IRS Audit and Appeals Process

Question 1

IRS Service Center -

routine review for errors

Answer 1

1. failure to sign a return
2. failure to report an item
3. mathematical error or clerical error

Question 2

IRS Svc. Center -

mailed a correct tax calculation

Answer 2

1. if a deficiency,
   a. request to pay additional amount

Question 3

IRS Svc. Center -

no responce from taxpayer

Answer 3

correspondence or office audit

Question 4

IRS Svc. Center -

not considered a formal examination return

Answer 4

taxpayer not entitled to administrative remedies available for formal examination

Question 5

Discriminant Function System

Answer 5

1. use of mathematical formulas
2. most likely to contain errors and most additional revenue
3. random selected returns under Nat’l Research Program
4. specific factors used are not disclosed

Question 6

Additional ways to random selection of returns

Answer 6

1. information exchanged in programs with states or foreign agencies
2. from an informant
3. from return linked to another return being audited
4. items exceeds certain thresholds

Question 7

Types of examinations -

Correspondence

Answer 7

1. for few items in question on taxpayer’s return
2. by letter, ask about questionable items
3. return must be verified by appropriate documentation

Question 8

Types of examination -

Office

Answer 8

1. for complex issues
2. at appropriate IRS District Office by tax auditor
3. must bring records to support items claimed
4. only limited to issues stated in the letter

Question 9

Types of examination -

Field

Answer 9

1. for more complex issues
2. a revenue agent goes to taxpayer’s place to examine records
3. authorized to take testimony and administer oaths
4. is an open-ended examination (investigate any questionable item on return or records)

Question 10

Audit Process -

IRS required to provide taxpayer

Answer 10

1. explanation of the process
2. rights available
3. that interview can be suspended any time to consult a representative

Question 11

Audit Process -

Representation before IRS

Answer 11

1. himself
2. CPA
3. attorney
4. enrolled agent
5. preparer who signed the return

***Form 2848 (Power of attorney and declaration representative) (taxpayer written authority for representation)

Question 12

Audit Process -

if taxpayer agrees with adjustments…

Answer 12

1. Form 870 (Waiver of Restriction on Assessment…)
2. by signing this form,

a. taxpayer waives his right to receive statutory notice of deficiency (90-day letter)
b. gives up right to go to IRS Appeals Division (30-day letter)

Question 13

Audit Process -

if taxpayer doesn’t agree with adjustments…

Answer 13

1. a 30-day letter to appeal to IRS Appeals Office
2. a 90-day letter, Notice of Deficiency, to file Tax Court petition

Question 14

Appeals Process -

Oral request

Answer 14

Can be for,

1. office examination
2. correspondence examination

Question 15

Appeals Process -

Written request for < $25,000

Answer 15

1. for field examination
2. file a small case for < $25,000, indicate,

a. adjustment in which disagree
b. reason for disagreement

Question 16

Appeals Process -

Written request for > $25,000

Answer 16

1. list of proposed changes that doesn’t agree and reasons
2. tax period
3. statement of facts supporting taxpayer’s position
4. statement of law or ther authorities that taxpayer relies upon

***Appeals of Division will settle disputes based on hazards of litigating the issues in court

Question 17

Appeals Process -

if taxpayer agrees to settle the case

Answer 17

1. Form 870AD (Offer of Waiver of Restrictions…)
2. case will not reopened unless,

a. fraud
b. misrepresentation of material fact
c. material mathematical error
d. other administrative wrongdoing

Question 18

Appeals Process -

if agreement not reached,

Answer 18

1. Notice of deficiency (90-day letter)
2. file a petition with Tax Court

Question 19

Judicial Process - Trial Court

US Tax Court

Answer 19

1. only federal tax disputes
2. located in Washington, DC

a. judges can travel accross US to hear cases
3. no juries; only one judge
4. deficiency court
a. only hear dispute tax
b. without paying tax deficiency
5. appeals go to US Court Federal Appeals

Question 20

Judicial Process - Trial Court

US Tax Court - Small Tax Division

Answer 20

1. less formal
2. cases heard by magistrates
3. < $50,000
4. no appeal from the decision

Question 21

Judicial Process - Trial Court

US District Court

Answer 21

1. must pay the tax
2. then sue government for a refund
3. one judge; taxpayer may request a jury trial
4. has both tax and nontax cases
5. appeals go to US Court of Federal Appeals

Question 22

Judicial Process -

US Federal Court of Appeals

Answer 22

1. file by taxpayer or government
2. 3 judges; hear the case and take part in decision
3. trial courts are bound to follow the decision
4. one Court of Appeals not bound to follow a decision of another Court of Appeals for same issue
5. both tax and nontax cases
6. appeals to US Supreme Court

Question 23

Judicial Process -

US Supreme Court

Answer 23

1. taxpayer or government
2. no appeal as a matter of right in a federal tax case
3. file a writ of certiorari
4. cases involving,

a. conflict in opinions
b. tax issue impacts large number of taxpayers
c. tax issue involving large amount tax revenue
5. the decision is the final word (unless Cogress acts legislatively)

Question 24

Tax Return Position - Required Disclosure

Schedule UTP

Answer 24

1. when taken a tax position on Inc. Tax return for current or prior tax year
2. when recorded a reserve regarding that tax position on audited F/S
3. when didn’t reserve for that position because it’s expected to litigate the position
4. must be reported, the tax position, regarding whether audited F/S are prepared using GAAP, IFRS, or other version

Question 25

Tax Return Position - Required Disclosure Who must file Sched. UTP, a corporation...

Answer 25

1. filing IRS forms 1120, 1120L, or 1120PC 2. has assets = or \> $10M (2014 and after) 3. related party issued audited F/S reporting all or portion of corp.'s operations for all or a portion of corp.'s tax year 4. has one or more tax positions 5. must be attached to inc. tax return

Question 26

Tax Return Position - Required Disclosures Policy of Restraint

Answer 26

IRS will use it and forgo seeking certain documents relating uncertain tax positions and the workpapers that document completion of Sched. UTP

Question 27

Tax Return Position - Req. Disclosure Policy of Restraint When document is privileged under

Answer 27

1. attorney-client privilege 2. tax advice privilege under Sec. 7525 IRC 3. work product doctrine and document provided to independent auditor to audit taxpayer's F/S, a. IRS will not assert during examination privilege has been waived by such disclosure

Question 28

Tax Ret. Position - Req. Disclosure Policy of Restraint when privilege not apply...

Answer 28

1. taxpayer has engaged in an activity or taken any action that would waive the privilege 2. unusual circumstances exist 3. taxpayer claimed benefits on one or more listed transactions

Question 29

Tax Ret. Position - Req. Disclosure Policy of Restraint examiners procedures

Answer 29

1. request from taxpayer a tax reconciliation of WP as a matter of course 2. includes, a. concise description of tax position reported b. amount of any reserve of tax position c. computations to determine that tax position or why that tax position designed as Major Tax Position 3. the requirement of filing Sched. UTP doesn't affect policy of restraint

Question 30

Substantiation Requirements

Answer 30

taxpayer must be able to substantiate any item in the tax return

Question 31

Substantiation Requirements - Business expenses

Answer 31

1. travel away (meals and lodging) 2. entertainment 3. business gifts 4. expenses in connection with use of "listed property" (cars, computers, etc) \*\*\*only deducted if adequate records

Question 32

Substantiation Requirements - Adequate records

Answer 32

1. amount of expense 2. time and place of travel, entertainment, or day of gift 3. business purpose of expense 4. for entertainment or gifts, a. business relationship

Question 33

Substantiation Requirements - Documentary evidence

Answer 33

1. not required for expenses \< $75 2. required for all lodging expenses

Question 34

Substantiation Requirements - Per diem allowance

Answer 34

1. amount of expense is substantiated if = or \< of federal per diem rate for area of travel 2. per diem rate is only to substantiate amount of expense; taxpayer must still substantiate place, time and business purpose of expense

Question 35

Substantiation Req. - Charitable Contributions

Answer 35

1. cancelled check a. name of charity b. date and amount