Federal Tax Procedures Flashcards
What are some ways that a return may be selected for audit by the IRS?
statistical model, random selection, prior year audit, information return discrepancy, and deductions that exceed established norms
What is an office audit?
conducted by an IRS agent in an IRS office or correspondence and is used for individual returns with few or no items of business income; in most cases a taxpayer just needs to substantiate an item
What is a field audit?
conducted by an IRS agent at the taxpayer’s office, home, or place of business of the taxpayer’s representative; IRS makes final determination of when/where/how
What’s next after an office/field audit?
if resolved, the taxpayer signs Form 870 and pays any additional money owed (or receives a refund)
if not resolved, the taxpayer receives a 30-day letter notifying the taxpayer of the right to appeal
What happens in the Office of Appeals?
the goal of the appeals process is to resolve the tax controversy without litigation; if an agreement is reached, the taxpayer signs Form 870-AD and everything is done
What happens if a settlement isn’t reached with the Office of Appeals?
a 90-day letter is issued where the taxpayer either pays the deficiency or files a petition with the U.S. Tax Court; if the taxpayer would like to litigate the case but prefers the case to be heard in the U.S. District Court or U.S. Court of Federal Claims, they must first pay the deficiency and then sue the IRS for the refund
How is the Federal Court system divided up?
the U.S. Tax Court, a U.S. District Court, and the U.S. Court of Federal Claims are considered trial courts
the U.S. Court of Appeals, the Federal Court of Appeals, and the Supreme Court are considered appellate courts
the appellate courts are limited to a review of the trial record of the lower court to determine if that court applied the proper law in arriving at its decision (rarely will an appellate court disturb the trial court’s decision)
U.S. Tax Court facts
nationwide court solely for tax cases
no payment required and has small claims division to hear claims involving disputed liabilities of $50k or less
judges are tax experts; a jury trial is not available, and the decisions are regular or memorandum
U.S. District Court facts
located throughout the USA, with each court assigned a specific geographic area
pay and sue for refund
judges are not tax experts; a jury trial is an option
U.S. Court of Federal Claims facts
court located in Washington, D.C.
pay and sue for refund
jury trial is not available; generally handles large tax claims for high-worth individuals and for national and multinational companies
What are the different circumstances where a taxpayer can be assessed a penalty by the IRS?
earned income credit penalty, penalty for failure to make sufficient estimated income tax payments, failure-to-file penalty, failure-to-pay penalty, negligence penalty with respect to an understatement of tax, penalty for substantial understatement of tax, penalty for a substantial valuation misstatement, and fraud penalties
How is the earned income credit penalty not a true penalty?
it’s more of a statutory restriction because taxpayers who negligently claim the earned income credit may not claim the credit for two subsequent years or up to ten years if the claim was fraudulent
What is a frivolous tax return?
it is one that has no basis in law or other authority
What is the reasonable basis standard?
a tax position that has at least a 20% chance of succeeding (arguable but fairly unlikely to prevail in court)
What is the substantial authority standard?
a tax position that has more than a 40% chance of succeeding in court (IRS regulations, court case decisions, etc. constitute substantial authority)
