©2003 south-western college publishing, cincinnati, ohio chapter 12 tax administration and tax...

©2003 South-Western College Publishing, Cincinnati, Ohio©2003 South-Western College Publishing, Cincinnati, Ohio©2003 South-Western College Publishing, Cincinnati, Ohio©2003 South-Western College Publishing, Cincinnati, Ohio

Chapter 12

Tax Administration

and Tax Planning

Tax Administration

and Tax Planning

© 2003 South-Western College Publishing Transparency 12-2

Objective

Be familiar with the organizational structure of the

Internal Revenue Service


Organization of IRS

Congress creates tax law and the IRS enforces it Includes assessment and collection

IRS is a branch of the Department of the Treasury

Commissioner of IRS is appointed by President and approved by Congress


Organization of IRS

Headquartered in Washington DCRegional Commissioners oversee four

regional offices in Atlanta, Dallas, New York and San Francisco

District offices are located throughout US and report to their respective regional offices

Ten service centers are responsible for processing information


IRS Restructuring Act of 1998

Due to persistent problems with taxpayer service, this act sought to structurally & operationally change the IRS (thereby making it more accountable to the taxpayer) Created separate National Taxpayer Advocate Created independent Oversight Board Mandated new taxpayer problem resolution

procedures Created new operating units to serve like kind

taxpayers


Objective

Have a general understanding of the IRS audit process


IRS Audits IRS has right to examine taxpayers’ accounting records in

a process called an audit Correspondence audits occur via mail Office audits occur at IRS office Field audits occur at taxpayer’s business

Tax returns are selected for audit based upon a multitude of factors such as: High DIF (Discriminant Function System) score [designated

because of items falling outside of normal parameters] Randomly selected tax returns chosen through TCMP (Taxpayer

Compliance Measurement Program)The TCMP has been suspended and the IRS is developing an

alternative system to measure compliance


Audit Appeals

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 the last scenario, taxpayer may appeal through established appeals procedures Appeal can move through Appeals Office, Tax

Court, petitioning to the Regional Tax Court, Court of Appeals and ultimately the US Supreme Court


Objective

Know the common penalties for taxpayers and tax preparers and

be able to calculate them


InterestInterest is charged to taxpayer for late taxes

(for example, prior year audit reveals tax due)Interest is paid to the taxpayer for refund

(prior year audit reveals refund due)Interest received from IRS is income; interest

paid to IRS by taxpayers is nondeductible consumer interest

Interest rate is set at 3 points above the short term federal rate and is adjusted quarterly


Failure to File PenaltiesIf a tax return is not filed by its due date (with

extensions) Penalty of 5% of tax is due per month (or 15% if fraudulently

failing to file) Limited to 25% in total (or 75% if fraudulent)

Minimum penalty if return is filed within 60 days of due date (with extensions) Lesser of $100, or Tax due

This penalty is reduced by failure to pay penalty, if both penalties apply


Other Penalties Failure to Pay Penalty

Penalty is 0.5% of tax for each month tax is late Limited to 25% in total

Accuracy Related Penalty If calculations on tax return substantially understate income

or overstate expenses, IRS can impose a 20% underpayment penalty (based upon tax due) for willful disregard of tax law

If the IRS can prove with a ‘preponderance of evidence’ that a taxpayer purposefully evaded tax by committing fraud, they can impose a 75% fraud penalty on the amount of taxes due


Other Penalties (continued)

Penalty for failing to file informational returns on a timely basis (1099s, W-2s, etc)

Penalty for filing a frivolous tax returnPenalty for filing false withholding informationPenalty for writing a bad check for taxesPenalty for underpaying estimated taxes


Objective

Know the general rule for the statute of limitations on tax

returns


Statute of LimitationsA taxpayer may not amend, nor may the IRS

assess additional taxes, on a tax return for which the statute of limitations has expired Generally this is 3 years from due date Becomes 6 years if amount of gross income omitted

exceeds 25% of gross total No limit if tax return was fraudulently filed

If IRS and taxpayer agree, Form 872 may be signed that allows for extension of statute of limitations


Tax Preparers Any person compensated for preparing another

person’s tax return is “paid tax return preparer” Only CPAs, attorneys or enrolled agents may

represent clients at IRS proceedings There are a multitude of penalties if preparer does not

conduct business with due diligence, sign returns, provide copy to clients, etc.

The attorney-client privilege has been extended in limited circumstances to non-attorneys who are authorized to practice in front of the IRS (i.e., CPAs and enrolled agents)


Objective

Be familiar with the process of filing tax returns electronically


e-FilingElectronic filing is a process of transmitting tax

returns by an ERO (electronic return originator) directly to IRS

Form 8453 (US Individual Income Tax Declaration for Electronic Filing), with original signatures and forms that cannot be electronically transmitted, must also be mailed

Tax preparers may only transmit 5 returns without officially requesting approval to be part of electronic filing system via Form 8633


Refund Anticipation Loans

Taxpayer can arrange a refund anticipation loan (RAL) at many places that transmit electronic returns If refund is requested in form of direct deposit,

may take 10-20 days IRS makes no guarantee that refund will not be

applied against debt to government, such as defaulted student loans or other tax liens


Taxpayer Bill of RightsDocument addresses taxpayers rights Requires the IRS to inform taxpayers of their

rights when dealing with the Service It provides remedies for resolving disputes with the

IRS

Part I – Declaration of Taxpayer RightsPart II –Examinations, Appeals, Collections &

Refunds


Objective

Know the basic concepts of tax planning


Tax PlanningAverage tax rate equals total tax paid divided

by total incomeMarginal tax rate is the tax rate on the “next”

dollar of income The relevant tax rate for tax planning

Tax avoidance (planning) refers to the taxpayer arranging his/her affairs in such a way that financial transactions produce the most favorable tax treatment allowed by law


Tax Planning (continued)Tax evasion refers to the taxpayer avoiding

tax in a manner that is illegal and can result in penalties and/or incarceration

Good planning helps the taxpayer avoid “tax traps” Areas in the law that will result in a loss of benefit

if a transaction is not well formed


Finished!

©2003 south-western college publishing, cincinnati, ohio chapter 12 tax administration and tax...

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