106 STUDY GUIDE AUDITS APPEALS 1C1 Flashcards
1
Q
4131.01
A
Preliminary review
- The IRS Service Center where the return is filed conducts a routine review of the return for obvious errors such as:
1. a failure to sign the return,
2. a failure to report an item from an information return on the tax return, or
3. a mathematical error or clerical error, such as the use of an incorrect table. - The taxpayer is then mailed a corrected tax calculation and, if there is a deficiency, a request to pay the additional amount.
- If the taxpayer fails to respond, the IRS generally conducts either a correspondence or an office audit.
- This review process is not considered a formal examination of the return. Therefore, the taxpayer is not entitled to the administrative remedies available for formal examinations.
2
Q
4131.02
A
Selection of returns for audit
- The IRS uses a method called the Discriminant Function System (DIF), which uses mathematical formulas in order to select returns that are most likely to contain errors and to generate the most additional revenue on audit. The formulas used are developed from information gained in regular audits and audits of randomly selected returns. The randomly selected returns are chosen under the National Research Program (NRP).
- Specific factors used by the IRS in determining which returns are selected for audit are not disclosed by the IRS.
- In addition to the computerized selection process, returns can be selected for audit under a number of other methods. For example, returns can be selected for audit:
1. due to information obtained as a result of information exchange programs with state or foreign agencies,
2. due to information obtained from an informant,
3. because the return is linked in some way to another return already being audited, or
4. because the taxpayer’s taxable income, total assets, gross receipts, or deductions exceed certain thresholds established by the IRS.
3
Q
4131.03
A
Types of examinations: Correspondence examinations
- If only a few items are in question on the taxpayer’s return, an examination may be conducted through correspondence with the taxpayer.
- The examiner will contact the taxpayer by letter and ask that the questionable items on the return be verified by appropriate documentation.
- A taxpayer involved in a correspondence examination has the same appeal rights as a taxpayer involved in an office or field examination.
- If the issues cannot be resolved, the case will be referred for handling as either an office or field examination
4
Q
4131.04
A
Types of examinations: Office examinations
For more complex issues, the examination will be conducted as an office examination at the appropriate IRS District Office by a tax auditor.
The taxpayer will be asked to bring particular records to support items claimed on the return.
Generally, the scope of the office examination is limited to the issues stated in the notification letter sent to the taxpayer
5
Q
4131.05
A
Types of examinations: Field examinations
- If the tax issues are more complex, the IRS generally conducts a field examination.
- In this situation, the IRS examiner, a revenue agent, goes to the taxpayer’s place of residence or business to examine the taxpayer’s records. The revenue agent is also authorized to take related testimony and to administer oaths.
- A field examination is open-ended. The revenue agent may investigate any questionable items on the taxpayer’s return (not only those previously identified) or any questionable items in the taxpayer’s records.
6
Q
4131.06
A
Audit process
- Before the start of an examination, the IRS is required to provide the taxpayer with an explanation of the audit process and the rights available to the taxpayer. The taxpayer must also be informed that the taxpayer can suspend the interview at any time to consult with a representative.
- A taxpayer may represent themselves or they may be represented by a CPA, an attorney, an enrolled agent, or the preparer of the return who signed the return as the preparer.
- The taxpayer must give a representative written authority to represent them. This is generally done by use of IRS Form 2848 (Power of Attorney and Declaration of Representative).
- At the conclusion of the exam, the tax auditor or revenue agent provides the taxpayer with any proposed adjustments of tax liability and any tax balance due.
- If the taxpayer agrees with the adjustments, the taxpayer will sign an IRS Form 870 (Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment). By signing this form, the taxpayer waives the right to receive a statutory notice of deficiency (90-day letter) needed to petition the Tax Court and also gives up the right to go to the IRS Appeals Division.
- If the taxpayer does not agree with the adjustments, the taxpayer will receive a 30-day letter notifying them of the right to appeal the proposed adjustment to the IRS Appeals Office within a 30-day period. If an appeal is not requested, the taxpayer is issued a Notice of Deficiency (90-day letter), which gives them 90 days in which to file a U.S. Tax Court petition.
7
Q
4131.07
A
Appeals process
- An oral request for an Appeals conference can be made in the case of an office examination or a correspondence examination.
- In the case of a field examination, a written request is necessary in order to have the case sent to the IRS Appeals Office.
- If the proposed adjustment in tax for a particular period is $25,000 or less, the taxpayer only has to file a small case request indicating the adjustments they disagree with and stating the reasons for disagreement.
- If the total amount of proposed adjustment in tax for a particular period is over $25,000, a formal written protest is required.
- The written protest must include:
1. a list of the proposed changes that the taxpayer does not agree with and the reason for disagreement,
2. the tax periods involved,
3. a statement of facts supporting the taxpayer’s position, and
4. a statement of the law or other authorities that the taxpayer relies upon. - The Appeals Division will settle disputes based on the hazards of litigating the issues in court.
Example: The taxpayer will have to weigh the cost of appealing against the amount of the tax owed. Furthermore, the Appeals Division can raise additional issues. - If a taxpayer agrees to settle the case with the Appeals Division, they will sign an IRS Form 870-AD (Offer of Waiver of Restrictions on Assessment and Collection of Deficiency and Acceptance of Overassessment). Acceptance of this form means that the case will not be reopened unless there has been fraud, misrepresentation of a material fact, a significant error in a mathematical calculation, or other administrative wrongdoing.
- If a settlement is not reached with the Appeals Division, a statutory notice of deficiency (90-day letter) is sent to the taxpayer. This gives the taxpayer the opportunity to file a petition, within 90 days, with the Tax Court. The 90-day period is statutory. No extension of the time can be granted by the Tax Court. A case in the Tax Court is heard without payment of the tax. If the taxpayer loses, the taxpayer pays the tax with interest. If the 90-day statutory period is missed, the taxpayer must pay the tax and sue for a refund in the U.S. District Court or the U.S. Court of Federal Claims. To assure receipt by the Tax Court, the petition should be sent by registered mail; this is not required, but it is prudent.
Example: If the alleged tax owed is high, a taxpayer’s better option is to file in the Tax Court and defer paying the tax until after the judgment of the Tax Court, rather than to liquidate assets to pay the tax and file for a refund.
8
Q
4131.08
A
Incomplete
9
Q
4131.09
A
Trial court: U.S. Tax Court
- The U.S. Tax Court hears only federal tax disputes. The Tax Court is officially located in Washington, D.C., but judges travel to various cities across the United States to hear cases.
- Generally, the case is heard by one judge. There are no juries in the Tax Court.
- The Tax Court is a “deficiency court” in that the taxpayer can have the Tax Court hear their tax dispute without first paying the tax deficiency.
- Appeals from the Tax Court go to the U.S. Court of Federal Appeals that covers the geographic area in which the taxpayer resides.
- The Tax Court also has a simplified small tax case procedure that is more informal and where cases are heard by magistrates. To have a case heard in a small tax case procedure, the amount of tax in dispute cannot exceed $50,000. The taxpayer can elect this option in lieu of the U.S. Tax Court; however, there is no appeal from a small tax case procedure decision.
10
Q
A
11
Q
A
12
Q
4131.12
A
Trial court: U.S. Federal Court of Appeals
- An appeal can be filed with the appropriate U.S. Federal Court of Appeals as a matter of right by either the taxpayer or the government if they disagree with the trial court decision. This means the appeals court must hear the appeal as long as proper procedures are followed in filing the appeal.
- Normally the appeal is heard by a three-judge panel. In certain cases, all of the judges of the Circuit may hear the case and take part in the decision.
- The trial courts whose decisions are appealable to a particular Court of Appeals are bound to follow the prior decision of the appellate court on the same issue.
- One Court of Appeals, though, is not bound to follow a decision of another Court of Appeals on the same issue.
- The Court of Appeals hears appeals of both tax and nontax cases from the trial courts.
- Decisions of the U.S. Federal Courts of Appeals are appealable to the U.S. Supreme Court.
13
Q
4131.13
A
U.S. Supreme Court
- Either the taxpayer or the government can request that the U.S. Supreme Court review a decision in a tax case which has been rendered by a U.S. Court of Appeals. There is no appeal as a matter of right to the U.S. Supreme Court in a federal tax case.
- To file an appeal, the taxpayer or the government must file a writ of certiorari requesting that the Supreme Court hear the case.
- The Supreme Court generally does not hear appeals of tax cases. The situations in which the Court grants the writ of certiorari and hears the appeal in a tax case will usually involve either a situation in which the Courts of Appeals have issued opinions that are in conflict, the tax issue in the case impacts a large number of taxpayers, or the tax issue involves a large amount of tax revenue.
- If the Supreme Court grants the appeal and renders a decision in the case, this is generally the final word on the issue (unless Congress acts legislatively). All of the lower courts, trial and appellate, must follow the Supreme Court decision in future cases.
14
Q
4223.08
A
Specific performance
- An equitable remedy available only if damages would be an inadequate remedy for breach of the agreement.
- Two common examples of specific performance:
1. Contract to buy (not sell) land. Each piece of land is unique unto itself. The buyer could not go into the marketplace and buy an exact equivalent.
2. Purchases of unique personal property. These are one-of-a-kind items. They would also include items like the controlling interest stock of a corporation. The buyer could not go into the marketplace and buy the same item. - The promise must be clear and relate to a specific identifiable item.
- No specific performance for the following:
1. Building contract. Too difficult for the court to supervise.
2. Personal services. This would be involuntary servitude prohibited by the Thirteenth Amendment of the U.S. Constitution. Courts will enforce a negative injunction to prohibit the individual from doing that type of work during the period of the contract. This has happened when a professional basketball player jumped to a new league but still had a contract with the old team.
15
Q
Question #100731
A
If an IRS agent completes an examination of a corporation and issues a “no change” report, the IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation.
