Tax Chapter Two

Individual: Fifteenth day of the fourth month. Can file for a six month extension

Partnership: Fifteenth day of the fourth month following partnership's year-end. Can file for a five month extension.

Corporation: Fifteenth day of the third month following the corporation's year end. Can file for a six month extension

Extensions do not extend due date for payments. Must estimate how much tax is owed. If tax payer does not pay entire balance must pay interest will be charged on the underpayment. If a return is not filed fees are 5% of tax due for each month that return is late. Max penalty is 25%

Period in which the taxpayer can file an amended tax return or the IRS can assess a tax deficiency for a specific tax year. Generally ends three years from the later of 1- the date the tax return was actually filed or 2- the tax return's original due date.

Six years if taxpayer omits items of gross income that exceed 25% of GI reported. Fraud has no statute of limitations

Uses computer programs and outside data sources.

Common computer initiatives: DIF (discriminant function) system, document perfection program and information matching program.

Correspondence Examinations: most common. By mail and are limited to one or two items on the taxpayer's return. Least complex.

Office Examinations: Second most common. Conducted at local office.

Field Examination: Least common. Conducted at taxpayer's place of business or where source documents are maintained. Can last months to years.

Changes proposed by IRS, if changes are agreed to taxpayer signs an agreement form and pays tax owed.

If disputed taxpayer will receive a 30-day letter, giving 30 days to either request a conference with appeals officer or agree to proposed adjustment.

Appeals officer considers the merits of the issue as well as the hazards of litigation.

If no resolution reached IRS will send 90-day letter, known as a statutory notice of deficiency. Taxpayer can either

1- pay the deficiency or

2-file a petition in the U.S. Tax Court.

If taxpayer decides to be heard in US District Court or Court of Federal Clams tax deficiency must be paid first and then sue IRS for refund.

Only court to provide jury trial

Losing party can request one of the 13 US Courts of Appeal to hear the case, based on taxpayer's residence.

Can petition the U.S. Supreme Court. Not usual. For most cases Supreme court won't hear. Denies the writ of certiorari.

Primary and Secondary Authorities

Official sources of tax law generated by the

-Legislative branch (Congress, Tax Treaties and the Constitution);

-Judicial branch (US District Court, US Tax court, US Court of Federal Claims, US Circuit court of Appeals or US Supreme Court)

-Executive/Administrative branch (Treasure and IRS pronouncements).

Unofficial tax authorities that interpret and explain the primary authorities.

Tax research services, tax articles from professional journals and law reviews, newsletters.

US Constitution (highest)

IRS (second and main statutory authority). Internal Revenue code of 1986

Originates in the House of Representatives with the Ways and Means Committee.

Bill goes to the House of Representatives for a vote...then becomes an act and is sent to the Senate -Senate Finance Committee.

If the Senate passes the act then the Joint Conference Committee debate the two versions of the proposed legislation.

After Joint conference Committee approves the act the revised legislation is sent to the House and Senate for vote. If both approve then it is sent to the president for signature. If signed it becomes law and is incorporated into the Internal Revenue code of 1986.

Reports provided by the three committee are good sources of statutory sources for tax law for new laws that still need interpretation.

Subtitles, chapters, sub chapters, parts, subparts, and sections. Usually referred to simply by its code section. Each code section is further segregated into subsections, paragraphs, sub paragraphs, and clauses to allow more specific reference or citation.

i.e. IRC Sec. 162(b)(2)

Negotiated agreements between countries that describe the tax treatment of entities subject to tax in both countries.

Ultimate authority to interpret the Internal Revenue Code and settles disputes between the IRS and taxpayers.

Five basic sources: Three trial level courts, 13 US Circuit Courts of Appeal and the Supreme Court.

In order of importance:
-Supreme Court
-13 US Circuit Courts of Appeal
-Trial Level Courts (US District Courts, US Court of Federal Claims, US Tax Court)

Of these the Tax Court is highest authority.

In rendering court decisions all courts apply the judicial doctrine of stare decisis.

The court will rule consistently with:

a) its previous rulings-unless overturned

b) the rulings of higher courts with appellate jurisdiction(the courts its cases are appealed to).

-Circuit court will abide by SC rulings and its own rulings

-Trial level courts will abide by SC rulings, its respective circuit court's rulings and its own rulings

The tax court will abide by rulings of the circuit court that has appellate jurisdiction for a case. Problematic for the US Tax Court b/c it appeals to different circuit courts based on the taxpayer's residence.

The U.S. Treasury.

Regulations, revenue rulings and revenue procedures.

The Treasury Department's official interpretation of the Internal Revenue Code. Highest authoritative weight and often contain examples of the application of the Code.

Three different forms:
-Final regulations, which have been issued in final form and represent the Treasury's interpretation of the Code.

-Temporary Regulations. limited life of three years and carry the same authoritative weight as final regulations

-Proposed Regulations. issued in this form first and allow the public to comment on them. Do not carry the same weight as the other two.

-Interpretive: represent the Treasury's interpretation of the code, one of the most common

-Procedural: explain TD procedures as they relate to the administering of the Code. Other most common.

-Legislative Regulations: rarest type. Issued when Congress specifically directs the TD to create regulations to address an issue in an area of law. TD is actually writing the law instead of interpreting the Code.

Second in administrative authoritative weight after regulations.

Revenue rulings address the application of the Code and regulations to a specific factual situation. Provide a detailed interpretation of the Code as it applies to a specific transaction and fact pattern.

Revenue procedures explain in greater detail IRS practice and procedures in administrating tax law. Explain in detail IRS practice and procedures in administering the tax law.

Below revenue rulings and revenue procedures in authoritative weight. More specific than rulings and regulations.

-Private letter ruling: Specific to transaction and taxpayer.

-Determination letters: Issued by local IRS and not controversial.

-Technical advice memorandums: Generated for completed transactions and requested during an audit

Guidance for how IRS intends to respond to a loss.

-Acquiescence: IRS has decided to follow but doesn't necessarily agree.

-Non: IRS plans to continue to litigate.

Actions or decisions issued to explain background reasoning behind them.

Guidance for how IRS intends to respond to a loss.

-Acquiescence: IRS has decided to follow but doesn't necessarily agree.

-Non: IRS plans to continue to litigate.

Actions or decisions issued to explain background reasoning behind them.

1-Understand Facts
2-Identify Issues
3-Locate Relevant Authorities
4-Analyze Tax Authorities
5-Communicate the Results

Open and closed.

Open have not yet occurred-proposed transaction.

Closed have already occurred.

Get a good understanding of the clients facts.

Code Sections, regulations, court cases, revenue rulings...that address the tax issue.

Annotated tax service are arranged by Internal Revenue Code Section.

Topical tax services are arranged by topic.

Questions of Fact. Hinge upon the facts and circumstances of the taxpayer's transaction.

Questions of Law hinge upon the interpretation of the law, such as interpreting a particular phrase in a code section.

When it is identified that different authorities have conflicting views the hierarchy jurisdiction and age of the authorities should be evaluated.

Research tool that allows you to check the status of several types of tax authorities.

Internal Research Memo.

Five parts are:

Facts, issues, authority list, conclusion and analysis.

Tax professionals are subject to various statutes, rules and codes of conduct:
AICPA Code of Professional Conduct
AICPA Statement on Standards for Tax Services
IRS’ Circular 230
State Board of Accountancy Statutes

Failure to comply with statutes can result in being admonished, suspended, or barred from practicing

Civil Penalties
Criminal Penalties
Substantial Authority vs. Reasonable Basis

40 plus percent range or above.

One-third probability or greater.