Tax Compliance Flashcards
Reporting income
- 1099-R: Pension & annuities: $600
- W-2: Salary & wages: 600
-1099-DIV: Dividends: 10
-1099-INT: Interest: $600 for individuals; $10 for banks and corporations
-1099-B: Sale of security
-1099-G: Unemployment compensation, tax returns, etc.:$10
-1099-MISC: Direct sales: $5,000
-1099-R: Total lump- sum distributions from retirement plans: $600/all IRA distributions
-1099-NEC: Payments to nonemployees: $600
How are returns selected for audit?
After Discriminant Function System (DIF) generates a score based on potential for return to generate additional tax revenue, less than 1% are selected for examination- following situations make it more likely:
-investments/trade/business expenses that produce significant tax losses
-itemized deductions exceeding average amount per income level
-filing of refund claim by taxpayer previously audited with assessed substantial tax deficiencies
-self-employed with substantial business income
Most large corporations are subject to annual audits
How are audits handled
through office audit in an IRS office, does not involve complete audit
Field audit
Most comprehensive of tax audits, often for corporations and individuals engaged in trade/business, usually on-site or tax advisor’s office
Statute of limitations
3 years from the later of due date/when filed, unless taxpayer omits items of gross income >25% reported gross income, then 6 years, indefinitely if fraudulent/no return. Refunds need to be requested within 3 years of filing.
Penalties
- penalty of 5% per month (or fraction thereof) subject to a maximum of 25% for failure to file a tax return
-penalty of .5% per month (or fraction thereof) subject to a maximum of 25% for failure to pay the tax that is due. - accuracy-related penalty of 20% of the underpayment for items such as negligence or disregard of rules or regulations, any substantial understatement of income tax, or any substantial misstatement of valuation.
- 75% penalty for fraud.
- penalty based on the current interest rate for underpayment of estimated taxes
-Criminal fraud carries a maximum penalty of $100,000, a prison sentence of up to five years, or both
Administrative Appeals Procedure
Taxpayer may be able to negotiate compromise settlement based on hazards of litigation/probability of winning/losing if litigated- settlement usually includes percentage of disputed tax amount plus interest and penalties. If no settlement reached with Appeals division, then taxpayer may seek redress through courts
Who may represent client
attorney, accountant, or an enrolled agent should always be used to negotiate with the IRS for the taxpayer; however there are provisions for the following:
- individual may represent a member of his/her immediate family
- regular FT employee of individual employer may represent employer
- GP/reg FT employee of partnership may represent partnership
-bona fide officer/reg FT employee of a corporation, association, or organized group may represent above
-trustee, receiver, guardian, personal representative, administrator, executor, or reg FT employee of a trust, receivership, guardianship, or estate may represent above
- officer or a regular employee of a governmental unit, agency, or authority may represent above
- individual may represent any individual or entity before personnel of the IRS who are outside of the United States.
-individual who prepares and signs a taxpayer’s return as the preparer, or who prepares a return but is not required to sign the return, may represent the taxpayer before officers and employees of the examination division of the IRS with respect to the tax liability of the taxpayer for the taxable year or period covered by that return.
Tax avoidance schemes
- Sham transaction doctrine- transaction that was made to create a tax gain/loss
- step transaction doctrine- considers economic reality of all steps aggregated together even though individual transactions are ok
- substance over form doctrine- substance rather than transactional form will determine transaction tax outcome
The monthly penalty for failure to pay is ____.
.5% up to a maximum of 25% for failure to pay the tax that is due.
Ethics of profession
No attorney, certified public accountant, enrolled agent, or enrolled actuary is allowed to:
-Employ or accept assistance from any person who is under disbarment or suspension from practice before the IRS.
-Accept employment as an associate, correspondent, or subagent from, or share fees with, any such person.
-Accept assistance from any former government employee where the provisions of any regulations or any Federal law would be violated.
-No partner of an officer or employee of the executive branch of the U.S. Government, of any independent agency of the United States, or of the District of Columbia, shall represent anyone in any case administered by the IRS in which such officer or employee of the Government participates or has participated personally and substantially.
IRS, through the courts, can compel the disclosure of any communication between a taxpayer and his or her agent or planner, except when the agent or planner is an attorney. A non-attorney agent or planner must be careful what a client discloses to them and should warn the client about this.
The maximum penalty assessed by the IRS for criminal fraud is:
$100,000
a prison sentence of up to five years
Across every situation, the IRS, through the courts, can compel the disclosure of any communication between a taxpayer and his or her agent or planner.
If the agent or planner is an attorney, the IRS cannot compel disclosure through the courts.
A 1099-NEC (Non-employee Compensation) must be filed if payment is equal to or exceeds ______.
600
The monthly penalty for failure to file is ____.
5% subject to a maximum of 25% for failure to file a tax return
