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20111.2 Tax Law and Research - Tax Law and Research CPA...

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Unformatted text preview: Tax Law and Research CPA Perspective Who Must File? All corporations Estates and trusts if gross income > $600 Individuals if gross income > standard deduction + 1 exemption File March 15, can extend for 6 months Cannot extend payment File April 15, can extend filing for 6 months Cannot extend payment Constitutionality Income tax upheld as constitutional Will be jailed for ignoring Tax Law Structure Tax Treaties Internal Revenue Code of 1986, as amended Court Cases Regulations: numbered by code section Rulings & Procedures: letter rulings and determination letters Technical Memoranda and Technical Advice Memoranda Supreme Court Appeals Courts District Court, Tax Court (including small case), Claims Court, Bankruptcy Court Of Code or Court, usually most recent controls Tax Treaty usually trumps Code/Court Rank the following sources of tax law in order of highest (to lowest) authority: Revenue Regulations Revenue Rulings The Internal Revenue Code Tax Process Prepare and File Return Examination if prompted by dif score, etc. Collection: Automated Collection Service or Revenue Officers if necessary Litigation/Appeal if prior results not acceptable to taxpayer Audit Selection Numbers look funny in relation to each other Numbers look funny compared to others in your industry Numbers look funny in relation to known facts Numbers don't match against disclosure forms Snitches Taxpayer Rights Representation Right to record proceedings Right to explanation of IRS position where disagreed Right to know why info is requested & how it will be used What happens if I refuse? Types of Exams Correspondence Audit: for contained issues Automated Underreporter: looks similar to a correspondence audit, but is result of mismatch of income on t/ps return v. information returns Automated Substitute for Return: looks similar to a correspondence audit, but is for nonfilers using std. deduction Office Audit Field Audit has higher agreement rate than correspondence audit Goal: No change letter shows you took care to mistakefree first time around Together, correspondence audits are 77% of all audits and growing. Doctrines Used By the IRS Substance over form Court Holding Co. 324 US 331 (1945) Step transaction doctrine collapsible Penrod v. Commr 88 TC 1415 (1987) Business purpose doctrine reason other than tax Economic substance doctrine economic substance is insignificant relative to tax benefits; decision driven by tax "sham" transaction doctrine Constructive receipt Economic benefit Assignment of income Lucas v. Earl 281 US 111 (1930) Cash Equivalency benefit is available w/ cash alternative Nominee or Alter Ego doctrines Accession to Wealth "Issue-focused exams" Especially popular w/ LB&I for Take into account: Area of high strategic importance, or Area of significant compliance risk, or Area of industry importance Globalization Aggressive tax planning Transparency and disclosure FBAR Statute of Limitations Assessment of tax: Collection: 10 yrs from timely assessment Claim for refund: 3 yrs from filing or 2 yrs from pyt Waivers & acceleration of statutes 3 yrs from date of filing or due date of return, whichever is longer 6 yrs from filing date or due date, whichever is longer for substantial (> 25%) underpayment which includes overstatement of basis on sale of asset. Indefinite for fraud The Audit Process Preliminary Review of Returns: matching, math & clerical or suspicious items Selection of Returns for Examination: dif score, TCMP the sequel, and love line Examinations Dealing With an Auditor Conclusions of Examination Correspondence Examinations Office Examinations Field Examinations Closing agreements Statutory Agreements If 30 day notice received respond ASAP! Binding, subject to malfeasance, etc. Used where both parties' interests are protected auditor's findings, agreement form; rights if disagreeing File a Protest or Go Straight to Court? If 90 day notice received: respond anyway, file protest @ 70 days May be an informal protest if <$25,000 in tax, P&I: brief written stmt. >$25,000 or partnership/S: must be written Get copy of Revenue Agent Report (RAR) before preparing protest Often 90day notice is rescinded Appealing a Case If correspondence case gets to collection, "have new information that wasn't considered." Problem Resolution>Taxpayer Advocate > Appeals Appeals Department: Mission "is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service." IRM To be used where there is doubt as to what the result would be if litigated in court Reasons for nonconsideration not important, can promprt audit reconsideration Refunds and Payments Refund claim may be filed for 3 years from date of return/due date or 2 years from payment Late payments incur penalties and interest (about 13%/year) on balance due Collections Levies, liens, seizures increasing Partial payment installment agreements (but not Form 9465) and OIC lessfavored Offers in compromise Form 656, filed w/ financial statements Currently need 3 different loan denials Use Form 9465 where possible: acceptance formula is 1.13*amount due/60 of up to $25k ($10 k stat) Prior to Justice Department intervention Generally for amounts less than $50,000, but can be for more w/ support of Chief Councel Doubt as to liability or doubt as to ability to pay Fee for processing, and must tender a check with offer Entering the Judicial System Expensive process involving pretrial motions (e.g. dismiss, summary judgment), pretrial stipulations of fact, witnesses (often subpoenaed) U.S. District Court Court of Federal Claims Tax Court Other: bankruptcy court Weighing Which Court to File Small Cases: $50,000 or less; informal, tax specialists, need not pay in advance, no jury, no appeal. Tax Court: tax specialists, need not pay in advance, no jury, may appeal. Federal Claims Court: hears all cases, must pay first, no jury, may appeal. District Court: hears all cases, must pay first, jury trial, may appeal. Bankruptcy Court: must seek bankruptcy protection, need not pay in advance. Which is not a possible venue sequence for tax litigation? a) U.S. Tax Court, U.S. Court of Appeals, U.S. Supreme Court b) U.S. District Court, U.S. Court of Appeals, U.S. Supreme Court c) U.S. Court of Federal Claims, U.S. Court of Appeals for the Federal Circuit, U.S. Supreme Court d) U.S. Tax Court, U.S. District Court, U.S. Court of Appeals, U.S. Supreme Court Appeals Courts 11 Regular Circuits of Appeal and the DC Circuit Court of Appeals Tax Research 1. 2. 3. 4. 5. Gather facts Identify issues Locate authorities Evaluate authorities/apply law to facts Conclude and Communicate Governing Ethics AICPA's Standards for Tax Services Cannot play audit lottery: 40% chance of being sustained on merits of case Circular 230 for representation of clients before the IRS New exam for unenrolled preparers Civil Penalties Penalty may be abated if t/p is relying on written advice from IRS Failure to file = 5% tax due for ea. Month (up to 25%) Failure to pay = (.5% 1%/month) of tax due up to 25% Accuracyrelated = 20% underpayment of tax Civil Fraud = 75% underpayment due to fraud Failure to make ES payments: (about 7% tax due) Failure to make deposits (215% of failure) False W4 = $500 Filing frivolous return = $500 Criminal Penalties In addition to civil penalties (not instead of) Generally must show fraud (which = "intent") Specifically, crimes are usually either: Willful attempt to evade or defeat tax (felony) Willful failure to collect or remit (felony) Willful failure to file return (misdemeanor) Willful misstatement of return (felony) Willful filing of (knowntobe) fraudulent document (misdemeanor) Unlawful disclosure (misdemeanor) Criminal Income Tax Evasion Filing a False Tax Return Conspiracy Assessable if preparer is compensated for tax return, and Provides all but (and maybe also) all info for tax return except clerical (mechanical) tasks Tax return positions must have substantial authority (40% chance) to be sustained on its merits; else must notify clients of risk. CPA to make a reasonable effort to answer all questions CPA may rely on info from client or third party CPA may estimate as necessary Knowledge of error requires advising client CPA may not disclose error to IRS without client's Tax Preparer Penalties And Responsibilities permission Preparer Conduct Penalties 1. 2. 3. 4. 5. Endorsing or negotiating a refund check $500 Understate due to unrealistic position $250 Willful understatement of t/p liability $1,000 Organizing abusive tax shelter Aiding & abetting understatement $1,000 Disclosure Penalties 1. 2. 3. 4. 5. $50/return for failure to give t/p complete copy of return $50/return for failure to sign $50/return failure to provide EIN $50/failure for each copy not retained for last 3 years $50/failure to keep list of each name, SS#, and place of work for each employee hired The accuracy related penalty is: a) generally 20 percent of the total tax liability for the year b) generally 20 percent of the portion of the tax underpayment for the year c) assessed instead of interest on tax underpayments d) a minimum penalty equal to 75% of the amount of underpayment for the year. Injunctions Action to enjoin income tax return preparers from engaging in misconduct OR from preparing returns Action to enjoin promoters of abusive tax shelters Interest About 6%/yr IRS pays about 1 1/2 % below what t/p pays on underpayment Organization of the Internal Revenue Service Commissioner Chief Counsel CID T/p Advocate Appeals Deputy Commissioner W & I SB/SE Assets > $10M LB & I TE/GE ...
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