15-1 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-2 ADMINISTRATIVE PROCEDURES (1 of 2) Role of the IRS Audits of tax returns Requests for rulings Due dates Failure-to-file/pay-penalties Estimated taxes 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-3 ADMINISTRATIVE PROCEDURES (2 of 2) Other more severe penalties Statute of limitations Liability for tax Tax practice issues 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-4 Role of the IRS (1 of 2) Enforcement of tax laws Collection of taxes due Interpretation of Internal Revenue Code 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-5 Role of the IRS Organization of the IRS (2 of 2) 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-6 Audits of Tax Returns (1 of 3) Type of Return Audited Individual returns1.00% C corporations1.30%1.20% Partnerships0.40% S corporations0.50%0.40% Fiduciary0.10% Individuals > $1M inc9.30%n/a Corps w/ assets>$250M27.0%44.1% 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-7 Audits of Tax Returns (2 of 3) Document matching 100% audit rate E.g., wages, interest, state income taxes, real estate taxes, home mortgage interest Returns selected for audit by discriminant function & other means 27% of returns selected in 2006 w/DIF NRP exams less intrusive than TCMP 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-8 Audits of Tax Returns (3 of 3) Large and mid-sized business division Ranks issues that might arise in an audit Lifestyle audits Types of audits Correspondence audit Office audit Field audit Appeals process Burden of proof 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-9 Appeals Process (1 of 3) Taxpayer first meet w/ revenue agent If taxpayer disagrees w/ findings, IRS sends thirty-day letter Taxpayer has 30 days to request a conference w/ appeals officer Taxpayer meets with appeals officer 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-10 Appeals Process (2 of 3) If no agreement with appeals officer reached, IRS issues ninety-day letter Taxpayer has 90 days to file petition w/ Tax Court or pay the tax Taxpayer must pay tax first to litigate in either District Court or U.S. Court of Federal Claims 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-11 Appeals Process (3 of 3) Either party may appeal court decision to Circuit Court Usually final appeal as Supreme Court rarely hears tax cases 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-12 Burden of Proof (1 of 2) In civil court cases burden of proof on factual matters shifts to IRS if taxpayer does all of the following: Introduces credible evidence Complies w/ recordkeeping & substantiation requirements of IRC 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-13 Burden of Proof (2 of 2) Burden of proof (continued) Cooperates w/ reasonable requests Qualifies as a natural person or legal person w/ net worth $7 million 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-14 Requests for Rulings (1 of 2) Allows taxpayer to learn how IRS will treat a particular transaction before the transaction is completed Request made in writing IRS has option whether or not to respond 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-15 Requests for Rulings (2 of 2) When rulings are desirable Transaction is proposed Potential tax liability is high Law is unsettled or unclear 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-16 Due Dates (1 of 2) Returns for individuals, fiduciaries and partnerships Fifteenth day of fourth month following year-end of entity C corporations and S corporations Fifteenth day of third month following year-end of entity 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-17 Due Dates (2 of 2) Extensions available Automatic 6-mo extension generally available May request additional time if out of country Some entities only get a 5-mo extension Tax must be paid by original due date to avoid penalties even if on extension Interest due on tax not timely paid 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-18Failure-to-File/Pay-Penalties Failure to file penalty 5% per month of net tax due; 25% max Fraudulent failure to file is 15% per month; 75% max Failure to pay incurs a penalty of 0.5% per month up to 25% Failure to pay + failure to file = 5%/mo See Topic Review 1 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-19 Estimated Taxes (1 of 2) Taxpayers receiving non- wages/salary income should pay quarterly estimated tax installments E.g., interest, flowthrough income, dividends Payments should equal lesser of 90% of tax due or 100% (110% if AGI > $150K) of last years tax 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-20 Estimated Taxes (2 of 2) Penalty for underpayment of ES taxes based on interest on underpayment times amount of time outstanding Exceptions to penalty of 10% of tax liability or $5,000 $10,000 for a C corp 20% of underpayment 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-22 Other More Severe Penalties (2 of 4) Civil fraud IRS has burden of proof Systematic omission from gross income or fictitious deductions or dependency claims... Civil fraud penalty is 75% of portion of underpayment attributable to fraud 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-23 Other More Severe Penalties (3 of 4) Criminal fraud IRS has burden of proof Prosecution may result from willful attempts to evade any tax, willful failure to file or willfully making returns taxpayer does not believe to be true and correct... Maximum penalty is a fine of $100K ($500K for corp), five years in jail or both. 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-24 Other More Severe Penalties (4 of 4) Willful failure to pay any tax or file a return Max penalty $25K ($100K for corp), up to a year in prison, or both Government must prove that taxpayer owes additional tax 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-25 Statute of Limitations (1 of 2) General 3-year rule 3 yrs from later of due date or date filed 6-year rule for substantial omissions Applies if gross income omitted >25% of gross income shown on return Fraud No statute of limitations 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-26 Statute of Limitations (2 of 2) No limitation period if return not filed Refund claims Taxpayer not entitled to refund for overpayments unless claim for refund filed by later of Three years from date original return is filed, OR Two years from date they pay tax 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-27 Liability for Tax (1 of 2) If spouses file a joint return, liability for taxes is joint and several Government can collect from either spouse regardless of who has income Tax may be collected from transferees and fiduciaries 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-28 Liability for Tax (2 of 2) Innocent spouse relief available if all met: Innocent spouse (IS) files joint return Understatement due to other spouses erroneous item(s) of filing return IS did not know or had no reason to know of understatement Inequitable to hold IS liable IS elects relief w/in two years after IRS begins collection efforts 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-29 Tax Practice Issues (1 of 4) Tax preparer penalties IRS may impose various penalties on tax return preparers for misconduct Treasury Department Circular 230 Regulates the practice of attorneys, CPAs, enrolled agents, and enrolled actuaries before the IRS Lists best practices for tax advisors 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-30 Tax Practice Issues (2 of 4) Tax accounting and law Accountants must be careful to avoid the unauthorized practice of law Accountant-client privilege Similar to attorney-client privilege, but it only applies in very limited circumstances 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-31 Tax Practice Issues (3 of 4) Sec preparer penalty Max of $1,000 or 50% of income derived from the return if she lacked substantial authority for the position Less stringent than the more likely than not standard (>50%) 2010 Pearson Education, Inc. Publishing as Prentice Hall 15-32 Tax Practice Issues (4 of 4) Statements on Standards for Tax Services Ethical guidance for CPAs engaged in tax practice Professionally enforceable 2010 Pearson Education, Inc. Publishing as Prentice Hall Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorados Kenneth W. Monfort College of Business 2010 Pearson Education, Inc. Publishing as Prentice Hall