Module 3: Federal Tax Procedures

Question 1

Ways for selection of returns for audit?

Answer 1

1. statistical models
2. random selection
3. prior year audit
4. info return “discrepancy”
5. deductions that exceed established norms

Question 2

What kind of tax returns do the statistical models select?

Answer 2

tax returns that are most likely to contain errors and yield significant amounts of additional tax revenue upon audit

Question 3

When would a return be audited?

Answer 3

most will be audited within 2 years from date of filing, but may be audited at any point prior to expiration of statute of limitations

Question 4

Correspondence audit (review for mathematical errors) arises as a result of what?

Answer 4

As a result of IRS review for the following:
- info errors
or
- matching issues
or
- mathematical errors

Question 5

What is Form 870?

Answer 5

Waiver of Restrictions on Assessment and Collection of Deficiency in Tax

Question 6

What happens if an agreement cannot be reached after the audit?

Answer 6

The individual receives a 30-day letter notifying taxpayer of right to appeal. Taxpayer had 30 days to request administrative appeal w/ an appeals officer

Question 7

Fast-track remediation

Answer 7

Can be done by small business owners ad self-employed individuals

Goal for resolution is 50 days

Question 8

What is the goal of the appeals process (administrative) which is handled by the IRS office of appeals?

Answer 8

To resolve the tax controversies w/out litigation

Question 9

90-day letter

Answer 9

Notice of Deficiency

Taxpayer has 90 days to pay the deficiency or file a petition w/the US Tax Court

If want to use US District Court or US Court of Federal Claims, must first pay the tax deficiency and then sue the IRS for refund

Question 10

In the Federal Judicial Process what courts are considered the trials courts and what courts are considered the appellate courts?

Answer 10

Trial: US Tax Court, US District Court, US Court of Federal Claims

Appellate: US Court of Appeals, Federal Court of Appeals, US Supreme Court

Question 11

When would the IRS have the burden of proof?

Answer 11

In any court proceeding on income, gift, estate, or generation-skipping tax w/respect to factual issues provided

Question 12

What types of decisions does the US Tax Court issue?

Answer 12

1. Regular - involves a new or unusual point of law

2. Memorandum - concerns only the application of existing law/interpretation of facts

Question 13

How many judges are in the US Court of Federal Claims?

Answer 13

16 judges

Question 14

If you lose at the US Tax Court or District Court, which appellate court would your case go to?

Answer 14

US Court of Appeals

Question 15

If you lose at the US Federal Claims Court, which appellate court would your case go to?

Answer 15

US Court of Appeals for Federal Circuit

Question 16

What are the exceptions to the penalty for failure to make sufficient estimated income tax payments?

Answer 16

Withholding and timely estimated payments that are:

1. less than or equal to $1,000 of current year tax
2. at least 90% of the current year’s tax
3. at least 100% of last year’s tax
4. equal to estimated current year tax based on annualization of income method

Question 17

What is the penalty for failure-to-file a return?

Answer 17

5% of amount of tax due for each month return is late (max 25%)

Question 18

What is the penalty for failure-to-pay tax?

Answer 18

one-half of 1% per month up to a max of 25% of the unpaid tax

Question 19

What is the penalty for negligence/disreard with repect to an unsubstantial understatement of tax?

Answer 19

20% of understatement of tax

Question 20

Negligence

Answer 20

Failure to make reasonable attempt to comply with the provisions of the IRC

Question 21

Disregard

Answer 21

Careless, reckless, or intentional disregard

Question 22

What is the penalty for substantial understatement of tax?

Answer 22

20% of the understatement of tax

Question 23

Substantial

Answer 23

exceeds the greater of 10% of the correct tax or $5,000

Question 24

What is the penalty for a substantial valuation misstatement?

Answer 24

20% of the understatement of tax with respect to a valuation for tax purposes to the extent the understatement exceeds $5,000

Question 25

What are the penalties for fraud?

Answer 25

Civil: at least 75% of understatement of tax due to fraud

Criminal: as high as $100,000; $500,000 for corps

Question 26

What must the IRS prove for fraud penalties?

Answer 26

The taxpayer “willfully and deliberately” attempted to evade tax

Question 27

What factors should be considered when tax positions are taken to avoid or reduce penalties?

Answer 27

1. Frivolous tax return
2. Reasonable basis standard
3. Substantial authority standard
4. More-likely-than-not standard
5. Disclosures for uncertain tax positions
6. General avoidance of penalties

Question 28

Form 8275

Answer 28

Disclosure statement

Used to disclose positions taken on tax return that are contrary to Revenue Rulings, Revenue Procedures, or other statutory provisions (except Regulations)

Question 29

Form 8886 - Reportable transaction disclosure statement

Answer 29

Required for any taxpayer that participates in a reportable transaction (i.e. listed transactions, confidential transactions, transactions w/contractual protection, loss transactions)

Question 30

Primary Substantial Authority

Answer 30

1. IRC
2. Proposed, temp, and final regulations
3. Revenue rulings
4. Court cases