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Chapter 13. Working with the IRS. William A. Raabe Gerald E. Whittenburg Debra L. Sanders. © 2009, South-Western, a part of Cengage Learning, Mason, Ohio. Chapter 13 - Overview. This chapter addresses the following topics related to working with the IRS: Organization of the IRS

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chapter 13

Chapter 13

Working

with the IRS

William A. Raabe

Gerald E. Whittenburg

Debra L. Sanders

© 2009, South-Western, a part of Cengage Learning, Mason, Ohio

chapter 13 overview
Chapter 13 - Overview
  • This chapter addresses the following topics related to working with the IRS:
    • Organization of the IRS
    • Taxpayer rights
    • The audit process
    • Examinations
    • Appeals process
organization of the irs
Organization of the IRS
  • Department of the Treasury
    • Commissioner of Internal Revenue
      • Commissioner is the CEO of the IRS
    • IRS was established in 1862
      • Then called the Bureau of Internal Revenue
      • Named changed to “IRS” in 1953
    • Currently organized along functional lines
    • IRS Oversight Board
      • Allows for private sector input
irs national office
IRS National Office
  • The IRS is the second largest agency of the Federal government with 100,000 employees
    • Located in Washington, D.C.
  • Commissioner of is appointed by President
    • Chief Counsel is the agency’s top legal advisor
  • National Taxpayer Advocate
    • Administers a taxpayer intervention system
irs service centers
IRS Service Centers
  • Primary function
    • Tax return processing and mathematical verification
  • Service Centers located in:
    • MA, GA, CA, MO, TN, PA
irs service centers1
IRS Service Centers
  • 3 Computing Centers
    • Manipulate data collected from processing centers
  • 4 Processing Centers
    • Return processing verification
  • 25 Customer Service Sites
    • Electronic filing, answer telephone and e-mail inquiries
taxpayer assistance orders toa
Taxpayer Assistance Orders (TOA)
  • Taxpayer Advocate
    • Reports directly to Commissioner
    • Issues TAO to suspend, delay, or stop actions that would cause undue hardship on taxpayers
  • Taxpayer files Form 911 for a TAO to relieve hardship
local taxpayer advocates
Local Taxpayer Advocates
  • Resolve taxpayer complaints
  • Access to IRS officials in district and regional offices, and service centers
  • Notify taxpayer within 5 days of case status
  • Usually resolve billing, procedural, computer-generated, and other problems
taxpayer rights
Taxpayer Rights
  • Taxpayer Bill of Rights guarantees:
    • Representation before the IRS
    • A recording of any proceeding
    • An IRS explanation of its tax position
taxpayer rights1
Taxpayer Rights
  • Right to know:
    • Why IRS is requesting information
    • How IRS will use the information
    • Repercussions of not providing information
    • Pertinent aspects of audit procedures
taxpayer rights2
Taxpayer Rights
  • Taxpayer representation
    • Taxpayer may be represented by an attorney, CPA, or other with power of attorney
      • Taxpayer may suspend IRS interview if he/she wishes to include a representative
    • Taxpayer need not appear personally (unless summoned)
    • Taxpayer may record interview
taxpayer rights3
Taxpayer Rights
  • Attorney-client type of confidentiality
    • Confidentiality exists between taxpayer and representative in non-criminal tax matters
    • Does not apply to dealings with tax shelters
  • Innocent spouse rights
    • IRS must inform (ex)spouses of joint and several liability for tax deficiencies
the audit process
The Audit Process
  • Tax system promotes voluntary compliance
    • Based on self-assessment
  • Examinations are used as enforcement tool
    • The threat of an IRS audit encourages accurate filings
  • A small number of returns are audited each year
    • IRS attempts to select returns for audit that will generate additional tax liability
preliminary review of returns
Preliminary Review of Returns
  • All business and individual returns
    • Reviewed for simple/obvious errors (e.g., SSN, signatures)
    • Automatic Data Processing
      • Information Document Matching Program
      • Mathematical/Clerical Error Program
    • Unallowable Items Program
information document matching program
Information Document Matching Program
  • Matches information on tax return with third party information returns (e.g., W-2, 1099)
    • Millions of discrepancies per year
    • Approximately 2 million failure-to-file inquiries per year
mathematical clerical error program
Mathematical/Clerical Error Program
  • Conducted at IRS service centers
  • Checks returns for math errors and recomputes tax due
    • Not considered an examination (called a summary assessment)
      • Around 5% of returns contain these errors
      • Interest accrues on untimely payments
      • 60 days to request abatement of tax
      • Not entitled to remedies available to taxpayers subject to formal exams
unallowable items program
Unallowable Items Program
  • Conducted at IRS service centers
  • Question items that appear to be unallowable
    • Identified manually and by computer
    • Tax recomputed based on adjustments
    • Not considered an examination
selection of returns for examination
Selection of Returns for Examination
  • Audit those likely to increase tax liability
  • Selection methods
    • Manual and computerized methods
    • Informants
    • Economic reality factors
    • Other selection methods
computer selection
Computer Selection
  • Discriminant Function System
    • Returns with high DIF score examined manually
  • TCMP
    • Furnishes IRS with tax return statistics
    • Used to update the DIF formulas
    • Around 50,000 individual returns selected randomly
    • Extremely thorough audit
other selection methods
Other Selection Methods
  • Informants
  • Link to another return under review
  • Income exceeds materiality level
    • Taxable income, gross receipts, or total positive income > $50K
    • Partnerships with >$500K receipts
other selection methods1
Other Selection Methods
  • Economic reality factors
    • Significant increases or decreases in certain items:
      • Interest, dividend, and investment income
      • Mortgage and other reportable interest paid
      • Self-employment or farm income relative to industry norm
      • Business and other expenses not justified by income levels
chances of audit
Chances of Audit
  • Less than 1 percent chance of audit
  • “Red flags” that increase audit chances:
    • Tax shelter losses
    • Cash-oriented businesses
    • Excessive business or itemized deductions for income level
    • Errors found in prior year audits
examinations
Examinations
  • Types of Audit
    • Correspondence Examinations
    • Office Examinations
    • Field Examinations
correspondence examinations
Correspondence Examinations
  • One or two items on a return questioned
    • Usually itemized deductions
  • Conducted by phone or mail
    • Informal examination, but same rights as office or field audits
    • Service Center usually handles these audits, may be referred to District Office
  • Simple documentation issues
    • Verify item by mailing copies of receipts, canceled checks, etc.
office examinations
Office Examinations
  • Requires IRS analysis and judgment
  • Conducted at IRS district office
    • Auditor given little time to prepare
    • Scope limited to items on notification letter
    • Taxpayer and/or representative bring records to office
    • Individual returns with no business income
    • Difficulty may lead to field exam
field examinations
Field Examinations
  • Complex issues
    • Revenue agents have more knowledge and experience
  • Conducted on taxpayers premises
    • Sometimes conducted in representative’s office
  • Open-ended
    • Agent free to pursue any unusual items in tax returns or taxpayer records
    • Reviews entire financial operations
dealing with an auditor
Dealing with an Auditor
  • Professional courtesy
    • While maintaining an adversarial role
  • Be well-prepared for the audit
  • Issues should be identified and addressed throughout process
dealing with an auditor1
Dealing with an Auditor
  • Auditor should not be allowed free access to records or facilities
  • May resolve to agree to disagree on major issues
conclusion of examination
Conclusion of Examination
  • Revenue agent’s report (RAR) prepared by the IRS agent for taxpayer
  • Explanation of proposed adjustments and lists balance due
    • Actions if taxpayer agrees with RAR:
      • Sign waiver of the restrictions on assessment
      • May make advance payment to avoid additional interest and penalties
thirty day letter
Thirty-Day Letter
  • If taxpayer disagrees with RAR:
    • Taxpayer receives 30-day letter
      • Notifies taxpayer of proposed adjustments and appeals rights
      • Taxpayer has 30 days from receipt to request conference with appeals officer
        • Oral request if office audit or if tax and penalties total < $2,500
        • Written request if tax and penalties > $2,500
        • Formal protest if tax and penalties >$10,000
file a protest or go to court
File a Protest or Go to Court?
  • Reasons to appeal
    • Appeals officers can consider the hazards of litigation
    • The litigation path still remains
    • Possible settlement without litigation costs
    • Delays payment of disputed tax
    • Discover more details of government’s position and appeal required to recover some court costs and attorney’s fees
    • Possibly recover future court costs
file a protest or go to court1
File a Protest or Go to Court?
  • Reasons to bypass appeal
    • New issues could be raised upon appeal
    • Taxpayer wishes to send message that he/she is firmly convinced of position
    • Expedite conclusion of the issue
appeals process
Appeals Process
  • Appeals Office
    • IRS encourages use of the appeals process
    • Appeals Office has exclusive authority to settle cases within its jurisdiction
    • Supervised by Commissioner of IRS with input from Chief Counsel
appeals conference
Appeals Conference
  • Informal proceeding
  • Appeals officer
    • Maintains impartiality
    • Authority to settle all factual and legal questions in the examiner’s report
    • Can settle based on the hazards of litigation
    • Can split or trade issues
ninety day letter
Ninety-Day Letter
  • Statutory notice of deficiency
    • Taxpayer and IRS cannot agree on proposed adjustments after appeals conference or if the taxpayer does not appeal
    • Must be sent before assessing additional (proposed) taxes
    • Taxpayer has 90 days to pay tax and sue for a refund or file petition in Tax Court
entering the judicial system
Entering the Judicial System
  • Tax Court
    • File within the 90-day letter period
    • Pretrial settlement conference with appeals officer
      • Available if not previously appealed
      • Any pretrial agreement is filed with Tax Court
  • District or Claims Court
    • Must pay tax first and then sue for a refund
end of chapter 13

End of Chapter 13

If you have any comments or suggestions concerning this PowerPoint Presentation for Federal Tax Research, 8th Edition, please contact:

Kristina Zvinakis, PhD

kristina.zvinakis@mccombs.utexas.edu

University of Texas at Austin