Principles of Taxation

1. Principles of Taxation Chapter 17 The Tax Compliance Process

2. Objectives • Late-filing and late-payment penalties • Statute of limitations • 3 types of IRS audits • Negligence or civil fraud, criminal fraud penalties • Trial and appeal courts • Transferee liability and innocent spouse rule

3. Filing and Payment Requirements • Due dates: • Individual: ___/15, extend to ___/15 or ___/15. • Corporate: 15th day of __rd month, extend to 15th day of ___th month. • Payments are due when? • Does the IRS charge YOU interest on late payments? • Does the IRS pay YOU interest on refunds?

4. Late-Filing and Late-Payment Penalties • Penalty is a function of taxes OWED. If taxpayer is due a refund, there is no late filing penalty. • Combined penalty = ___% of balance due per month late for ___ months, then ___ of 1 percent for up to an additional 45 months.

5. Statute of Limitations • The IRS has _______years from the later of • If the taxpayer omits > ____% of gross income, IRS has _____ years. • What is the statute for fraudulent returns?

6. The Audit Process • Corporate returns selected mainly by size. • Individual returns are scored by IRS using discriminant function system. • Returns audited more frequently: • High income • High deduction • Personal business (Schedule C)

7. Types of Audits • Correspondence - routine audits conducted by mail - send in documentation, explanations, etc. • Office exams take place at an IRS district office - limited scope. • Field exams take place at the taxpayer’s place of business - these are broader in scope. • Deficiency is the additional tax owed. If interest is charged, it is deductible if the taxpayer is a corporation, but only for individuals if the liability is related to the operation of the individual’s business.

8. Noncompliance Penalties - Negligence • What does negligence mean? • Penalty = ____% of any underpayment attributable to the taxpayer’s failure to make this reasonable attempt. • Negligence versus mistake? • Complexity of issues, taxpayer’s education/experience, cooperation with IRS, advice from professionals

9. Noncompliance Penalties - Civil Fraud • ____% of tax underpayment due to fraud. • Fraud is the “ .” • Evidence includes: • Systematic omission of substantial amounts of income • Deduction of nonexistent expenses • 2 sets of books

10. Noncompliance Penalties - Criminal Fraud • Tax evasion = criminal fraud • Up to $___________ individual, $500,000 corporation • Prison • IRS must show guilt beyond a reasonable doubt.

11. Tax Return Preparer Penalties • Failure to sign - $50 per failure. • Taking a position with no realistic possibility of sustaining on its merit - $250 per return. • Intentional disregard of rules a regulations - $1000 per return.

12. Contesting Audit Results - Appeal • See IRS Problem Resolution department. If this fails, • Appeal is 1st step. • See Publication 5, Appeal Rights and Preparation of Protest for Unagreed Case.

13. Contesting Audit Results - Litigation • Trial Courts • _________________ (single judge or panel of judges) - taxpayer does not have to pay deficiency first. • Taxpayer pays deficiency and sues for refund. Advantage - interest stops accruing should taxpayer lose. • ______________ Court (jury trial) or • U.S. Court ________________ (single judge or panel of judges).

14. Contesting Audit Results - Litigation • Appeal Courts • U.S. Circuit Courts of Appeal • U.S. Supreme Court (hears very few tax cases)

15. IRS Collections • IRS can seize property. • When corporations are dissolved, shareholders have ___________ __________ for back taxes up to the value of any assets received on liquidation. • Spouses may not be subject for deficiencies attributable to the other spouse under the __________ ____________ rule. • Doesn’t apply if spouse received benefit from evaded/avoided taxes.