Describe the federal legislative process.
- Most tax legislation begins in the House Ways and Means Committee (part of the House of Representatives). Some is introduced by the Senate.
- The bill is voted on and approved by the Full House.
- The bill goes to the Senate Finance Committee
- full Senate
- If there are differences between the House and Senate versions of the bill, the bill is referred to the joint conference committee where differences are resolved, and
- the compromise bill must then be approved by both the House and the Senate.
- President signs the bill or vetoes it
- A presidential veto can be overridden by a vote of "two-thirds" of both the House and the Senate.
If there is no agreement after the appeals conference, the taxpayer is entitled to take the case where?
- U.S. Tax Court
- U.S. Court of Federal Claims
- U.S. District Court
Appellate courts (do not hold trials):
- U.S. Court of Appeals
- Federal Court of Appeals
- U.S. Supreme Court
Describe the U.S. Tax Court.
- specialized court that only hears federal tax cases
- the only forum in which taxpayers may litigate without first having paid the disputed tax in full
- trials are conducted before one judge
- no jury trials
Describe the U.S. District Court.
- unique: it has a jury trial
- both civil and criminal cases (not just tax cases)
- a taxpayer will request a hearing before the district court that has jurisdiction over the location in which the taxpayer lives or conducts business
- must first pay disputed tax liability & sure IRS for refund
- heard before one judge, not a panel of judges
- taxpayer may request a jury trial
Describe the U.S. Court of Federal Claims.
- no jury trial
- taxpayer must pay disputed tax & sue IRS for refund
- nationwide court
- follows the decisions of the Federal Court of Appeals, not the geographic Court of Appeals
Describe the U.S. Court of Appeals.
- the first level of federal appellate courts
- hears appeals from the U.S. District Court
- only hear cases involving a question of law, not a question of fact
- 3 judge panel
- no jury trials
- handle tax and nontax issues brought from the tax court or a district court for a specific geographic area
Which court handles the appeals for tax courts and district courts?
Which court handles appeals for the Court of Federal Claims?
- U.S. Court of Appeals hears appeals for U.S. tax and district courts
- Federal Court of Appeals hears appeals for U.S. Court of Federal Claims
List the eight common penalties imposed on taxpayers.
- Earned income Credit Penalty
- Penalty for Failure to Make Estimated Income Tax Payments
- Failure to File Penalty
- Failure to Pay Penalty
- Negligence Penalty with Respect to an Understatement of Tax
- Penalty for Substantial Underpayment of Tax
- Penalty for Substantial Valuation Misstatement
- Fraud Penalties
Summarize the earned income credit penalty
Taxpayers who negligently claim the earned income credit may lose the ability to claim this credit for two years or, if fraudulently claimed, for up to three years.
Summarize the penalty for failure to make estimated income tax payments.
Taxpayers (including corporations, estates, and trusts) who do not have sufficient amounts of withholding and who do not make timely payments of estimated income tax (including self employment tax) must pay this penalty, which accrues from the date the estimated income tax must be paid until the tax return due date without extensions.
Summarize the failure to file penalty.
Generally, 5% of the amount of tax due for each month (or any portion therof) the return is not filed.
Generally, the penalty cannot exceed a max of 25% of the amount of tax due.
The min penalty if the income tax return is more than 60 days late is less of $135 or 100% of the tax due.
If no tax is due, then there is no failure to file penalty.
If both the failure to file penalty and the failure to pay penalty are due, the failure to file penalty is reduced by the amount of the failure to pay penalty.
Summarize the failure to pay penalty.
One half of 1% per month (of any fraction thereof) up to a max of 25% of the unpaid tax.
Exception: No failure to pay penalty if:
- at least 90% of the tax is paid in by the unextended due date and
- the balance of the tax is paid by the extended due date
Note: Interest is due on the amount of tax not paid in by the unextended due date.
Summarize the negligence penalty with respect to an understatement of tax.
The penalty amount is 20% of the understatement of tax.
Defense: The taxpayer has a reasonable basis for the tax position even if the tax return does not disclose the tax position.
Summarize the penalty for substantial underpayment of tax.
Except as set forth below, an understatement of tax is "substantial" if the understatement exceeds the greater of: 10% of the correct tax, or $5,000.
- For C Corps other than personal holding companies, an understatement is "substantial" if the amount exceeds the lesser of: 1. $10 Million or 2. the greater of $10k or 10% of the correct tax
- If the tax return adequately discloses the tax position, then the taxpayer can avoid the penalty if the taxpayer has a reasonable basis for the tax position.
- If the tax return does not disclose the tax position, then the taxpayer can avoid the penalty only if the taxpayer has substantial authority for the tax position (except for tax shelters).
Summarize the penalty for a substantial valuation misstatement.
20% penalty on the understatement of tax if there is a substantial valuation.
- exists if the taxpayer claimed a value that was atleast 150% of the property's correct value
- no penalty if the amount of the tax underpayment attributable to the overstatement is no more than $5k, or $10k for C Corps
Summarize the fraud penalties.
- Both civil penalties and criminal penalties can apply
- with respect to civil penalty, the IRS must prove by a preponderance of the evidence that the taxpayer willfully and deliberately attempted to evade tax
- with respect to a criminal penalty, the IRS must prove beyond a reasonable doubt that the taxpayer criminally, willfully, and deliberately attempted to evade tax.
List the Standards of Compliance defenses that are available to avoid or reduce penalties.
Summarize a position that is not frivolous.
- 5not patently improper, but arguable. <20%
- not a sufficient basis to avoid penalties, even if the tax return disclosed the tax position
Summarize the reasonable basis standard.
- A position that has atleast a 20% chance of succeeding; one that is arguable but fairly unlikely to prevail in court
- This standard is not met if the taxpayer fails to make a reasonable attempt to determine the correctness of a position that seems too good to be true.
- The basis will avoid the negligence penalty with respect to an understatement of tax that is not substantial and the penalty for disregard of rules or regulations, even if the taxpayer does not disclose the tax return position for which the taxpayer has a reasonable basis.
- The basis will avoid the substantial underpayment penalty only if the taxpayer discloses the tax return position (except for tax shelters) for which the taxpayer has reasonable basis.
Summarize the substantial authority standard.
- The substantial authority standard is a position that has more than a 1-in-3 chance of succeeding but less than a more-than-50% chance of succeeding.
- >33% but <50%
- The basis will avoid the substantial underpayment penalty even if the taxpayer does not disclose the tax return position (except for tax shelters) for which the taxpayer has substantial authority.
- Only analyes and reports issued by the U.S. Congress, IRS regulations, and releases, and U.S. court case decisions constitute substantial authority.
- Tax articles and treatises do not constitute substantial authority.
Summarize the more likely than not standard.
- A position that has mroe than a 50% chance of succeeding
- for certain nondisclosed tax shelters, the basis will avoid both the negligence penalty with respect to an understatement of tax that is not substantial and the substantial underpayment penalty.
What other circumstances will generally allow a taxpayer to avoid a penalty?
A taxpayer generally can avoid any penalty by showing that the taxpayer:
- had reasonable cause to support the tax return position
- acted in good faith and
- did not have willful neglect