Appealing a Tax Audit - Assignment Example

Due: Assignment, Finance and Accounting Introduction Taxpayers facing an audit have to focus on the substantive issues to determine when the tax is due and often give little consideration to the procedural rules relating to the audit and appeal process. It is this gap of substance and procedure, compliance and controversies that often subjects them to huge losses that would have been avoided. New York’s taxes like in many other states are self assessed meaning that the burden of calculating the correct tax due falls on the taxpayer and not the taxing authorities. In C.I.R. v Lane-wells Co, the Supreme Court referred to our “system of self assessment”, stating that it“is so largely the basis of our American scheme of income taxation”. Hence it places a task on the taxpayer to complete returns accurately and on time. A tax audit is when the Department of Taxation decides to critically go through your tax returns and verify the accuracy of the incomes and deductions. For ABC partners the audit is on their partnerships 2012 tax return and their individual partner’s income tax return. This could be because the tax department needs more information validating their tax returns with the reasons such as, failure to disclose all your taxable income, claiming unearned income credit, failure to include additional income and making errors. The tax audit is to enforce and encourage voluntary compliance of the tax laws for an efficient running of the tax system (Lan, 1959). The expectations of the audit are three possible outcomes. When the tax department is beyond no doubt satisfied with the explanations and documentations provided to them, then the tax returns remain the same. It can also propose suggestions to your tax returns which you have an option of incorporating them or to challenge their assessment. When in agreement, you sign the form provided by the tax department and agree on the payment agreement. When in disagreement, you can set up a conference with the tax department manager for a further review of your case or place a request for formal appeals within the administrative system and the courts. On the determination of what constitutes tax evasion for civil or criminal purpose the elements of tax evasion in Internal Revenue Code Section 7201 is checked. The distinction between civil and criminal tax fraud is the different burdens of proof. The case would be different if this was a criminal tax audit since in most cases the enforcement personnel would not give such a warning in case of a criminal tax audit. In other cases the investigators would proceed intentionally with the case as if it was of a civil nature while looking at the outside civil matters and in the meanwhile luring the taxpayer and their representatives into making disclosures and statements. In case of a criminal audit, the taxpayer should retain criminal counsel for representation. In 2002, New York legislators passed a bill requiring criminal investigators for both New York and city to advice targets as to the criminal nature of their investigations. A major issue in resolving criminal sales tax charge is the collateral estoppels effect of a guilty plea on corresponding civil liabilities and in such a case, the state has to prove beyond reasonable doubt the facts of the case. Collateral estoppel is a doctrine preventing a party from relitigating an issue determined against the party in an earlier action even if the second case is different from the first. This deprives the taxpayer of any defense to civil fraud penalties and interest rates levied on them even when they have the burden of proof (Lebran, 2013). While tax avoidance is the legally accepted ways of reducing ones tax liability, tax evasion is the willfully and fraudulent ways to reduce ones tax liability and often leads to a criminal tax liability. Criminal liability begins to run from the date of the offense and has a statute of limitations that is unlimited where instances of fraud are cited. The crimes are classified to categories which are class A (willful commission of an act of tax fraud), class B (underpayments or excess refunds of more than $1million) and class E (underpayments or excess refunds for only $3000). For partner A, his defense would be to prove that the act of improper payment of his substantive deductions were not intentional to avoid tax or to defraud the state and were as a result of an error. If he fails to do so, a civil fraud penalty will be imposed on him which is a civil penalty of 200% of the tax due. But the tax department has to prove that by clear and convincing evidence. If he kept proper records of all transactions he could also use them as a defense to avoid instances of the department using inappropriate methodology. The statute of limitation stands at 3 years if the omitted amount is less than 25% of the reported gross income and is extended to 6 years if the omitted amount is greater than 25% of the reported gross income. For partners B and C, the fact of them having unreported income seems intentional and constitutes tax evasion according to the tax department. However the government has to determine that the underpayment of tax is attributable to fraud. Partners B and C have can claim that they lived off a non taxable source. Receipt of money is not always taxable income as one may acquire tax-free wealth by gifts, loans, inheritances and other ways and can couple it with a cash hoard defense where there is no law against having cash of any amount kept in a safe deposit box (Lebran, 2013). In cases where the clients don’t agree with the proposed adjustments and want to protest the audit determinations, the department will mail a formal copy of the Notice of deficiency to the taxpayers which must be formally protested to guarantee the taxpayer’s right to oppose the assessment. The taxpayer has the option of also letting the protest period expire and then pay the tax due and seek a refund no later than 2 years after the tax payment. The protest must be made 30 or 90 days from the date of mailing of the notice and is only valid if it was mailed to the taxpayer regardless of whether or not he actually received it. The mailed letter tells you of your rights to request a conference with an Appeals or Settlement Officer as well as how to make the request for your conference. In addition to the adjustments many other items can be appealed such as penalties, levies, liens and interests. On request of the Appeals conference, one should be ready with the records and documentation to support your position. In starting the audit appeal process, you will receive a detailed report from IRS outlining all the proposals and adjustments which you will not sign and return the copy of the report which leads to a 30 day letter explaining the process of appealing the audit. When in need of a longer duration you can seek a 30 day or 60 day extension which is often granted. A conciliation conference is then in place which is intended to offer taxpayers a quick and inexpensive means of resolving tax disputes without need for a formal hearing at the DTA and is where the taxpayer’s representatives present his position. He should thereafter prepare for the conference or hearing by obtaining the entire audit file and other related documents or records. The audit file should be obtained on issuance of the Notice and are obtainable cheaply through a request filed under New York’s Freedom of Information Law (FOIL). After the hearing they have to make Mediation Bureau agreement while considering the effect on other taxes. If they reach an agreement, the conciliation conference will issue a consent that upon execution will finally determine the tax amount in the basis set forth in the consent which must be considered carefully to avoid causing the taxpayer more problems. If the parties cannot agree on settlement at the Mediation Bureau, the conciliation conferee will issue a conciliation order to sustain the original assessment proposed in the Notice of Deficiency and the taxpayer has a 90 day period to file a petition with the DTA for a formal hearing. On lapse of the 90 days, a hearing takes place at the Division of Tax Appeals which is conducted similarly to trials in a court of law subject to relaxed rules of evidence and less formality. The parties call and examine witnesses, introduce exhibits, cross examine and impeach opposing witnesses. The determination is made based on the facts of the hearing and conclusions of the law relating to the case. If not satisfied by the tribunal decision, the taxpayers can appeal adverse Tribunal decision and obtain judicial review of the decisions under Article 78 of the New York Civil Practice Law and Rules otherwise; the decisions of the tribunal are precedent and may not be appealed by the department (Slemroid, 2000). Appealing an audit can at times have adverse consequences but most taxpayers who come out to place these appeals come out with a good chance of having some of the proposed adjustments by the tax department reversed. Works Cited Finkel, Robert, Espanola Diana. “The life Cycle of an IRS Audit.” Morse Barnes-Brown Pendleton (2005): PDF File. Slemroid, Joel. “Tax Avoidance, Evasion and Administration” The Hebrew University of Jerusalem (2000) Lebran, Leah. “Annual Audit Plan.” Treasury Inspector for Tax Administration. (2013): Print. Cuban, Den “Tax Audit techniques in cash Based Economies.” Common Wealth Association (2005) Mo Phyllis Lai Lan, “Tax Avoidance and Anti-Avoidance Measures In Major Developing Economies” Tang Yunwei. (1959) Read More