Tax Research Exam II

Commissioner of internal revenue

A position which serves as the head of the IRS and is appointed by the president

Chief Counsel

The highest ranked legal adviser to the IRS. Represents the IRS in tax court litigation and drafts proposed legislation, treaties, and reguations

National taxpayer advocate

A service that helps resolve problems that taxpayers cannot correct through normal IRS procedures. Will issue an annual report to congress which addresses issues which plague taxpayers and recommends changes

Taxpayer assistance order (TAO)

Issued by the taxpayer advocate which suspends, delays, or stops actions by the IRS that may cause significant hardship to the taxpayer

Field audit

A type of audit which requires the IRS to perform the audit on the taxpayer’s premises

Revenue agent’s report (RAR)

Issued at the end of an IRS audit which explains proposed adjustments, documents the IRS’ position, and lists any tax due

• Meet with supervisor

• 30 days letter is issued

What happens if a taxpayer disagrees with a RAR?

Sign form 870 which waives taxpayers’ right to notice of deficiency

What happens if a taxpayer agrees with a RAR?

30 day letter

• A letter received called a “notice of adjustment” which notifies the taxpayer of proposed adjustments and appeal rights

• The taxpayer will have 30 days from the date of the letter to accept the proposed adjustments or request a conference with the independent office of appeals (requires written protest if >$25,000)

90 day letter

• Received if taxpayer and IRS cannot come to an agreement at appeals conference or taxpayer doesn’t respond to 30 day letter

• Gives the taxpayer 90 days from when mailed to file a petition with the tax court for redetermination of tax

Statute of limitations (general)

• Generally requires assessments to be made within 3 years of the later of : date return is filed or original due date

• Will never start if no return is filed

• Increases to 6 years if taxpayer omits gross income of more than 25%

• Does not apply to false or fraudulent returns

Statute of limitations on collections

• Allows the IRS to collect assessed taxes within 10 years (of assessment date)

• Gives IRS power to levy wages funds, seize property, and apply future refunds against debt

Statute of limitations on claims for refund

Allows refund claims to be made by the later of: 3 years from return date OR 2 years from payment date

Offers in compromise

Allows the IRS to settle civil or criminal tax assessments for less that the full amount when tax liability is in doubt, collection is in doubt, or payment would cause taxpayer economic hardship

Taxpayer bill of rights

• Taxpayer may be represented under power of attorney

• IRS must inform spouses of joint and several liability for tax deficiencies

• Taxpayer may recover litigation costs from treasury if IRS loses tax case

• Practitioners have limited client confidentiality privilege

• Return preparation

• Advice

• Written communications about tax shelters

• Client work papers

What does client confidentiality privilege not apply to?

Ad valorem penalties

Civil penalties that are assessed as a percentage of delinquent tax, the most common type

Failure to file tax return (IRC 6651)

• A penalty assessed if no return is filed within 60 days of the due date (no penalty if no tax is owed)

• 5% of the tax due per month, stops at 25%

• Not applicable if extension is filed or reasonable cause is established

Taxpayer

Who bears the burden of proof for showing reasonable cause for failure to file?

Failure to pay penalty

• Penalty assessed when taxpayer fails to pay tax owed on a return without reasonable cause OR taxpayer fails to pay assessed deficiency within 10 days of notice

• 0.5% per month to 25% max

Failure to file - failure to pay

How do you calculate failure to file / failure to pay penalty when both apply?

• Reasonable cause

• Presumption of reasonable cause (have paid 90% of tax and only 10% remains unpaid)

In what instances dies the failure to pay penalty not apply?

Automatic penalty abatement

Allows relief for taxpayers with a failure to pay, failure to file, or failure to deposit penalty if they have been clean in the past 3 years

Accuracy related penalty (6662)

Assesses a 20% tax ib underpayment of tax which results from:

• Negligence of rules

• Substantial understatement of income tax

• Transactions that lack economic substance

• Substantial valuation overstatement

• Substantial overstatement of pension liabilities

Negligence

Any failure to make a reasonable attempt to comply with provisions of the code

• Reasonable basis and disclosure OR substantial authority

• Good faith attempt to comply with tax law

• AND full disclosure

When do accuracy related penalties not apply?

IRS

For the civil fraud penalty, who bears the burden of proof?

Civil fraud penalty (6663)

Assesses a 75% penalty for underpayments which are attributable to fraud

Safe harbor for underpayment of estimated income tax

No penalty if estimated payment is lesser of:

• 100% prior year tax

• 90% of current year tax (100% for corporations)

Return preparer

Anyone who prepares, for compensation, all or a substantial portion (>$10,000 or >$400,000 and > 20% AGI) of a tax return)

Greater of $1,000 or ½ of fee received

What is the penalty for a tax preparer taking an unreasonable position?

Injunction

A judicial order that prohibits the names person from practicing as a tax return preparer or other tax related activities

Reduce the net present value of tax liability → tax savings produce benefits beyond taxation

What is the goal of tax planning?

Before tax cost * (1 - marginal tax rate)

What is the formula for the after tax cost of tax planning?

Tax base

Amount on which a tax is levied

Marginal tax rate

The tax rate on the next dollar of income or deduction

Economic substance doctrine

Disallows the creation of transactions for the sole purpose of reducing tax liability

Avoid recognition of taxable income

A goal of tax planning such as using debt and exclusions to avoid accumulating gross income

Change timing of recognition

A goal of tax planning which involves postponing recognition of income

Change tax jurisdictions

A goal of tax planning which might involve changing jurisdiction of a transaction to another state

Change character of income

A goal of tax planning which involves changing the classification of income to items with preferential tax treatment

Statutory tax traps

Provisions in the law that are intended to prevent certain planning opportunities such as section 482 or the kiddie tax

Taxpayer

Generally, the burden of proof for a tax position falls on…

• Taxpayer provides credible factual evidence and cooperates

• Criminal cases

• Fraud

In what situations does the burden of proof shift to the IRS in a judicial setting?

Writ of certiorari

Process by which SCOTUS agrees to hear a case based on the appeal of a lower court decision

En banc

Decision by the full court instead of a single judge

Collateral estoppel

When a fact or issue has been determined by valid judgement, that fact or issue cannot be litigated again by the same parties

• US courts of federal claims

• US district court

• US tax court

List the US trial courts:

• Federal circuit court of appeals

• US court of appeals

List the US appellate courts:

No

Is a jury trial available for tax court?

Tax court

• Does not require taxpayer to pay disputed tax before their hearing

• Has 19 tax specialist judges which can hear a case en banc

• Entered by filing petition within 90 days of letter

• Jury trial is unavailable

Golsen rule

Specifies that the tax court will follow the precedent of the court of appeals that has jurisdiction over the taxpayer in question → will make their own ruling in absence of an appeals decision

Small claims division

• A division of the tax court which disputes tax deficiencies up to $50,000

• Decisions CANNOT be appealed

District courts

What is the only court where jury trial is available?

District courts

• Courts which hear all types of cases, including non-tax

• Judges are generalists

• Jury trial is available

• Taxpayer must pay deficiency before trial

• Decisions are only binding within their district

Court of federal claims

• National court which hears cases regarding monetary claims against the US

• Must pay tax deficiencies before trial

• Not bound by geographical appeals decisions

False, it just means they won’t hear the case

True or False: SCOTUS denying certiorari means they agree with the decision of the lower court

Federal circuit court of appeals

Which court(s) can the US court of federal claims appeal to?

US court of appeals

Which court(s) can the US district court appeal to?

US court of federal appeals

Which court(s) can the Tax court appeal to?