Tax - Federal Process Flashcards
Federal tax legislative process
- House of Representatives: Ways and Means Committee
- House of Representatives
- Senate Finance Committee
- Senate
- Joint Conference Committee
- Full House and Senate
- President
Federal tax return due dates
If date falls on Saturday, Sunday or holiday, return due on next working day.
– Individuals: April 15 – Corporations: March 15 – Partnerships: April 15 – Gifts: April 15 or same as estate if taxpayer died – Estate: 9 months after death
Federal tax return extensions
Does not usually extend time for tax payment.
File by return due date for 6-month extension: – Individuals: form 4868 – Corporations : form 7004 – Partnerships: form 7004 – Estates: form 4768
Federal tax return requirements for exempt organizations
Nonprofits must file 990s if gross receipts > $50,000
Foundations must file annually
IRS audit process: preliminary review
IRS Service Center conducts routine review for obvious errors: signatures, reporting of items, clerical errors.
Taxpayer is mailed corrected tax calculation and tax deficiency, if any.
If taxpayer fails to respond, IRS generally conducts either correspondence or office audit.
IRS audit process: selection of returns for audit
IRS uses method: Discriminant Function System, which selects returns most likely to contain errors and generate most additional revenue on audit.
Also, returns can be selected for:
– Info from state or foreign agencies
– Info from informant
– Return is linked to another return being audited
– Taxpayer’s items exceed certain thresholds
IRS audit process: examination types
– Correspondence examinations: a few items. If unresolved, can become other exam types
– Office examinations: complex issues. Taxpayer brings supporting docs.
– Field examinations: any issue can be questioned or investigated. IRS examiner goes to taxpayers place of residence or business to examine records. Can take related testimony and administer oaths.
IRS audit process
– IRS required to explain audit process and taxpayer rights.
– Taxpayer may represent self by CPA, attorney, enrolled agent or preparer of return
– Taxpayer must give representative written authority: Form 2848
– After exam, tax auditor provides proposed adjustments of tax liability
– If taxpayer agrees, sign Form 870: waives right to receive statutory notice of deficiency needed to petition Tax Court, and also right to go to IRS Appeals Division
– If taxpayer doesn’t agree, will receive 30 day letter notifying right to appeal within 30 day period to IRS Appeals Office. If appeal not requested, will receive notice of deficiency, giving 90 days to file Tax Court petition
IRS appeals process
– Oral request for Appeals conference: office or correspondences exam
– Written request to IRS Appeals Office: field exam
If proposed adjustment in tax:
– $25,000 or less, file small case request with reasons for disagreement
– Over $25,000, formal written protest required, including: reasons, tax periods, facts supporting position, laws taxpayer relies upon.
Appeals division will settle disputes.
- If taxpayer agrees to settle case with appeals division, sign IRS Form 870-AD. This means case won’t be reopened unless for certain reasons.
- if not, statutory notice of deficiency sent to taxpayer, to file petition with the 90 days with Tax Court.
Judicial process: general
After taxpayer exhausted administrative remedies with IRS, may generally litigate the case in court.
All cases must start at trial court level.
If either government or taxpayer does not agree with trial court’s decision, case may be appealed to appeal court.
Judicial process: trial courts
US Tax Court
– In DC, but judges can travel.
- One judge, no Jury
– Deficiency court: taxpayer must first pay tax before case is heard
– Has Small Tax Division for informal procedures and cases are heard by magistrates. Disputed amount can’t exceed $50,000. No appeals allowed.
– Appeals to US Federal Court of Appeals
US District Court
– In federal district where taxpayer resides
– One judge, taxpayer may request jury trial
– Taxpayer must first pay tax then sue for refund
– Hears both tax and nontax cases
– Appeals to US Federal Court of Appeals
US Court of Federal Claims
- In DC
– One judge, no jury
– Hears both text and nontax cases
– Taxpayer must first pay tax then sue for refund
– Appeals to US Court of Appeals for the Federal Circuit
Judicial process: appeal courts
US Federal Court of Appeals
– Usually three-judge panel
– Hears both tax and nontax cases
– Appeal to US Supreme Court
US Court of Appeals for the Federal Circuit
- In DC
US Supreme Court
- To file appeal, taxpayer or gov must file a writ of certiorari for request.
– Generally does not hear tax appeals. Does usually if Courts of Appeals issue conflicting opinions, impacts many taxpayers, or involves large tax revenue
– If grants appeal and renders decision, generally is final word
Tax return positions: general
IRS Schedule UTP: uncertain tax positions.
Requires reporting of each position taken by applicable corporation if both:
– Corporation took tax position on return for current or prior tax years
– Either corporation or related party has recorded a reserve for that position in audited statements or did not record a reserve because corporation expects to litigate the position.
Tax position is one that would result in adjustment if position is not sustained.
Schedule UTP not required for tax years beginning before Jan 1, 2010.
Must be attached to corp’s income tax return.
Tax return positions: who must file
Corporation must file if all:
– Files IRS forms 1120, 1120–L, 1120–PC
– Assets equal or exceed $100 million
– Issued audited statements reporting all or portion of operations for all or portion of tax year
– Has one or more positions that must be reported
Tax return positions: policy of restraint
IRS will forgo seeking certain documents that relate to UTP and the workpapers that document completion of schedule UTP.
Work product doctrine, a.k.a. work product rule: protects certain work to be admitted into tax case. Material in question maybe shielded.
Substantiation requirements
Taxpayer must generally be able to substantiate any item on tax return.
Substantiation of business expenses
Can deduct only if substantiated:
– Travel away from home
– Entertainment expenses
– Business gifts, limited to $25 per donee, per year
– Expenses related to use of listed property (cars, computers, etc.)
Records should contain info: – Amount of expense – Time and place of expense – Business purpose of expense – Name and business relationship of person being gifted/entertained
Documentary evidence, like receipt, generally not required for less than $75. But required for all lodging expenses.
Penalties: failure to pay estimated tax
Not apply if tax due is less than $500 for corporations or $1000 for all other taxpayers.
Individual underpayment = diff btwn estimated tax paid and lowest of:
– 90% of current year tax
– 100% of prior year tax (110% if AGI > $150k joint or $75k single)
Corporation underpayment = diff btwn estimated tax paid and lowest of:
– 100% of current year tax
– 100% of prior year tax
Penalties: erroneous refund claims
If taxpayer filed claim for refund greater than amount actually allowable, penalty equals 20% of improperly claimed amount.
Penalty does not apply if taxpayer shows they had reasonable basis for a claim.
Penalties: general
Any fines and penalties paid are not allowed deductions on tax return.
Civil fraud penalties can be imposed on corporation that underpays tax when it maintains false records and reports fictitious transactions to minimize corporate tax liability.
Statute of limitations
Assessment
– Three years from later of: date return filed or date return due
– If taxpayer fails to file or files fraudulent return, is unlimited time
- if has substantial omission of income (25% of reported income), is six years
– Can be extended if IRS and taxpayer both consent: sign IRS Form 872
Dash is suspended if notice of deficiency see his sense to text pair. If text pair filed petition with tax court, suspension continues until 60 days after tax court decision becomes final
Collection
IRS has 10 years from date of assessment to collect tax due by loving text pairs property or filing court action.
Refund claims
Taxpayer must file refund claim within later of: 3 years from date that related return was filed or within 2 years of actual payment of tax.
If no return was filed, refund must be filed within 2 years of date tax was paid.
Taxpayer accounting periods: basics
It has adequate wreckers, can use fiscal year. If not, must use calendar year.
Can elect 52/53 week tax year: ends on same day of the week each year.
Make election when filing initial tax return. Must use this election unless obtain approval to change from IRS: Form 1128. Generally not approved.
Taxpayer accounting periods: partnerships and S corporations
Partnership use year of:
- Majority partner rule: partner(s) holding more than 50% interest in the capital and profits.
- If not apply, use principal partners: holding 5% or more interest, and all principal partners have same tax year.
- If not apply, use tax year with least aggregate deferral of income.
S corporation must use calendar year.
Either can elect different tax year if:
– Business purpose can be shown
– Results in deferral of income of not more than three months and entity agrees to make tax deposits (Section 444 election)
Taxpayer accounting periods: personal service corporations
Generally must use calendar year.
Can elect fiscal year if:
– Business purpose exists
– Following occurs:
– – Results in deferral of no more than three months of income
– – Pays shareholder–employees salary during part of calendar year after close of fiscal tax year
– – Salary for that period is proportionate to shareholder-employees salary for previous fiscal tax year
