Tax - Federal Process

Question 1

Federal tax legislative process

Answer 1

1. House of Representatives: Ways and Means Committee
2. House of Representatives
3. Senate Finance Committee
4. Senate
5. Joint Conference Committee
6. Full House and Senate
7. President

Question 2

Federal tax return due dates

Answer 2

If date falls on Saturday, Sunday or holiday, return due on next working day.

– Individuals: April 15
– Corporations: March 15
– Partnerships: April 15
– Gifts: April 15 or same as estate if taxpayer died
– Estate: 9 months after death

Question 3

Federal tax return extensions

Answer 3

Does not usually extend time for tax payment.

File by return due date for 6-month extension:
– Individuals: form 4868
– Corporations : form 7004
– Partnerships: form 7004
– Estates: form 4768

Question 4

Federal tax return requirements for exempt organizations

Answer 4

Nonprofits must file 990s if gross receipts > $50,000

Foundations must file annually

Question 5

IRS audit process: preliminary review

Answer 5

IRS Service Center conducts routine review for obvious errors: signatures, reporting of items, clerical errors.

Taxpayer is mailed corrected tax calculation and tax deficiency, if any.
If taxpayer fails to respond, IRS generally conducts either correspondence or office audit.

Question 6

IRS audit process: selection of returns for audit

Answer 6

IRS uses method: Discriminant Function System, which selects returns most likely to contain errors and generate most additional revenue on audit.

Also, returns can be selected for:
– Info from state or foreign agencies
– Info from informant
– Return is linked to another return being audited
– Taxpayer’s items exceed certain thresholds

Question 7

IRS audit process: examination types

Answer 7

– Correspondence examinations: a few items. If unresolved, can become other exam types
– Office examinations: complex issues. Taxpayer brings supporting docs.
– Field examinations: any issue can be questioned or investigated. IRS examiner goes to taxpayers place of residence or business to examine records. Can take related testimony and administer oaths.

Question 8

IRS audit process

Answer 8

– IRS required to explain audit process and taxpayer rights.
– Taxpayer may represent self by CPA, attorney, enrolled agent or preparer of return
– Taxpayer must give representative written authority: Form 2848

– After exam, tax auditor provides proposed adjustments of tax liability
– If taxpayer agrees, sign Form 870: waives right to receive statutory notice of deficiency needed to petition Tax Court, and also right to go to IRS Appeals Division
– If taxpayer doesn’t agree, will receive 30 day letter notifying right to appeal within 30 day period to IRS Appeals Office. If appeal not requested, will receive notice of deficiency, giving 90 days to file Tax Court petition

Question 9

IRS appeals process

Answer 9

– Oral request for Appeals conference: office or correspondences exam
– Written request to IRS Appeals Office: field exam

If proposed adjustment in tax:
– $25,000 or less, file small case request with reasons for disagreement
– Over $25,000, formal written protest required, including: reasons, tax periods, facts supporting position, laws taxpayer relies upon.

Appeals division will settle disputes.

• If taxpayer agrees to settle case with appeals division, sign IRS Form 870-AD. This means case won’t be reopened unless for certain reasons.
• if not, statutory notice of deficiency sent to taxpayer, to file petition with the 90 days with Tax Court.

Question 10

Judicial process: general

Answer 10

After taxpayer exhausted administrative remedies with IRS, may generally litigate the case in court.

All cases must start at trial court level.
If either government or taxpayer does not agree with trial court’s decision, case may be appealed to appeal court.

Question 11

Judicial process: trial courts

Answer 11

US Tax Court
– In DC, but judges can travel.
- One judge, no Jury
– Deficiency court: taxpayer must first pay tax before case is heard
– Has Small Tax Division for informal procedures and cases are heard by magistrates. Disputed amount can’t exceed $50,000. No appeals allowed.
– Appeals to US Federal Court of Appeals

US District Court
– In federal district where taxpayer resides
– One judge, taxpayer may request jury trial
– Taxpayer must first pay tax then sue for refund
– Hears both tax and nontax cases
– Appeals to US Federal Court of Appeals

US Court of Federal Claims
- In DC
– One judge, no jury
– Hears both text and nontax cases
– Taxpayer must first pay tax then sue for refund
– Appeals to US Court of Appeals for the Federal Circuit

Question 12

Judicial process: appeal courts

Answer 12

US Federal Court of Appeals
– Usually three-judge panel
– Hears both tax and nontax cases
– Appeal to US Supreme Court

US Court of Appeals for the Federal Circuit
- In DC

US Supreme Court
- To file appeal, taxpayer or gov must file a writ of certiorari for request.
– Generally does not hear tax appeals. Does usually if Courts of Appeals issue conflicting opinions, impacts many taxpayers, or involves large tax revenue
– If grants appeal and renders decision, generally is final word

Question 13

Tax return positions: general

Answer 13

IRS Schedule UTP: uncertain tax positions.

Requires reporting of each position taken by applicable corporation if both:
– Corporation took tax position on return for current or prior tax years
– Either corporation or related party has recorded a reserve for that position in audited statements or did not record a reserve because corporation expects to litigate the position.

Tax position is one that would result in adjustment if position is not sustained.

Schedule UTP not required for tax years beginning before Jan 1, 2010.

Must be attached to corp’s income tax return.

Question 14

Tax return positions: who must file

Answer 14

Corporation must file if all:
– Files IRS forms 1120, 1120–L, 1120–PC
– Assets equal or exceed $100 million
– Issued audited statements reporting all or portion of operations for all or portion of tax year
– Has one or more positions that must be reported

Question 15

Tax return positions: policy of restraint

Answer 15

IRS will forgo seeking certain documents that relate to UTP and the workpapers that document completion of schedule UTP.

Work product doctrine, a.k.a. work product rule: protects certain work to be admitted into tax case. Material in question maybe shielded.

Question 16

Substantiation requirements

Answer 16

Taxpayer must generally be able to substantiate any item on tax return.

Question 17

Substantiation of business expenses

Answer 17

Can deduct only if substantiated:
– Travel away from home
– Entertainment expenses
– Business gifts, limited to $25 per donee, per year
– Expenses related to use of listed property (cars, computers, etc.)

Records should contain info:
– Amount of expense
– Time and place of expense
– Business purpose of expense
– Name and business relationship of person being gifted/entertained

Documentary evidence, like receipt, generally not required for less than $75. But required for all lodging expenses.

Question 18

Penalties: failure to pay estimated tax

Answer 18

Not apply if tax due is less than $500 for corporations or $1000 for all other taxpayers.

Individual underpayment = diff btwn estimated tax paid and lowest of:
– 90% of current year tax
– 100% of prior year tax (110% if AGI > $150k joint or $75k single)

Corporation underpayment = diff btwn estimated tax paid and lowest of:
– 100% of current year tax
– 100% of prior year tax

Question 19

Penalties: erroneous refund claims

Answer 19

If taxpayer filed claim for refund greater than amount actually allowable, penalty equals 20% of improperly claimed amount.

Penalty does not apply if taxpayer shows they had reasonable basis for a claim.

Question 20

Penalties: general

Answer 20

Any fines and penalties paid are not allowed deductions on tax return.

Civil fraud penalties can be imposed on corporation that underpays tax when it maintains false records and reports fictitious transactions to minimize corporate tax liability.

Question 21

Statute of limitations

Answer 21

Assessment
– Three years from later of: date return filed or date return due
– If taxpayer fails to file or files fraudulent return, is unlimited time
- if has substantial omission of income (25% of reported income), is six years
– Can be extended if IRS and taxpayer both consent: sign IRS Form 872
Dash is suspended if notice of deficiency see his sense to text pair. If text pair filed petition with tax court, suspension continues until 60 days after tax court decision becomes final

Collection
IRS has 10 years from date of assessment to collect tax due by loving text pairs property or filing court action.

Refund claims
Taxpayer must file refund claim within later of: 3 years from date that related return was filed or within 2 years of actual payment of tax.
If no return was filed, refund must be filed within 2 years of date tax was paid.

Question 22

Taxpayer accounting periods: basics

Answer 22

It has adequate wreckers, can use fiscal year. If not, must use calendar year.

Can elect 52/53 week tax year: ends on same day of the week each year.

Make election when filing initial tax return. Must use this election unless obtain approval to change from IRS: Form 1128. Generally not approved.

Question 23

Taxpayer accounting periods: partnerships and S corporations

Answer 23

Partnership use year of:

• Majority partner rule: partner(s) holding more than 50% interest in the capital and profits.
• If not apply, use principal partners: holding 5% or more interest, and all principal partners have same tax year.
• If not apply, use tax year with least aggregate deferral of income.

S corporation must use calendar year.

Either can elect different tax year if:
– Business purpose can be shown
– Results in deferral of income of not more than three months and entity agrees to make tax deposits (Section 444 election)

Question 24

Taxpayer accounting periods: personal service corporations

Answer 24

Generally must use calendar year.

Can elect fiscal year if:
– Business purpose exists
– Following occurs:
– – Results in deferral of no more than three months of income
– – Pays shareholder–employees salary during part of calendar year after close of fiscal tax year
– – Salary for that period is proportionate to shareholder-employees salary for previous fiscal tax year

Question 25

Taxpayer accounting methods

Answer 25

May use:
– Cash method
– Accrual method
– Any other method permitted by IRC
– Any combo of permissible methods

Cash Method
– Income if constructively received
– Expenses in year actually paid
– Prepaid expenses over one year after tax year must be capitalized and amortized.
- Prepaid interest must be accrual

Accrual Method
– Must be used for inventories

Accrual:

• C corporation
• Partnership that has C corporation as partner
• Tax shelters

Exceptions:
– Farming or tree-raising business
– Qualified personal service corporation
– Average annual gross receipts for most recent three tax years are $5 million or less
– Average annual gross receipts do not exceed $1 million
– Some taxpayers whose average annual gross receipts do not exceed $10 million

Question 26

Inventory valuation methods

Answer 26

IRC Section 471: generally same as for financial accounting.

All items in inventory should be valued at either: Cost or LOCOM
May use LIFO, FIFO or specific ID.
If using LIFO, must value at cost.

Election to LIFO, once made, needs IRS approval to be changed. If LIFO for tax, must be for financials too.

Question 27

Inventory evaluation methods: Uniform Capitalization rules

Answer 27

IRS Section 263A: UNICAP

Requirements to capitalize all direct costs and allocable share of most indirect costs associated with production or resale activities.

UNICAP rules apply to:

• real or tangible personal property produced by taxpayer for business or for profit
• real or tangible personal property produced by taxpayer for sale to customers
• real or personal property acquired for resale by taxpayer

Does not apply to personal property acquired by taxpayer for resale if taxpayer’s average annual gross receipts for most recent three tax years do not exceed $10 million.

Question 28

Installment sales

Answer 28

Required to recognize gain over periods when payments are received.
– Applies if at least one payment will be received after tax year of sale
– Does not apply to losses

Can’t be used for:
– Property held for sale in ordinary course of business: inventory
– Gain that must be recaptured as ordinary income (Sections 1245 or 1250)
– Stocks or securities traded on established securities market

[Gain FORMULA]

Question 29

Tax return elections: check the box

Answer 29

IRC section 7701: certain entities can you let how to be treated for tax.

Entity must meet all requirements:
– Separate from its owners or members
– Is business and not trust or other special entity
– Eligible entity: not organized under either state or federal incorporation statute

To elect out of default classification or change classification, file IRS Form 8832.
Can file initial action at any time. Prohibited from filing more than one election to change during any 60 month period. Except for more than 50% change in ownership of entity.

Question 30

Tax return elections: details on elections

Answer 30

Domestic entity with at least two members is partnership, unless elect to be corporation.

Single member entity not treated separate from owner, unless elect to be corporation.

Certain corporations can elect S-corporation status. Must be:
- Small business corporation
– Domestic corporation
– Have only individuals, estates, certain trusts, banks, and certain exempt orgs as shareholders
– Shareholders must be citizens or residents of US
– Can have only one class of stock
– Limited to 100 shareholders. Married couple counts as one shareholder.

Question 31

Tax planning

Answer 31

– Includes projections of tax consequences for getting optimal after tax result.
– Also allows taxpayer to avoid penalties regarding estimated taxes.
- Tax decision-making is influenced by tax and non-tax considerations.

Question 32

Multi-jurisdictional tax issues: state and local taxes

Answer 32

• Local jurisdictions in all states impose real estate taxes.
• Most states allow local taxes on personal property.
• States generally impose statewide general sales tax on sale of personal property and sometimes certain services.
• Most states impose personal income tax on individuals. Some allow local personal income tax.
• Most states impose corporate income tax.

Question 33

Multi-jurisdictional tax issues: foreign taxes

Answer 33

Text payers conducting business internationally will be subject to various foreign taxes. Can range from income taxes, real and personal property taxes, and sales taxes.
Often, treaty between US and foreign country has impact on taxes.

Will often encounter value added tax. It is a form of consumption tax: computed based on incremental value added to the goods in manufacturing (not at cash register like sales tax)

Question 34

Tax research

Answer 34

Legislative sources:
– IRC is ultimate thought he’d of source: tax law and I could by Congress.
– Legislative history can be valuable

Administrative sources:
– Treasury regulations: official interpretation of IRC by Department of the Treasury. Given great deference.
– Revenue rulings issued by IRS. Has less weight.

Judicial sources:
– US Supreme Court decision: definitive answer on tax issue, unless Congress disagrees and changes tax law.
– Decisions by Court of Appeals given more weight than trial courts
– Reviewed decisions by Tax Court has greater weight the normal Tax Court decision.

Question 35

Tax communications with or on behalf of clients

Answer 35

Once tax research completed, results generally is communicated to clients and possibly third-party like IRS.
How much detail or how technical will be determined by audience. If text pair has a little knowledge, should be less detail and technical.

Generally should include following elements:
– Brief statement of essential facts necessary to answer tax questions
– Identification of tax issues. If multiple, each should be separately laid out
– Clear identification of conclusions reached by researcher. Separate conclusion for each tax issue. If more than one conclusion exists, clearly state.
– Clear statement of tax sources that form conclusion and reasoning that supports conclusion.