Chapter 2

Chapter Overview

Title: Tax Compliance, the IRS, and Tax AuthoritiesPublisher: McGraw Hill LLCCopyright Information

Learning Objectives

1. Filing Requirements and Statute of Limitations

   • Identify the specific requirements for income tax returns for different entities and the applicable statute of limitations concerning assessments.

2. IRS Audit Process

   • Outline the comprehensive audit process, including how returns are selected for audit, the various types of audits, and procedures that follow an audit.

3. Tax Law Sources

   • Evaluate and compare the weight and authority of different sources of tax law, including statutory, administrative, and judicial precedents.

4. Legislative Process

   • Describe in detail how tax legislation is developed, the role of Congress, and how enacted laws affect tax administration.

5. Tax Research Steps

   • Perform the essential steps in conducting effective tax research, including fact-finding, issue identification, and applying tax authority.

6. Tax Professional Responsibilities

   • Outline the ethical and legal responsibilities of tax professionals when providing tax advice to ensure compliance with current laws.

7. Penalties

   • Identify penalties that are enforceable against both taxpayers and tax professionals alike, detailing the circumstances under which they apply.

Taxpayer Filing Requirements

• Corporations: Required to file federal income tax returns regardless of income level, ensuring compliance with Corporate Tax obligations.

• Estates and Trusts: Must file returns if their gross income exceeds $600, adhering to specific fiduciary responsibilities.

• Individuals: Filing status, age, and gross income determine the filing requirement, which varies significantly based on these factors.

Exhibit 2-1: 2024 Gross Income Thresholds by Filing Status

Tax Return Due Dates

• Individuals: Returns due on the 15th day of the fourth month following the end of the tax year, typically April 15.

• C Corporations: Same as individuals, aligning with the fiscal year reporting schedule.

• Partnerships/S Corporations: Due on the 15th day of the third month following the year-end.

• Should a due date fall on a weekend or holiday, it extends to the next business day.

• Automatic extensions are also available for individuals and entities upon proper request.

Statute of Limitations

• Defines the period available for taxpayers to file amended returns or for the IRS to assess any deficiencies. Generally, it expires three years after the actual filing or the original due date, whichever is later.

Example of Statute of Limitations

• Bill and Mercedes filed their 2020 tax return on September 6, 2021. The statute limitations for this return end on September 6, 2024.

IRS Audit Selection

• Tax returns are selected for audit based on the likelihood of inaccuracies, determined through:

  1. DIF system: A scoring system that identifies returns needing scrutiny.

  2. Document perfection program: This checks returns for potential math errors and discrepancies.

  3. Information matching programs: These programs compare taxpayer-submitted data with IRS records to flag inconsistencies.

Types of Audits

1. Correspondence Examinations: The most common type of audit, typically conducted via mail on limited issues, requiring minimal taxpayer interaction.

2. Office Examinations: Broader in scope, conducted at local IRS offices, involving more detailed review of tax returns.

3. Field Examinations: The least common type, potentially lasting months or years, conducted at the taxpayer's business premises, allowing for an in-depth review of relevant records and activities.

Tax Litigation Process (Exhibit 2-2)

• An initial IRS examination may result in either taxpayer agreement or disagreement with the proposed adjustments:

  • If the taxpayer agrees, they must pay the taxes due.

  • If the taxpayer disagrees, a series of written notices and potential appeals follow, which may lead to a court case if unresolved.

Trial-Level Courts

• U.S. Tax Court: Designed specifically for tax-related disputes, allowing trials without the need for tax payment beforehand.

• U.S. District Courts: Generalist judges preside here; jury trials may occur, but taxes due must be paid ahead of filing.

• U.S. Court of Federal Claims: Generalist court where tax payment is required before proceedings; appeals come from the Federal Circuit.

Primary Tax Authorities

• Statutory Authorities: This includes official tax law sources like the Internal Revenue Code.

• Judicial Authorities: Courts interpret existing tax laws and provide rulings.

• Administrative Authorities: The IRS's pronouncements regarding the application of tax laws and guidelines in practice.

Secondary Tax Authorities

• Tax Research Services:

  • BNA Tax Management Portfolios

  • CCH Standard Federal Tax Reporter

• Newsletters:

  • Daily Tax Report

  • Federal Tax Weekly Alert

Tax Research Steps

1. Understand Facts: Gather relevant data through comprehensive interviews and thorough document review.

2. Identify Issues: Utilize existing knowledge and context to narrow down specific topics or areas of concern.

3. Locate Relevant Authorities: Use appropriate tax research services and follow a systematic approach to research.

4. Analyze Tax Authorities: Differentiate the types of queries (factual vs. legal) and confirm the validity of the authority cited.

5. Document and Communicate Results: Clearly format tax research memos and client communications to enhance understanding and clarity.

Tax Professional Responsibilities

• Tax professionals must be familiar with codes governing their conduct, such as:

  • AICPA Code of Professional Conduct

  • IRS Circular 230

  • Relevant state laws

• Non-compliance may lead to severe legal and financial penalties, including loss of certification or licensing.

Taxpayer and Preparer Penalties

• Civil Penalties: These are monetary fines incurred for statutory violations, often linked to negligence or failure to comply with regulations.

• Criminal Penalties: These arise from serious infractions, leading to substantial fines and the possibility of imprisonment.