filled.
Accuracy-related penalties
These penalties apply to
- the portion of tax underpayments attributable to negligence or disregard of tax rules, and regulations
- any substantial understatement of income tax
Audit process
IRS dispute
1) formal examination at the office or field. If agreement is reached between taxpayer and IRS agent, then the taxpayer signs Form 870
2) If not resolved, then it goes through the appeal process with the “Administrative Appeal Request”, if agreed taxpayers signs a Form 870-AD, OR
The taxpayer can take the case directly to the US Tax Court but must have an IRS notice of deficiency letter.
3) If not settled in the Administrative Appeal process, the taxpayer can take the case to the
(i) US Tax Court-only hears federal tax cases. There is no jury, only 1 judge and taxpayer may litigate without having to pay the disputed tax in full. To appeal is goes to the U.S. Courts of Appeals for that direct jurisdiction over the taxpayer in question
(ii) US District Court- one judge and jury trial option, this court is a genera trial court for both civil and criminal cases (not just tax cases). Taxpayer must first pay disputed tax liability and sue IRS for refund. Appeals are made to the U.S. Court of Appeals for that direct jurisdiction over the taxpayer in question
(iii) US Court of Federal Claims: nationwide court that has jurisdiction over most claims for money damages against the United States, one type is tax refunds. Taxpayer must pay the disputed tax and sue the IRS for a refund. There are 16 judges. Appeals are made to the US Federal Court of Appeals
U.S. Court of Appeals: 3 judge panel, no jury
Tax Preparer vs Tax Practitioner
Tax preparer: any person who prepares for compensation
Tax practitioner: any of the following individuals who practice before the IRS: attorneys, CPA’s, enrolled agents, enrolled actuaries, and enrolled retirement plan agents.
Tax Preparer: Understatement of Taxpayer’s Liability Due to Willful and Reckless Conduct (Fraud) of the “Tax Return Preparer”
Penalty for “willful and reckless” conduct: penalty equal to the greater of $5,000 or 50% of the income the preparer derived with respect to the tax return or tax refund.
Tax preparer faces other penalties if:
1) failure to provide a completed copy of tax return to the taxpayer (client) ($50 for each failure/max $25K per year)
2) failure to sign the tax return or refund claim ($50 for each failure/max $25K per year)
3) failure to furnish (indicate on the return or claim) the Tax ID number or the tax preparer ($50 per failure/$25K per year)
4) failure to retain records properly: tax preparer is required to keep 3 years a copy of the return or claim or a listing of the name and ID of each taxpayer for whom the preparer prepared a return or claim. ($50 per failure, $25K per year)
5) failure to file correct information returns: any person who employed a tax preparer at any time during that return period must send to the IRS an information return containing personal information of preparer ($50 for each failure, $25K per year)
6) negotiation of IRS refund check: tax preparer who endorses or otherwise negotiates an IRS refund check issued to a taxpayer other than the tax return preparer shall pay a penalty of $500 with respect to each check.
7) failure to be diligent in determining a client’s eligibility for the “earned income credit”: due diligence requirement address (i) eligibility checklists, (ii) computation worksheets; (iii) reasonable inquiries; and (iv) record retention ($500 for each failure)
Aiding and abetting understatement of tax liability
The penalty for aiding and abetting understatement of tax liability applies to Any person, not just to tax return preparers.
The IRS has the burden of proof to establish that any person is liable for this civil penalty.
IRC imposes a civil penalty of $1K for all taxpayers, and $10K for corporations.
Treasury department Circular 230 for Tax Practitioners
Practice for Former Government employees: addresses “conflict of interest”
1) A former government employee while in that position “personally and substantially participated” in a particular matter involving specific parties, can never represent or assist those parties with respect to that particular matter.
2) If the former govt employee while at that position had “official responsibility” for a particular matter involving specific parties, that individual within 2 years after leaving the govt employment cannot represent those parties with respect to that particular matter.
3) within 1 year after that govt position, the individual cannot appear before the IRS to influence any US Treasury employee if i) the former employee at any time “participated in the development” of the rule;; or (ii) within 1 year period prior to departure has “official responsibility” with respect to that rule
Circular 230: Best practices for Tax advisors
1) Communicating with the client regarding the terms of engagement to determine client’s purposes and use for the advice
2) Establishing the facts and arriving at a conclusion supported by law and the facts
3) Advising the client about the importance of the conclusions reached (i.e. whether the client will be able to avoid penalties)
4) Acting fairly and with integrity in practice before the IRS
5) Taking reasonable steps that all members, associates, and employees of the firm follow procedures that all consistent with the above.
