💰Federal Income Tax Accounting Unit 17 – Tax Administration and IRS Procedures

Overview of Tax Administration

• Tax administration involves the processes and procedures used by the Internal Revenue Service (IRS) to collect taxes and ensure compliance with tax laws and regulations
• Encompasses various activities such as processing tax returns, issuing refunds, conducting audits, and enforcing tax laws
• Aims to promote voluntary compliance among taxpayers by providing guidance, education, and assistance
• Utilizes technology and data analytics to identify potential non-compliance and target enforcement efforts
• Collaborates with other government agencies and international organizations to combat tax evasion and fraud
• Continuously evolves to adapt to changing tax laws, economic conditions, and taxpayer behavior
• Balances the need for efficient tax collection with the protection of taxpayer rights and privacy

IRS Structure and Functions

• The IRS is organized into four main operating divisions: Wage and Investment, Small Business/Self-Employed, Large Business and International, and Tax Exempt and Government Entities
  • Wage and Investment division serves individual taxpayers with wage and investment income
  • Small Business/Self-Employed division focuses on small businesses, sole proprietorships, and self-employed individuals
  • Large Business and International division handles complex tax issues of large corporations and international businesses
  • Tax Exempt and Government Entities division oversees tax-exempt organizations, employee plans, and government entities
• The IRS is headed by the Commissioner of Internal Revenue, who is appointed by the President and confirmed by the Senate
• The IRS has a national office in Washington, D.C., and numerous regional and local offices throughout the country
• The agency's functions include:
  • Processing tax returns and issuing refunds
  • Providing taxpayer services and education
  • Conducting audits and examinations to ensure compliance
  • Collecting delinquent taxes and enforcing tax laws
  • Interpreting and applying tax laws and regulations
• The IRS also has specialized units, such as the Criminal Investigation Division, which investigates tax fraud and other financial crimes

Taxpayer Rights and Responsibilities

• Taxpayers have the right to be informed about tax laws, procedures, and their tax accounts
• The right to quality service ensures that taxpayers receive prompt, courteous, and professional assistance from the IRS
• Taxpayers have the right to pay only the correct amount of tax owed, including interest and penalties
• The right to challenge the IRS's position and be heard allows taxpayers to object to formal IRS actions or proposed actions
• Taxpayers have the right to appeal IRS decisions, both within the agency and to the courts
• The right to finality provides taxpayers with clear time limits for the IRS to audit their tax returns or collect outstanding taxes
• Taxpayers have the right to privacy and confidentiality regarding their tax matters
• The right to retain representation allows taxpayers to seek the assistance of an authorized representative when dealing with the IRS
• Taxpayers have the right to a fair and just tax system, which includes the right to expect the tax system to consider facts and circumstances that might affect their tax liabilities
• Taxpayer responsibilities include:
  • Filing accurate and timely tax returns
  • Paying taxes on time
  • Providing accurate information to the IRS
  • Maintaining records to support tax returns
  • Cooperating with IRS audits and examinations

Filing Requirements and Deadlines

• Individuals must file a federal income tax return if their gross income exceeds certain thresholds based on filing status, age, and dependency
• The standard tax return form for individuals is Form 1040, U.S. Individual Income Tax Return
• The tax year for individuals is typically the calendar year, and the due date for filing tax returns is usually April 15th of the following year
  • If April 15th falls on a weekend or holiday, the due date is extended to the next business day
• Taxpayers can request an automatic six-month extension to file their tax returns by submitting Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
  • An extension to file does not extend the time to pay taxes owed
• Corporations generally must file Form 1120, U.S. Corporation Income Tax Return, by the 15th day of the fourth month following the end of their tax year
• Partnerships and multi-member LLCs treated as partnerships must file Form 1065, U.S. Return of Partnership Income, by the 15th day of the third month following the end of their tax year
• Employers must file various information returns, such as Form W-2 for employees and Form 1099 for independent contractors, by specific deadlines
• Failure to file required tax returns or to pay taxes owed by the due dates can result in penalties and interest charges

IRS Audits and Examinations

• An IRS audit is an examination of a taxpayer's tax return and supporting documentation to verify the accuracy and completeness of the reported information
• Audits can be conducted through mail correspondence, in-person interviews at an IRS office, or field examinations at the taxpayer's home or place of business
• The IRS selects tax returns for audit based on various factors, including:
  • Random selection
  • Discrepancies between the tax return and information reported by third parties (e.g., W-2 forms, 1099 forms)
  • High deductions or credits compared to others in similar situations
  • Related examinations (e.g., business partners, investors)
• During an audit, the IRS may request additional information or documentation to support the items reported on the tax return
• Taxpayers have the right to represent themselves or to be represented by an authorized representative, such as a tax attorney, CPA, or enrolled agent
• The outcome of an audit can be:
  • No change to the tax return
  • Proposed changes agreed to by the taxpayer
  • Proposed changes disputed by the taxpayer
• If the taxpayer disagrees with the audit findings, they can request an appeals conference or file a petition with the U.S. Tax Court

Appeals Process and Tax Court

• The IRS Appeals Office is an independent organization within the IRS that provides taxpayers with an opportunity to resolve tax disputes without going to court
• Taxpayers can request an appeals conference if they disagree with the findings of an audit or other IRS actions
• The appeals process is designed to be a less formal and less costly alternative to litigation
• Appeals officers are impartial and have the authority to settle cases based on the hazards of litigation
• If the taxpayer and the appeals officer cannot reach an agreement, the taxpayer can file a petition with the U.S. Tax Court
• The U.S. Tax Court is a federal court that specializes in resolving tax disputes between taxpayers and the IRS
• Taxpayers can file a petition with the Tax Court within 90 days of receiving a statutory notice of deficiency from the IRS
• The Tax Court is independent of the IRS and provides a judicial forum for taxpayers to contest proposed tax deficiencies or other IRS determinations
• Proceedings in the Tax Court are conducted in accordance with the Federal Rules of Evidence and the Tax Court Rules of Practice and Procedure
• Decisions of the Tax Court can be appealed to the U.S. Court of Appeals and, ultimately, to the U.S. Supreme Court

Penalties and Interest

• The IRS imposes penalties and interest charges on taxpayers who fail to comply with tax laws and regulations
• Failure-to-file penalty: Assessed when a taxpayer does not file a required tax return by the due date (including extensions)
  • The penalty is usually 5% of the unpaid tax for each month or part of a month that the return is late, up to a maximum of 25%
• Failure-to-pay penalty: Applied when a taxpayer fails to pay the tax shown on their return by the due date
  • The penalty is generally 0.5% of the unpaid tax for each month or part of a month that the tax remains unpaid, up to a maximum of 25%
• Accuracy-related penalties: Imposed when a taxpayer understates their tax liability due to negligence, substantial understatement of income tax, or other specified reasons
  • The penalty is typically 20% of the underpayment attributable to the accuracy-related issue
• Fraud penalty: Assessed when a taxpayer willfully attempts to evade tax or files a fraudulent return
  • The penalty is 75% of the underpayment attributable to fraud
• Interest charges: Applied to unpaid taxes, penalties, and interest from the due date of the return until the amount is paid in full
  • Interest rates are determined quarterly and are based on the federal short-term rate
• Penalty abatement: In some cases, taxpayers may request a waiver or reduction of penalties if they can demonstrate reasonable cause for their non-compliance

Collection Procedures and Enforcement

• When taxpayers fail to pay their tax liabilities, the IRS has various tools and procedures to collect the outstanding amounts
• The collection process typically begins with the issuance of a notice and demand for payment
• If the taxpayer does not respond or make arrangements to pay, the IRS may take the following enforcement actions:
  • Federal tax lien: A legal claim against the taxpayer's property, which secures the government's interest in the unpaid tax
  • Notice of Federal Tax Lien: A public notice filed with local or state authorities to alert creditors of the government's claim on the taxpayer's property
  • Levy: A legal seizure of the taxpayer's property or rights to property, such as wages, bank accounts, or Social Security benefits
  • Summons: A legal document requiring the taxpayer or a third party to appear, testify, or produce records related to the taxpayer's tax liability
• Installment agreements: Taxpayers who cannot pay their full tax liability at once may request an installment agreement to pay the debt over time
  • The IRS will consider the taxpayer's ability to pay, compliance history, and the amount owed when determining whether to approve an installment agreement
• Offer in Compromise (OIC): A program that allows taxpayers to settle their tax debt for less than the full amount owed if they can demonstrate that paying the full amount would create a financial hardship
  • The IRS will consider the taxpayer's income, expenses, asset equity, and ability to pay when evaluating an OIC
• Collection Due Process (CDP) hearing: Taxpayers have the right to request a CDP hearing with the IRS Office of Appeals after receiving certain collection notices
  • During the hearing, taxpayers can propose collection alternatives, challenge the appropriateness of the collection action, or raise other relevant issues
• The IRS may suspend or delay collection actions if the taxpayer demonstrates a hardship or enters into an agreement to resolve their tax debt