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Chapter 12Tax Administration &

Tax PlanningIncome Tax Fundamentals 2010

Gerald E. Whittenburg & Martha Altus-BullerStudent’s Copy

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Congress creates tax law and the IRS enforces it◦ Includes assessment and collection departments◦ Is a branch of the Treasury Department◦ Is headquartered in Washington DC

Commissioner of IRS is appointed by president and approved by Congress

2010 Cengage Learning

Internal Revenue Service (IRS)

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This act sought to structurally and operationally change the IRS by creating operating units along functional lines° Service and Enforcement arm collects taxes and

audits tax returns° Small Business/Self-Employed (SB/SE) unit

serves SB/SE customers° Wages & Investment (W&I) division helps

taxpayers (that primarily pay taxes through withholdings) comply with applicable laws

2010 Cengage Learning

IRS Restructuring Act of 1998

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IRS has authority to examine taxpayers’ accounting records and books in a process called an audit

IRS can summon taxpayers and require them to appear before the IRS and produce necessary accounting records◦ IRS may also summon taxpayer records from

third parties (CPAs, brokers, etc.)◦ Taxpayer should enlist professional tax advice

2010 Cengage Learning

Examination of Records

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When tax return is selected for examination, an agent is assigned

There are three possible results from an audit◦ Agent determines that there are no changes◦ Agent and taxpayer agree that there is a change in

tax liability◦ Agent and taxpayer disagree on outcome

In this scenario, taxpayer may appeal through established appeals procedures

2010 Cengage Learning

Appeals Process

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Interest is charged to taxpayer for late taxes ◦ Interest paid is nondeductible consumer interest

Interest is paid to the taxpayer for refund ◦ Prior year audit reveals refund due◦ Interest received from IRS is income

Interest rate is adjusted quarterly based on the short-term federal rate plus 3 percentage points, sample of recent rates:◦ First quarter 2009 5%◦ Second quarter 2009 4%◦ Third quarter 2009 4%◦ Fourth quarter 2009 4%

2010 Cengage Learning

Interest

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A taxpayer may not amend, nor may the IRS assess additional taxes, on a tax return for which the three year statute of limitations has expired - generally this is three years from due date

Exceptions◦ No statute of limitations if it is a fraudulent tax return◦ Six years if amount of gross income omitted exceeds

25% of total gross income◦ Statute of limitations for deduction of a bad debt or

worthless security is seven years

2010 Cengage Learning

Statute of Limitations

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The IRS does not prescribe any minimum level of education for tax preparation

Only CPAs, attorneys or enrolled agents may represent clients at IRS proceedings

There are a multitude of preparer penalties ◦ For example, if tax preparer does not exercise due

diligence, tax returns are not signed, or copy is not provided to clients, the tax preparer may be assessed a penalty

◦ See page 12-15 for full list of prepare penalties

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Tax Practitioners

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In most civil tax cases the IRS has historically placed burden of proof on taxpayer

IRS Restructuring & Reform Act of 1998 changed tax law to shift burden of proof to IRS in many cases◦ Burden of proof automatically shifts to IRS in two

situations IRS uses statistics to reconstruct an individual’s income Court proceeding against an individual taxpayer involves

penalty/addition to tax◦ In certain situations, burden of proof still rests with the

taxpayer

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Burden of Proof

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Document addresses taxpayers rights Requires the IRS to inform taxpayers of their

rights when dealing with the Service◦ It provides remedies for resolving disputes with IRS

Part I – Declaration of Taxpayer Rights◦ Directs taxpayer to other IRS publications for more

details Part II –Examinations, Appeals, Collections &

Refunds

Note: See pages 12-19 – 12-20 for Taxpayer Bill of Rights

2010 Cengage Learning

Taxpayer Bill of Rights