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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 © 2009 Pearson Education, Inc. Publishing as Prentice 15 -2

ADMINISTRATIVE PROCEDURES (2 of 2) ® Other more severe penalties ® Statute of limitations

Role of the IRS (1 of 2) ® Enforcement of tax laws ® Collection

Role of the IRS Organization of the IRS (2 of 2) © 2009 Pearson

Audits of Tax Returns (1 of 3) Type of Return Audited Individual returns C corporations Partnerships S corporations Fiduciary Individuals > $100 K inc Corps w/ assets>$250 M 2005 1. 00% 1. 20% 0. 40% 0. 10% 1. 41% 44. 1% © 2009 Pearson Education, Inc. Publishing as Prentice Hall 2004 0. 93% 1. 24% 0. 33% 0. 18% 0. 12% 1. 41% 44. 1% 15 -6

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 by using DIF NRP exams less intrusive than TCMP ® Lifestyle audits © 2009 Pearson Education, Inc. Publishing as Prentice 15 -7

Audits of Tax Returns (3 of 3) ® Types of audits Correspondence Office audit

Appeals Process (1 of 3) ® Taxpayer first meet w/ revenue agent ® If taxpayer disagrees w/ findings, IRS sends 30 -day letter Taxpayer has 30 days to request a conference w/ appeals officer ® Taxpayer meets with appeals officer © 2009 Pearson Education, Inc. Publishing as Prentice 15 -9

Appeals Process (2 of 3) ® If no agreement with appeals officer reached, IRS issues 90 -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 © 2009 Pearson Education, Inc. Publishing as Prentice 15 -10

Appeals Process (3 of 3) ® Either party may appeal court decision to Circuit Court Usually final appeal as Supreme Court rarely hears tax cases © 2009 Pearson Education, Inc. Publishing as Prentice 15 -11

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 © 2009 Pearson Education, Inc. Publishing as Prentice 15 -12

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 © 2009 Pearson Education, Inc. Publishing as Prentice 15 -13

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 © 2009 Pearson Education, Inc. Publishing as Prentice 15 -14

Requests for Rulings (2 of 2) ® When rulings are desirable Transaction is proposed Potential tax liability is high Law is unsettled or unclear © 2009 Pearson Education, Inc. Publishing as Prentice 15 -15

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 © 2009 Pearson Education, Inc. Publishing as Prentice 15 -16

Due Dates (2 of 2) ® Extensions Automatic available 6 -month extension generally available ¬May request additional time if out of country Tax must be paid by original due date to avoid penalties even if on extension ® Interest due on tax not timely paid © 2009 Pearson Education, Inc. Publishing as Prentice 15 -17

Failure-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 ® See to pay + failure to file = 5%/mo Topic Review C 15 -1 © 2009 Pearson Education, Inc. Publishing as Prentice 15 -18

Estimated Taxes (1 of 2) ® Taxpayers receiving nonwages/salary income should pay quarterly estimated tax installments E. g. , interest, flow-through income, dividends Payments should equal lesser of 90% of tax due or 100% (110% if AGI > $150 K) of last year’s tax © 2009 Pearson Education, Inc. Publishing as Prentice 15 -19

Estimated Taxes (2 of 2) ® Penalty for underpayment of ES taxes based on interest on underpayment times amount of time outstanding ® Exceptions to penalty < $1, 000 underwithheld No taxes owed during prior year © 2009 Pearson Education, Inc. Publishing as Prentice 15 -20

Other More Severe Penalties (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 corp ¬ 20% of underpayment © 2009 Pearson Education, Inc. Publishing as Prentice 15 -21

Other More Severe Penalties (2 of 3) ® 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 © 2009 Pearson Education, Inc. Publishing as Prentice 15 -22

Other More Severe Penalties (3 of 3) ® 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 $100 K ($500 K for corp), 5 years in jail or both © 2009 Pearson Education, Inc. Publishing as Prentice 15 -23

Statute of Limitations (1 of 2) ® General 3 3 -year rule 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 © 2009 Pearson Education, Inc. Publishing as Prentice 15 -24

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 ¬ 3 years from date original return is filed, OR ¬ 2 years from date they pay tax © 2009 Pearson Education, Inc. Publishing as Prentice 15 -25

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 © 2009 Pearson Education, Inc. Publishing as Prentice 15 -26

Liability for Tax (2 of 2) ® Innocent spouse relief available if all met: Innocent spouse (IS) files joint return Understatement due to other spouse’s 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 2 years after IRS begins collection efforts © 2009 Pearson Education, Inc. Publishing as Prentice 15 -27

Tax Practice Issues (1 of 2) ® 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 © 2009 Pearson Education, Inc. Publishing as Prentice 15 -28

Tax Practice Issues (2 of 2) ® 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 © 2009 Pearson Education, Inc. Publishing as Prentice 15 -29

Comments or questions about Power. Point Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard. newmark@Ph. Duh. com © 2009 Pearson Education, Inc. Publishing as Prentice Hall 15 -30