15-1 ©2008 Prentice Hall, Inc.. 15-2 ©2008 Prentice Hall, Inc. ADMINISTRATIVE PROCEDURES (1 of 2) ...
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Transcript of 15-1 ©2008 Prentice Hall, Inc.. 15-2 ©2008 Prentice Hall, Inc. ADMINISTRATIVE PROCEDURES (1 of 2) ...
15-1©2008 Prentice Hall, Inc.
©2008 Prentice Hall, Inc. 15-2
ADMINISTRATIVEADMINISTRATIVEPROCEDURESPROCEDURES (1 of 2) (1 of 2)
Role of the IRSAudits of tax returnsRequests for rulingsDue datesFailure-to-file/pay-penaltiesEstimated taxes
©2008 Prentice Hall, Inc. 15-3
ADMINISTRATIVEADMINISTRATIVEPROCEDURESPROCEDURES (2 of 2) (2 of 2)
Other more severe penaltiesStatute of limitationsLiability for taxTax practice issues
©2008 Prentice Hall, Inc. 15-4
Role of the IRSRole of the IRS(1 of 2)(1 of 2)
Enforcement of tax lawsCollection of taxes dueInterpretation of Internal
Revenue Code
©2008 Prentice Hall, Inc. 15-5
Role of the IRSRole of the IRSOrganization of the IRS (2 of 2)Organization of the IRS (2 of 2)
Commissioner/Deputy Commissioner
Shared Services Functional Units Operating Divisions
Agency Wide SharedServices 4,900 employees
Agency Wide Info SystemsServices 7,000 employees
Appeals1,900 employees
Taxpayer AdvocateService 1,600 employees
Criminal Investigation4,500 employees
Wage & InvestmentIncome 21,000 employees
Small Business & SE39,000 employees
Large & Mid-sizeBusiness 9,500 employees
Chief Council2,600 employees
National Office Staff1,000 employees
Tax Exempt & Gov’t Entities2,800 employees
©2008 Prentice Hall, Inc. 15-6
Audits of Tax ReturnsAudits of Tax Returns(1 of 3)(1 of 3)
Type of Return Audited
2004 2003
Individual returns 0.93% 0.77%C corporations 1.24% 0.71%Partnerships 0.33% 0.26%S corporations 0.18% 0.19%Fiduciary 0.12% 0.12%Individuals > $100K
inc1.41% 0.99%
Corps w/ assets>$250M
44.1% 20.0%
©2008 Prentice Hall, Inc. 15-7
Audits of Tax ReturnsAudits of Tax Returns(2 of 3)(2 of 3)
Document matching100% audit rateE.g., wages, interest, state income taxes,
real estate taxes, home mortgage interestReturns selected for audit by
discriminant function & other means29% of returns selected by using DIFNRP exams less intrusive than TCMP
Lifestyle audits
©2008 Prentice Hall, Inc. 15-8
Audits of Tax ReturnsAudits of Tax Returns(3 of 3)(3 of 3)
Types of auditsCorrespondence auditOffice auditField audit
Appeals processBurden of proof
©2008 Prentice Hall, Inc. 15-9
Appeals Process(1 of 3)
Taxpayer first meet w/ revenue agent
If taxpayer disagrees w/ findings, IRS sends thirty-day letterTaxpayer has 30 days to request a
conference w/ appeals officerTaxpayer meets with appeals officer
©2008 Prentice Hall, Inc. 15-10
Appeals Process(2 of 3)
If no agreement with appeals officer reached, IRS issues ninety-day letterTaxpayer has 90 days to file petition w/
Tax Court or pay the taxTaxpayer must pay tax first to litigate
in either District Court or U.S. Court of Federal Claims
©2008 Prentice Hall, Inc. 15-11
Appeals Process(3 of 3)
Either party may appeal court decision to Circuit CourtUsually final appeal as Supreme
Court rarely hears tax cases
©2008 Prentice Hall, Inc. 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
©2008 Prentice Hall, Inc. 15-13
Burden of Proof(2 of 2)
Burden of proof (continued)Cooperates w/ reasonable
requestsQualifies as a natural person or
legal person w/ net worth $7 million
©2008 Prentice Hall, Inc. 15-14
Requests for RulingsRequests for Rulings(1 of 2)(1 of 2)
Allows taxpayer to learn how IRS will treat a particular transaction before the transaction is completed
Request made in writingIRS has option whether or not to
respond
©2008 Prentice Hall, Inc. 15-15
Requests for RulingsRequests for Rulings(2 of 2)(2 of 2)
When rulings are desirableTransaction is proposedPotential tax liability is highLaw is unsettled or unclear
©2008 Prentice Hall, Inc. 15-16
Due DatesDue Dates(1 of 2)(1 of 2)
Returns for individuals, fiduciaries and partnershipsFifteenth day of fourth month
following year-end of entityC corporations and S corporations
Fifteenth day of third month following year-end of entity
©2008 Prentice Hall, Inc. 15-17
Due DatesDue Dates(2 of 2)(2 of 2)
Extensions availableAutomatic 6-month extension
generally availableMay request additional time if out of
countryTax must be paid by original due date
to avoid penalties even if on extensionInterest due on tax not timely paid
©2008 Prentice Hall, Inc. 15-18
Failure-to-File/Pay-Failure-to-File/Pay-PenaltiesPenalties
Failure to file penalty 5% per month of net tax due; 25% maxFraudulent failure to file is 15% per
month; 75% maxFailure to pay incurs a penalty of 0.5%
per month up to 25%Failure to pay + failure to file = 5%/mo
See Topic Review C15-1
©2008 Prentice Hall, Inc. 15-19
Estimated TaxesEstimated Taxes(1 of 2)(1 of 2)
Taxpayers receiving non-wages/salary income should pay quarterly estimated tax installmentsE.g., interest, flowthrough income,
dividendsPayments should equal lesser of 90% of
tax due or 100% (110% if AGI > $150K) of last year’s tax
©2008 Prentice Hall, Inc. 15-20
Estimated TaxesEstimated Taxes(2 of 2)(2 of 2)
Penalty for underpayment of ES taxes based on interest on underpayment times amount of time outstanding
Exceptions to penalty<$1,000 underwithheldNo taxes owed during prior year
©2008 Prentice Hall, Inc. 15-21
Other More Severe Other More Severe PenaltiesPenalties
(1 of 3)(1 of 3)
Negligence penalty (underpayment)Due to negligence or disregard of
rules/regs w/o intent to defraud 20% of underpayment
Substantial understatement > of 10% of tax liability or $5,000
$10,000 for a C corp20% of underpayment
©2008 Prentice Hall, Inc. 15-22
Other More Severe Other More Severe PenaltiesPenalties
(2 of 3)(2 of 3)
Civil fraudIRS has burden of proofSystematic omission from gross income
or fictitious deductions or dependency claims...
Civil fraud penalty is 75% of portion of underpayment attributable to fraud
©2008 Prentice Hall, Inc. 15-23
Other More Severe Other More Severe PenaltiesPenalties
(3 of 3)(3 of 3)
Criminal fraudIRS has burden of proofProsecution 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 $25,000 ($100K for corp), five years in jail or both.
©2008 Prentice Hall, Inc. 15-24
Statute of LimitationsStatute of Limitations(1 of 2)(1 of 2)
General 3-year rule3 yrs from later of due date or date
filed6-year rule for substantial omissions
Applies if gross income omitted >25% of gross income shown on return
FraudNo statute of limitations
©2008 Prentice Hall, Inc. 15-25
Statute of LimitationsStatute of Limitations(2 of 2)(2 of 2)
No limitation period if return not filedRefund claims
Taxpayer not entitled to refund for overpayments unless claim for refund filed by later ofThree years from date original return is filed, OR
Two years from date they pay tax
©2008 Prentice Hall, Inc. 15-26
Liability for TaxLiability for Tax(1 of 2)(1 of 2)
If spouses file a joint return, liability for taxes is joint and severalGovernment can collect from either
spouse regardless of who has income
Tax may be collected from transferees and fiduciaries
©2008 Prentice Hall, Inc. 15-27
Liability for TaxLiability for Tax(2 of 2)(2 of 2)
Innocent spouse relief available if all met:Innocent spouse (IS) files joint returnUnderstatement due to other spouse’s
erroneous item(s) of filing returnIS did not know or had no reason to know of
understatementInequitable to hold IS liableIS elects relief w/in two years after IRS
begins collection efforts
©2008 Prentice Hall, Inc. 15-28
Tax Practice IssuesTax Practice Issues(1 of 2)(1 of 2)
Tax preparer penaltiesIRS may impose various penalties on
tax return preparers for misconductTreasury Department Circular 230
Regulates the practice of attorneys, CPAs, enrolled agents, and enrolled actuaries before the IRS
©2008 Prentice Hall, Inc. 15-29
Tax Practice IssuesTax Practice Issues(2 of 2)(2 of 2)
Tax accounting and lawAccountants must be careful to avoid
the unauthorized practice of lawAccountant-client privilege
Similar to attorney-client privilege, but it only applies in very limited circumstances
Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark atUniversity of Northern Colorado’s
Kenneth W. Monfort College of [email protected]
15-30©2008 Prentice Hall, Inc.