Chapter 2: Tax Compliance, the IRS, and Tax Authorities

Treasury regulations have different purposes. _____________ regulations represent the Treasury's understanding of the Code. __________ regulations explain Treasury Department's policies as they relate to administering the Code. And, ______________ regulations are issued when the Treasury Department has been instructed to address an issue in an area of law. Listen to the complete question Need help? Review these concept resources.

Blank 1: Interpretative, Interpretive, or Interpretation Blank 2: Procedural Blank 3: Legislative

_________ facts provide opportunities for tax planning, while _______ facts deal with tax compliance.

Blank 1: Open Blank 2: Closed or Close

In order to identify issues in the tax research process, the tax preparer should get a good understanding of the _________ __________. Then, the tax preparer can combine that information with his knowledge of the tax laws.

Blank 1: client's, relevant, taxpayer's, important, clients, or client Blank 2: facts or fact

The IRS can impose both ______ and _______ penalties to encourage tax compliance by both tax professionals and taxpayers.

Blank 1: criminal Blank 2: civil

A question of _______ could involve the interpretation of a particular Code section, while a question of _____ hinges upon the circumstances of the taxpayer's transaction.

Blank 1: law Blank 2: fact or facts

The tax preparer can avoid a penalty if the tax position has at least a(n) ________ __________ , as long as it is disclosed on the tax return.

Blank 1: reasonable or substantial Blank 2: basis or authority

The IRC imposes a penalty on a tax practitioner for any position that is not supported by _________ __________

Blank 1: substantial Blank 2: authority

Which of the following statements regarding tax return extensions are CORRECT? (Check all that apply.) Multiple select question. A. Partnerships extensions are granted for up to four months only. B. A six-month extension allows a taxpayer to pay the tax due up to six months after the original due date. C. "C" Corporations are not granted automatic tax return extensions. D. A six-month extension allows a taxpayer to file a return up to six months after the original due date. E. "S" Corporations may request an automatic six month extension to file.

D. A six-month extension allows a taxpayer to file a return up to six months after the original due date. E. "S" Corporations may request an automatic six month extension to file.

Which of these penalties is the most common and generally comes in the form of monetary penalties? Multiple choice question. A.. Negligence B. Criminal C. Punitive D. Civil

D. Civil

Which of the following choices is NOT one of the steps in the tax research process? Multiple choice question. A. Identify issues B. Understand facts C. Locate tax authorities D. Contact IRS

D. Contact IRS

Name 3 factors that determine whether a taxpayer is required to file a tax return

Filing status Age Gross income

Treasury regulations come in three forms: ____________ regulations have been issued in their final form and represent the Treasury's interpretations of the Code; _______________ regulations have a limited life but carry high authoritative weight; and ________ regulations, which have the lowest authority.

Final Temporary Proposed

Action on decisions

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

Private letter rulings

IRS pronouncements issued in response to a taxpayer request for a ruling on specific issues for the taxpayer. They are common for proposed transactions with potentially large tax implications. For the requesting taxpayer, a private letter ruling has very high authority. For all other taxpayers, private letter rulings have little authoritative weight

The__________________ ___________________ Committee attempts to reconcile the House and Senate versions of a tax bill.

Joint Conference

Our___________ system has the ultimate authority to interpret the Internal Revenue Code and to settle disputes between the IRS and taxpayers.

Judicial or court

______________ rulings are less authoritative and more specific than revenue rulings and regulations.

Letter

How many parts are there in Circular 230?

There are five parts of Circular 230: Subpart A describes who may practice before the IRS (e.g., CPAs, attorneys, enrolled agents) and what practicing before the IRS means (tax return preparation, representing clients before the IRS, etc.). Subpart B describes the duties and restrictions that apply to individuals governed by Circular 230. Subparts C and D explain sanctions and disciplinary proceedings for practitioners violating the Circular 230 provisions. Subpart E concludes with a few miscellaneous provisions (such as the Circular 230 effective date)

Stare decisis

a doctrine meaning that a court will rule consistently with (a) its previous rulings (i.e., unless, due to evolving interpretations of the tax law over time, it decides to overturn an earlier decision) and (b) the rulings of higher courts with appellate jurisdiction (i.e., the courts to which its cases are appealed)

Writ of certiorari

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

U.S. Tax Court

a national court that only hears tax cases and where the judges are tax experts. The U.S. Tax Court is the only court that allows tax cases to be heard before the taxpayer pays the disputed liability and the only court with a small claims division (hearing claims involving disputed liabilities of $50,000 or less)

Information matching program

a program that compares the taxpayer's tax return to information submitted to the IRS from other taxpayers (e.g., banks, employers, mutual funds, brokerage companies, mortgage companies). Information matched includes items such as wages (e.g., Form W-2 submitted by employers), interest income (e.g., Form 1099-INT submitted by banks), dividend income (e.g., Form 1099-DIV submitted by brokerage companies), and so forth

Document perfection program

a program under which all tax returns are checked for mathematical and tax calculation errors

Question of fact

a research question that hinges upon the facts and circumstances of the taxpayer's transaction

Question of law

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

Citator

a research tool that allows one to check the status of several types of tax authorities. 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. Can also be used to check the status of revenue rulings, revenue procedures, and other IRS pronouncements

Annotated tax service

a tax service arranged by code section. For each code section, an annotated service includes the code section; a listing of the code section history; copies of congressional committee reports that explain changes to the code section; a copy of all the regulations issued for the specific code section; the service's unofficial explanation of the code section; and brief summaries (called annotations) of relevant court cases, revenue rulings, revenue procedures, and letter rulings that address issues specific to the code section

Topical tax service

a tax service arranged by subject (i.e., topic). For each topic, topical services identify tax issues that relate to each topic and then explain and cite authorities relevant to the issue (code sections, regulations, court cases, revenue rulings, etc.)

Nonacquiescence

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

Acquiescence

issued after the IRS loses a trial-level or circuit court case when the IRS has decided to follow the court's adverse ruling in the future. It does not mean that the IRS agrees with the court's ruling. Instead, it simply means that the IRS will no longer litigate this issue

Civil penalties

monetary penalties imposed when tax practitioners or taxpayers violate tax statutes without reasonable cause—for example, as the result of negligence, intentional disregard of pertinent rules, willful disobedience, or outright fraud

DIF (Discriminant Function) system

assigns a score to each tax return that represents the probability that the tax liability on the return has been underreported (a higher score = a higher likelihood of underreporting). The IRS derives the weights assigned to specific tax return attributes from historical IRS audit adjustment data from the National Research Program. The DIF system then uses these (undisclosed) weights to score each tax return based on the tax return's characteristics. Returns with higher DIF scores are then reviewed to determine if an audit is the best course of action.

Primary authorities

official sources of the tax law generated by the legislative branch (i.e., statutory authority issued by Congress), judicial branch (i.e., rulings by the U.S. district court, U.S. Tax Court, U.S. Court of Federal Claims, U.S. circuit courts of appeals, or U.S. Supreme Court), or executive/administrative branch (i.e., Treasury or IRS pronouncements)

U.S. Court of Federal Claims

one of the three trial-level courts. It is a national court that only hears monetary claims against the federal government

U.S. district court

one of three trial-level courts. It is the only court that allows a jury trial. There is at least one district court in each state

Criminal penalties

penalties commonly charged in tax evasion cases (i.e., willful intent to defraud the government). They are imposed only after normal due process, including a trial. Compared to civil cases, the standard of conviction is higher in a criminal trial (beyond a reasonable doubt). However, the penalties are also much higher, such as fines up to $100,000 for individuals plus a prison sentence

Circular 230

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

Proposed regulations

regulations issued in proposed form; they do not carry the same authoritative weight as temporary or final regulations. All regulations are issued in proposed form first to allow public comment on them

Temporary regulations

regulations issued with a limited life (three years for regulations issued after November 20, 1988). During their life, temporary regulations carry the same authoritative weight as final regulations

Procedural regulations

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

Final regulations

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

Technical advice memorandums

rulings issued by the IRS national office, requested by an IRS agent, and generated for completed transactions

Determination letters

rulings requested by the taxpayer, issued by local IRS directors, and 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."

Revenue procedures

second in administrative authoritative weight after regulations. Revenue procedures are much more detailed than regulations and explain in greater detail IRS practice and procedures in administering the tax law. Revenue procedures have the same authoritative weight as revenue rulings

Revenue rulings

second in administrative authoritative weight after regulations. Revenue rulings address the specific application of the Code and regulations to a specific factual situation. Revenue rulings have the same authoritative weight as revenue procedures

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

Statements on Standards for Tax Services (SSTS)

standards of practice for tax professionals issued by the AICPA. Currently, there are seven SSTS that describe the tax professional standards when recommending a tax return position, answering questions on a tax return, preparing a tax return using data supplied by a client, using estimates on a tax return, taking a tax return position inconsistent with a previous year's tax return, discovering a tax return error, and giving tax advice to taxpayers

Golsen rule

the rule that states that the U.S. Tax Court will abide by the rulings of the circuit court that has appellate jurisdiction for a case

Office examinations

the second most common audit. As the name suggests, the IRS conducts these audits at the local IRS office. These audits are typically broader in scope and more complex than correspondence examinations. Small businesses, taxpayers operating sole proprietorships, and middle- to high-income individual taxpayers are more likely, if audited, to have office examinations

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 under IRC §6694 and IRC §6662, respectively. A good CPA evaluates whether supporting authority is substantial or not based upon the supporting and opposing authorities' weight and relevance. Substantial authority suggests that the probability that the taxpayer's position will be sustained upon audit or litigation is in the 35 to 40 percent range or above

Tax services that are arranged by topic, such as types of taxable income, are known as ____________ tax services.

topical or topic

Secondary authorities

unofficial tax authorities that interpret and explain the primary authorities, such as tax research services, tax articles, newsletters, and textbooks. Secondary authorities may be very helpful in understanding a tax issue, but they hold little weight in a tax dispute (hence, the term unofficial tax authorities)

Click and drag on elements in order Starting with the highest authoritative weight, rank the authorities in descending order. Internal Revenue Code Treasury regulations Revenue rulings and revenue procedures Letter rulings

1. Internal Revenue code 2. Treasury regulations 3. Revenue rulings and revenue procedures 4. Letter rulings

Click and drag on elements in order Starting with the court having the highest level of authority, rank the courts in descending order of authoritative rank. District Courts Circuit Courts of Appeal U.S. Supreme Court U.S. Tax Court U.S. Court of Federal Claims

1. U.S. Supreme Court 2. Circuit Courts of Appeal 3. U.S. Tax Court 4. U.S. Court of Federal Claims 5. District Courts

What is the statute of limitations for tax returns where over 25 percent of gross income has been omitted in a particular tax year? Multiple choice question. A. 6 years B. 3 years C. 10 years D. No limit

A. 6 years

Which type of issue will focus on understanding how the various components and circumstances of the transaction affect the research answer and look for authorities with fact patterns similar to the client's? Multiple choice question. A. Question of fact B. Question of law C. Question of legality D. Question of interpretation

A. Question of fact

In which of the following situations will a tax preparer likely incur a penalty? Multiple choice question. A. The tax position is supported by one authority, contradicted by several other authorities, and is not disclosed on the tax return. B. The tax position is supported by substantial authority and is not disclosed on the tax return. C. The position has a reasonable basis for being upheld and is disclosed on the tax return. D. Based on research, it appears there is a 35-40 percent chance that the position will be upheld in an audit or litigation.

A. The tax position is supported by one authority, contradicted by several other authorities, and is not disclosed on the tax return.

What action does the 90-day letter provide a taxpayer if the taxpayer does NOT agree with an assessment after being audited by the IRS and participating in the appeals conference? Multiple choice question. A. The taxpayer should petition the U.S. Tax Court to hear the case. B If the appeals conference is unsuccessful, the taxpayer should pay the deficiency. There is no recourse. C. The taxpayer should file for an Offer in Compromise. D. The taxpayer can request a second appeals conference with a senior IRS manager.

A. The taxpayer should petition the U.S. Tax Court to hear the case.

Which of the following primary authorities is NOT a legislative source of authority? Multiple choice question. A. Treasury regulations B. U.S. Constitution C. Tax treaties D. Internal Revenue Code

A. Treasury regulations

Which of the following statements is correct regarding extensions? Multiple choice question. A. An extension to file will allow a taxpayer extra time to pay his taxes. B. An extension to file is granted automatically at the request of the taxpayer. C. Extensions must be approved by the IRS before they are valid. D. Extensions for individual returns give the taxpayer four additional months to file.

B. An extension to file is granted automatically at the request of the taxpayer.

Which of the following statements is correct regarding extensions? Multiple choice question. A. Extensions for individual returns give the taxpayer four additional months to file. B. An extension to file is granted automatically at the request of the taxpayer. C. Extensions must be approved by the IRS before they are valid. D. An extension to file will allow a taxpayer extra time to pay his taxes.

B. An extension to file is granted automatically at the request of the taxpayer.

What is the main statutory tax authority? Multiple choice question. A. Supreme Court decisions B. Internal Revenue Code C. Regulations D. Internal Revenue Service

B. Internal Revenue Code

The understanding that the Treasury Department has of the Internal Revenue Code is represented in ______ regulations. Multiple choice question. A. Legal B. Interpretative C. Procedural D. Legislative

B. Interpretative

Which type of tax authority is the Internal Revenue Code of 1986? Multiple choice question. A. Secondary B. Legislative C. Judicial D. Administrative

B. Legislative

Which of the following choices describes the official sources of the tax law generated by one of the branches of government? Multiple choice question. A. Secondary authorities B. Primary authorities C. Main authorities D. Editorial authorities

B. Primary authorities

Which of the following is NOT a computer initiative that helps the IRS identify tax returns that may have an understated tax liability? Multiple choice question. A. Discriminant function system B. Statistical percentage program C. Information matching program D. Document perfection program

B. Statistical percentage program

Which of the following statements is INCORRECT regarding Treasury regulations? Multiple choice question. A. Proposed regulations do not carry the same authoritative weight as final regulations. B. Temporary regulations carry less authoritative weight than final regulations. C. Final regulations represent the Treasury's interpretation of the Code. D. Proposed regulations allow public comment on them.

B. Temporary regulations carry less authoritative weight than final regulations.

Who has the ultimate authority to interpret the IRC and settle tax disputes? Multiple choice question. A. The legislative system B. The judicial system C. The Internal Revenue Service D. Congress

B. The judicial system

During the tax research process, the exercise of attaining and understanding the client's facts and combining those facts with the tax preparer's knowledge of the tax law is referred to as: Multiple choice question. A. analyzing the tax authorities B. identifying the issues C. communicating the results D. locating the relevant authorities

B. identifying the issues

Which of the following lists contains the five basic parts of an internal research memo? Multiple choice question. A. issues, facts, authority list, opinion, discussion B. issues, facts, authority list, conclusion, analysis C. issues, facts, authority list, conclusion, discussion D. issues, facts, authority list, opinion, analysis

B. issues, facts, authority list, conclusion, analysis

What is the statute of limitations for tax returns where over 25 percent of gross income has been omitted in a particular tax year? Multiple choice question. A. No limit B. 10 years C. 6 years D. 3 years

C. 6 years Reason: The statute of limitations is generally 3 years, but changes to 6 years when over 25 percent of gross income has been omitted.

Where does a tax bill originate in the legislative process for enacting a law? Multiple choice question. A. President's office B. U.S. Senate C. House of Representatives D. Joint Conference Committee

C. House of Representatives

Which of the following is NOT one of the basic parts of the internal research memo? Multiple choice question. A. Conclusion B. Fact section C. Secondary authorities D. Issues section E. Analysis

C. Secondary authorities

Which of the following statements is correct? Multiple choice question. A. Within its own geographic area, a District Court carries more authoritative weight than the U.S. Tax Court. B. The U.S. Court of Federal Claims is considered to be a higher authority than the U.S. Tax Court. C. The Supreme Court and the Internal Revenue Code represent the highest tax-specific authorities in tax law. D. The Supreme Court, along with the IRC, establishes tax law that is interpreted by the other authorities.

C. The Supreme Court and the Internal Revenue Code represent the highest tax-specific authorities in tax law.

What type of tax authority is the U.S. Constitution, the Internal Revenue Code, and tax treaties? Multiple choice question. A. Administrative B. Judicial C. Executive D. Legislative

D. Legislative

Which trial court provides for a jury trial? Multiple choice question. A. The U.S. Circuit Court of Appeal B. The U.S. Tax Court C. The U.S. Court of Federal Claims D. The U.S. District Court

D. The U.S. District Court

What action does the 30-day letter provide a taxpayer if the taxpayer does NOT agree with an assessment after being audited by the IRS? Multiple choice question. A. The taxpayer should file for an Offer in Compromise. B. The taxpayer should petition the U.S. Tax Court to hear the case. C. If there has been an audit, the taxpayer should pay the deficiency. There is no recourse. D. The taxpayer can request an appeals conference.

D. The taxpayer can request an appeals conference.

The ____________ _____________ system assigns a score to each tax return representing the probability the tax liabilities on the return have been underreported

Discriminant function

If their gross income exceeds $600,__________ and_________________ must file a tax return.

Estates Trusts

True or false: Revenue rulings and revenue procedures carry the same authoritative weight as Treasury regulations.

False

The______________ authorities are official sources of the tax law generated by one of the branches of government. The_________________ authorities are unofficial tax authorities that help explain the law.

Primary Secondary

The highest authoritative weight when interpreting the Internal Revenue Code are ________________ issued by the Treasury Department. (Enter only one word per blank.)

Regulations

Revenue __________ and revenue ___________ are second in administrative authoritative weight after regulations.

Rulings Procedures

The highest judicial authority is the U.S. _________________Court followed by the 13 U.S. Circuit Courts of Appeal, the U.S.________________ Court, the U.S. Court of Federal Claims, and the District Court.

Supreme Tax

Match the statute of limitations to the various types of noncompliance. Three years Six years No statute of limitations If the taxpayer misreports income (not exceeding 25 percent of gross income) or deductions If the taxpayer omits items of gross income that exceed 25 percent of gross income If the taxpayer commits fraud or doesn't file a tax return

Three years: If the taxpayer misreports income (not exceeding 25 percent of gross income) or deductions Six years: If the taxpayer omits items of gross income that exceed 25 percent of gross income No statute of limitations: If the taxpayer commits fraud or doesn't file a tax return

The _______________ ______________ is charged with administering and interpreting the tax laws.

Treasury, U.S Department, Treasury

Match which trial court would be the best choice for a taxpayer in the situation described below. U.S. Tax Court U.S. District Court U.S. Court of Federal Claims A taxpayer feels very confident in her position and lacks the funds to pay the assessment The tax return position is low on technical support, but high on emotional appeal The taxpayer knows that the Circuit Court of Appeal in the circuit in which she resides has ruled against a similar tax return position in the past

U.S. Tax Court: A taxpayer feels very confident in her position and lacks the funds to pay the assessment U.S. District Court: The tax return position is low on technical support, but high on emotional appeal U.S. Court of Federal Claims: The taxpayer knows that the Circuit Court of Appeal in the circuit in which she resides has ruled against a similar tax return position in the past

Tax treaties

agreements negotiated between countries that describe the tax treatment of entities subject to tax in both countries (e.g., U.S. citizens earning investment income in Spain). The U.S. president has the authority to enter into a tax treaty with another country after receiving the Senate's advice

Correspondence examination

an IRS audit conducted by mail and generally limited to one or two items on the taxpayer's return. Among the three types of audits, correspondence audits are generally the most common, the most narrow in scope, and least complex. The IRS typically requests supporting documentation for one or more items on the taxpayer's return (e.g., documentation of charitable contributions deducted)

Tax services that are arranged by Internal Revenue Code Sections are known as _____ tax services.

annotated or annotative

Regardless of the level of income, all________must file a tax return annually.

corporations

90-day letter

the IRS letter received after an audit and receipt of the 30-day letter that explains that the taxpayer has 90 days to either (1) pay the proposed deficiency or (2) file a petition in the U.S. Tax Court to hear the case. The 90-day letter is also known as the statutory notice of deficiency

30-day letter

the IRS letter received after an audit that instructs the taxpayer that he or she has 30 days to either (1) request a conference with an appeals officer or (2) agree to the proposed adjustment

Regulations

the Treasury Department's official interpretation of the Internal Revenue Code. Regulations are the highest authority issued by the IRS

Internal Revenue Code of 1986

the codified tax laws of the United States. Although the Code is frequently revised, there have been only three different codes since the Code was created in 1939 (i.e., the IRC of 1939, IRC of 1954, and IRC of 1986

U.S. circuit courts of appeals

the first level of appeals courts after the trial-level courts. There are 13 U.S. circuit courts of appeal: 1 for the Federal Circuit and 12 assigned to hear cases that originate from a specific circuit (e.g., the 11th Circuit Court of Appeals only hears cases originating within the 11th Circuit)

U.S. Constitution

the founding law of the United States, ratified in 1789

U.S. Supreme Court

the highest court in the United States. The Supreme Court 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 among the circuit courts. For most tax cases, the Supreme Court refuses to hear the case (i.e., the writ of certiorari is denied) and, thus, litigation ends with the circuit court decision

Field examinations

the least common audit. The IRS conducts these audits at the taxpayer's place of business or the location where the taxpayer's books, records, and source documents are maintained. Field examinations are generally the broadest in scope and most complex of the three audit types. They can last many months to multiple years and generally are limited to business returns and the most complex individual returns

Interpretative regulations

the most common regulations; they represent the Treasury's interpretation of the Code and are issued under the Treasury's general authority to interpret the Code

Legislative regulations

the rarest type of regulation, 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. Because legislative regulations actually represent tax law instead of an interpretation of tax law, legislative regulations have more authoritative weight than interpretative and procedural regulations