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Professional Accounting Research 1st Power Point

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Professional Accounting Research1st Power Point. Introduction to Professional Research. Tax Research. PAK chapter 1, pp. 1-1 to 1-7. Ethics. Tax Shelters – PowerPoint PPT presentation

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Title: Professional Accounting Research 1st Power Point


1
Professional Accounting Research1st Power Point
  • Introduction to Professional Research
  • Tax Research
  • PAK chapter 1, pp. 1-1 to 1-7
  • Ethics
  • Tax Shelters
  • Coltec, 2006-2 USTC 50,389, 454 F3d 1340
  • Wal Mart, 12/31/2007, NC Superior Court

2
Research Accounting
  • need for critical thinking
  • need for judgment
  • principal-based versus rules-based financial
    accounting
  • tax avoidance versus tax evasion
  • too much authoritative literature
  • important to be able to communicate results

3
Research CPA Exam
  • CONTENT AND SKILL SPECIFICATIONS FOR THE UNIFORM
    CPA EXAMINATION (approved May 15, 2009, effective
    Jan. 1, 2011)
  • Application of the Body of Knowledge (40-50 of
    FAR, REG, AUD) including
  • analysis
  • judgment
  • synthesis
  • evaluation
  • research
  • Higher-level cognitive skills that require
    individuals to act or transform knowledge in some
    fashion. These skills are inextricably
    intertwined and thus are grouped into this single
    skill area.

4
Research CPA Exam (cont)
  • Research
  • Identify the appropriate research question.
  • Identify key search terms for use in performing
    electronic searches through large volumes of
    data.
  • Search through large volumes of electronic data
    to find required information.
  • Organize information or data from multiple
    sources.
  • Integrate diverse sources of information to reach
    conclusions or make decisions.
  • Identify the appropriate authoritative guidance
    in applicable financial reporting frameworks and
    auditing standards for the accounting issue being
    evaluated.

5
From The Uniform CPA Examination Alert Spring 2009
  • What is your focus in seeking new ways to assess
    research skills?
  • We are now developing research tasks that involve
    not only searching authoritative literature, but
    also making use of the findings. At the time CBT
    was launched in 2004, not all students were being
    instructed in research skills as part of their
    curricula. This has now changed. Research courses
    are available at many institutions. In our
    national survey of entry-level practice last
    year, we recognized that the time has come to
    expand the testing of research skills. We are
    also using content experts to guide us in
    identifying the ways in which entry-level
    practitioners are finding and using information.
    This is leading us to explore research topics
    outside the scope of authoritative literature. We
    plan to field-test this type of research task
    with students in accounting programs. If
    successfully tested, we could introduce research
    tasks that rely on alternative databases,
    exhibits and resources. Our consideration of
    other sources reflects the recognition that CPAs
    must often rely on a variety of information and
    data sources. Some of the resources we have been
    exploring include Thomas, the Library of Congress
    record of legislation, the U.S. Tax Court
    database of tax court rulings, and information
    databases, such as financial reports submitted to
    the SEC in XBRL format. No decisions have as yet
    been made concerning these resources but their
    use is being explored.
  • http//www.cpa-exam.org/

6
Research Steps
  • identify the relevant facts and issues
  • locate authority and collect the evidence
  • analyze the results and identify the alternatives
  • develop conclusions and recommendations
  • communicate the results and recommendations

7
Tax Research - Why taxes?
  • governments need revenue to support their
    activities
  • taxes can be a major source of revenue
  • revenue ltgt government spending
  • balanced budget
  • gt surplus
  • lt deficit

8
What to tax? What rate to use?
  • tax base X tax rate tax
  • tax base
  • amount to which tax rate is applied
  • what to include or exclude?
  • base broadening - more income included
  • tax rate
  • proportional, progressive or regressive

9
Criteria used to select a tax structure
  • Adam Smith - 18th century
  • equality
  • convenience
  • certainty
  • economy
  • factors influencing current tax structure
  • economic
  • social
  • equity
  • political

10
Tax Formula
  • Income(broadly conceived) x,xxx
  • Less Exclusions (x,xxx)
  • Gross Income x,xxx
  • Less Deductions for AGI (x,xxx)
  • Adjusted Gross Income (AGI) x,xxx
  • Deductions from AGI
  • Less gt of itemized deductions
  • or standard deduction (x,xxx)
  • Less Personal dependency exemptions (x,xxx)
    ______
  • Taxable Income x,xxx

11
Elements of Tax Practice
  • Tax Practice for a CPA
  • Tax Compliance
  • preparing tax returns
  • Tax Research
  • attempting to answer tax questions
  • Tax Planning
  • arranging ones affairs to optimize tax
    liabilities
  • Tax Litigation
  • generally handled by lawyers

12
Tax Research by CPAs
  • unauthorized practice of law
  • sometimes difficult to determine
  • a CPA should probably not provide the following
    types of general legal services
  • expressing a legal opinion on any nontax matter
  • drafting wills and trust instruments
  • drafting contracts
  • drafting incorporation papers
  • drafting partnership agreements

13
Tax Planning
  • Consider social, economic, and business goals as
    well as tax motives
  • Tax avoidance
  • the legal minimization of tax liabilities and one
    goal of tax planning
  • Tax evasion
  • the illegal minimization of tax liabilities and
    can lead to fines and jail
  • Abusive tax avoidance
  • a transaction, or series of transactions, created
    for the sole purpose of avoiding taxes. Unlike
    other tax avoidance, abusive tax avoidance often
    uses multi-layer transactions for the purpose of
    concealing the true nature and ownership of the
    taxable income and/or assets. (IRS)

14
Tax Planning (cont)
  • open transactions
  • transaction not yet completed so modifications
    can be made prior to completing
  • closed transactions
  • transaction already completed so have to plan
    within the constraints of what is already done
  • also already filed transaction that is being
    audited

15
Show me someone who doesnt think accounting is a
creative profession and I will show you someone
who does their own taxes.
16
Over and over again, courts have said that there
is nothing sinister in so arranging ones affairs
as to keep taxes as low as possible.Judge
Learned Hand
17
The difference between tax avoidance and tax
evasion is the thickness of a prison wall.Denis
Healy, a former British Chancellor
18
Ethics for Tax Professionals
  • IRS Circular 230
  • all who practice before the IRS
  • more later in semester
  • Sarbanes-Oxley and Taxation
  • more later in semester
  • American Institute of Certified Public
    Accountants (AICPA) Code of Professional Conduct
    Statements of Standards for Tax Service
  • for CPAs who are members of the AICPA
  • also states have ethics guidelines
  • more later in semester

19
Ethics More Generally
  • Morality
  • Is a little tax evasion ok?
  • a continuum of interpretations
  • some examples
  • not reporting a small amount of income from
    working
  • babysitting lawn mowing
  • not paying Use Tax to North Carolina
  • North Carolina Individual Income Tax Return line
    17
  • see example
  • Social Responsibility
  • good for society
  • is reincorporating in a tax haven country
    unpatriotic?
  • Stanley Tool
  • moving jobs out of the U.S.
  • V F Corporation 95 of products come from non
    US sources
  • 30 North American Manufacturing plants closed

20
Tax Shelters
  • estimated that 10 billion of taxes evaded
    annually by improper or questionable tax programs
  • Large CPA firms (and others) sell to clients
  • tax investment strategy (KPMG) or tax products
  • When does tax planning become a tax shelter?
  • IRS provides a specific definition of when an
    activity is a tax shelter and therefore has
    disclosure requirements
  • more generally when does an activity violate
    ethical standards of conduct
  • abusive tax shelter
  • no economic substance
  • no business purpose
  • see Coltec and Wal Mart
  • substance over form
  • sham transactions

21
Tax Shelters Large CPA firms
  • Arthur Andersen Enron
  • 881 offshore subsidiaries to shelter income
  • Ernst Young
  • helped Sprint executives shelter income from
    stock options
  • KPMG First Union
  • helped client shelter income from selling a mall
    in Asheville, NC
  • KPMG fine settlement

22
Cracking Down on Tax Shelters
  • Reporting Requirements Penalties
  • enacted in the American Jobs Creation Act of 2004
  • Reportable Transactions
  • transactions the IRS has identified as having
    potential for tax avoidance or evasion
  • broader than what might be considered a tax
    shelter
  • report on Form 8886
  • include (detailed definitions not required)
  • listed transactions (on IRS website)
  • confidential transactions
  • transactions with contractual protection
  • loss transactions
  • transactions with significant book-tax
    differences
  • transactions involving brief asset holding period

23
Cracking Down on Tax Shelters
  • Material Advisors
  • provides material aid, assistance, or advice wrt
    organizing, managing, promoting, selling,
    implementing, insuring, or carrying out any
    reportable transaction
  • derives gross income, directly or indirectly, in
    excess of specified threshold from activity
  • threshold 50,000 when provided to individuals
  • threshold 250,000 in all other cases
  • if Material Advisor
  • provide a return identifying and describing
    reportable transaction
  • From 8918
  • penalty for not complying
  • 50,000 for reportable transaction that is not a
    listed transaction
  • gt of 200,000 or 50 of gross income for listed
    transaction
  • also must maintain a list of advisees and the
    list make available to the IRS
  • penalty of 10,000 / day starts 21 days after
    list requested
  • lawyers and accountants arguing privilege applies

24
Cracking Down on Tax Shelters
  • Taxpayers
  • penalty for failure to include reportable
    transaction information with return
  • reportable transaction that is not a listed
    transaction
  • 10,000 for individuals
  • 50,000 for all others
  • listed transaction
  • 100,000 for individuals
  • 200,000 for all others
  • additional penalty if understatement of tax
    related to reportable transactions
  • penalty is 20 of understatement
  • penalty increases to 30 if transaction not
    disclosed (as required)

25
Tax Planning Research(2nd Power Point)
  • Research Process
  • 5 or 6 steps
  • Example of memo posted on Blackboard
  • PAK
  • corporate ch. 1, pp. 1-2 to 1-6
  • Appendix A

26
Research Steps
  1. Identify the relevant facts and issues
  2. Locate authority and collect the evidence
  3. Analyze the results and identify the alternatives
  4. Develop conclusions and recommendations
  5. Communicate the results and recommendations
  • Determine the facts
  • Identify the issues
  • Locate applicable authority
  • Evaluate authorities
  • Analyze the facts in terms of applicable
    authority
  • Communicate conclusions and recommendations

27
Step 1 Identify Relevant Facts Issues
  • What is clients factual situation?
  • listening
  • learning what to ask
  • ask more questions as research process progresses
    (iterative process)
  • both tax and nontax considerations

28
Step 1 Identify Relevant Facts Issues (cont)
  • Based on the facts, what are the important
    questions that need to be answered?
  • a broad question may lead to several narrower
    questions
  • fact versus law issues
  • diamond necklace as gift or compensation
  • Gifts are excluded from taxable income (sec. 102)
  • Compensation for services are taxable (sec. 61)
  • dependency example

29
CAN I TAKE MY SON WHO IS AWAY AT COLLEGE AS A
DEPENDENT FOR 2009?
30
For Electronic Research
  • State the Issue as a Question
  • Identify the Keywords
  • important to the question
  • unique enough to narrow search
  • Construct a Research Query
  • using connectors (Boolean)
  • using wildcards
  • exact phrase

31
Example
  • A self-employed attorney incurs substantial
    business-related travel expenses during the year.
    If she buys airline tickets in advance and stays
    over a Saturday night, she can often receive a
    substantial savings on airfare. Usually, an extra
    day of meals and lodging is less costly than
    buying the more expense airline ticket. In the
    current year, she has spent 4,000 in extra
    Saturday night expenses to save 12,000 in
    airfare.

32
Example (cont)
  • Are the additional travel costs (primarily meals
    and lodging) of staying over a Saturday night in
    order to save substantial amounts on the business
    airfare deductible?
  • key words
  • travel
  • meals and lodging
  • Saturday
  • airfare
  • deductible

33
Step 2 Locate Authority Collect Evidence
  • primary authority
  • statutory
  • administrative
  • judicial
  • secondary authority
  • tax commentary
  • provided as part of electronic resources
  • tax journals
  • textbooks

34
Primary vs Precedent
  • primary authority defined
  • An element of the Federal tax law that was
    issued by Congress, the Treasury or Internal
    Revenue Service, or a Federal court, and thus
    carries greater precedential weight than elements
    of the tax law issued by other parties.
  • there are some primary authorities that provide
    no precedential value
  • Small Cases Division decisions (cited as T.C.
    Summary Opinions) cannot be used as precedents
    when dealing with the IRS.

35
substantial authority
  • IRC 6662 requires for tax positions taken
  • code
  • proposed, temporary and final regulations
  • court cases
  • administrative pronouncements
  • tax treaties
  • committee reports (for congressional intent)
  • private letter rulings
  • technical advice memoranda
  • actions on decision
  • general counsel memoranda
  • other items published by IRS in Internal Revenue
    Bulletin

36
Primary vs Precedent vs Substantial Authority
  • substantial authority
  • IRC 6662 imposes a penalty on substantial
    understatements of tax except where the taxpayer
    has substantial authority for the position
    taken on the return.
  • the Regulations for 6662 specify the sources of
    substantial authority
  • might include items that do not provide precedent
  • Letter Rulings are a source of substantial
    authority but do not provide precedent to anyone
    except the taxpayer issued to

37
For Electronic Research
  1. Select a Database and Execute the Search
  2. Interpret and Refine the Search

38
Step 3 Analyze the Results Identify
Alternatives
  • may result in going back to facts, issues and /
    or authority
  • Determine that the authority appropriate
  • Surface features vs structural relation
  • within primary authority sources have different
    weight
  • different precedential value
  • some have no precedential value
  • Small Cases Division Decisions
  • Letter Rulings
  • to taxpayer issued to only

39
Best Authority
Authority A Clients scenario Authority B
Surface feature asset generating expense Dog Dog Elevator
Surface feature - expense Dog Food Dog Food Electricity
40
Best Authority (cont)
Healthy taxpayer with no sensory loss Client is blind Taxpayer with heart disease
Surface feature asset generating expense Dog Dog Elevator
Surface feature - expense Dog Food Dog Food Electricity
41
Best Authority (cont)
Healthy TP with no sensory loss Blind taxpayer TP with heart disease
Surface feature asset type Dog Dog Elevator
Surface feature - expense Dog Food Dog Food Electricity
Structural relation Asset used for pleasure Asset used to mitigate medical condition Asset used to mitigate medical condition
Transfer appropriate? NO NO
Transfer appropriate? YES YES
Example courtesy of Anne Magro, George Mason
University
42
Step 4 Develop Conclusions Recommendations
  • might have some unresolved issues
  • might present alternatives
  • especially if dealing with open transaction
  • pros and cons of each alternative
  • risks associated with alternatives
  • have to consider clients preferences

43
Step 5 Communicate the Results Recommendations
  • written and oral
  • can vary in degree of formality
  • how uncertain is the outcome?
  • tax research memo
  • Example on Blackboard
  • Example PAK, p. A-6
  • http//www2.gsu.edu/accerl/

44
IRS Web Site
  • http//www.irs.gov
  • IRS publications and Tax Forms Instructions

45
Tax Planning Research (3rd Power
Point)Constitutional Legislative Sources
Writing a Memo
  • Review of History of U.S. Taxation
  • PAK, Individual Ch. 1, pp. 1-2 to 1-3
  • Statutory Sources
  • PAK, Corporate Ch. 1, pp. 1-7 to 1-9
  • U.S. Constitution
  • The Legislative Process
  • Internal Revenue Code
  • Reading the IRC
  • Tax Treaties
  • Writing
  • tax memo examples

46
History of U.S. Taxation
  • 1861 - 65 Civil War
  • 1894 Congress imposed an income tax
  • Supreme Court unconstitutional (Pollock 1895)
  • 1909 corporate income tax
  • Feb. 3, 1913 16th amendment ratified
  • 1st returns due 3-1-14
  • rates from 2 to 6
  • 6 applied to gt500,000
  • 1939 6 of U.S. population subject to tax
  • Revenue Acts from 1913 to 1939 codified as IRC of
    1939

47
History of U.S. Taxation (cont)
  • 1941 - 45 World War II
  • by 1945 74 of U.S. population subject to tax
    (mass tax)
  • 1943 pay-as-you-go tax system
  • 1950 - 63 top marginal tax rate 90 - 91
  • dropped to 70 and then 50
  • 1988 - 90 top marginal tax rate 28
  • 1993 - 2000 top marginal tax rate 39.6
  • 2001 - 2004 top marginal tax rate drops from
    39.1 to 35

48
U.S. Constitution
  • 16th Amendment
  • The Congress shall have the power to lay and
    collect taxes on incomes, from whatever source
    derived, without apportionment among several
    States, and without regard to any census or
    enumeration.

49
Legislative Process
50
The Legislative Process
  • influenced by economic, social, equity and
    political considerations
  • committee reports
  • general structure
  • present law
  • reasons for change
  • explanation of provisions
  • effective date
  • can provide Congressional intent
  • especially for recently enacted provisions
  • see example
  • influenced by economic, social, equity and
    political considerations
  • committee reports
  • general structure
  • present law
  • reasons for change
  • explanation of provisions
  • effective date
  • can provide Congressional intent
  • especially for recently enacted provisions

51
The Legislative Process
  • every bill passed has a public law number
  • P.L. congressional session - bill
  • congressional session based on 2 year time
    periods
  • 2007-08 is the 110th Congressional Session
  • 2009-10 is the 111th Congressional Session
  • P.L. 110-28 Small Business and Work Opportunity
    Tax Act of 2007
  • P.L. 110-343 - The Emergency Economic
    Stabilization Act of 2008

52
Internal Revenue Code
  • Revenue Acts from 1913 to 1939 codified as IRC of
    1939
  • followed by IRC of 1954 IRC of 1986
  • Title 26 of the United States Code
  • LII U.S. Code Home

53
Internal Revenue Code (cont)
  • Subtitles (A I J K)
  • A, Income Taxes
  • Chapters (1 98 99 100)
  • some numbers are skipped
  • 1-6, 11-14, 21-25, etc.
  • continuous through all subtitles
  • Subtitle A, Income Taxes Chapters 1 6
  • Chapter 1, Normal Taxes and Surcharges
  • Subchapters (capital letters)
  • not all chapters have
  • start over at A for each chapter
  • Subtitle A, Income Taxes, Chapter 1, Normal Taxes
    and Surcharges, Subchapters A X (no R)
  • some subchapters associated with the subject
    covered
  • C corporations in Subchapter C
  • US CODE Title 26,CHAPTER 1NORMAL TAXES AND
    SURTAXES

54
Internal Revenue Code (cont)
  • Parts (upper case Roman numeral)
  • not all subchapters have
  • start over at I for each subchapter
  • some numbers are skipped
  • Subparts (capital letters)
  • not all parts have (fairly few)
  • Sections (1 9602 9701 9833)
  • continuous in Title 26 (not repeated)
  • some numbers are skipped
  • tax research generally focuses on code section

55
IRC Section
  • subsection (lower case letters a , b, c, etc.)
  • paragraphs (numerical 1, 2, 3, etc.)
  • subparagraphs (upper case (capital) letters A,
    B, C, etc.)
  • clauses (lower case Roman numerals i, ii, iii,
    etc.)
  • subclauses (upper case Roman numerals I, II,
    III, etc.)
  • use parentheses for each division other than
    section
  • Section 6662(d)(2)(C)(ii)(I)
  • an exception
  • See Section 212

56
Reading the IRC
  • complex sentence structures
  • long sentences
  • a number of clauses
  • wordiness
  • word usage
  • some words are used in the IRC but would not
    generally be used in other writing
  • use of legalese
  • Legalese
  • SEC, A Plain English Handbook, (ch. 2, pp.
    30-35)
  • an example - 183

57
Section 183
  • activity is not engaged in for profit
  • hobby
  • gross income derived from such activity for the
    taxable year exceeds the deductions
  • profitable
  • net income
  • breeding, training, showing, or racing of horses
  • involves horses

58
10 common pitfalls in interpreting the code
  • Determine the limitations and exceptions to a
    provision. Do not permit the language of the Code
    Section to carry greater or lesser weight than
    was intended.
  • Just because a Section fails to mention an item
    does not necessarily mean that the item is
    excluded.
  • Read definitional clauses carefully.
  • Small Business Corp. - 1244 versus 1361

59
10 common pitfalls (cont)
  • Do not overlook small words such as and and or.
    There is a world of difference between these two
    words.
  • see examples
  • Read the Code Section completely do not jump to
    conclusions.
  • special rules, exceptions, definitions, etc. are
    often in another part of the section

60
10 common pitfalls (cont)
  • Watch out for cross-referenced and related
    provisions, since many Sections of the Code are
    interrelated.
  • See section 183
  • At times Congress is not careful when reconciling
    new Code provisions with existing Sections.
    Conflicts among sections, therefore, do arise.
  • Be alert for hidden definitions terms in a
    particular Code Section may be defined in the
    same section or in a separate Section.

61
10 common pitfalls (cont)
  • Some answers may not be found in the Code
    therefore, a researcher may have to consult the
    Regulations and/or judicial decisions.
  • Take careful note of measuring words such as less
    than 50 percent, more than 50 percent, and at
    least 50 percent.
  • Journal of Business Strategy, 1972

62
Tax Treaties
  • between the U.S. and other countries
  • President enters into after receiving advice
    consent of the Senate
  • gt 60 countries
  • may allow some income tax exemptions
  • IRS Publication 901, U.S. Tax Treaties
  • Income other than Personal Service Income
  • Personal Service Income
  • professors, teachers, and researchers
  • students and apprentices
  • wages and pensions paid by foreign government

63
Writing a Tax Memo
  • see examples
  • Structure for this Class (can be different)
  • Facts
  • summarize information provided
  • briefly, succinctly
  • Issue(s)
  • state as a question
  • Conclusion(s)
  • one to two sentences (no authority cited)
  • Reasoning
  • discussion and analyze the authority that
    supports the conclusion
  • combine applicable law and analysis from the PAK
    example

64
Writing a Tax Memo (cont)
  • Cite code section in good form
  • IRC 265(a)(2)
  • IRC Section 265(a)(2)
  • IRC Sec. 265(a)(2)
  • can eliminate IRC from any of the above citations
  • Either include as part of the sentence
  • IRC 989(a) has three requirements
  • Or include a parenthetical reference at the end
    of the sentence
  • The three requirements are (IRC 989(a))
  • Writing tips
  • do not use 1st person (I is not allowed)
  • use 3rd person
  • write formally
  • no slang, clichés, or jargon
  • keep direct quotes from IRC to a minimum
  • no 1 sentence paragraphs (other than issue and
    conclusion statement)
  • use spelling and grammar check
  • also proofread by reading your writing aloud
  • beware of autocorrect issues in Microsoft

65
Administrative Judicial Sources
  • PAK, Corp. Ch. 1, pp. 1-8 to 1-21
  • Administrative Sources
  • Regulations
  • Revenue Rulings
  • Revenue Procedures
  • Letter Rulings
  • Other IRS Pronouncements
  • Judicial Sources
  • Federal Court System
  • Case Briefs

66
Vocabulary
  • precedent (pres' e dent)
  • noun
  • law definition
  • a legal decision or other authoritative material
    that furnishes an example for deciding the
    treatment of future similar or analogous
    situations
  • precedential (pres' e den' shel)
  • adjective
  • of the nature of or constituting a precedent

67
The Department of the Treasury
  • administers the tax laws of the United States
  • Secretary of the Treasury is a member of the
    Presidents Cabinet
  • Timothy Geithner
  • Internal Revenue Service (IRS) is bureau within
    Treasury
  • See Treasury Organizational Chart
  • headed by the Commissioner of Internal Revenue
  • Douglas Shulman

68
Regulations
  • interpretation of the IRC
  • Legislative Regulations
  • Congress specifies in the IRC that Regulations
    will provide details
  • an example
  • essentially the same authority as IRC
  • highest precedential value of any IRS
    pronouncement
  • General Regulations
  • issued under general authority granted the IRS
  • an example

69
Regulations (cont)
  • Proposed Regulations
  • at least 30 days prior to final
  • interest parties can comment on
  • can be much longer process example 162(m)
  • bill passed 8/6/93
  • rules effective 1/1/94
  • regulations 1st proposed 12/20/93
  • modifications proposed 12/2/94
  • adopted 12/19/95
  • do not have the effect of law
  • Final Regulations
  • issued after proposed regulations

70
Regulations (cont)
  • Temporary Regulations
  • not subject to public comment
  • effective immediately
  • expire 3 years after issuance
  • But if not replaced by final regulations continue
    to use
  • provide immediate guidance
  • considered the same authority as final
    regulations until replaced by final regulations
  • for example 1.469-5 versus 1.469-5T
  • rare to challenge the authority of the
    Regulations
  • improper exercise of IRS power or overly broad
    application of a rule

71
Regulations (cont)
  • Citing Regulations
  • type of regulation
  • 1. for Income Tax
  • 20. for estate, 25. for gift, 31. for employment
    301. for procedural
  • code section that regulation relates to
  • number, paragraph, subparagraph
  • number is consecutive within Reg.
  • starting with 0 or 1
  • but does not necessarily related to subsections
    in code
  • Reg. 1.262-1(b)(2)
  • add a T when temporary

72
Revenue Rulings
  • 2nd to Regulations in authority of administrative
    sources
  • addresses a specific factual situation
  • issue, facts, law and analysis holding
  • useful for fact situations that are similar
  • cite
  • Rev. Rul. year number
  • Internal Revenue Bulletin (IRB)
  • Cumulative Bulletin (CB)

73
Revenue Procedures
  • internal practices and procedures
  • tend to be factual or procedural rules
  • example standard mileage rates for 2009
  • Rev. Proc. 2008-72
  • example how to request a letter ruling and
    other IRS guidance
  • Rev. Proc. 2009-4

74
Letter Rulings
  • Private Letter Rulings (PLRs)
  • National Office of the IRS issues to a specific
    taxpayer discussing a proposed transaction
  • for a fee
  • 275 - 11,500
  • issue, facts, law and analysis holding
  • IRSs interpretation
  • open (proposed) transaction
  • or tax return not yet filed
  • is substantial authority under Reg.
    1.6662-4(d)(3)(iii)
  • for penalty assessment
  • for precedential value only provides authority
    for taxpayer issued to

75
Letter Rulings (cont)
  • Technical Advice Memoranda (TAMs)
  • completed transaction
  • requested from National Office by agent during
    audit
  • applies to client being audited only
  • Determination Letters
  • issued by local district rather than National
    office
  • issues that are less controversial
  • more likely to be a completed transaction

76
Letter Rulings (cont)
  • not published by the IRS
  • but made publicly available
  • added 1976
  • identifying details eliminated
  • published by tax services
  • Ltr. Rul. 200430031
  • year (4 digits) ( 2 digit before 2000)
  • week (2 digits)
  • number of ruling for week (3 digits)
  • includes PLRs, TAMs, and other IRS Pronouncements
  • including Field Service Advice, Service Center
    Advice,

77
Other IRS Pronouncements
  • acquiescences and nonacquiescences
  • response when IRS loses in court
  • will follow or not follow the court
  • example IRS versus court for vacation home
    rental
  • Bolton, 82-2 USTC 9699, 694 F2d 556 or
    McKinney, 83-2 USTC 9655
  • Internal Revenue Bulletin (IRB)
  • available on-line at IRS
  • issued once a week
  • Internal Revenue Bulletin
  • combine into Cumulative Bulletin (CB)
  • Chief Counsel Memoranda
  • Technical Memorandum, General Counsels
    Memorandum, Action on Decision

78
Overview of the Legal Process
  • exhaust administrative review process
  • within the IRS
  • overpayment of tax versus deficiency assessment
  • 1st trial court then appeals
  • historically burden of proof on taxpayer
  • in 1998 shifted more to the IRS

79
Federal Judicial System
80
Tax Court
  • hears only Federal tax cases
  • technical tax issues
  • 19 judges
  • based in Washington
  • trial court locations throughout the country
  • usually one judge per trial
  • no juries
  • file petition within 90 days of IRSs mailing of
    notice and demand for payment
  • disputed tax liability does not have to be paid

81
Tax Court (cont)
  • Decisions
  • Regular
  • new or unusual points of law
  • Memorandum
  • application of existing law
  • interpretation of facts
  • can be appealed to Court of Appeals
  • if the circuits disagree on an issue the Tax
    Court should follow the decisions in the circuit
    where the taxpayer is located
  • Small Cases Division
  • disputed deficiency not gt 50,000
  • informal
  • legal representation not necessary
  • no written briefs or formal oral arguments
  • cannot be used as precedent
  • decision final and cannot be appealed

82
District Courts
  • hears all legal issues based on the U.S. Code
  • disputed tax liability must be paid
  • country divided into districts
  • file in district where taxpayer lives
  • See Circuit Court Map
  • case heard by one judge
  • jury possible
  • questions of fact only
  • can be appealed to Court of Appeals

83
Court of Federal Claims
  • cases concerning monetary claims
  • disputed tax liability must be paid
  • 16 judges
  • based in Washington
  • trial court locations throughout the country
  • no juries
  • not required to follow circuit Court of Appeals
    decisions
  • can be appealed to Court of Appeals for the
    Federal Circuit

84
Court of Appeals
  • usually question of law not fact
  • 13 circuits
  • 11 geographic
  • Washington, D.C.
  • Court of Appeals for the Federal Circuit
  • each circuit independent and only has to follow
    Supreme Court decisions
  • typically three-judge panel
  • no juries

85
Supreme Court
  • highest court in U.S.
  • hears very few tax cases
  • usually if conflict among Federal circuits or
    issue of major importance
  • 9 judges hear every case
  • located in Washington, D.C.
  • file a writ of certiorari to request case to be
    heard
  • certiorari is granted
  • certiorari is denied
  • If Congress disagrees then pass new laws or
    clarify existing laws
  • Soliman, 113 SCt 701, 93-1 USTC 50,014 home
    office deduction under 280A
  • 1997 Taxpayer Relief Act (PL 105-34) modified
    280A

86
Cites for Cases
  • Tax Court
  • Regular
  • Hillman, D. H., 114 TC 511(2000) (permanent) or
  • Hillman, D. H., 114 TC __, No. 32 (2000)
    (temporary)
  • Memorandum
  • Nicholls, Walter J., 69 TCM 3042 (1995) (CCH) or
  • Nicholls, Walter J., T.C. Memo 1995-291 (general)
  • Small Cases Division
  • Fields, Edward M., TC Summary Opinion 2001-35

87
Cites for Cases (cont)
  • District Court
  • Barber, Lori, 2000-1 USTC 50,209 (N.D.C.A.,
    2000) (CCH) or
  • Barber, Lori, 85 AFTR 2d 2000-879 (RIA) or
  • Barber, Lori, 85 F.Supp.2d 967 (N.D.C.A., 2000)
    (West)
  • Court of Federal Claims
  • Bennett, Courtney, 94-1 USTC 50,044 (Fed. Cl.,
    1994) (CCH) or
  • Bennett, Courtney, 73 AFTR 2d 94-1042 (RIA) or
  • Bennett, Courtney, 30 Fed. Cl. 396 (1994) (West)

88
Cites for Cases (cont)
  • Court of Appeals
  • Oxford Capital Corp., 2000-1 USTC 50,447 (CA-5,
    2000) (CCH) or
  • Oxford Capital Corp., 85 AFTR 2d 2000-1840 (RIA)
    or
  • Oxford Capital Corp., 211 F.3d 280 (CA-5, 2000)
    (West)
  • F.2d for older cases
  • Supreme Court
  • Indianapolis Power and Light, 90-1 USTC 50,007
    (USSC, 1990) (CCH) or
  • Indianapolis Power and Light, 65 AFTR 2d 90-394
    (RIA) or
  • Indianapolis Power and Light, 110 S.Ct. 589
    (1990) (West)

89
Case Briefs
  • summarize case briefly (1 -2 pages)
  • citation
  • issue(s)
  • facts
  • holding
  • reasoning
  • http//www2.gsu.edu/7Eaccerl/

90
Evaluating Law and Rules Ethics
  • Evaluating Sources of Law
  • Citators
  • CCH Shepards for Supreme Court within
    LexisNexis Academic Universe
  • Rules and Ethics in Tax Practice
  • Circular 230 (on Blackboard)
  • AICPA Code of Professional Conduct
  • Statements on Standards for Tax Services (on
    Blackboard)
  • NC Professional Ethics and Conduct
  • North Carolina Accountancy Rules found in
    Subchapter 8N Professional Ethics and Conduct
    (summary on Blackboard)

91
Evaluating Sources of Law
  • administrative sources
  • Regulations are generally held to be valid by the
    Courts
  • Revenue Rulings and Revenue Procedures might be
    modified or held invalid by the courts

92
Evaluating Sources of Law (cont)
  • Court Cases
  • a case should summarize the evolution of the tax
    law prior to the case
  • starting with a recent case might give cites to
    earlier relevant cases
  • decisions by higher courts carry more weight
  • District Court Circuit Court of Appeals
    opinions in the taxpayers circuit carry more
    weight than ones not

93
Evaluating Sources of Law (cont)
  • Court Cases (cont)
  • Tax Court and Court of Claims decisions are
    binding on all jurisdictions, unless overturned
    on appeal
  • circuits are assigned more weight
  • 2nd (NY, CT VT)
  • 9th (CA, WA, OR, NV, AZ, ID, MT)
  • federal (Court of Federal Claims)
  • older cases should be given less weight
  • 183 added for tax years after 12/31/69
  • Reg. 1.183-2 adopted 7/12/72
  • Action on Decision (AOD)
  • example

94
Citators
  • how up to date is your research?
  • annotations
  • other cases referred to within a court case
  • cited, followed, criticized, questioned,
    explained
  • case appealed
  • affirmed, reversed, modified, overruled,
    remanded, vacated
  • administrative sources
  • superceded, modified, revoked, withdrawn

95
Citators (cont)
  • citing case
  • case that makes reference to another case
  • cited case
  • case that is referenced by another case
  • citator
  • provides information on citations to cases
  • may or may not tell you how the cases are related
  • example Soliman, 113 Sct 701, 93-1 USTC 50,014
  • CCH RIA
  • CCH - just a list of cases
  • RIA annotation for each case
  • also can link to annotation
  • Shepards for Supreme Court within Lexis/Nexis
    Academic
  • indicates annotation for each case
  • shepardizing the case
  • (Legal tab then Shepards Citations)

96
Circular 230
  • practice before the IRS
  • consists primarily with representing the client
    during an audit
  • who may practice
  • attorneys
  • certified public accountants
  • enrolled agents
  • pass an IRS exam or worked for the IRS for 5
    years
  • enrolled actuaries

97
Circular 230 (cont)
  • limited practice without enrollment
  • family members
  • employee for employer
  • partner for a partnership, officer for a
    corporation
  • trustee, receiver, guardian, personal
    representative, administrator or executor
  • tax return preparers
  • signs a return as preparer
  • limited practice
  • only before the Examination Division of the IRS

98
Circular 230 (cont)
  • conduct before the IRS
  • furnish information requested by the agent
  • unless request is questionable
  • unrelated to tax return?
  • confidential
  • do not delay matters unreasonably

99
Circular 230 (cont)
  • due diligence
  • honest with clients
  • simple errors happen
  • but at some point an error goes beyond what a
    reasonable person would expect from a tax
    preparer
  • contingent unconscionable fees
  • contingent fee not allowed on original return
  • allowed for amended or claim for refund
  • unconscionable fee if too high for complexity of
    return
  • solicitation advertising
  • must not contain false, fraudulent, unduly
    influencing, coercive, or unfair statements or
    claims
  • tax return positions
  • IRC 6662 substantial authority
  • realistic possibility now reasonable belief (2007
    change)
  • 1 in 3 likelihood now 1 in 2 likelihood

100
AICPA Code of Professional Conduct
  • details are covered in Advanced Auditing
  • not responsible for here
  • related to tax matters
  • more restrictive than Circular 230
  • contingent fee not allowed for original return,
    amended return, or claim for refund
  • advertising solicitation
  • creates a false or unjustified expectations of
    favorable results
  • Ryan Company, America's State Local Tax
    Advisors
  • an example of a firm that is not a CPA firm

101
Statements on Standards for Tax Services
  • issued by the AICPA
  • enforceable standards for AICPA members
  • tax return positions
  • similar to IRS realistic possibility and
    substantial authority
  • answers to questions on returns
  • make reasonable effort to obtain answers
  • certain procedural aspects of preparing returns
  • can rely on client provided information
  • unless appears incorrect, incomplete or
    inconsistent
  • dont have to review supporting documentation
  • use of estimates
  • supplied by taxpayer
  • appears reasonable
  • certain expenses have more restrictive
    substantiation requirements
  • for example, travel entertainment

102
Statements on Standards for Tax Services (cont)
  • departure from previous position
  • allowed unless bound by the IRS as part of audit
    resolution
  • knowledge of error
  • return preparation
  • if significantly effects tax liability
  • notify client but not the IRS of errors on prior
    returns
  • ensure error is not repeated in current return
  • administrative proceedings
  • request clients permission to disclose to IRS
  • withdraw from engagement if client does not
    agree?
  • form and content of advice to taxpayers
  • professional competence

103
North Carolina
  • North Carolina State Board of Certified Public
    Accountant Examiners
  • NC State Board of Certified Public Accountant
    Examiners
  • Professional Ethics Conduct
  • See NC Accountancy Rules Ethics Conduct
  • all CPAs
  • CPAs using CPA title in offering or rendering
    products or services
  • CPAs performing attest services
  • overlaps substantially with AICPA
  • some examples (available on the website)
  • Roger William Younts
  • Tracie Wright Cox

104
Working with the IRSTax Practice Administration
  • Working with the IRS
  • Organization of the IRS
  • Taxpayer Rights
  • The Audit Selection Process
  • Examinations
  • The Appeals Process
  • Tax Practice Administration
  • Taxpayer Penalties
  • Penalties on Return Preparers
  • Interest
  • Statutes of Limitations
  • PAK, Corporations Chapter 15, Administrative
    Procedures

105
IRS Facts Figures
  • almost 134 million individual returns (2006)
  • 60.2 efile (TY 2006)
  • 59.6 paid preparers (TY 2005)
  • 102 million refunds (TY 2005)
  • business returns
  • over 2.4 million C corporation returns (2006)
  • over 3.5 million S corporation returns (2004)
  • over 2.7 million Partnership returns (2005)
  • over 31 million employment tax returns (2006)
  • over 1.2 million other (gift, estate excise)
    (2006)

106
IRS Facts Figures
  • 99,000 employees (FY 2004)
  • budget
  • 10.811 billion FY 2006 (actual)
  • 10.960 billion FY 2007 (proposed)
  • collect almost 2 trillion (net after refund)
    (2005)
  • 880 billion from individual income tax (44.0)
  • 273 billion from corporate income tax (13.7)
  • 766 billion from employment taxes (38.3)
  • 755 billion social security medicare
  • 25 billion from estate and gift (1.2)
  • 55 billion from excise taxes (2.8)

107
IRS National Office
  • Commissioner
  • Deputy Commissioner for Services Enforcement
  • Operating Divisions
  • wage and investment
  • approximately 116 million taxpayers
  • small business and self employed
  • approximately 45 million small businesses
    self-employed
  • large and mid-size businesses
  • corporations with assets gt10 million
  • tax-exempt government entities
  • Criminal Investigation
  • Office of Professional Responsibility
  • National Taxpayer Advocate
  • Appeals
  • Deputy Commissioner for Operations Support
  • agency wide shared services

108
Organization of the IRS
  • National Office in DC
  • IRS Service Centers
  • 8 service centers serve IRS regions
  • process mathematical verification of returns
  • where you mail your tax return
  • IRS Data Center Detroit
  • National Computer Center Martinsburg, WV
  • other Computing centers Processing Centers
  • Customer Service Centers
  • telephone electronic contact

109
Taxpayer Advocate
  • National Local
  • taxpayer-intervention system
  • taxpayer representative with the IRS
  • Taxpayer Assistance Order (TAO)
  • to suspend, delay, or stop actions
  • taxpayer is suffering or about to suffer a
    significant hardship due to IRSs administrative
    handling of situation
  • might involve levy of property or collection
    activities

110
Taxpayer Advocate (cont)
  • report annually to Congress
  • 2009 issued
  • Most Serious Problems
  • at least 20 required
  • 21 in 2009
  • Legislative Recommendations
  • 11 in 2009
  • Most Litigated Issues
  • top 10 litigated

111
Taxpayer Rights
  • Taxpayer Bill of Rights
  • evolved from 1988 to 1998
  • current version was part of the IRS Restructuring
    and Reform Act of 1998
  • in response to abusive behavior by IRS agents
  • Taxpayers are guaranteed
  • rights to representation before the IRS
  • attorney, CPA, or other authorized representative
  • recordings of proceedings
  • an IRS explanation of its position relative to a
    pertinent disagreement
  • why is IRS requesting information, how will they
    use it what might happen if requested
    information withheld
  • must separately notify both spouses of tax
    deficiencies, audits, appeals, etc.

112
Tax Gap
  • based on tax year 2001
  • 1,767 billion paid voluntarily and timely
  • voluntary compliance rate of 83.7
  • estimated at 345 billion
  • 16.3 noncompliance rate
  • difference between what should be paid and what
    is actually paid
  • underreporting 285 billion (82.6)
  • nonfiling - 27 billion (7.8)
  • underpayment 33.5 billion (9.7)

113
Audit Selection Process
  • system of voluntary compliance
  • but do collect substantial revenue through
    withholding
  • almost 85 of the returns have some amount of
    wages (2004)
  • 4,921,806,344,000 income from salaries wages
  • 394,285,849,000 income from taxable pensions
    annuities
  • 315,993,163,000 income from partnerships S
    corps.
  • 247,217,288,000 income from trade or business
  • threat of audit increases compliance
  • audit rate fairly low
  • audit rate for all returns was 1.0 for returns
    filed in 2006
  • 6.2 of individuals with Schedule C with gross
    receipts from 100,000 to 200,000
  • 16.8 of large corporations with 10 million in
    assets
  • 19.9 of estate returns with 5 million in value
  • but use statistical models and computer
    technology to maximum audit effectiveness

114
Audit Selection Process (cont)
  • Preliminary Review
  • simple and obvious errors
  • IRS Automatic Data Processing (ADP) Program
  • computer matching W-2s, 1099s, etc.
  • mathematical / clerical error program
  • send taxpayer a corrected tax computation and
    request payment (or adjust refund)
  • unallowable items program
  • corrections at this stage are not an examination
    (not an audit)
  • no administrative or judicial appeals process

115
Audit Selection Process (cont)
  • Selection of Returns for Examination
  • Discriminant Function Program
  • discriminant function formula (DIF)
  • assigns numeric weight to return items
  • each return assigned a mathematical score
  • higher DIF score gt higher probability of audit
  • Taxpayer Compliance Measu
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