Federal Tax Research - Ch 13

Return Preparer

A preparer is a person who prepares a tax return for compensation, or employs one or more persons to prepare for compensation.

Failure to Make Estimated Payments

Tax penalty is 0.5% of the tax you owe per month, but it also caps at 25% of the tax due. If you set up an IRS installment agreement, the IRS will reduce your failure to pay penalty to 0.25% of the tax you owe while the installment agreement is in effect. 5% of the amount due: From the original due date of your tax return. After applying any payments and credits made, on or before the original due date of your tax return, for each month or part of a month unpaid. Penalty 5% of the unpaid tax (underpayment), and 0.5% of the unpaid tax for each month or part of the month it's unpaid not to exceed 40 months (monthly).

Failed, because of lack of office supplies, to provide a copy of the tax return to the taxpayer. Which penalty, if any, would the tax advisor be charged with? a. Civil tax penalty, §6695(a) b. No penalty applies. c. Civil tax penalty, §6695(c) d. Civil tax penalty, §6695(f)

a. Civil tax penalty, §6695(a)

The tax advisor provided information about the taxpayer's federal income tax returns to the pertinent county's property tax agency. Which penalty, if any, would the tax advisor be charged with? a. Criminal preparer penalty, §7216, disclosure or use of information by preparer of return b. No penalty applies. c. Civil tax penalty, §6701, for aiding and abetting understatement of tax liability d. Civil tax penalty, §6695(f), negotiation or endorsement of refund checks

a. Criminal preparer penalty, §7216, disclosure or use of information by preparer of return

In which of the following cases does a taxpayer hold the right to refuse to answer inquiries that are made by the IRS in a criminal setting? a. The taxpayer would suffer a loss of some constitutional right by answering a criminal inquiry. b. The taxpayer would suffer a monetary loss by answering a criminal inquiry. c. The taxpayer is confident that a conviction will be obtained. d. The nature of the crime is not severe.

a. The taxpayer would suffer a loss of some constitutional right by answering a criminal inquiry.

When the accuracy-related penalty applies, interest on the penalty accrues from the: a. due date of the return b. date on which the penalty was imposed c. date on which the assessment is made d. date on which the penalty was imposed or December 31, whichever is earlier

a. due date of the return

An individual who is convicted of willfully aiding or assisting in the preparation of a false return is subject to which of the following penalties? a. imprisonment up to 2 years and/or fine that cannot exceed $10,000 b. imprisonment up to 10 years and/or fine that cannot exceed $15,000 c. imprisonment up to 3 years and/or fine that cannot exceed $100,000 d. imprisonment up to 5 years and/or fine that cannot exceed $50,000

a. imprisonment up to 2 years and/or fine that cannot exceed $10,000

Failure to Pay

assessed if taxpayer does not pay taxes or assessed deficiency within 10 days of IRS notice (21 days if tax due is less than $100K); penalty = 0.5% of required liability each month (maximum penalty of 25%)

Failed, because of pressing time conflicts, to conduct the usual review of the client's tax return. The IRS discovered a mathematical error in the computation of the taxpayer's standard deduction. Which penalty, if any, would the tax advisor be charged with? a. Criminal preparer penalty, §7216, disclosure or use of information by preparer of return b. No penalty applies. c. Criminal tax penalty, §7201, attempt to evade or defeat tax d. Civil tax penalty, §6694(a), understatement as a result of unreasonable position

b. No penalty applies.

The tax advisor provided information about the taxpayer's federal income tax returns to the pertinent state income tax agency. Which penalty, if any, would the tax advisor be charged with? a. Criminal preparer penalty, §7216, disclosure or use of information by preparer of return. b. No penalty applies. c. Civil tax penalty, §6701, for aiding and abetting understatement of tax liability d. Civil tax penalty, §6713, improper disclosure or use of return data

b. No penalty applies.

Julian filed a valid extension for his 2020 tax return, giving him until October 15, 2021, to file his return. He filed his return on November 30 and paid $1,000 of tax due. For what period of time will Julian be subject to the failure-to-file and failure-to-pay penalties? a. 2 months for both b. None of the above. c. 2 months for failure to file and 8 months for failure to pay d. 8 months for both

c. 2 months for failure to file and 8 months for failure to pay

Failed, because of lack of office supplies, to retain a copy of the client's tax return. Which penalty, if any, would the tax advisor be charged with? a. Civil tax penalty, §6695(a) b. No penalty applies. c. Civil tax penalty, §6695(d) d. Civil tax penalty, §6695(b)

c. Civil tax penalty, §6695(d)

The tax advisor suggested to the client various means by which to conceal cash receipts from gross income. Which penalty, if any, would the tax advisor be charged with? a. Criminal preparer penalty, §7216, disclosure or use of information by preparer of return b. No penalty applies. c. Criminal tax penalty, §7201, attempt to evade or defeat tax d. Civil tax penalty, §6695(f), negotiation or endorsement of refund checks

c. Criminal tax penalty, §7201, attempt to evade or defeat tax

Jennie received a 6-month extension (to October 15, 2021) to file her 2020 tax return. Jennie actually filed the return on November 20, 2021, paying the $20,000 amount due at that time. She has no reasonable cause for failing to file the return by October 15 or for failing to pay the tax that was due on April 15, 2021. How much is the failure-to-file penalty? a. $2,000 b. $1,900 c. $1,000 d. $1,800

d. $1,800

Failed, because of pressing time conflicts, to conduct the usual review of the client's tax return. The IRS discovered the return included fraudulent data. Which penalty, if any, would the tax advisor be charged with? a. Criminal preparer penalty, §7216, disclosure or use of information by preparer of return b. No penalty applies. c. Criminal tax penalty, §7201, attempt to evade or defeat tax d. Civil tax penalty, §6694(a), understatement as a result of unreasonable position

d. Civil tax penalty, §6694(a), understatement as a result of unreasonable position

Penalties that are based on a percentage of the delinquent tax are referred to as: a. assessable penalties b. nominal penalties c. criminal penalties d. ad valorem penalties

d. ad valorem penalties

A tax return preparer may disclose information obtained from the taxpayer without being subject to civil and criminal penalty if such disclosure is: a. required for the growth of his profession b. pursuant to fulfillment of his own financial goals c. for other than the specific purpose of preparing a tax return d. pursuant to any provisions of the code, or to a court order

d. pursuant to any provisions of the code, or to a court order/subpoena

To avoid the penalty, the ___________ must meet the burden of proof that the failure to file was the result of reasonable cause. a. IRS b. none of these are correct c. TRP d. taxpayer

d. taxpayer

Preparer Disclosure Penalties

really small $50 penalties for not giving taxpayer copy of return, preparer forgets to sign the return, failing to put preparer ID on return, etc. (maximum of $25,000 in calendar year)

Criminal Penalties Nature Defenses

taxpayer may be acquitted criminally yet liable for civil penalties; beyond a reasonable doubt burden of proof; defenses: see below

Failure to Make Deposits of Taxes

varies from 2 - 15%; not an important section

Reliance on Written Advice

written advice is only applicable to the specific taxpayer and any taxes assessed may be abated (fancy for reduced)

Failure to File

5% (15% if fraudulent return) of the amount of tax, less prior payments and credits, for each month the return is not filed (maximum of 25%; 75% if fraudulent return)

Filing a Frivolous Return

$5,000 penalty; don't take stupid positions

Giving False Info

$500 penalty on taxpayer; employers must submit copy of W-4 to IRS if employee that claims 10 or more exemptions

10. Indicate whether the following statements are true or false: a. The government never pays a taxpayer interest on an overpayment of tax. b. Penalties may be included as an itemized deduction on an individual's tax return. c. An extension of time for filing a return results in an automatic extension of the time in which the tax may be paid. d. The statute of limitations for assessment of taxes never extends beyond three years from the filing of a return. e. There is no statute of limitations relative to a taxpayer's claim for a refund.

10a) False; the government will owe the taxpayer interest if the refund is not paid within 45 days. 10b) False; penalties are nondeductible. 10c) False; the tax is always due when the return is initially due, regardless if the return is extended. 10d) False; the statute of limitations can be extended for substantial omission of income or fraud. 10e) False; the taxpayer must claim their refund within the 3 year statute of limitations before the claim becomes stale.

Suspension of Period of Assessment and Collection

150 days once a notice of deficiency has been issued

15. What is the applicable filing period under the statute of limitations in each of the following independent situations? a. No return was filed by the taxpayer. b. The taxpayer incurred a bad-debt loss that she failed to claim. c. A taxpayer inadvertently omitted a large amount of gross income. d. Same as item c, except that the omission was deliberate. e. A taxpayer inadvertently overstated her deductions by a large amount.

15a) If no return is filed, the statute of limitations is indefinite. 15b) The statute of limitations would be 3 years. 15c) If the taxpayer inadvertently omitted a large amount of gross income, the statute of limitations will be 6 years. 15d) A deliberate omission would make the return fraudulent, so the statute of limitations would be indefinite. 15e) The taxpayer overstated her deductions inadvertently so the limit is 3 years.

1. Should prevailing interest rates bear on tax decision making in either or both of the following situations? a. The taxpayer is contemplating litigation in either the Tax Court or the Court of Federal Claims. b. An understatement of estimated tax payments is discovered late in the tax year.

1a) the taxpayer shouldn't take into account interest rates in this case because interest rates are always higher for the underpayment of taxes than the interest on an individual bank account. 1b) The interest will only continue to go up so the taxpayer should be quickly

Statutes of Limitations

3 years = normally and refunds; 6 years = substantial omission of income; 10 years = IRS collections; indefinite = fraud or no return filed

3. Describe the civil fraud penalties, the definition of fraud, and the all-or-nothing rule for civil fraud. What are the differences in individual and corporate penalties for failure to make adequate estimated payments? What is a frivolous return?

3) There are 2 types of civil fraud penalties: Ad valorem and assessable. Ad valorem penalties are additions to taxes that are based on a percentage of the delinquent tax. Assessable penalties typically are expressed as a flat dollar amount. Under the all-or-nothing rule, if the IRS establishes that any portion of an underpayment is attributable to fraud, the entire amount is treated as attributable to fraud, and the penalty applies to the entire amount due. A frivolous return lacks any sort of reasonableness and can be seen as intentionally evading the payment of taxes. Individual taxpayers will be exempt from a penalty on failure to make estimated tax payments if they are within $1,000 of the actual amount whiles corporations must be within $500. The individual can be punished quarterly while only large corporations can have this happen.

4. Explain the imposition of criminal penalties. What is the relationship between criminal and civil penalties? What are the defenses against criminal penalties?

4) Criminal penalties are imposed only after the implementation of the constitutional criminal process, under which the taxpayer is entitled to the same rights and privileges as other criminal defendants. There is a greater burden of proof for criminal case vs civil cases (beyond a reasonable doubt vs. clear and convincing evidence), so a taxpayer may be liable for a civil tax penalty but not a criminal penalty. Some criminal defenses: unreported income was offset 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 the law is, the taxpayer relied on the erroneous advice of a competent tax adviser, the taxpayer has a mental disease or defect an so could not have acted willfully to violate the tax law, the statute of limitations has expired, and the taxpayer enters a plea bargain and accepts conviction of a lesser offense.

5. Discuss the penalties imposed on TRPs. Who is a preparer, what is defined as a tax return preparation, and what is not considered preparation?

5) Most penalties on Tax Return Preparers (TRPs) are mild, like $50 for failure to furnish ID numbers, but some can be severe and even include criminal penalties. A preparer is a person who prepares a tax return for compensation, or employs one or more persons to prepare for compensation. Tax return preparation includes preparing all or a substantial portion of a tax return. If the person prepares less than a substantial portion of the return or does it gratuitously, then they are not a tax return preparer.

6. What is an injunction, and when may the IRS seek an injunction?

6) An injunction is a judicial order that prohibits the named person from engaging in specific activities. The IRS may seek an injunction against a TRP who is guilty of certain misconduct to prohibit him or her from engaging in such misconduct or from practicing as a tax return preparer. They also can go after anyone that promotes abusive tax shelters.

7. What are the statutes of limitations for the IRS and taxpayers? Why did Congress create them? When can they be shortened, extended, or suspended?

7) The statute of limitations are the specific time period that all taxes must be assessed and collected and all refund claims must be made. Congress made these rules because they believe that, at some point, the right to be free of stale claims must prevail over the government's right to pursue them. They can be extended beyond 3 years if there is a substantial omission of income (6 years) or fraud (indefinitely). They can be shortened to 18 months if a request for a prompt assessment is filed with the IRS. This is usually made for an income tax return of a decedent, an estate, or a corporation in dissolution. Receiving a notice of deficiency will suspend the assessment and collection period by 150 days (also see page 520 for further examples).

9. Define and illustrate the following terms or concepts: a. Fraud b. Negligence c. Reasonable cause d. Lack of reasonable cause e. Civil penalty conviction f. Criminal penalty conviction

9a) Fraud is actual intentional wrongdoing. The intent required is the specific purpose to evade a tax believed to be owed. 9b) Negligence is unwillful disregard of pertinent rules. 9c) Reasonable cause is action that would prompt an ordinary, intelligent person to act in the same manner as did the taxpayer under similar circumstances. 9d) Lack of reasonable care includes when an individual does not act like an ordinary, intelligent person through negligence or fraud. 9e) Civil penalty conviction must show that the taxpayer attempted to intentionally defraud the government. The standard that must be met is "clear and convincing evidence." 9f) Criminal penalty conviction is the same as the civil penalty, except the standard is "beyond a reasonable doubt."

True/False: Failure to file as a result of a taxpayer not having the sufficient funds to pay the tax liability is an example of reasonable cause.

False

True/false: If a taxpayer is convicted of criminal fraud, he or she can contest a civil fraud determination.

False

True/false: The Employee Withholding Allowance Certificate is required to be given by the employee to the employer.

True

Civil Penalties

Two types of civil penalties: Ad Valorem (percentage of delinquent tax) and Assessable (Flat Dollar amount)

True/False: Tax return preparers are subject to criminal prosecution for willful misconduct.

True

True/False: The penalty for failure to make payment of quarterly estimated income taxes is computed without any daily compounding and is not deductible.

True

True/False: Underpayment is defined in § 6664 as the correct amount of tax, less the sum of the amount of tax reported by the taxpayer on the return, plus any amount previously assessed or collected, less the amount of rebates made.

True

True/False: Unless a gross valuation misstatement is made, the accuracy-related penalty amounts to 20 percent of the portion of the tax underpayment.

True

True/false: Assessable penalties typically are expressed as a flat dollar amount and are usually imposed on third parties, such as tax return preparers.

True

Preparer Conduct Penalties

Understatement due to Unreasonable Position: position is unreasonable unless there is substantial authority; substantial authority = weight of the authorities in favor of the taxpayer > authoritites against; reasonable bass is necessary whe position is disclosed Willful Understatement: penalty greater of $5K or 50% of preparer fees Organizing Abusive Tax Shelters: Aiding and Abetting Understatement Aiding or Assisting in the Preparation of a False Return Disclosure or Use of Info by Return Preparers

Injunctions

judicial order that prohibits the named person from engaging in certain specific activities

Civil Fraud Penalty

may be liable for criminal penalties as well; penalty = 75% of underpayment that is attributed to fraud; burden of proof on IRS; All-or-Nothing rule: any portion of the underpayment attributable to fraud, the entire underpayment is attributed to fraud, and the penalty applies to the entire amount due

Action to Enjoin TRPs

preparer must have violated preparer penalty or criminal provision of Code, misrepresented ability to practice before IRS, guaranteed payment of refund. or engaged in fraud or deceptive conduct