Chapter 2

What are the filing requirements for individuals?

If gross income > standard deduction

married filed separately → must file if gross income is > $5 aka both spouses have to file returns

CAN file if below gross income level and are owed a refund or can claim a refundable income tax credit.

The statute of limitations defines the period in which the taxpayer can file an amended tax return, or the IRS can assess a tax deficiency for a specific tax year. When can it be audited?

3 years from the later of the date the tax return was actually filed or the tax return’s original due date

6 years if there is a substantial understatement (more than 25%) of gross income

Indefinite if fraudulent return or no return is filed

Audits are based on a return’s _______.

Discriminant function system (DFI) - assigns a score to each tax return that represents the probability that the tax liability on the return has been underreported (a higher score = a higher likelihood of underreporting).

What is a correspondence audit?

an audit conducted by mail and generally limited to one or two items on the taxpayer’s return. most common audit seeking supporting documentation.

What is an office audit?

wider in scope; notice details items subject to examination and the support needed; can have legal/tax representation

What is a field audit?

least common; generally limited to business returns and the most complicated individual returns

What happens after an IRS audit?

• Agree with adjustment: Pay the taxes due.

• Disagree with adjustment: Receive a 30-day letter and request an appeals conference.

  • Agree at appeals → Pay taxes due.

  • Disagree at appeals → File a refund claim with the IRS.

• If the IRS denies the refund claim → Sue in U.S. District Court or the U.S. Court of Federal Claims.

• If no response to the 30-day letter → Receive a 90-day letter:

  • Pay the tax → File a refund claim.

  • Do not pay → Petition the Tax Court (only a judge - no jury).

What does a stare decisis mean in a federal judicial system?

means that a court will rule consistently with its previous rulings and the rulings of higher courts with appellate jurisdiction. **Golsen rule

What does a writ of certiorari mean in a federal judicial system?

Supreme Court refuses to hear the case and litigation ends with the circuit court of appeals decision.

What are the common primary authorities?

Statutory authorities: U.S. Constitution, Treaties, Internal Revenue Code

Administrative authorities: Treasury regulations, revenue rulings & procedures

Judicial authorities: Supreme court, appellate courts, and trial courts

Explain this professional guideline/responsibility: Treasury Department Circular 230

Sets forth rules to practice before the IRS

Pertains to federal tax only

Explain this professional guideline/responsibility: AICPA Statements on Standards for Tax Services

Sets forth guidelines governing ethical issues

Not legally enforceable

SSTS No.2 - Tax Return Position: must comply with standards imposed by applicable tax authority when recommending a tax position or preparing/signing a return (such as IRC 6694: imposes a penalty on a tax practitioner for any position that is not supported by substantial authority (35-40%) unless the position has been disclosed and has reasonable basis (supported by one or more tax authorities))

IRS can impose both civil and criminal penalties for failure to file and failure to pay. true or false?

true

Is the penalty higher for failure to file or failure to pay?

Failure to file has the higher penalty.

• Failure to file: 5% of unpaid taxes per month, up to 25%.

• Failure to pay: 0.5% of unpaid taxes per month, up to 25%.