Chapter 14

giving false information with respect to withholding

All employees have to complete a W-4 A penalty of $500 is imposed on any person who give there employer false information with respect to withholding status or the number of exemptions to which they are entitled

Willful Neglect

a conscious, intentional failure or reckless indifference. Many IRS penalties may be abated if the underling act resulted from reasonable cause rather than willful neglect

Reasonable Cause

a means by which a taxpayer or preparer can be excused from an applicable penalty or other sanction.

Failure to file penalty

a penalty imposed on taxpayers who fail to file a required tax return. The penalty can be waiver for reasonable cause and is coordinated with the failure-to-pay penalty

Failure to pay penalty

a penalty imposed on taxpayers who fail to pay a tax that is shown on their return. The penalty is generally .5 percent of the required liability for each month that the tax is not paid, up to a maximum of 25 percent

Frivolous Return

a return that does not include enough information to figure the correct tax, contains information or statements that on their face indicate that the self-assessment requirement has not been met, or takes positions that are meant to impede the administration of the tax law.

Preparer Penalties

a series of fined and other levies by which the IRS encourages taxpayers and preparers to fulfill their responsibilities under the IRC.

Substantial Authority

a taxpayer penalty may be incurred if a tax return position is taken and not disclosed to the IRS and no substantial authority supports the position

two types of civil penalties

ad valorem assessable

Ad Valorem Penalties

additions to tax based on a percentage of the delinquent tax

the limitations period is extended by 60 days if the IRS receives, within 60 days of the expiration of the statute of limitations, an

amended return that shows the taxpayer owes an additional tax

situations in which required information related to certain international transactions and foreign transfers

another exception to general three limitation, statute is suspended and will not begin until the missing information is supplied to the IRS

burden of proof in fraud cases

falls on the IRS

Failure to pay tax

if a taxpayer fails to pay either a tax that is shown on their return or an assessed deficiency within 10 days of an IRS notice penalty is imposed -10 day period becomes 21 days when tax is less than $100,000 -penalty is 0.5% of the required liability --increases to 1% of the underpaid tax per month after the notice and demand is issued --maximum penalty is 25% penalty not applied if reasonable cause

Under an all-or-nothing rile,

if the IRS establishes that any portion of an underpayment is attributable to fraud, the entire underpayment is treated as attributable to fraud and the penalty applies to the entire amount due

Negligence

in a federal tax context a failure to exercise one's duty with respect to the IRC or use a reasonable degree of expected or professional care

Fraud

in a tax practice context, a taxpayer action to evade the assessment of a tax. Criminal fraud requires a willful intent by the taxpayer. The IRS bears the burden of proof relative to fraud allegations

Taxpayer penalties

may involve both criminal and civil offenses, not mutually exclusive

valuation overstatement

o 20% penalty applies when an asset value has been overstated on a return o Assed when the valuation used is 150% or more of the actul value, resulting in an underpayment of more than $5,000 (10 for C-Corp) o Increases to 40% is overstatement is deemed "gross"—200% of actual value

Interest

o Code provides for the payment of interest on underpayments and overpayments of tax, at an adjustable rate, compounded daily o The interest charge eliminates the benefits that taxpayers could obtain by adopting aggressive positions in the creation or processing of tax returns in order to postpone or avoid the payment of taxes

negligence or disregard of applicable federal tax rules and regulations

o Failure to make a reasonable attempt to comply with the provisions of the Code o Occurs when the taxpayer fails to report gross income, overstates deduction or keep adequate records o Waived when the taxpayer makes a good-faith attempt to comply with the law

the failure to file penalty is reduced by

the 0.5% failure-to-pay penalty for any month in which both apply

valuation understatement

-20% is assed in situations in which the claimed value is 65% or less than the asset's actual value, resulting in an underpayment of more than $5000 increase to 40% penalty also applies

A taxpayer who reports a NOL, CL, or credit carryback can accelerate the processing of the refund by filing an Application for Tentative Refund

-IRS has 90 days from the later of the date on which the application was filed or the last day of the month in which the return for the loss is due, to examine the application and accept or deny the claim --if application is denied the taxpayer must wait six months before legal action

Interest Computation Conventions

Interest on underpayments is payable at a federally specified rate, from the last date that is prescribed for the payment of tax to the date on which the tax is actually paid Interest is compounded daily IRS has published interest-factor tables that automatically calculate the daily compounding for various rates of interest In situations where the taxpayer is subject to both underpayment and overpayment computations for the same time period, whether the prior disputes involve income, transfer or employment taxes, the amounts due from and payable to the government are netted and a zero interest rate applies to those amount Interest accrues on the full amount of the tax liability Interest is imposed on an assessable penalty, additional amount, or addition to the tax if these amounts are not paid within 21 calendar days of the date on which the IRS requests its payments No interest is charged on criminal penalties or delinquent estimated-tax payments IRS has no authority to forgive the payment of interest

failure to make estimated payments

Penalty is based on the amount and duration of the underpayment and the rate of interest that currently is established by the code Each penalty period begins on the date on which the installment was due and runs through the earlier of either the date that the amount is paid or the due date for filing the return Any overpayment is first applied to prior underpayments and then excess is credited to later installments An individual's underpayment of estimated tax is computed as the difference between the amounts that were paid by the quarterly due dates and the least of the following: • 90% of the tax that is shown on the current year's return • 100% of the prior year's tax, if a return was filed for that tax year of 12 months. The threshold increase to 110% if the adjusted gross income reported one that return is more than$150,000 • 90% percent of the tax that would be figured by annualizing the income that was earned during the year, up to the month in which the quarterly payment is due

mitigation of statute of limitations

The IRS cannot make an assessment and a taxpayer cannot obtain a refund after the statute of limitations has expired When an error has been made in the inclusion of income, allowance, disallowance of a deduction or other tax treatment that affects the basis of property, the mitigation provisions will allow a submission of the error to be corrected, even though the normal period of limitations has expired for that year

failure to make deposits of taxes

The code requires employers to collect and withhold income and Social Security taxes from their employees Amounts withheld are considered to be held in a special trust fund and they must be deposited in a government depository on or before certain dates prescribed by the statutes and regulations • The code imposes heavy civil and criminal penalties on those who are responsible for the failure to make a timely deposit of the withheld funds If an employer fails to deposit on a timely basis, a penalty equal to a percentage of the underpayment is imposed • The rate varies from 2-15% If any person who is required to collect, account for and remit employment taxes willfully fails to do so, a penalty equal to 100% percent of the tax is imposed

suspension of period of assessment and collection

When the IRS mails a statutory notice of deficiency to the taxpayer, the assessment and collection period is suspended for 150 days Statute can be extended in the following situations • Taxpayers assets are in the custody of the court • Taxpayer is outside the US for six or more consecutive months • Taxpayer's assets are wrongfully seized • A fiduciary or receiver is appointed in a bankruptcy case • The IRS is prohibited under bankruptcy law from any assessment or collection of a tax • The collection of excise or termination taxes on certain retirement plans or private foundations is suspended

important civil penalties

-failure to file a tax return -failure to pay tax -accuracy related penalty --substantial understatement of income tax --substantial valuation overstatement --substantial overstatement of pension liabilities --substantial understatement of estate and gift tax valuation• . --Disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law --Any undisclosed foreign-financial-asset understatement -civil fraud -failure to make estimated payments -failure to make deposits of taxes -giving false information with respect to withholding -filing a frivolous return -reliance on written advice of the IRS

the government is required to pay interest at the applicable federal rate to any taxpayer who has

-made an overpayment of tax -• Runs from the date of the overpayment to the date on which the overpayment is credited against another tax liability • IRS is allowed a specific period in which it may refund an overpayment without incurring interest o Runs for 45 days after the unextended due date of the return or if the return is filed after the due date, for 45 days after it is actually filed

failure to file a tax return

-penalty imposed unless reasonable caiuse -5% per month --max 25% or 5 months -fraudulent failure is subject to 15% per month --75% max -If a failure to file is the result of willful neglect, there is a minimum penalty for failure to file an income tax return within 60 days of the due date, including extensions --The penalty is the lesser of $135 or the full amount of taxes that are required to be shown on the return

Criminal tax offenses

-willful attempt to evade or defeat a tax -willful failure to collect, account for, and remit any tax by any person who is required to do so - willful failure to file a return, supply information, or pay tax estimated tax -willful making, subscribing, or siding or assisting in the making of return or other document that is verified by a declaration under the penalties if perjury and that person does not believe to be true correct as to every material matter - willful filing of known-to-be false or fraudulent document -o Disclosure or use of any information that Is furnished to a person who is engaged in the business of preparing tax returns or providing services in connection with the preparation of tax returns, for purposes other than the preparation of the return—a misdemeanor offense that is punishable by a fine not to exceed $1,000 and/or imprisonment for a period not to exceed one year

all taxes must be collected within

10 years after a timely assessment has been made

Civil fraud

75% penalty of the underpayment that is attributable to the fraud -neither the fail-to-file, fail-to-pay or accuracy related penalty are imposed -just requires clear and convincing evidence

accuracy related penalty

A penalty of 20% of the underpayment amount imposed on taxpayers who file incorrect tax returns in certain situations. -negligence or disregard of applicable federal tax rules and regulations -substantial understatement of income tax -substantial valuation overstatement -substantial overstatement of pension liabilities -substantial understatement of estate and gift tax valuation

Accuracy-Related Penalty

Civil tax penalty assessed in situation in which the taxpayer has been negligent in completing the return or is found to have acted with a disregard of IRS rules and regulations or in which a substantial understatement of the income tax, a substantial valuation or pension liability understatement exists or a substantial transfer-tax valuation understatement exists. A 20 percent penalty usually applies to the pertinent understatement and related interest accrues from the due date of the return, rather than the date on which the penalty was assessed.

Civil Penalties

In a tax practice context, a fine or other judgement that is brought against a taxpayer or preparer for a failure to comply with one or more of the elements of the federal tax law.

Injunctions

The action by which the IRS or a court prevents a taxpayer, preparer, or tax shelter distributor from undertaking a specified action TRPs • Must have violated one of the following o A prepare penalty or a criminal provision of the Code o Misrepresented his or her eligibility to practice before the IRS o Guaranteed the payment of any tax refund or the allowance of a credit o Engaged in other fraudulent or deceptive conduct that substantially interferes with the administration of the tax laws • In addition it must be shown that the injunction relief is appropriate to prevent the conduct from recurring Promoters of abusive tax shelters • A court mist find that injunctive relief is appropriate to prevent this conduct from recurring

Criminal Penalties

The punishment for a severe infraction of the elements of the federal tax law by a taxpayer or tax preparer. Felony or misdemeanor status for tax crimes can be accompanied by substantial fines or jail terms

Tax Return Preparer

any person who prepares for compensation, or employs one or more persons to prepare for compensation, all or a substantial portion of a tax return or claim for income tax refund A person is not a TRP merely because he or she • Furnishes typing, reproducing or other clerical assistance • Prepares a return or refund claim of his or her regular employer or of an officer or employee of the employer • Prepares as a fiduciary a return or claim for refund • Prepares a claim for refund during the course of an audit • Provides general tax advice to a taxpayer • Is an employee or official of the IRS while performing job-related duties • Prepares the return for no compensation • Works for IRS-sponsored programs

civil tax penalties are

collected in the same manner as other taxes and usually provide only for monetary fines

Defenses to criminal penalties

o Need to establish guilt beyond a reasonable doubt o Some successful defenses Unreported income was offset fully by unreported deductions Unreported income was in reality a gift or some other excludible receipt The taxpayer was confused or ignorant as to the. applicable law and one cannot intend to violate the tax law if he or she does not know what that law is Taxpayer relied on the erroneous advice of a competent tax adviser The taxpayer has a mental disease or defect and so could not have acted willfully to violate the tax law The statute of limitations expired Taxpayer enters into a plea bargain

substantial understatement of income tax

o Occurs if the determined understatement exceeds the greater of 10% of the proper tax liability or $5,000 o Understatement must exceed the lesser of the following for a corporation other than an S. Corp 10% of proper tax liability or $10,000 if greater or $10 million

penalties on return prepares

o Prepares are subject to a number of disclosure requirements and penalties for improper conduct in the preparation of those documents

Assessable Penalties

penalties expressed as a flat dollar amount rather than a percentage of the delinquent tax

filing a frivolous return

penalty of $5000

anytime a taxpayer files a fraudulent or false return with the intent to evade tax liability the limitations period

remains open indefinitely

three year assessment period can be reduced to 18 months if a

request for a prompt assessment is filed with the IRS

Statute of Limitations

the maximum amount of time within one or both parties in the taxing process must perform an act, such as file a return, pay a tax, or examine a return. Various time limits apply relative to the IRC, although both parties can agree to extend one or more of these time limitations o Congress believes that, at some point, the right to be free of stale claims must prevail over the government's right to pursue them o If the statutes permitted could be jeopardized because witnesses might have died or disappeared, memories might have faded, and records or other evidence might have been lost o Are designed solely to protect the government

Collection

the process by which the IRS extracts an assessed tax liability from a taxpayer. Usually takes the form of the receipt of a check or other draft from the taxpayer but can include liens or other garnishments of taxpayer assets.

Assessment

the process in which the IRS files the amount of a taxpayer's tax liability. Although the US tax system exhibits some degree of self-assessment, the IRS has the ultimate authority to assess the liability of every taxpayer

civil penalties are imposed when

the tax statutes are violated without reasonable cause, because of negligence, through willful disobedience or fraud

criminal penalties are imposed only after

the usual criminal process of law is carried out, during which the taxpayer is entitled to the same constitiutional guarantees that are given to non-tac criminal defendants

if the taxpayer shows that any part of an underpayment is not attributable to fraud

then the fraud penalty is not imposed with respect to that amount

if a taxpayer is convicted of criminal fraud then

they cannot contest a civil fraud dermination

a taxpayer who has filed a return must file a claim for credit or refund within

three years of the date on which the return was filed or two years of the date on which the tax was paid, whichever is later

assessment of a federal income tax is generally

three years of the later of the date that the return was actually filed or the unextended due date of the return -is extended to six years if the taxpayer omits from his or her reported gross income an amount that is greater than 25% of the reported gross income

criminal fraud must be proven

without a shadow of reasonable debt