Tax Law and Research

1
Tax Law and Research

• CPA Perspective

2
Constitutionality

• Income tax upheld as constitutional
• Will be jailed for ignoring

3
Doctrines Used By the IRS

• Substance over form Court Holding Co. 324 US
  331 (1945)
• Step transaction doctrine collapsible Penrod v.
  Commr 88 TC 1415 (1987)
• Business purpose doctrine reason other than tax
  
• Economic substance doctrine economic substance
  is insignificant relative to tax benefits
  decision driven by tax
• sham transaction doctrine
• Constructive receipt
• Economic benefit
• Assignment of income Lucas v. Earl 281 US 111
  (1930)
• Cash Equivalency benefit is available w/ cash
  alternative
• Nominee or Alter Ego doctrines
• Accession to Wealth

4
Tax Law Structure

• Tax Treaties
• Internal Revenue Code of 1986, as amended
• Regulations numbered by code section
• Rulings Procedures letter rulings and
  determination letters
• Technical Memoranda and Technical Advice
  Memoranda
• Court Cases
• Supreme Court
• Appeals Courts
• District Court, Tax Court (including small case),
  Claims Court, Bankruptcy Court
• Of Code or Court, usually most recent controls
• Tax Treaty usually trumps Code/Court

5

• Rank the following sources of tax law in order
  of highest (to lowest) authority
• Revenue Regulations
• Revenue Rulings
• The Internal Revenue Code

6
Tax Process

• Prepare and File Return
• Examination if prompted by dif score, etc.
• Collection Automated Collection Service or
  Revenue Officers if necessary
• Litigation/Appeal if prior results not acceptable
  to taxpayer

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Taxpayer Rights

• Representation
• Right to record proceedings
• Right to explanation of IRS position where
  disagreed
• Right to know why info is requested how it will
  be used
• What happens if I refuse?

8
Organization of the Internal Revenue Service
Commissioner
Chief Counsel
CID
T/p Advocate
Appeals
Deputy Commissioner
W I
SB/SE
LMSB Assets gt 10M
TE/GE
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Types of Exams

• Correspondence Audit for contained issues
  Automated Underreporter looks similar to a
  correspondence audit, but is result of mismatch
  of income on t/ps return v. information returns
• Automated Substitute for Return looks similar to
  a correspondence audit, but is for non-filers
  using std. deduction
• Together, correspondence audits are 77 of all
  audits and growing.
• Office Audit
• Field Audit has higher agreement rate than
  correspondence audit

10
Issue-focused exams

• Especially popular w/ LMSB for
• Area of high strategic importance, or
• Area of significant compliance risk, or
• Area of industry importance
• Take into account
• Globalization
• Aggressive tax planning
• Transparency and disclosure
• FBAR

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The Audit Process

• Preliminary Review of Returns matching, math
  clerical or suspicious items
• Selection of Returns for Examination dif score,
  TCMP - the sequel, and love line
• Examinations
• Correspondence Examinations
• Office Examinations
• Field Examinations
• Dealing With an Auditor
• Conclusions of Examination

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Statutory Agreements

• Closing agreements
• Binding, subject to malfeasance, etc.
• Used where both parties interests are protected
• If 30 day notice received respond ASAP!
• May be an informal protest if lt25,000 in tax,
  PI brief written stmt.
• gt25,000 or partnership/S must be written
• Get copy of Revenue Agent Report (RAR) before
  preparing protest
• If 90 day notice received respond anyway, file
  protest _at_ 70 days
• Often 90-day notice is rescinded

13
Conclusions of Examination

• Thirty-Day Letter auditors findings, agreement
  form rights if disagreeing
• File a Protest or Go Straight to Court?

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Collections

• Levies, liens, seizures increasing
• Partial payment installment agreements (but not
  Form 9465) and OIC less-favored
• Currently need 3 different loan denials
• Offers in compromise Form 656, filed w/
  financial statements
• Prior to Justice Department intervention
• Generally for amounts less than 50,000, but can
  be for more w/ support of Chief Councel
• Doubt as to liability or doubt as to ability to
  pay
• Fee for processing, and must tender a check with
  offer
• Use Form 9465 where possible acceptance formula
  is 1.13amount due/60 of up to 25k (10 k stat)

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Appealing a Case

• If correspondence case gets to collection, have
  new information that wasnt considered.
• Reasons for non-consideration not important, can
  promprt audit reconsideration
• Problem Resolution-gtTaxpayer Advocate -gt Appeals
• Appeals Department Mission is to resolve tax
  controversies, without litigation, on a basis
  which is fair and impartial to both the
  government and the taxpayer and in a manner that
  will enhance voluntary compliance and public
  confidence in the integrity and efficiency of the
  Service. IRM 8.1.1.1
• To be used where there is doubt as to what the
  result would be if litigated in court

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SBSE Fast-Track Settlements

• Should be requested prior to 30-day letter
• T/p Exam complete FTS Application
• Fully developed unagreed cases where facts are
  stipulated qualify
• TEFRA, Service Center cases, frivolous cases do
  not qualify FTS is at IRS discretion
• Trained mediator works w/ both sides
• LMSB has similar Alternative Dipute Resolution
• For early referral, see Rev. Proc. 99-28
• For Post Appeals Mediation, Rev. Proc. 2002-44
• For Arbitration, Rev. Proc. 2008-44.

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Entering the Judicial System

• Expensive process involving pre-trial motions
  (e.g. dismiss, summary judgment), pre-trial
  stipulations of fact, witnesses (often
  subpoenaed)
• U.S. District Court
• Court of Federal Claims
• Tax Court
• Other bankruptcy court

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Weighing Which Court to File

• Small Cases 50,000 or less informal, tax
  specialists, need not pay in advance, no jury, no
  appeal.
• Tax Court tax specialists, need not pay in
  advance, no jury, may appeal.
• Federal Claims Court hears all cases, must pay
  first, no jury, may appeal.
• District Court hears all cases, must pay first,
  jury trial, may appeal.
• Bankruptcy Court must seek bankruptcy
  protection, need not pay in advance.

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• Which is not a possible venue sequence for tax
  litigation?
• U.S. Tax Court, U.S. Court of Appeals, U.S.
  Supreme Court
• U.S. District Court, U.S. Court of Appeals, U.S.
  Supreme Court
• U.S. Court of Federal Claims, U.S. Court of
  Appeals for the Federal Circuit, U.S. Supreme
  Court
• U.S. Tax Court, U.S. District Court, U.S. Court
  of Appeals, U.S. Supreme Court

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U.S. District Court

• Must pay first refund for suit
• Longer to initiate suit
• Generalist judges
• Broad discovery
• Jury trial available
• Appeal to circuit where district is located

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Tax Court

• Need not prepay
• Limited discovery rarely depositions taken
• Viewed as government friendly BUT many nuisance
  cases taken here
• (1-3) Judges with technical tax expertise
• No jury available
• Appeal to U.S. court of appeals Golson rule

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Court of Federal Claims

• Must prepay suit for refund
• More specialized judges than district court
• More taxpayer friendly than tax court
• Appeal to Federal Circuit

23
Bankruptcy Court

• Available to limited taxpayers
• 11 USC 505
• Most taxpayer friendly
• 2 appeals available

24
Appeals Courts

• 11 Regular Circuits of Appeal and the DC Circuit
  Court of Appeals

25
Civil Penalties

• Failure to file 5 tax due for ea. Month (up to
  25)
• Failure to pay (.5 - 1/month) of tax due up
  to 25
• Accuracy-related 20 underpayment of tax
• Civil Fraud 75 underpayment due to fraud
• Failure to make ES payments (about 7 tax due)
• Failure to make deposits (2-15 of failure)
• False W-4 500
• Filing frivolous return 500
• Penalty may be abated if t/p is
• relying on written advice from IRS

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Criminal Penalties

• In addition to civil penalties (not instead of)
• Generally must show fraud (which intent)
• Willful attempt to evade or defeat tax (felony)
• Willful failure to collect or remit (felony)
• Willful failure to file return (misdemeanor)
• Willful misstatement of return (felony)
• Willful filing of (known-to-be) fraudulent
  document (misdemeanor)
• Unlawful disclosure (misdemeanor)
• Specifically, crimes are usually either
• Criminal Income Tax Evasion
• Filing a False Tax Return
• Conspiracy

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For Criminal Tax Evasion, Govt Must
Prove/Reasonable Doubt

1. T/p owed more tax for the year than was declared
   on the return, AND
2. T/p knew more tax was due than was declared, AND
3. T/p made an affirmative attempt to evade or
   defeat tax, AND
4. T/p acted willfully

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For Filing False Tax Return, Govt Must
Prove/Reasonable Doubt

1. T/p made and signed return, or knew it contained
   material false information, AND
2. T/p signed subject to penalties of perjury
   (standard), AND
3. T/p acted willfully

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Defenses to Criminal Penalties

• Unreported income lt unreported deductions
• Unrecorded income was gift or excludable receipt
• T/p is a moron
• T/p relied on erroneous advice of tax advisor
• T/p is mentally ill
• Statute of limitations barred
• Plea bargain for lesser offense

30
Return Preparer Penalties

• Assessable if preparer is compensated for tax
  return, and
• Provides all but (and maybe also) all info for
  tax return except clerical (mechanical) tasks

31
Preparer Penalties

• Effective 1/1/08 must meet more likely than
  not standard or be disclosed or face stiff
  penalty (was 1-in-3 chance) BUT THIS IS REPEALED
  10/3/08 except for tax shelters reverts to
  substantial authority same burden as
  taxpayer.
• Even w/ disclosure, may be penalized if no
  reasonable basis for disclosed position.
• Minimum penalty larger of 1,000 or ½ fee

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Disclosure Penalties

1. 50/return for failure to give t/p complete copy
   of return
2. 50/return for failure to sign
3. 50/return failure to provide EIN
4. 50/failure for each copy not retained for last 3
   years
5. 50/failure to keep list of each name, SS, and
   place of work for each employee hired

33
From the IRS Office of Professional
Responsibility (OPR)

• Due diligence in answering questions is required
  under Circular 230.
• Due diligence does not require an audit of the
  client
• Make reasonable inquiries
• May rely on client
• Advise client of potential penalties
• If receiving inconsistent info, must attempt to
  reconcile.

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Penalties

• Civil penalties for a NON-willful violation up
  to 10,000 per violation
• Civil penalties for a WILLFUL violation greater
  of 100,000 or 50 of the amount in the account
  at the time of violation
• Criminal penalties up to 500,000 fine 10
  years imprisonment
• Both civil and criminal may be imposed.

35
FBAR Who Must Disclose?

• A US person with
• A financial account
• In a foreign country
• Or, a financial interest in OR signature or other
  authority over the financial account
• The aggregate value of all the foreign financial
  accounts exceed 10,000

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Exceptions

1. An officer/employees of a bank with banks
   signature authority over another, foreign bank,
   provided the employee has no personal interest in
   foreign account.
2. An officer/employee of a domestic corporation
   listed on an SEC exchange, provided the employee
   has no personal interest in foreign account.
3. An officer/employee of a domestic subsidiary of a
   domestic corporation listed on an SEC exchange,
   provided the employee has no personal interest in
   foreign account.
4. An officer/employee of a foreign subsidiary where
   the parent has filed a current report, provided
   the employee has no personal interest in foreign
   account.

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Where/When Is the Filing Due

• Must report the international relationship on
  Form 5471 or TD F 90-22.1 EACH calendar year by
  filing before June 30 of the succeeding year.
• Note that the due date does not correspond with
  other filing deadlines.
• NO EXTENSIONS for this form, even if an extension
  of time for the federal income tax return is
  valid.
• Mail to Department of the Treasury, P.O. Box
  32621, Detroit MI 48232-0621 (or may be
  hand-carried to service center or US embassy).

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General Definitions

• A US person is a citizen, resident of the US or a
  person in and doing business in the US.
• A financial account is an account maintained with
  a financial institution (or person engaged in the
  business of a financial institution).
• A foreign country refers to the geographic
  location of the account regardless of the
  nationality of the financial institution
  exceptions apply for military banking facilities
  overseas.
• A financial interest means, generally that the
  client is a gt50 owner of record or has legal
  title, OR is acting as an agent on behalf of a US
  person or trust. This includes correspondent or
  nostro accounts (international interbank
  transfer accounts).

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Preparer Conduct Penalties

1. Endorsing or negotiating a refund check -500
2. Understate due to unrealistic position-250
3. Willful understatement of t/p liability - 1,000
4. Organizing abusive tax shelter
5. Aiding abetting understatement - 1,000
6. Assisting preparation of false return-100,000
7. Disclosure/use of info by preparer 250/use

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Injunctions

• Action to enjoin income tax return preparers from
  engaging in misconduct OR from preparing returns
• Action to enjoin promoters of abusive tax shelters

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Interest

• About 6/yr
• IRS pays about 1 1/2 below what t/p pays on
  underpayment

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Statute of Limitations

• Assessment of tax
• 3 yrs from date of filing or due date of return,
  whichever is longer
• 6 yrs from filing date or due date, whichever is
  longer for substantial (gt 25) underpayment
  which includes overstatement of basis on sale of
  asset.
• Indefinite for fraud
• Collection 10 yrs from timely assessment
• Claim for refund 3 yrs from filing or 2 yrs from
  pyt
• Waivers acceleration of statutes

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Hot Spots for Audit

• Tool plans tax-free reimbursement for tools
  used on job must use accountable plan or be
  taxed.
• Returns prepared by VITA
• Wages v. Contract labor new Form 8917
• Misclassifying refineries as chemical plants
  underground storage tanks at gas stations
• Retail stores closed store losses and credits
  for hiring disadvantaged workers
• Farmers poultry and livestock inventory
• Employment tax audits increase by 33 over 3
  years checking for worker classification,
  executive pay and fringe benefits. Form 8919
  Tattler for misclassification

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Some Recent Tax Law Changes

• Std. mileage allotment 55 cents/mi. 2009 50
  cents/mi. - 2010
• Depreciation component 21 cents/mi. 08/09
• Medical travel 19 cents/mi. 2008
• Charitable travel 14 cents/mi. 2008
• Kiddie tax age rises to 19/24 student
• PMI payments policies issued after 2006 t/p w/
  AGI phased out over 100,000
• Easier to claim unrelated child as dependent.
  See notice 2008-5.

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Health Care Reform Package

• Imposes a Hospital Insurance (HI) tax rate of
  0.9 on earned income gt200,000 or 250,000MFJ.
• Imposes a 3.8 unearned income Medicare
  contributions tax on investment income of
  high-income individuals. Lesser of net
  investment income or MAGIgt 250,000 MFJ 125,000
  individuals

46
Small Employer Tax Credit

• 35 credit for cost of premiums paid toward
  health insurance coverage
• Small employer must contribute gt 50 of premium
  costs

47
HIRE Act

• Social security tax forgiveness (6.2) up to the
  social security wage base for the remainder of
  the year on 2010 on new hires who are currently
  unemployed.
• If workers stay on payroll for at least a year,
  employer gets up to 1,000 business tax credit
  per employee.
• Cannot be taken with Work Opportunity Tax Credit
• Claim on Form 941