Chapter 12 Tax Administration & Tax Planning

1. Chapter 12Tax Administration & Tax Planning Income Tax Fundamentals 2010 Gerald E. Whittenburg & Martha Altus-Buller Student’s Copy 2010 Cengage Learning

2. Internal Revenue Service (IRS) • Congress creates tax law and the IRS enforces it • Includes assessment and collection departments • Is a branch of the Treasury Department • Is headquartered in Washington DC • Commissioner of IRS is appointed by president and approved by Congress 2010 Cengage Learning

3. IRS Restructuring Act of 1998 • This act sought to structurally and operationally change the IRS by creating operating units along functional lines • Service and Enforcement arm collects taxes and audits tax returns • Small Business/Self-Employed (SB/SE) unit serves SB/SE customers • Wages & Investment (W&I) division helps taxpayers (that primarily pay taxes through withholdings) comply with applicable laws 2010 Cengage Learning

4. Examination of Records • IRS has authority to examine taxpayers’ accounting records and books in a process called an audit • IRS can summon taxpayers and require them to appear before the IRS and produce necessary accounting records • IRS may also summon taxpayer records from third parties (CPAs, brokers, etc.) • Taxpayer should enlist professional tax advice 2010 Cengage Learning

5. Appeals Process • When tax return is selected for examination, an agent is assigned • 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 this scenario, taxpayer may appeal through established appeals procedures 2010 Cengage Learning

6. Interest • Interest is charged to taxpayer for late taxes • Interest paid is nondeductible consumer interest • Interest is paid to the taxpayer for refund • Prior year audit reveals refund due • Interest received from IRS is income • Interest rate is adjusted quarterly based on the short-term federal rate plus 3 percentage points, sample of recent rates: • First quarter 2009 5% • Second quarter 2009 4% • Third quarter 2009 4% • Fourth quarter 2009 4% 2010 Cengage Learning

7. Statute of Limitations • A taxpayer may not amend, nor may the IRS assess additional taxes, on a tax return for which the three year statute of limitations has expired - generally this is three years from due date • Exceptions • No statute of limitations if it is a fraudulent tax return • Six years if amount of gross income omitted exceeds 25% of total gross income • Statute of limitations for deduction of a bad debt or worthless security is seven years 2010 Cengage Learning

8. Tax Practitioners • The IRS does not prescribe any minimum level of education for tax preparation • Only CPAs, attorneys or enrolled agents may represent clients at IRS proceedings • There are a multitude of preparer penalties • For example, if tax preparer does not exercise due diligence, tax returns are not signed, or copy is not provided to clients, the tax preparer may be assessed a penalty • See page 12-15 for full list of prepare penalties 2010 Cengage Learning

9. Burden of Proof • In most civil tax cases the IRS has historically placed burden of proof on taxpayer • IRS Restructuring & Reform Act of 1998 changed tax law to shift burden of proof to IRS in many cases • Burden of proof automatically shifts to IRS in two situations • IRS uses statistics to reconstruct an individual’s income • Court proceeding against an individual taxpayer involves penalty/addition to tax • In certain situations, burden of proof still rests with the taxpayer 2010 Cengage Learning

10. 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 IRS • Part I – Declaration of Taxpayer Rights • Directs taxpayer to other IRS publications for more details • Part II –Examinations, Appeals, Collections & Refunds Note: See pages 12-19 – 12-20 for Taxpayer Bill of Rights 2010 Cengage Learning