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Tax Statute of Limitations

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					         UCF
      Tax 6065
Tax Practice and Administration
Text: Chapter Fourteen
Common Taxpayer Civil Penalties
   Failure to File [§6651(a)(1)]
       5% of balance due per month (up to 25%)
           Minimum of $100 or 100% of tax if return > 60 days late
       This penalty is reduced by any penalty for failure
        to pay on time in months where both apply
   Failure to Pay on Time [§6651(a)(2)]
       ½ % of balance due per month (up to 25%)
       Tax is timely paid if paid by un-extended due date
        unless there is “reasonable cause” (or by extended
        due date if balance due does not exceed 10% of
        total tax)
       Also applies to assessed deficiencies that are not
        paid within 21 days of an IRS notice or demand
Common Taxpayer Civil Penalties
   Failure to Make Estimated Payments on time
       Individuals [§ 6654]
           Required payment is lesser of:
               90% of amount tax on current year’s return
               100% (110% for t/p’s with AGI >$150,000) of prior year’s
                tax
           Payments must be made by quarterly due dates (4/15,
            6/15, 9/15, and 1/15)
               Amounts withheld from paycheck are considered remitted
                to IRS in equal quarterly installments
           Penalty is based on the duration of the underpayment
            and interest rate (§ 6621)
Common Taxpayer Civil Penalties
   Failure to Make Estimated Payments on time
       Corporations [§ 6655]
           Required payment is lesser of:
               100% of current year’s tax
               100% of prior year’s tax (only for small corporations)
           Payments must be made by quarterly due dates
            (calendar year t/p: 4/15, 6/15, 9/15, and 1/15)
           Penalty is based on the duration of the underpayment
            and interest rate (§ 6621)
Failure to Make Payroll Tax Deposits
   Penalty Rate [§6656]
       Corrected by 5th day – 2% penalty
       Corrected from 6th – 15th day – 5% penalty
       More than 15 days but less than 40 days – 10%
       More than 40 days – 15%
   Willful Failure [§6672]
       Penalty is 100% of tax due
       Corporate employee/officer may be held
        personally liable
Accuracy-Related Penalties
   Accuracy-Related Penalties [§ 6662]
       20% (or more) of tax underpayment due to:
           Negligence or disregard of laws
               “negligence” includes any failure to make a reasonable
                attempt to comply
               “disregard” includes any careless, reckless, or intentional
                disregard
           Substantial understatement of income tax
           Substantial valuation overstatement
           Substantial overstatement of pension liabilities
           Substantial understatement of estate and gift valuation
           Disallowance based on lack of economic substance
Substantial Understatement
   Definition of substantial understatement
       C Corps - lesser of: 10% of tax (or $10,000 if
        greater) OR $10 million
       All other taxpayers - Greater of: 10% of tax OR
        $5,000
   Can avoid penalty if:
       Supported by “substantial authority” OR
       Adequately disclosed & has a “reasonable basis”
   What is “substantial authority”?
       Types of authority
       Conclusion reached
Lack of Economic Substance
   Economic Substance (if “relevant”)
       Transaction changes in a meaningful way (apart
        from FIT effects) taxpayer’s economic position,
        AND
       Taxpayer has a substantial purpose (apart from
        FIT effects) for entering into transaction
   Cannot assert reasonable cause to avoid
    penalty
   Penalty increased to 40% for “nondisclosed
    noneconomic substance transactions”
Other Accuracy-Related Penalties
   Substantial valuation overstatement
       Valuation of 150% or more of actual value resulting in
        underpayment of $5,000 ($10,000 for C Corps)
       Penalty is increased to 40% if there is a “gross”
        misstatement [200% or more]
   Substantial overstatement of pension liabilities
       Valuation of 200% or more of correct amount
       Penalty is increased to 40% if there is a “gross”
        misstatement [400% or more]
   Substantial estate or gift valuation understatement
       Valuation of 65% or less of correct value
       Penalty is increased to 40% if there is a “gross”
        misstatement [40% or less]
Civil Fraud [§6663]
   Civil Fraud penalty is 75% of the part of
    underpayment that is attributable to fraud
   IRS has burden of proving fraud by clear and
    convincing evidence
   Accuracy related penalties do not apply to
    portion of underpayment for which fraud
    penalty is imposed
   Fraud implies intentional wrong-doing
Criminal Penalties - Examples
   Willful attempt to evade or defeat tax
       $100,000 ($500,000 for corps) max fine
       Reimbursement of cost of prosecution
       Imprisonment for up to 5 years
   Willful failure to collect, account for, remit tax
    by any person required to do so
       $10,000 max fine
       Reimbursement of cost of prosecution
       Imprisonment for up to 5 years
Preparer Penalties
   Disclosure Penalties [§6695]
   Conduct Penalties - examples
       Negligence Penalty: $5,000 or 50% of fees
        penalty for “willful attempt” to understate, or
        “reckless” or “intentional disregard” of IRS rules or
        Regulations
       $500 penalty for endorsing/negotiating a tax
        refund check
       Organizing Abusive Tax Shelters
       Aiding and Abetting Understatement
       Aiding or Assisting Preparation of False Return
   Criminal Fraud
Preparer Penalties
   OLD 6694(a): $250 penalty for taking a
    position that does not meet the “realistic
    possibility” standard
         Penalty also applied if preparer did not make adequate
          inquires when t/p info appeared incomplete or incorrect
         Could be avoided by disclosing a non-frivolous position
Preparer Penalties–2007 Iraq Funding Bill
   All tax return preparers must disclose any
    position that the tax return preparer does not
    reasonably believe is more likely than not
    correct [6694(a)]
   Penalty is the greater of $1,000 or 50% of
    fees for the return if:
       Position was not disclosed and return preparer did
        not have a reasonable basis that the position was
        more likely than not correct OR
       Position was disclosed but did not have a
        reasonable basis
Preparer Penalties – 2008 Act
   Penalty described in 6694(a) applies to the
    following positions:
       Position was not disclosed and return preparer
        took an unreasonable position
           An unreasonable position is a position for which there is
            not substantial authority
       Position was disclosed but did not have a
        reasonable basis
       More likely than not standard still applies to tax
        shelter advice
Statute of Limitations
   Assessment
       3 years from the later of the date the return was
        filed or the un-extended due date of return
       Increases to 6 years if t/p omits gross income
        >25% (substantial understatement)
       False or Fraudulent Return or Failure to File
           No statute of limitations
       There are some special rules for amended
        returns, special requests by t/p or IRS
Statute of Limitations
   Collection
       Taxes must be collected within 10 years of timely
        assessment
           Or the IRS must obtain a judgment against the t/p
   Claim for Refund or Credit
       3 years from time return is filed OR
       2 years from date tax was paid
       7 years in special circumstances
           Bad debts/worthless securities
       Carry backs increase statute of limitation also
Statutory Agreements
   Closing Agreement
   Offer in Compromise
   Collateral Agreement

				
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