Transcript Tax Practice and Administration: Sanctions, Agreements, and Disclosures Chapter 13 Tax Penalties Voluntary Compliance vs. Revenue Production.

Tax Practice and Administration:
Sanctions, Agreements, and
Disclosures
Chapter 13
Tax Penalties
Voluntary Compliance
vs.
Revenue Production
Penalties
(Civil)
Penalties
• Characterized by statute as “addition to tax;”
as such, are not deductible
• Imposed when statutes are violated
– Without reasonable cause
– As a result of
• Negligence, or
• Intentional disregard, or
• Willful disobedience, or
• Fraud
But, first ……
Preparer Penalties
Preparer Penalties
• An Income Tax Return Preparer
(affectionately - ITRP) is defined in IRC
§7701:
– > Any person who prepares,
– Or employs one or more people to prepare,
– > All or a substantial part of a return,
– Or claim for income tax refund,
– > for compensation
Return Preparer Definition
(cont’d)
• “Substantial portion of return” – obviously a
relative term, but
• Regulations help to define:
– If entry on return > $2,000, or
– > $100,000, and
• > 20 % of
– gross income (AGI of individual) shown on return,
then
– the item is not substantial
Reg. §301.7701-15(b)(2)
Preparer Penalties
(cont’d)
• IRTP includes
– Tax advisers
– Planners
– Software designers
– Consultants
even though they may only review the
return, or give TP sufficient advice to
complete return or claim for refund
Preparer Penalties
(cont’d)
• Definition includes – anyone who
provides a taxpayer with “sufficient
information and advice so that the
completion of the return or claim for
refund is largely a mechanical matter.”
– §301.7701-15(a)(1)
Preparer
Penalties
(Civil)
§6695 Disclosure Penalties
ITRP’s Beware
$50 each occurrence (return)
On employer and/or ITRP if TP is not
given complete copy of return upon
presentation for signature
On employee ITRP if he/she fails to sign
return
On employer, if TIN of preparer or
employer, or both, not on return
§6695 Disclosure Penalties
(cont’d)
 On employer and/or ITRP if he/she does not
retain a copy of each return prepared
 On employer of ITRP for each failure to
 Retain
 and for each item omitted
- for each ITRP employed for year
beginning July 1 of each year:
(1) Name, - (2) TIN – (3) Place of work
§6695 Disclosure Penalties
(cont’d)
Maximum §6695 disclosure penalty $25,000
§6694 Conduct Penalties
• Endorsing or negotiating a refund check
- $500 [§6695(F)]
§6694 Conduct Penalties (cont’d)
• Understatement due to unrealistic
position - $250 [§6694(a)]
– No realistic possibility that position will
be sustained on merits
– Waived if position disclosed on return
– Also applies if TP provided info appears
incomplete or inadequate, and preparer
fails to make adequate inquiry
§6694 Conduct Penalties
(cont’d)
Realistic Possibility – reasonable and
well-informed analysis by person
knowledgeable in tax law would
conclude there is a one-in-three
likelihood the position would be upheld
on its merits
§6694 Conduct Penalties
(cont’d)
• Willful understatement - $1,000
[§6694(b)]
– Willfully understates, or
– Recklessly or intentionally disregards IRS
rules and regulations
§6694 Conduct Penalties
•
•
•
•
(cont’d)
Organizing abusive tax shelters
Organizing
Participates in a sale
Furnishes a statement regarding an
expected tax benefit that the person
knows or has reason to know is either
false or fraudulent, or a gross valuation
understatement
§6694 Conduct Penalties
(cont’d)
• Aiding and Abetting Understatement
- $1,000 ($10,000 for corporations)
[§6701(a)]
• Aids, assists, procures, advises, in the
prep or presentation of any return or
claim, knowing it will be used in any
material matter and will result in
understatement of another person’s tax
liability.
Preparer
Penalties
(Criminal)
Criminal Conduct Penalty
• Aiding or Assisting in Prep of False
Return, a felony – up to $100,000
($500,000 for corporations) + up to 3
years imprisonment - §7206
• (Criminal equivalent to civil §6701
Aiding and Abetting penalty)
Criminal Conduct Penalty (cont’d)
• For willfully aiding or assisting in the
prep of a return or other document that
is false as to any material matter
• Preparer may include any person that
supplies false info used in the prep of a
return
Criminal and Civil Conduct Penalty
• Disclosure or Use of Info by Return
Preparer – civil - $250, $10,000 max
per year - §6713 - for disclosure or use
of tax return info for other than
preparing the tax return
• Criminal misdemeanor – up to $1,000
+ imprisonment if knowingly or
recklessly so uses - §7216
Civil / Criminal Penalties
• Remember, if convicted of a criminal act
and subjected to a criminal penalty,
may and probably will also be subject to
the civil equivalent
Action to Enjoin
• IRS may seek injunction against ITRP to
prohibit him/her from practicing as ITRP
(§7407)
• Preparer must have:
– Violated preparer penalty or criminal provision of
IRC
– Misrepresented his/her eligibility to practice before
the IRS
– Guaranteed payment of any tax refund or credit
– Engaged in other fraudulent or deceptive conduct
Action to Enjoin (cont’d)
• IRS may also obtain an injunctions
against a person guilty of promoting
abusive tax shelters, or of aiding and
abetting an understatement of tax
liability, to prohibit him/her from
engaging in such conduct or activities
(§7408)
Taxpayer
Penalties
(Civil)
Failure to File Penalty - §6651
Civil– 5% per month or fraction,
maximum 25%.
 Reasonable cause applies
Burden of proof on TP
Criminal – 15% per mo. or fractionmax of 75%
“Reasonable Cause”
• No statutory definition
• Courts – “whether an ordinary, intelligent
person would act in the same manner as did
the taxpayer in similar circumstances”
• The following “need not apply”
–
–
–
–
Lack of funds to pay tax
Records lost or destroyed
TP incarcerated
Etc.
Failure to Pay Penalty - §6651
• .5% per month until IRS Notice and Demand
if paid w/in 10 days (21 days if tax
>$100,000); if not paid, becomes 1% per
month. Max – 25%
• Reasonable cause applies
• This penalty reduces the Failure to File
penalty by the same amount, so that there is
no more than a 5% penalty for any given
month
Accuracy Related Penalty - §6662
20% of the portion of a deficiency attributable
to one or more of
 Negligence or disregard of statute or
regulations
 Negligence = failure to make a reasonable
attempt to comply with the provisions of the IRC
 Disregard = careless, reckless, or intentional
disregard of the elements of the tax law
Accuracy Related Penalty - §6662
(cont’d)
Negligence defense
good faith effort to comply
Full disclosure on return of non-frivolous
position – attach Form 8275 (or 8275-R,
position contrary to regs) to return
§6662 Penalty
(cont’d)
Substantial understatement of
income of greater of:
Deficiency of 10% or more of proper tax
liability, or
 $5000 ($10,000 for corp. other than S
Corp or PHC)
Defense
Full disclosure – Form 8275 or 8275-R
Substantial authority (cont’d)
§6662 Penalty
(cont’d)
• Substantial Authority includes
(Regulation §1.6662-4(d)(3)(iii):
– Code
–Regs§1.6662-4(d)(3)(iii)
– Court decisions
– Press releases, notices
– Etc. – see Reg.
– NOT professional opinions or legal
periodicals, secondary authorities
§6662 Penalty
(cont’d)
Substantial valuation overstatement
–
200% or more, resulting in
deficiency of over $5000 ($10,000 for C
corporations)
Penalty is 40% if overstatement is 400% or
more
Substantial overstatement of
pension liability
§6662 Penalty (cont’d)
Substantial understatement of E & G
tax valuation
50% or less than actual value
Penalty is 40% if stated value is 25% or
less of actual value
Civil Fraud Penalty - §6663
Standard of proof – “Clear and
convincing evidence”
Penalty is 75% of the portion of the
underpayment attributable to fraud
Burden of proof is on government
Criminal fraud penalty may also apply
§6663 Civil Fraud Penalty
(cont’d)
Fraud – not defined by statute
Courts’ definition –
Actual, intentional wrongdoing
With intent of specific purpose to evade a
tax believed to be owing
Willfulness is a crucial element
Willfulness is present when TP’s actions
“constitute a voluntary, intentional violation of
a known legal duty.” SCt, 97 429 U.S. 10
§6663 Civil Fraud Penalty
(cont’d)
Standard of Proof Required
Criminal – “beyond a shadow of any
reasonable doubt”
Civil – “clear and convincing evidence”
If convicted of criminal fraud, cannot
contest civil fraud – collateral estoppel
§6663 Civil Fraud Penalty
• Civil Fraud Penalty (CFP)
negates/supercedes
– Failure to file
– Failure to pay
– Accuracy related
(cont’d)
Failure to Make Estimated Tax
Payments - §6654
• Is similar to interest, and rate varies
• Individuals – computed on the
difference between the actual payment
and the least of:
– 90% of the tax on the current year’s return
– 100% of the tax on the prior year’s return
– 90% of the tax on annualized income up to
the month the installment is due
Failure to Make Estimated Tax
Payments - §6654 (cont’d)
• Corporations – computed on the
difference between the actual amount
paid and
– 100% of tax shown on return
– Or if no return filed, amount due
Estimated Tax Penalty - §6654
(cont’d)
• Is not applicable if underwithheld
< $1000
Failure to Make Deposits and
Overstatement of Deposits - §6656
• Rate varies from 2% to 15% depending
on when failure is corrected.
• Is a reasonable cause penalty
• Assessed on employer
– But remember the §6672 Trust Fund
Recovery Penalty
Filing a Frivolous Return Penalty §6702
• $500 per return
• Usually filed to assert
– Fifth Amendment rights violated
– TP objects to use for defense or other uses
– Or other frivolous argument
• Applies when
– Return does not contain sufficient info for tax
computation and assessment
– Otherwise takes a frivolous position
– Return indicates info insufficient for proper
assessment
Reliance on Advice of IRS - §6404(f)
• Don’t
– unless
– In writing,
– In response to specific request, and
– Based on sufficient and accurate
information
Taxpayer
Penalties
(Criminal)
Standard of proof – Beyond a
shadow of any reasonable doubt
§§7201 and 7202 Criminal Taxpayer
Penalties
Willful attempt to evade or defeat tax
(tax evasion) (§7201) – felony, fine up
to $100,000 ($500,000 corporations),
up to 5 years imprisonment
Willful failure to collect, account for, and
remit (§7202)– felony, up to $10,000, 5
years
Criminal Taxpayer Penalty
Willful failure to file, supply info, or pay
tax or estimated tax (§7203) –
misdemeanor, up to $25,000 ($100,000
for corps), 1 year (5 years felony for
returns relative to cash received by a
business
§7206 Criminal Taxpayer Penalty
• Willful making, subscribing to, or aiding
or assisting in making a return or
document, verified by declaration under
penalty of perjury, but not believed to
be true and correct in every material
matter (§7206) – felony, up to
$100,000 ($500,000 for corps), three
years
§7207 Criminal Taxpayer Penalty
• Willful filing of any known-to-be-false or
fraudulent document (§7207 –
misdemeanor, up to $10,000 ($50,000
for corps), up to one year
§7216 Criminal Taxpayer Penalty
• Disclosure or use of any info furnished
to tax return preparer, or provided
services connected with return
preparation, for purposes other than
return prep (§7216) – misdemeanor, up
to $1000, one year.
Criminal Taxpayer Penalties (cont’d)
There are others
Interest §6601
• §6601 – is statutory
• No matter which way it is going, simply
for the payment for use of funds.
• Also, as disincentive for TPs that would
postpone payment of tax.
– Under old rules, interest was always 6%.
Under those rules postponement was a
problem.
Interest
(cont’d)
• Interest rate on tax owed is variable, may be
adjusted quarterly
– Large corporations add 2% to general rate
• Compounded daily
• Rate for refunds due individual TPs generally
the same (after 1998) as on amounts due IRS
– Corporations deduct 1%
– For corporate > $10,000, deduct 2½%
Interest (cont’d)
• Computation of interest starts with the
latter of the date of payment or the due
date of the return. Due date of the
return is the basis.
Interest Abatement - §6404
Interest is statutory and generally
cannot be waived
However, interest may be waived where
IRS commits a “ministerial” act (§6064)
 Unintentional, non-discretionary,
managerial, administrative
 Must file claim for abatement
 For obvious reasons, very rare
Statute of Limitations (SOL) - §6501
• Collection – ten years, may be extended
• Assessments – generally three years from
latter of due date of return or date return
filed
• Exceptions
– 25% omission of §61 gross income – 6 years
– Fraudulent return - civil – 6 years
– Fraudulent return - criminal – no limitation
SOL – Deficiency Procedure
• SOL suspended 150 days (210 days if
TP out of country)
– 90 SND period
– Additional 50 days to allow for assessment
if no petition is filed
SOL – Tax Court Jurisdiction
SOL is suspended during the period TC
has jurisdiction and for 60 days
thereafter.
If judgment favors the government
Government must asses w/in 60 days after
TC’s decision becomes final
Petitioner must pay tax
Or post bond
Even if planning an appeal
SOL - Refunds
• Generally latter of 3 years from date
return filed or due date of return (same
as Assessments)
• Exception – latter of date established
above, or two years from date of
payment
SOL - Extensions
• Generally at IRS request during administrative
proceeding
– Form 872 – period specific
– Form 872-A – period indefinite; TP may terminate
by giving 90 days notice – Form 872-T
– Practitioners generally prefer former; IRS prefers
latter
• TP not required to extend
– Failure to do so may result in IRS initiating
deficiency proceedings. Practitioner/client must
weigh the consequences
§§1311-1314 Mitigation of Statute
Provisions
• Very complex, generally an equity
provision, works both ways
• Allows for correction of error even if
statute expired
•Questions?