Ch. 2

2- Identify the issues

A tax professional's ability to identify issues is largely a function of his or her type of tax expertise. A tax expert in a particular area will typically be able to identify quickly the Page 2-18specific tax issues that relate to transactions in that area.

U.S. Supreme Court

After an appeals court hears a case, the losing party has one last option to receive a favorable ruling: a petition to the U.S. Supreme Court to hear the case Only sees few tax cases per year, with broad scope that might apply to many people

After Audit Process -30 day letter -90 day letter - court

After the audit, the IRS will send the taxpayer a 30-day letter, which provides the taxpayer the opportunity to pay the proposed assessment or request an appeals conference. If an agreement is not reached at appeals or the taxpayer does not pay the proposed assessment, the IRS will send the taxpayer a 90-day letter. After receiving the 90-day letter, the taxpayer may pay the tax or petition the U.S. Tax Court to hear the case. If the taxpayer chooses to pay the tax, the taxpayer may then request a refund of the tax and eventually sue the IRS for refund in the U.S. District Court or the U.S. Court of Federal Claims

Courts of Appeals

After the trial court's verdict, the losing party has the right to request one of the 13 U.S. Circuit Courts of Appeals to hear the case

Extension

Any taxpayer unable to file a tax return by the original due date can request an extension to file. An extension allows the taxpayer to delay filing a tax return but does not extend the due date for tax payments

Client letters

Basic components of the client letter include: (1) research question and limitations, (2) facts, (3) analysis, and (4) closing

District Court or Court of Federal Claims

If the taxpayer would like to litigate the case but prefers it to be heard in the local U.S. District Court or the U.S. Court of Federal Claims, the taxpayer must pay the tax deficiency first, then request a refund from the IRS, and then sue the IRS for refund in the court after the IRS denies the refund claim.

1- Understand Facts

Open facts have not yet occurred, such as the facts associated with a proposed transaction. Closed facts have already occurred.

Differing Authorities

When the researcher identifies that different authorities have conflicting views, she should evaluate the "hierarchy," jurisdiction, and age of the authorities. Once the tax researcher has identified relevant authorities, she must make sure that the authorities are still valid and up to date.

Writ of certiorari

a document filed to request the U.S. Supreme Court to hear a case. (typically denied for tax cases)

Citator

a research tool that allows one to check the status of several types of tax authorities. A citator can be used to review the history of the case to find out, for example, whether it was subsequently appealed and overturned, and to identify subsequent cases that cite the case. Citators can also be used to check the status of revenue rulings, revenue procedures, and other IRS pronouncements.

Proposed Regulations

all regulations are issued this way first, to allow public comment on them. Proposed regulations do not carry the same authoritative weight as temporary or final regulations.

Revenue Procedures

are also much more detailed than regulations. They explain in greater detail IRS practice and procedures in administering the tax law.

Annotated tax services

arranged by Internal Revenue Code section

Topical tax services

arranged by topic, such as taxable forms of income, tax-exempt income, and trade or business expenses

DIF system

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

IRS Audit Selection

The IRS uses a number of computer programs and outside data sources to identify tax returns that may have an understated tax liability. Common computer initiatives include the DIF (Discriminant Function) system, the document perfection program, and the information matching program

Due dates

The due date for tax returns varies based on the type of taxpayer. Individual tax returns are due on April 15 for calendar-year individuals. Due dates that fall on a Saturday, Sunday, or holiday are automatically extended to the next day that is not a Saturday, Sunday, or holiday.

Tax Research

The five steps in tax research are (1) understand the facts, (2) identify issues, (3) locate relevant authorities, (4) analyze the tax authorities, and (5) document and communicate research results. The two types of tax services that tax professionals use in tax research are annotated tax services, arranged by code section, and topical services, arranged by topic.

5- Document and communicate the results

The tax memo is the end result w/ 5 parts: (1) facts, (2) issues, (3) authority list, (4) conclusion, and (5) analysis.

Document perfection program

checks all returns for mathematical and tax calculation errors.

Information Matching Program

compares the taxpayer's tax return to information submitted to the IRS from other taxpayers

Statute of limitations

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. For both amended tax returns filed by a taxpayer and proposed tax assessments by the IRS, the statute of limitations 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. For IRS - 6 years if taxpayer omitted estimated 25% of gross income or open indefinitely if fraud or failure to file

Technical Advice Memorandums

differ from private letter rulings in that they are generated for completed transactions and usually are requested by an IRS agent during an IRS audit.

Procedural Regulations

explain Treasury Department procedures as they relate to administering the Code. Again, for Bill and Mercedes's case, these might be the regulations issued under IRC Sec. 6501 regarding the statute of limitations for IRS assessment and collection.

Temporary Regulations

have a limited life (three years for regulations issued after November 20, 1988). Nonetheless, during their life, they carry the same authoritative weight as final regulations

Revenue Rulings

have less authoritative weight, but they provide a much more detailed interpretation of the Code as it applies to a specific transaction and fact pattern.

Acquiescence

indicates that the IRS has decided to follow the court's adverse ruling in the future, it does not mean that the IRS agrees with it. Instead, it simply means that the IRS will no longer litigate this issue

Nonacquiescence

issued after the IRS loses a trial-level or circuit court case when the IRS has decided to continue to litigate this issue.

Determination Letters

issued by local IRS directors, are generally not controversial. An example of a determination letter is the request by an employer for the IRS to rule that the taxpayer's retirement plan is a "qualified plan."

Circular 230

issued by the IRS, provides regulations governing tax practice and applies to all persons practicing before the IRS

Field Examinations

least common audit. The IRS conducts these at the taxpayer's place of business or the location where the taxpayer's books, records, and source documents are maintained broadest scope, most complex can last months to years and are mostly limited to business returns and complex individuals

Research Memo

most common end product of research process five basic parts: (1) facts, (2) issues, (3) authority list, (4) conclusion, and (5) analysis

Criminal penalties

much less common than civil penalties, although they have been used to incarcerate some of the most notorious criminals

Civil penalties

much more common, generally come in the form of monetary penalties, and may be imposed when tax practitioners or taxpayers violate tax statutes without reasonable cause—say, as the result of negligence, intentional disregard of pertinent rules, willful disobedience, or outright fraud

U.S. tax court

national court whose judges are tax experts and who hear only tax cases

Tax Treaties

negotiated agreements between countries that describe the tax treatment of entities subject to tax in both countries, such as U.S. citizens earning investment income in Spain

Primary authorities

official sources of the tax law generated by the legislative branch (statutory authority issued by Congress), judicial branch (rulings by the U.S. District Courts, U.S. Tax Court, U.S. Court of Federal Claims, U.S. Circuit Courts of Appeals, or U.S. Supreme Court), and executive/administrative branch (Treasury and IRS pronouncements)

4- Analyze tax authorities

question of fact- hinges upon the facts and circumstances of the taxpayer's transaction. For example, whether a trade or business expense is "ordinary," "necessary," "reasonable," and thus deductible, is a question of fact question of law- hinges upon the interpretation of the law, such as interpreting a particular phrase in a code section

Final Regulations

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

3- Locate Relevant Authorities

relevant authorities (code sections, regulations, court cases, revenue rulings) that address the tax issue. Luckily, tax services can aid the researcher in identifying relevant authorities. Most, if not all, of these services are available on the Internet (with a subscription) and thus offer the flexibility to conduct research almost anywhere

Private Letter Rulings

represent the IRS's application of the Code and other tax authorities to a specific transaction and taxpayer. Private letter rulings are issued in response to a taxpayer request and are common for proposed transactions with potentially large tax implications

Interpretive Regulations

represent the Treasury's interpretation of the Code. In Bill and Mercedes's case, these might be the regulations issued under IRC Sec. 163, which discuss interest deductions

Internal Revenue Code of 1986 (the Code)

second (and main) statutory authority the same authoritative weight as tax treaties and Supreme Court rulings. Thus, a taxpayer should feel very confident in a tax return position, such as taking a deduction that is specifically allowed by the Code.

Office Examinations

second most common audit. As the name suggests, the IRS conducts them at its local office. broader scope, more complex than correspondence mostly for small businesses, taxpayers operating sole proprietorships, and middle- to high-income individual taxpayers

Research Questions

Research questions often consist of questions of fact or questions of law. The answer to a question of fact hinges upon the facts and circumstances of the taxpayer's transaction. The answer to a question of law hinges upon the interpretation of the law, such as interpreting a particular phrase in a code section

Filing requirements

Specified by law for each type of taxpayer. For individuals, filing requirements vary by filing status, gross income, and age. Gross income thresholds are indexed each year for inflation

Judicial authorities

Stare decicis - a court will rule consistently with (a) its previous rulings (unless, due to evolving interpretations of the tax law over time, the court decides to overturn an earlier decision) and (b) the rulings of higher courts with appellate jurisdiction (the courts its cases are appealed to) Golsen rule - states that the tax court will abide by rulings of the circuit court that has appellate jurisdiction for a case.

Due dates for corporations

tax returns for taxable corporations ("C" corporations) are generally due on the fifteenth day of the fourth month following the corporation's year-end The exception is for tax returns for C corporations with a June 30 year-end, which are due on the fifteenth day of the third month (September 15th) For both partnerships and S corporations (generally nontaxable corporations), tax returns must be filed by the fifteenth day of the third month following the entity's year-end (March 15 for calendar-year partnerships or S corporations) Any individual, partnership, or S corporation unable to file a tax return by the original due date can, by that same deadline, request a six-month extension to file, which is granted automatically by the IRS.

Regulations

the Treasury Department's official interpretation of the Internal Revenue Code, have the highest authoritative weight, and often contain examples of the application of the Code that may be particularly helpful to the tax researcher

U.S. Constitution

the highest authority in the United States, but it provides very little in the way of tax law since it contains no discussion of tax rates, taxable income, or other details. Instead, the 16th Amendment provides Congress the ability to tax income directly, from whatever source derived, without apportionment across the states.

Correspondance Examinations

the most common. These audits, as the name suggests, are conducted by mail and generally are limited to one or two items on the taxpayer's return narrowest scope, least complex

Legislative Regualtions

the rarest type, are issued when Congress specifically directs the Treasury Department to create regulations to address an issue in an area of law. In these instances, the Treasury is actually writing the law instead of interpreting the Code.

Substantial authority

the standard used to determine whether a tax practitioner may recommend and a taxpayer may take a tax return position without being subject to IRS penalty IRC Sec. 6694 imposes a penalty on a tax practitioner for any position that is not supported by substantial authority

Secondary authorities

unofficial tax authorities that interpret and explain the primary authorities, such as tax research services (discussed below), tax articles from professional journals and law reviews, newsletters, and textbooks.

Actions on decisions

which explain the background reasoning behind an IRS acquiescence or nonacquiescence