NYU Billman Tax Procedure by dgvlcek

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									Tax Procedure Outline Unit I – Theories of Voluntary Compliance
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The Self Assessment System o IRS Definition of “Voluntary Compliance”: a system of compliance that relies on individual citizens to report their income freely and voluntarily, calculate their tax liability correctly, and file a tax return on time  Note: taken off website because does not only apply to citizens o Rationales for using system of Voluntary Compliance  Administrative Ease – too difficult for gov’t to calculate every persons’ TI  Income tax – rather than a consumption tax  Income = Consumption + ΔWealth  Other countries use consumption tax o C = I – ΔW o Compliance Numbers  ~85% Compliance (shocking that a 1% audit rate leads to 85% compliance)  Tax gap mainly result of underreporting o Rationales for Paying Taxes (Voluntarily Complying)  Patriotism; Ethical / Personal Integrity; Social Contract  Rational Actor Theory  FEAR  Risk / Reward  Signaling  Golden Rule (“free rider problem”) – person is more likely to pay if they believe everyone else is paying for those roads, military, etc o Deterrence Factor?  With low audit rate, Expected Penalty is very low when contemplating cheating – to not cheat:  Expected Penalty > Benefit  Expected Penalty = (Benefit + Penalty) x Audit Rate (.01) o If benefit is $100 the penalty would have to be $9,900 for the expected penalty to be greater than benefit (not practicable)  IRS cannot impose effective penalties due to the low audit rate

Unit II – Audit Practice
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Three Different Types of Audits o Correspondence Audits (most benign) – IRS sends a letter referencing a discrepancy o Office Audits – TP goes to local IRS office o Field Audit – IRS agents bread down door and search all your records and items  Choosing TPs for Audit o DIF score – calculation (unknown) that shows chance of audit

Mismatch of reporting b/w employer/employee Large corporations under audit virtually all the time Sec 7263(b) – Awards to Whistleblowers (i.e. award for turning in tax cheat)  Once Audited, The Long Road to the Tax Court (Chart) o (1) IRS agent will be forthcoming with supporting law behind adjustment; Agent must assume that IRS position is right  Agent has no settlement authority, but may be able to compromise o (2) If form 870 is signed:  TP can still apply for refund  IRS can still audit TP  IRS can immediately assess tax o (3) When TP disagrees, he can choose to go to Appeals Division (“nondocketed”)  AD’s purpose is to facilitate settlements on a fair and impartial basis without litigation  In attempting to settle, AD can consider that IRS position is wrong  Protest Letter o If proposed adjustment exceeds $25,000 for any taxable year, TP is required to file a protest letter to obtain Appeals consideration  (4) When TP signs Form 870-AD:  TP cannot start a refund action  IRS cannot re-audit  TP waives the right to a 90 day letter  cannot get into tax court (applies to signing Form 870 as well) o Only way to contest is by paying liability and asserting a refund claim o If no settlement or TP ignores 30 day letter  IRS sends 90 day letter (notice of deficiency)  TP has 90 days to pay or to petition the tax court  If TP ignores 90 day letter, IRS may assess tax after prohibited period  If TP petitions the Tax Court, he will have to go to AD (docketed basis) if have not already gone o Appeals Division  AD is independent unit from IRS  Appeals Officer and IRS employee are not suppose to communicate re: case outside presence of TP or representative  But only some communications are prohibited  Not prohibited = mistrial, administrative, procedural  Disposing of a case at Appeals Division (i.e. settlement is reached)  Form 870-AD is signed  IRS agrees not to reopen case for taxable years  TP aggress to pay the settled liability and not file a refund claim  No requirement that AD treat all TPs the same (Slovacek) o Settlements are discretionary

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Strategy re: Appeals Division: choosing to go before (non-docketed) or after 90 day letter (docketed)  Non-docketed:  Giving a lot more information upfront; IRS could take position that TP owes even more  Not in the public record  Settling earlier avoids interest, professional fees, time  Qualified Offers - § 7430 o TP will be deemed the prevailing party (i.e. able to recover costs) if it makes a “qualified offer” that is rejected and TP’s liability is subsequently determined to be less or equal to the offer o Qualified offers can be made after the 30 day letter  (5) Appeals Officer retains exclusive settlement authority o May not be as familiar with rules of evidence and has not been alerted by IRS counsel about what is inadmissible  More time to settle a case on non-docketed basis  Docketed  (6) Settlement Authority split b/w Appeals Officer and IRS counsel o Once docketed case is sent to AD, AD has sole settlement authority until it is returned to IRS counsel (generally when clear that no progress is being made or case is put on trial calendar o Once returned, IRS counsel has sole authority  Gov’t must amend its pleadings to assert any new issues (and acquires the burden of proof) o In non-docketed, such new issues can just be added to 90 day letter  If TP is concerned about new theories being asserted or feels that case ma be referred back to Examination Division for further factual development, it is safer to negotiate settlement on docketed basis

Unit IIIA – Filing and Payment Requirements
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Persons Required to File o § 6011 – Any person liable for tax (very broad) o § 6012 – Returns shall be made by  Individual if GI equal or exceeds exemption ($3400) + standard deduction ($5350)  However, must file to get credits back  All corporations  All estates and trusts with GI of 600 or more  Due Date o Individual: April 15th (calendar year) or 15th day of fourth month (fiscal year)

Corporation: March 15 (calendar year) or 15th day of third month (fiscal year  Filing Techniques o Mailing  § 7502 – Timely Mailing treated as Timely Filing and Paying  Date of postmark = date of delivery  Registered or certified mail: receipt is prima facie evidence that return/payment was received by IRS o Burden is on TP to show receipt by IRS if later disputed  (f) Delivery services other than USPS permitted  Date of delivery is important for:  SOL  Late Penalties o Electronic  More than half returns now filed electronically – most corps must file electronically o Delivery: can be made to any IRS office  Deemed Filed Rules (when “deemed filed”, SOL begins to run) o General Rule: return is “deemed filed” when IRS receives it, unless some other rule applies o SOL = 3 years generally  IRS cannot assess tax after 3 years  Rationales: Administrative ease of not having to keep records of every year; cannot be chased forever (Les Mis) o Extensions  An extension is only applicable to filing, not payment  Payment is due on last day return is due without extensin  Individual can get automatic 6 month extension with appropriate form  Corporations can get automatic 3 month extension with appropriate form o Early Filed Return - § 6501(b)  If return is filed on or before the due date (IRS receives it on or before due date) ignoring extensions, then deemed filed on the due date (i.e. April 15)  Rationale: Administrative Ease; IRS gets longer SOL  Weekend / Holiday Rule (§ 7503) does not apply:  If April 15 falls on Saturday and return is mailed on Jan 2, it is still deemed filed on April 15 (even though it is a Saturday o Timely Mailed Return - § 7502  This rule basically makes it so that a return that was mailed on time but received after the due date (including extensions) by the IRS is still deemed timely and the “deemed filed” date will be date of mailing  See chart for requirements o Deemed Timely Return - § 7503  When due date falls on holiday or weekend and TP files (with any method) on the NEXT day that is not holiday or weekend, return is deemed timely for penalty purposes, but SOL starts when filed (i.e. received by IRS)

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Note: also applies to the expiration of the SOL – if such falls on a weekend or holiday, then period is extended to next day that is not a weekend/holiday  Amended Returns o Accepted automatically if filed before due date o IRS can accept or reject if filed after due date (if IRS accepts, original SOL controls)
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Unit IIIB – Restrictions on Assessment of Tax
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Introduction o Assessment = IRS formal recording of a tax liability (no collection until assessment) o Protections to TP: IRS must give notice to TP of what they owe and an opportunity to appeal  Types of Assessments o (1) Summary Assessment:  IRS can assess an admitted tax liability (e.g. TP agrees to owing tax and signs form 870) o (2) Deficiency Assessment  TP and IRS dispute the amount owed  IRS must first send deficiency notice  Statute of Limitations on Assessment of Tax o General Rules  Main timing rule - 6501: IRS must assess the deficiency before SOL runs (typically 3 years)  Other timing rules:  IRS must send Deficiency Notice (90 day letter) before assessing o Sending NOD creates a “prohibited period”  IRS cannot assess during the prohibited period (at least 90 days)  Prohibited period = time TP has to petition the Tax Court o Prohibited period cannot end on a weekend / holiday o Prohibited period is extended during pendency of case if Tax Court is petitioned  SOL on assessment is tolled during the prohibited period plus 60 days (§ 6503(a)) o Exceptions to Three year Statutory Period  Rationale for extensions: if TP makes it difficult for IRS to discover deficiencies, IRS is afforded more time  Substantial Omissions of Items - § 6501(e)  SOL = 6 years if there is a substantial omission of an item  Substantial omission = TP omits from GI an amount more than 25% of the GI stated on the return

Note: must be more than 25% and TP must omit an entire item (not substantial omission if just underreports value of item)  When there is a substantial omission, IRS gets 6 years to discover any deficiencies in the entire return (Colestock)  False or Fraudulent Return or No Return - § 6501(c)(1)-(3)  No SOL; IRS can assess tax indefinitely  False or Fraudulent requires intent to evade tax  False or Fraudulent return, followed by amended non-fraudulent return  indefinite SOL (Bararraco) o Nothing in the language or code or case law supports contention that the fraudulent returns are nullities  No return, followed by correct return  SOL begins to run when “deemed filed”  Voluntary Agreement with IRS to extend SOL - § 6501(c)(4)  Reasons to voluntarily extend: Avoid assessment if a settlement is close, but SOL is about to expire  Reasons to refuse to extend: TP knows a deficiency is owed; TP believes IRS case is week  Note: Some cheating which is very easy to catch renders an indefinite SOL (Wes Snipes listing 200 dependents) while others that are not so easy to catch (padding $100 to charitable contribution) still only get normal 3 year SOL  SOL is for the TP, not necessarily the IRS o Tolling of SOL - § 6503(a) – SOL is tolled:  During prohibited period (90 days after NOD is sent)  60 days after prohibited period  While case is in court o Four Steps for Determining Last Day IRS Can Assess Tax  (1) Determine amount of time left on SOL when 90 day letter is sent  (2) Determine when prohibited period ends (cannot end on weekend or holiday)  (3) Add 60 days  (4) Add back remaining time from Step (1) (cannot end on weekend or holiday) Unit IV – Choice of Tax Fora
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Introduction o Three courts with trial-level J over most federal tax cases: Tax Court, District Court and Court of Federal Claims  Tax Court: J over tax deficiencies (6213(a)) and overpayment claims (6512(b)(1)) that arise out of same tax year for which TP received NOD  District and Court of Federal Claims: share J over “refund” actions o Appeals  Tax Court  CoA for circuit where TP resided at time of filing petition

District Court  CoA in same circuit Court of Federal Claims  CoA for the Federal Circuit  United States Tax Court o Overview  Representation  TP represented by anyone admitted to practice before Tax Court (includes non-attorneys  IRS represented by attorney’s from IRS Chief Counsel’s Office  Tax Court follows its own procedural rules (based on FRCP)  19 Judges – appointed by President – serve 15 years  Tax Court issues three types of opinions:  Division Opinions  precedential value and officially published  Memorandum and Summary Opinions  no precedential value; privately published o Pleading Requirements  Jurisdiction based on (how to get into tax court):  NOD (90 day letter); and  Timely Petition  IRS’s responsive pleading is the answer  No need to pay to play o Discovery Procedures  Tax Court follows its own discovery rules  More limited than District court  Relies heavily on stipulation of facts  Encourages informal discovery  Rule 70(a)(1): “Court expects the parties to attempt to attain the objectives of discovery through informal consultation or communication before utilizing discovery procedures in the Rules”  Branerton Corp: TP did not have to answer interrogatories since informal methods had not been attempted o Branerton Letter: requests informal communications o Precedent Applicable to Tax Court Cases  Golsen: where two circuit courts were split on an issue, court held that it was bound by the precedent set in the court to which the appeal would lie  Makes it possible to have inconsistent Tax Court decisions  Tax Court can make its own decision or use its own precedent if the Circuit court to where appeal would lie has not decided on the issue o Tax Court’s Small Tax Case Procedure (S Cases)  § 7463 – provides elective, informal procedure for cases in which neither deficiency or claimed overpayment exceeds $50k for any taxable year  Permission from Tax Court required  No appeal from S cases o Overpayments Determined by Tax Court
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§ 6512(b)(1) – if a TP receives and NOD and believes that he is actually entitled to a refund, all issues (both related to deficiency and refund) can be litigated in the Tax Court  Refund Litigation o Overview of Refund Litigation in US District Courts  Jurisdiction prerequisites:  (1) Pay in Full  (2) Filing Timely Refund claim with IRS; and  (3) File timely complaint (refund suit)  Either party may demand trial by jury  TPs don’t often take advantage of jury  FRCP and FRE apply  IRS represented by Department of Justice (not as many tax lawyers) o Overview of Refund Litigation in Court of Federal Claims  Litigation begins when TP files a complaint  Like the Tax Court, based in D.C. but judges (16) travel  Rules are flexible re: place of trial o Judges are not tax experts o Corporations are in refund court more often than Individuals – mainly because of ability to pay  One corp accused of a tax shelter chose refund court thinking that the case was too complicated for the judge – but she really threw the book at them o Refund without receiving a NOD  File an amended return – no need to wait for a NOD (but cannot go to Tax Court without NOD)
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Unit IVA – Tax Court Litigation Notice of Deficiency – Requirements and its Functions in Tax Court
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The Notice of Deficiency o Serves Multiple Functions  § 6213(a) – “Ticket to Tax Court” – prerequisite for Tax Court SMJ  Informs TP of IRS’s claim  Becomes part of Tax Court Pleadings o General Requirements of the NOD  For a NOD to be valid, it  Must be mailed within the SOL  Must identify TP and the year involved  Must state the deficiency and amount and should provide a basis for deficiency  Must specify deadline for filing Tax Court petition  Must notify TP of right to contact local IRS office and provide contact info  Courts generally refuse to invalidate NODs

No requirement for the letter to say in detail how they arrived at the deficiency o Safe Harbor for Mailing:  IRS has satisfied its duty by mailing the NOD to the TP’s last known address (from either most recent tax return or obtained from postal service)
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Burden of Proof in Tax Case o TP has burden of proof in tax case and most overcome burden by preponderance of the evidence  TP must establish by preponderance of evidence that items in 90 day letter are incorrect  Rationales for putting burden of proof on TP o TP initiated the litigation in Tax Court (they are bringing the case to court – like a prosecutor would) o TP has the documents – better position to prove their position o Two components of “burden of proof”  Burden of Production: (burden of going forward): Requires party to produce sufficient evidence to make a prima facie case  Burden of Persuasion: must persuade court that its version of relevant facts is the correct version o Exceptions to general rule that TP has burden of proof  Fraud  IRS bears both the burden of proof in production and persuasion  Must satisfy burden of persuasion with clear and convincing evidence  New Matters  Once in Tax Court, the court has jurisdiction over return for whole year – since the SOL is tolled, IRS can keep checking for new matters  But if IRS raises a new mater, they bear the burden of proof on production and persuasion – Rule 142(a)(1)  Achiro: explains definition of “new matter” o In amended answer IRS alleged for first time that additional code sections also justified the deficiency o Court’s definition: If the assertion in the amended answer either alters the original deficiency or requires presentation of different evidence, then IRS has introduced a new matter o It will not be a new matter if it simply clarifies of develops original position  Effect: IRS writes NODs very broadly so as to not be accused of bringing up new matters  Substantial Omissions

IRS bears the burden of proving a substantial omission (both production and persuasion)  Rationale: hard for the TP to prove a negative  Naked Assessment  Occurs when IRS makes an assessment without foundation or deficiency based on unreported income  IRS bears the burden of production, but TP still bears the burden of persuasion  Penalties  IRS has burden of production  TP has burden of persuasion (or can raise affirmative defenses) o § 7491 – Shifting the Burden of Proof  The burden of proof with respect to any factual issue shifts to from TP to IRS where TP meets five requirements (can be quite difficult) “  (1) TP produces “credible evidence of the factual issue  (2) TP has complied all substantiation requirements  (3) TP has maintained all required records  (4) TP has cooperated with all IRS’s reasonable requests for info, docs, meetings, and interviews  (5) If TP is a p-ship, corp, or trust, it meets net worth limitation  “Credible Evidence” = evidence a court would find sufficient upon which to base a decision if no contrary evidence were submitted  This is the provision that was spearheaded by James Traficant Unit IVB – Overpayments and Refund Litigation
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Overview of Refund Claims and Refund Suits o § 7422(a) – To seek a refund after filing a return and without receiving NOD, TP must file amended return claiming the refund o Refund with NOD (gives TP choice of responses)  Petition the Tax Court  Tax Court has J to address the refund issue under § 6512(b) for same taxable years for which NOD applies  Commence Refund Action  TP could pay deficiency and file refund claim for both amount paid and prior overpayment  Refund Claims o Overpayment of Tax  To obtain a refund, TP must have made an “overpayment” (not specifically defined)  Two types of Overpayments entitled to refund  IRS has too much of your money  Payments made after SOL o § 6401(a) – overpayment includes payment of any internal revenue tax that is assessed or collected after applicable SOL has expired

Jones v. Liberty Glass: “whether the reason, the payment of more than is rightfully due is what characterizes an overpayment” o Which Remittances are “Payments”?  Overpayment requires a “payment” rather than a “deposit”  Both may be made to stop accrual interest  Payments vs. Deposits  Deposits refundable at any time – TP only need ask for it back; Payments are not  Must specifically identify as deposit, otherwise it is a payment  For SOL purposes, payment is key  IRS only has to pay interest back to TP when returning a payment  Rev. Proc. 82-51: Guidance concerning whether remittance is payment or deposit  Remittance made after NOD (or any proposed liability), absent any instruction from TP = payment  Remittance made before any liability is proposed = deposit o Submission and Timing of Refund Claim  A refund claim invites IRS examination of return  might be advantageous for TP to file refund claim after SOL on assessment, but   Lewis v. Reynolds: Court applied setoff  Court denied TP’s refund claim because examination of return showed she owed more tax than paid  Even though SOL on assessment had run, court denied refund because there was no actual overpayment  To claim a refund:  (1) must make full payment to IRS o Courts are split on whether “full amount” includes interest and penalties  (2) timely file refund claim with IRS o Either on original return or with amended return  (3) Wait for IRS to reject refund claim o IRS must send a notice of disallowance  (4) File a timely refund suit (follow procedures for getting into refund court) o Earliest time to file is on receipt of notice of disallowance or 6 months after sending refund claim (if IRS ignores) o Content of Refund Claim  Claim must set forth each ground on which TP claims a credit or refund with sufficient facts to inform IRS of basis of claim  Phrasing of grounds is critical because refund suit is limited to assertions raised in claim  But, claim can be amended to add new grounds if before SOL has run (see below)  Statute of Limitations on Refund Claim o Overview
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§ 6511(a) – In general, refund claim is timely if filed within 3 years from date return was filed or 2 years of when claimed tax was paid, whichever is later  TP gets “whichever is later treatment” because NOD could come om last day of 3 year SOL  Note: early return deemed filed on due date (6513(a))  7503 – Weekend holiday Rule applies o Special Rule: Statutory Period Applicable when TP Extends the SOL on Assessment  6511(c)(1): TP is permitted to file a claim for credit or refund at any time within extended period plus an additional 6 months o SOL on Refund Claims Applicable in Tax Court Cases  § 6512(b)(3) – parallel to refund method
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Unit V – Penalties Specific Civil Penalties and Defenses to Those Penalties
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§ 6651- Delinquency Penalties o Failure to File Penalty – return filed after due date (including extensions)  § 6651(a)(1) – for each month, or fraction thereof return is late  penalty equals 5% of the net amount of tax required to be shown on the return (subj. to 25% cap)  “Net” amount = no penalty assessed against tax already paid o Failure to Pay Penalty – payment made after due date (ignoring extenstions)  § 6651(a)(2) – for each month, or fraction thereof, payment is late  0.5% of net amount of tax shown on the return (subj. to 25% cap)  No extensions allowed for payment – due date for payment is due date of return o Stacking: If both penalties apply, they stack but only up to 5% - they offset each other so as failure to file penalty is 4.5% and failure to pay penalty is .5% - § 6651(c)(1) o Reasonable Cause Defense to Delinquency Penalties  Neither penalty applies if delinquency is due to reasonable cause and not willful neglect (in language of the statute)  Reasonable cause based on ordinary business care and prudence  Examples of Reasonable Cause: unavoidable postal delays; death or serious illness; civil disturbance; unavoidable absence (Apollo 13)  Boyle: Supreme Court held that reliance on an attorney to file a tax return was not reasonable cause  Procedural vs. Substantive o There is a difference b/w reliance on attorney relating to substantive matter compared to procedural matter o BUT, procedure can be just as hard  § 6662 – Accuracy Penalties

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§ 6662 imposes a single accuracy related penalty of 20% of the underpayment of tax for the following types of misconduct  (1) Negligence  (2) Disregard of Rules and Regulations  (3) Substantial Understatement of Tax Maximum penalty is 20% even if more than one type of misconduct Negligence - § 662(b)(1)  Applies when there is a “failure to make a reasonable attempt to comply” with Code or Regulations  Examples of Negligence:  Omitting an item that a third party reported  TP fails to ascertain availability (legality) of a deduction, i.e. “too good to be true”  Defenses  Reasonable Cause + Good Faith – this is the omnibus defense that applies to all accuracy penalties under 6664(c) o Reasonable Cause = exercise of ordinary business care and prudence  Coleman – reliance on tax shelter opinion letter o P-ship had 600k of deductions disallowed and raised defense of reliance on professional advice (tax opinion letter) o Reliance on professional advice alone is not absolute defense to negligence, only a factor o First, must be established that reliance was reasonable – here it was not because TP was an attorney at the preparer firm and opinion letter advised to seek independent counsel o Court distinguishes from case where reliance was on a “trusted and long term adviser”  Reasonable Basis  Did TP in Coleman raise defense of reasonable cause or reasonable basis? Disregard of Rules or Regulations  Applies when there is a careless, reckless or intentional disregard of the rules or regulations  Requires more of a subjective analysis than Negligence to determine if there is reckless or intentional conduct  Defenses  Reasonable Cause + Good Faith (omnibus)  Reasonable Basis + Disclosure Substantial Understatement of Tax  § 6662(b)(2) - Applies when the understatement of tax exceeds the GREATER of:  $5,000 (for individuals) or $10,000 (for corps), OR  10% of the gross tax required to be shown

Defenses  Reasonable Cause + Good Faith (omnibus)  Reasonable Basis + Disclosure  Substantial Authority o Explanation of Accuracy Penalty Defenses  Reasonable Cause + Good Faith - § 6664(c)  6664(c) provides that accuracy penalties (6662) or fraud penalties (6663) will not be imposed to any portion of underpayment if it is shown that there was reasonable cause and that the TP acted in good faith  This is a defense based on the facts and circumstances – usually granted when TP exercises ordinary business care and prudence in determining their obligations  Ordinary Business Care and Prudence = taking degree of care that a reasonably prudent person would exercise  This defense usually comes up when TP has received tax advice o Tax advisor needs to use some sort of independent judgment (cannot only rely on TP’s disclosures)  Reasonable Basis  Reg 1.6662-3(b)(3) – RB is a high standard of tax reporting that is significantly higher than not frivolous or not patently proper o Even if position is merely arguable or merely colorable, it does not satisfy RB  RB will generally be satisfied when it is based on one or more of the authorities set forth in Reg. 1.6662-4(d)(3)(iii) o It is based on the TP’s subjective view of the authorities  RB alone can be a defense against Negligence  Reliance on a tax form, i.e. 1099-Misc, can be RB  Reasonable Basis + Disclosure  In order to raise defense of RB against Disregard of Rules and Regs or Substantial Understatement penalty, it must be coupled with disclosure  Facts must be adequately disclosed (Form 8275) and there must be a “reasonable basis” for TP’s treatment  Rev Proc 2001-11 – Disclosure on the return itself is sometimes adequate  Substantial Authority  Reg 1.6662-4(d) – Amount of tax understatement is reduced by items supported by “substantial authority”  Substantial Authority is an objective standard – it only exists if the weight of authorities for support of TP’s position is substantial in relation to the weight of authorities against o The applicable authorities are those set forth in Reg. 1.6662-4(d)(3)(iii) o Note that different authorities will have different weights  Reg 1.6662-4(d)(3)(iii) Authorities

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Includes: Code, Regulations, Revenue Rulings and Procedures, Court Cases, Private Letter Rulings  Does Not Include: Treatises; legal periodicals, legal opinions, tax opinions o But note that the underlying authorities of a tax opinion may give rise to substantial authority o Reliance on Tax Opinions – Circular 230  It used to be that TPs could rely on tax opinions to avoid accuracy penalties  Circular 230 now provides that any written tax advice that is a “covered opinion” cannot be relied upon for avoidance of penalties unless it complies with Circular 230  Covered Opinions are defined very broadly – includes: o Any advice re: listed transactions o Any advice re: transactions whose principal purpose is tax avoidance o Any advice re: transactions where significant purpose is avoiding tax and it will be relied on by someone or will be used to promote the transaction  Practitioners who give advice in a covered opinion that fails to meet the requirements can be penalized  Purpose of 230: incentivize lawyers to make opinions as thorough as possible  Civil Fraud Penalty - § 6663 o Applies when there is an intentional underpayment of taxes knowingly due  Only applies if TP actually files a return  Main reason a person would file is to avoid the delinquency penalty which triples when attributed to fraud  Penalty = 75% of the underpayment attributable to fraud  Stacking: No stacking of Fraud and Accuracy penalties o Burden of Proof:  Initial burden of proving fraud is on IRS and must show by clear and convincing evidence  Requires a showing of specific intent to avoid a tax known or believed to be owing  Fraud is usually based on circumstantial evidence  Categories that courts usually find fraudulent: o Pattern or understatement (i.e. repetition) o Overstatement of deductions (repeated) o Putting assets in hands of another o Deliberate failure to keep records and books o Misleading conduct during audit o Dealing almost exclusively in cash  IRS need only show that any portion of underpayment is fraudulent  presumes entire underpayment is attributable to fraud  burden shifts to

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TP to establish by preponderance of evidence the portion that is not attributable to fraud o Defenses  Reliance on Tax Advisor  Personal Attributes of the TP  Lack of education or knowledge of tax  Lack of experience with tax law


								
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