Chp 2: Tax Compliance, The Irs, And Tax Authorities

Front 1

30-Day Letter

Back 1

The IRS letter received after an audit that instructs the taxyper that he has 30 days to either request a conference with an appeals officer or agree to the proposed adjustment.

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90-Day Letter

Back 2

The IRS letter received after the audit and the 30-day letter, explaining that the taxpayer has 90 days to either pay the proposed deficiency or file a petition in the U.S. Tax Court to hear the case. Also known as the statutory notice of deficiency.

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Acquiescence

Back 3

Issued after the IRS loses a trial court or circuit court case; when the IRS decides to follow through the court's adverse ruling in the future. Does not mean that the IRS agrees with the ruling, but that the IRS has chosen not to litigate the issue any further.

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Action on Decision

Back 4

An IRS pronouncement that explains the background reasoning behind an IRS acquiescence or nonacquiescence.

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Annoted Tax Service

Back 5

A tax arranged by code section.

For each code section includes:

1. The code section

2. A listing of the code section history

3. copies of congressional committee reports that explain changes to the code section

4. copy of all the regulations issued for the specific code section.

5. Service's unofficial explanation of the code section.

6. brief summaries(annotations) of relevant court cases, revenue rulings, revenue procedures, and letter rulings that address issues specific to the code section.

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Circular 230

Back 6

Regulations issued by the IRS that govern tax practice and apply to all persons practicing before the IRS.

5 parts:

Subpart A:

1.Who may practice before the IRS and what practicing before the IRS means.

Subpart B:

Desrcibes the duties and restrictions that apply to individuals governed by Circular 230.

Subpart C and D: explain sanctions an disciplinary proceedings for practitioners violating the Circular 230 provisions.

Subpart E: Miscellaneous provisions.

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Citator

Back 7

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

1. Can be used to review the history of the case to find out whether it was subsequently appealed and overturned.

2. Identify subsequent cases that cite the case.

3. Can also be used to check the status of revenue rulings, revenue procedures, and other IRS pronouncements.

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Civil Penalties

Back 8

Monetary penalties imposed when tax practitioners or taxpayers violate tax statutes without reasonable cause, such as for negligence or intentional disregard of pertinent rules.

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Correspondence examination

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IRS audit conducted by mail and generally limited to one or two items on the taxpayer's return.

1. Most common and narrow in scope and least complex among the three types of audits

2. IRS typically requests supporting documentation for one or two items on the taxpayer's return.

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Criminal Penalties

Back 10

Penalties commonly charged in tax evasion cases.

1. imposed only after normal due process, including a trial

2. Standard of conviction is higher in a criminal trial compared to civil cases.

3. Penalties are also much higher.

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Determination letters

Back 11

Rulings requested by the taxpayer, issued by local IRS directors and generally not controversial.

Front 12

DIF(Discriminant Function) System

Back 12

Assigns a score to each tax return that represents the probability that the tax liability on the return has been underreported.

1. IRS derives the weights assigned to specific tax return attributes from historical IRS audit adjustment data from the National Research Program.

2. DIF system uses these weights to score each tax return based on the tax return's characteristics.

3. Returns with higher DIF scores are than reviewed to determine if an audit is the best course of action.

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Document Perfection program

Back 13

A program under which all tax returns are checked for mathematical and tax calculation erros.

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Field Examination

Back 14

The least common audit. The IRS conducts these audit's at the taxpayer's place of business or the location where the taxpayer's books, records, and source documents are maintained.

1. Generally the broadest in scope and most complex among the three audit types.

2. Can last many months to multiple years.

3. Limited to business returns and most complex individual returns.

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Final Regulations

Back 15

Regulations that have been issued in final form, and thus, until revoked, they represent the Treasury's interpretation of the Code.

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Golsen Rule

Back 16

The rule that states that the U.S. Tax Court will abide by the Circuit Court's rulings that has appellate jurisdiction for a case.

Front 17

Information matching program

Back 17

A program that compares the taxpayer's tax return to information submitted to the IRS from other taxpayers .

Information matched includes items such as wages, interest income, dividend income and so forth.

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Internal Revenue Code of 1986

Back 18

The codified tax laws of the United States. Although the code is frequently revised , there have only been three codes since the Code was created in 1939.

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Interpretative Regulations

Back 19

The most common regulation. They represent the Treasury's interpretation of the Code and are issued under the Treasury's general authority to interpret the Code.

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Legislative Regulation

Back 20

1. Rarest type of regulation, issued when Congress specifically directs the Treasury Department to create regulations to address an issue in an area of law.

2. Treasury is actually writing the law rather than interpreting the code.

3. Since it actually represents tax law instead of an interpretation of it, it has more authoritative weight than the other forms of regulation.

Front 21

Nonacquiescence

Back 21

Issued after the IRS loses a trial-level or circuit-level court case and decides to continue litigating the issue.

Front 22

Office Examination

Back 22

1. Second most common audit.

2. Conducted at local IRS office.

3. Broader in scope and more complex than correspondence examinations.

3. Small businesses, taxpayers operating sole proprietorships and middle-high income individuals are most likely to have office examinations.

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Primary Authority

Back 23

1. Official sources of tax law generated by the legislative branch, judicial branch, executive/administrative branch.

2. Legislative branch: Statutory authority issued by Congress

3. Judicial Branch: rulings by the U.S. District court, U.S. Tax Court, U.S. Court of Federal Claims, U.S. Circuit Court of Appeals, or U.S. Supreme Court

4. Executive/Administrative branch: Treasury or IRS pronouncements

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Private Letter Rulings

Back 24

1. IRS pronouncements issued in response to a taxpayer request for a ruling on specific issues for the taxpayer.

2. Common for proposed transactions with potentially large tax implications.

3. Has very high authority for the requesting taxpayer but has little authority for other taxpayers.

Front 25

Procedural Regulations

Back 25

Regulations that explain Treasury Department procedures as they relate to administering the Code.

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Proposed Regulations

Back 26

1. Regulations issued in proposed form.

2. Do not carry the same authoritative weight as temporary or final regulations.

3. All regulations are issued in proposed form first to allow public comment on them.

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Question of Fact

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A research question that hinges on the facts and circumstances of the taxpayers transaction.

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Question of Law

Back 28

A research question that hinges upon the interpretation of the law, such as interpreting a particular phrase in a code section.

Front 29

Regulations

Back 29

The Treasury Department's official interpretation of the Internal Revenue Code.

Regulations are the highest authority issued by the IRS.

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Revenue Procedures

Back 30

1. Second in administrative authoritative weight after regulations.

2. Much more detailed than regulations and explain in greater detail IRS practice of procedures and administering the tax law.

3. Have the same authoritative weight as revenue rulings.

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Revenue Rulings

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1. Address the specific application of the Code and regulations to a specific factual situation.

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Secondary Authority(unofficial tax authority)

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1. Unofficial tax authorities that interpret and explain the primary authorities, such as tax research services, tax articles, newsletters, and textbooks.

2. May be helpful in understanding a tax issue, but hold little weight in a tax dispute.

Front 33

Stare Decisis

Back 33

A doctrine meaning a court will:

1. rule consistently with its previous rulings(unless its overturned due to evolving interpretations.)

2. Rulings of higher courts with appellate jurisdiction.

Front 34

Statements on Standards for Tax Service(SSTS)

Back 34

1. Standards of practice for tax professionals issued by the AICPA.

2. Seven SSTS that describe tax professional standard when:

1. Recommending a tax return position

2. Answering questions on a tax return

3. Preparing a tax return using data supplied by a client

4. Using estimates on a tax return

5. Taking a tax return position inconsistent with a previous year's tax return

6. Discovering a tax return error

7. Giving advice to taxpayers.

Front 35

Statute of Limitations

Back 35

1. Defines the period in which the taxpayer can file an amended tax return or the IRS can assess a tax deficiency for a specific tax year.

2. For both, statute of limitations generally ends three years later from the later of (a) the date the tax return was actually filed or (b) the tax return's original due date.

Front 36

Substantial Authority

Back 36

1. Standard used to determine whether a tax practitioner may recommend and a taxpayer may take a tax return position without being subject to a specific IRS penalty(IRC 6694 and IRC 6662 respectively)

2. Good CPA evaluates whether the supporting authority is substantial or not based upon the supporting and opposing authorities' weight and relevance.

3. Suggests that the probability of the taxpayer's position is sustained upon audit or litigation is in the 35 to 40 percent range or above.

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Tax treaties

Back 37

1. Agreements negotiated between countries that describe the tax treatment of entities subject to tax in both countries.

2. U.S. president has the authority to enter into a tax treaty with another country after receiving the Senate's advice.

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Technical Advice Memorandum

Back 38

Ruling issued by the IRS national office, requested by an IRS agent, and generally for a completed transaction.

Front 39

Temporary Regulations

Back 39

1. Regulations issued with limited life.

2. Three years if issued after November, 20, 1988

3. During their life, carry the same authoritative weight as final regulations.

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Topical Tax Service

Back 40

1. Tax service arranged by subject

2. For each topic, identify the tax issues that relate to each topic, and then explain and cite authorities relevant to the issue.

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U.S. Circuit Court of Appeals

Back 41

1. First level of appeals courts after the trial-level courts.

2. 13 U.S. Circuit Courts of Appeal

3. One for the Federal Circuit and 12 assigned to hear cases that originated from a specific circuit.

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U.S. Constitution

Back 42

Founding law of the U.S., ratified in 1789.

Front 43

U.S. Court of Federal Claims

Back 43

1. One of the three trial-level courts.

2. National court that only hears monetary claims against the federal government.

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U.S. District Court

Back 44

1. One of the three trial-level courts.

2. Allows a jury trial.

3. At least one in each state.

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U.S. Supreme Court

Back 45

1. Highest court in the U.S.

2. Hears only a few tax cases a year with great significance to a broad cross-section of taxpayers or cases litigating issues in which there has been disagreement the circuit courts.

3. Refuses to hear most cases(denies writ of ceritiorari) and thus litigation ends with the circuit court decision.

Front 46

U.S. Tax Court

Back 46

1. National court that only hears tax cases.

2. Judges are tax experts.

3. Only court that allows tax cases to be heard before the taxpayer pays the disputed liability.

4. Only court with a small claims division(disputed liabilities of less than $50,000).

Front 47

Writ of Certiorari

Back 47

A document filed to request the U.S. Supreme court to hear a case.