What is a Correspondence Audit? How is a discrepancy resolved?
The IRS reviews for an information error (missing signature), a matching issue (1099 filed doesn’t match the tax return), or simple mathematical error.
There is no issue; it’s an obvious error. The IRS calculates the correct tax and communicates the issue (tax due or refund coming) in a correspondence letter.
There is typically no penalty if the tax due is paid in a timely manner.
What is an Office or Field Audit?
There is an issue of concern.
An office audit is held either at the IRS office or by correspondence for individual returns without business income.
A field audit is held at the person’s home, place of business, or at the taxpayer’s representative, at the IRS’s discretion.
True / False: The taxpayer may make an audio recording of a field audit?
True
What are the three types of outcomes of an office or field audit?
Issue Resolved: Either the IRS says “Oh, I see what you did here” and issues a No Change Report OR there is a change and the taxpayer and IRS agree on the outcome. The taxpayer then waives the right to any appeal.
Issue Unresolved: the taxpayer receives a copy of the Revenue Agent’s report and a 30-day notice of the right to appeal. The taxpayer has 30 days to request an administrative appeal with an appeals officer.
Fast-Track Remediation: For small business owners and self-employed to use a mediator to solve the dispute within 60 days. If still unresolved, the appeals process is available.
What types of issues CANNOT be referred to the Fast-Track Remediation process?
Issues for which there is no legal precedent in the courts
… the courts in different jurisdictions have rendered differing decisions,
… and other specialized situations.
A taxpayer endures a field audit and both parties agree to the outcome. The taxpayer owes more money. Is interest accrued on the amount owed? If so, how is interest determined?
Interest accrues from the due date of the return until 30 days after the waiver of appeals is filed.
A taxpayer endures a field audit and both parties agree to the outcome. The taxpayer should receive a refund. Is interest paid by the government on the refund?
Yes
What is the non-judicial appeals process if an issue is unresolved immediately following an IRS audit?
Appeals Conference: A meeting with an appeals officer to resolve the issue
If still unresolved, the taxpayer receives a Notice of Deficiency (90-Day Letter) stating the taxpayer has 90 days to either
++ pay the deficiency OR
++ file a petition with the U.S. TAX COURT (the only court where you don’t have to pay the deficiency first)
What are the 3 trial courts? What is the major advantage and disadvantage of each?
U.S. Tax Court
++ don’t pay the tax bill first
++ no jury
U.S. District Court
++ jury trial option
++ must pay the tax bill first
U.S. Court of Federal Claims
++ panel of 16 judges
++ must pay the tax bill first
What are the 3 appellate courts and from which courts do they receive appeals?
U.S. Court of Appeals: from US Tax Court and US District Court
Federal Court of Appeals: from US Court of Federal Claims
U.S. Supreme Court: from US Court of Appeals and Federal Court of Appeals
Under which circumstances is the burden of proof placed on the IRS rather than the taxpayer?
When the taxpayer has introduced credible evidence, maintained books and records as required, and has complied with reasonable IRS requests, then the IRS has burden of proof for income, gift, estate, or generation-skipping tax.
What types of cases are heard by the U.S. Tax Court? What are the requirements to petition? What types of decisions can be made?
Only federal tax cases generally prior to the time that formal tax assessments are made.
++ Small Cases Division: for taxes amounts <$50,000 in one year. Decisions may not be appealed and do not set precedent.
The ONLY forum in which taxpayers may litigate w/o first having paid the disputed tax in full.
One tax expert judge; no jury trials
Two types of decisions: (1) Regular Decision involving a new or unusual point of law or (2) Memorandum Decision concerns only the application of existing law or interpretation of facts
What types of cases are heard by the U.S. District Court? What are the requirements to petition?
Not a specialized court. Will hear civil, criminal, and tax suits.
Must first pay the disputed tax in full and then sue for refund
One judge; jury trial is an option
What types of cases are heard by the U.S. Court of Federal Claims? What are the requirements to petition?
Jurisdiction for claims for money damages against the U.S., including tax refunds. Generally handles large tax claims for high-worth individuals and for national and multinational companies.
Must first pay the disputed tax in full and then sue for refund
Panel of 16 judges; no jury trials
How can one avoid the failure to make sufficient estimated income tax payments?
Pay at least 90% of the current year tax OR
100% of previous year’s tax (if AGI <$150,000) OR
110% of previous year’s tax (if AGI >$150,000)
How much is the failure-to-file penalty?
Typically: 5% of the amount of tax due to each month or any part of the month that the return is late, up to a max of 25%.
++ If >60 days late: lesser of $210 or 100% of the tax due
Partnerships: $200 for each month or part thereof, up to a max 12 months, times the number of persons who are partners at any time during the year.
If BOTH failure-to-pay and failure-to-file: Failure-to-file penalty is reduced by the amount of the failure-to-pay penalty
How much is the failure-to-pay penalty?
½ of 1% per month or part thereof to a max of 25% of the unpaid tax
How much is the negligence penalty for non-substantial understatement of tax? What level of proof is needed to avoid this penalty?
This is an accuracy penalty
Not substantial = <10% of the correct tax or <$5,000
Penalty: 20% of the understatement of tax
Level of Proof: Reasonable Basis (20% chance of succeeding = arguable but unlikely to succeed) whether or not the position is disclosed
How much is the penalty for substantial understatement of tax? What level of proof is needed to avoid this penalty?
This is an accuracy penalty
Substantial for C-Corps: Exceeds the lesser of $10M OR the greater of (a) 10% of the correct tax or (b) $10,000
Substantial for all others: when the error is >10% of the correct tax or >$5,000
20% of the valuation for tax that exceeds $5,000 ($10,000 for C-Corp)
Level of Proof: Reasonable Basis (20% chance of succeeding = arguable but unlikely to succeed) IF the taxpayer disclosed the tax return position. Substantial Authority (>33% but <50% chance of success) is needed for undisclosed positions.
How much is the penalty for substantial valuation misstatement? What level of proof is needed to avoid this penalty?
This is where an item (such as a vehicle donated to a charity) is valued incorrectly.
20% of the valuation for tax that exceeds $5,000 ($10,000 for C-Corp)
Level of Proof: Reasonable Basis (20% chance of succeeding = arguable but unlikely to succeed) IF the taxpayer disclosed the tax return position. Substantial Authority (>33% but <50% chance of success) is needed for undisclosed positions.
What penalties may be imposed for fraud? Who is responsible for the burden of proof?
The IRS is responsible for the burden of proof that the taxpayer criminally, willfully, and deliberately attempted to evade tax.
Civil penalty: 75% of the understatement of tax
Criminal penalty: $100,000 ($500,000 for C-Corp). These may be subject to doubling with an inflation adjustment. The penalty may also include imprisonment.