Chapter 12 : Chapter 12 Tax Administration
and Tax Planning
Slide 2: Objective Be familiar with the organizational structure of the Internal Revenue Service
Organization of IRS : Organization of IRS Congress creates tax law and the IRS enforces it
Includes assessment and collection
IRS is a branch of the Department of the Treasury
Commissioner of IRS is appointed by President and approved by Congress
Organization of IRS : Organization of IRS Headquartered in Washington DC
Regional Commissioners oversee four regional offices in Atlanta, Dallas, New York and San Francisco
District offices are located throughout US and report to their respective regional offices
Ten service centers are responsible for processing information
IRS Restructuring Act of 1998 : IRS Restructuring Act of 1998 Due to persistent problems with taxpayer service, this act sought to structurally & operationally change the IRS (thereby making it more accountable to the taxpayer)
Created separate National Taxpayer Advocate
Created independent Oversight Board
Mandated new taxpayer problem resolution procedures
Created new operating units to serve like kind taxpayers
Slide 6: Objective Have a general understanding of the IRS audit process
IRS Audits : IRS Audits IRS has right to examine taxpayers’ accounting records in a process called an audit
Correspondence audits occur via mail
Office audits occur at IRS office
Field audits occur at taxpayer’s business
Tax returns are selected for audit based upon a multitude of factors such as:
High DIF (Discriminant Function System) score [designated because of items falling outside of normal parameters]
Randomly selected tax returns chosen through TCMP (Taxpayer Compliance Measurement Program)
The TCMP has been suspended and the IRS is developing an alternative system to measure compliance
Audit Appeals : Audit Appeals There are three possible results from an audit
Agent determines that there are no changes
Agent and taxpayer agree that there is a change in tax liability
Agent and taxpayer disagree on outcome
In the last scenario, taxpayer may appeal through established appeals procedures
Appeal can move through Appeals Office, Tax Court, petitioning to the Regional Tax Court, Court of Appeals and ultimately the US Supreme Court
Slide 9: Objective Know the common penalties for taxpayers and tax preparers and be able to calculate them
Interest : Interest Interest is charged to taxpayer for late taxes (for example, prior year audit reveals tax due)
Interest is paid to the taxpayer for refund (prior year audit reveals refund due)
Interest received from IRS is income; interest paid to IRS by taxpayers is nondeductible consumer interest
Interest rate is set at 3 points above the short term federal rate and is adjusted quarterly
Failure to File Penalties : Failure to File Penalties If a tax return is not filed by its due date (with extensions)
Penalty of 5% of tax is due per month (or 15% if fraudulently failing to file)
Limited to 25% in total (or 75% if fraudulent)
Minimum penalty if return is filed within 60 days of due date (with extensions)
Lesser of $100, or
Tax due
This penalty is reduced by failure to pay penalty, if both penalties apply
Other Penalties : Other Penalties Failure to Pay Penalty
Penalty is 0.5% of tax for each month tax is late
Limited to 25% in total
Accuracy Related Penalty
If calculations on tax return substantially understate income or overstate expenses, IRS can impose a 20% underpayment penalty (based upon tax due) for willful disregard of tax law
If the IRS can prove with a ‘preponderance of evidence’ that a taxpayer purposefully evaded tax by committing fraud, they can impose a 75% fraud penalty on the amount of taxes due
Other Penalties (continued) : Other Penalties (continued) Penalty for failing to file informational returns on a timely basis (1099s, W-2s, etc)
Penalty for filing a frivolous tax return
Penalty for filing false withholding information
Penalty for writing a bad check for taxes
Penalty for underpaying estimated taxes
Slide 14: Objective Know the general rule for the statute of limitations on tax returns
Statute of Limitations : Statute of Limitations A taxpayer may not amend, nor may the IRS assess additional taxes, on a tax return for which the statute of limitations has expired
Generally this is 3 years from due date
Becomes 6 years if amount of gross income omitted exceeds 25% of gross total
No limit if tax return was fraudulently filed
If IRS and taxpayer agree, Form 872 may be signed that allows for extension of statute of limitations
Tax Preparers : Tax Preparers Any person compensated for preparing another person’s tax return is “paid tax return preparer”
Only CPAs, attorneys or enrolled agents may represent clients at IRS proceedings
There are a multitude of penalties if preparer does not conduct business with due diligence, sign returns, provide copy to clients, etc.
The attorney-client privilege has been extended in limited circumstances to non-attorneys who are authorized to practice in front of the IRS (i.e., CPAs and enrolled agents)
Slide 17: Objective Be familiar with the process of filing tax returns electronically
e-Filing : e-Filing Electronic filing is a process of transmitting tax returns by an ERO (electronic return originator) directly to IRS
Form 8453 (US Individual Income Tax Declaration for Electronic Filing), with original signatures and forms that cannot be electronically transmitted, must also be mailed
Tax preparers may only transmit 5 returns without officially requesting approval to be part of electronic filing system via Form 8633
Refund Anticipation Loans : Refund Anticipation Loans Taxpayer can arrange a refund anticipation loan (RAL) at many places that transmit electronic returns
If refund is requested in form of direct deposit, may take 10-20 days
IRS makes no guarantee that refund will not be applied against debt to government, such as defaulted student loans or other tax liens
Taxpayer Bill of Rights : Taxpayer Bill of Rights Document addresses taxpayers rights
Requires the IRS to inform taxpayers of their rights when dealing with the Service
It provides remedies for resolving disputes with the IRS
Part I – Declaration of Taxpayer Rights
Part II –Examinations, Appeals, Collections & Refunds
Slide 21: Objective Know the basic concepts of tax planning
Tax Planning : Tax Planning Average tax rate equals total tax paid divided by total income
Marginal tax rate is the tax rate on the “next” dollar of income
The relevant tax rate for tax planning
Tax avoidance (planning) refers to the taxpayer arranging his/her affairs in such a way that financial transactions produce the most favorable tax treatment allowed by law
Tax Planning (continued) : Tax Planning (continued) Tax evasion refers to the taxpayer avoiding tax in a manner that is illegal and can result in penalties and/or incarceration
Good planning helps the taxpayer avoid “tax traps”
Areas in the law that will result in a loss of benefit if a transaction is not well formed
Slide 24: Finished!