Tax Research - Ch 14

Civil Penalties

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

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)

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%)

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, an

Failure to Make Estimated Payments

...

Failure to Make Deposits of Taxes

varies from 2 - 15%; not an important section

Giving False Info

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

Filing a Frivolous Return

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

Reliance on Written Advice

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

Criminal Penalties
Nature
Defenses

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

Return Preparer

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

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)

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 di

Injunctions

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

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

Statutes of Limitations

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

Suspension of Period of Assessment and Collection

150 days once a notice of deficiency has been issued

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 paymen

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 s

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

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 ca

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 pe

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 pra

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 prev

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

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 fi

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) Fal

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 inadvertent

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 deliberat