Analysis of Tax Return Procedures - Example

Analysis of Tax Return Procedures Name of Student Institutional Affiliation Analysis of Tax Return Procedures Introduction The American approach to payment of tax has greatly changed over the past few decades. Adoption of new tax structures by organizations is on the rise. Businesses are no longer relying on the traditional tax practices. Instead, they are making use of the new technology in planning and payment of tax. The direction taken by firms involves the use of structures that are legal. The partnership is a perfect example of a legal structure that the businesses are using in payment of tax. The use of legal structures helps the organizations to avoid the payment of corporate income tax. Corporations operating as single entities are subject to corporate tax and, therefore, the new approach aims at shielding firms from paying the income tax (Greenaway, 2009) The number of partnership businesses is, however, growing at a very high rate. A report by General Accountability Office (2011) shows an immense growth in magnitude of partnership firms in America. According to GAO report, large partnerships comprises of more than a hundred partners that are either direct or indirect partners. The report also describes the asset base of these partnerships as more than $100 million (GAO, 2011). A big number of these large partnership firms operate in the insurance and finance sectors. The number of large partnerships in finance and insurance, however, constitutes only a small fraction of the partnership firms in America (Harris, 2009) According to GAO’s report, the highest percentage of partnerships is in the real estate business. The legal structure of partnerships is rapidly growing and the more it grows, the more complicated it is becoming. Further, the partnership tiers add to the complexity of the structure. With tiering, it is difficult to evaluate the performance of large partnership businesses. Several reasons are necessary for the adoption of the new legal structure. One such reason is the increase of the corporate income tax by the U.S Congress. Also, the increasing demand in the global market prompted the adoption of the new system. Most people perceive the partnership system as more efficient compared to the old system (Greenaway, 2009) Discussion of the Problem Despite the much support of the partnership structure, there are serious problems within the system. Managers of partnership firms encounter great challenges in running them. Proper compilation of books of accounts is usually a nightmare to the accountants of these organizations. The management of these firms sometimes tends to ignore the technicalities involved in running a partnership business (Harris, 2009). The managers and stakeholders of partnership businesses sometimes perceive it as informal and, therefore, they do not understand the technical requirements of the firm. The inefficient operation of the partnerships leads to difficulties in the calculation of tax returns. Tax authorities experience serious challenges when examining the returns of partnership entities. The problems in evaluation of returns results from the complexities of the partnership structures (Sands, 2010) The report analyzes the large partnership’ structures and how they hinder effective examination of tax returns. Several audit regimes apply to partnership businesses. On such system is the TEFRA audit system. The system contains complex procedures that apply to most partnership firms. The regime requires treatment of tax returns done at the partnership level as opposed to the individual level. The system transfers the tax burden from individual partners and places it upon the entire partnership business. The partnership is, therefore, accountable to the tax authorities (Harris, 2009) Consequences of the Problem The nature of the partnerships ’structure, however, creates problems in computing of tax returns using the audit rules. As discussed earlier, partnerships are usually large and complex. The nature of the partners also poses a challenge since some partners are likely to be partners in more than one firm making them indirect partners. It is, therefore, difficult for tax authorities to monitor the income flows of partners in such cases. There is also the lack of compliance from the partners in a partnership business. Auditing of large partnerships is also a challenge since they have an interest in many investments, and this may encourage noncompliance to audit rules. A lot of time and resource is, therefore, necessary for effective audit of large partnerships (Sands, 2010) Following the complexity of the partnerships structure, the use of TEFRA audit procedures is no longer effective. As a result of the hindrances posed by the partnerships system, the number of firms audited is very small. Enforcers of audit rules are reluctant to examine many partnerships, due to the challenges they face. Observers also argue that the audit report from these firms is not consistent with the acceptable rules. Revision of the TEFRA audit rules is, therefore, proposed (Staudenraus, 2009) Responses to the Problem The Treasury proposes the adoption of new audit procedures that will help mitigate the problems emanating from large partnerships. The simplified partnership procedures are the new rules proposed to replace the TEFRA rules. The new rules require the enforcers to examine the partnerships’ tax returns and to make the necessary adjustments at the partnership level. Under the new system, request of a refund can only be done by the partnership, unlike in the TEFRA regime (Staudenraus, 2009) The new rules prohibit partners from taking part in the management of the business. The new system requires large organizations to employ professional managers to run the business. Stakeholders in a partnership business lack the necessary managerial skills to operate the business effectively. Organizations, therefore, have no choice but to hire experts who will run the business effectively. The new management should be able to maintain the capital accounts of the partnerships and to comply fully with the audit procedures (Sands, 2010) Conclusion From the above analysis, it is evident that tax authorities experience serious challenges in the examination of large partnerships’ tax returns. The problems arise from the failure of partnership businesses to prepare their books of accounts properly. In particular large partnerships violate the taxation code by not efficiently maintaining their capital accounts. The rapid increase in the number of large partnerships and their complex nature hinders the effectiveness of audit procedures. Following the complexities of the partnership businesses, it is difficult for tax authorities to scrutinize the firms’ tax returns. The adoption of new audit procedures aims at mitigating the tax return problems. References Greenaway, T. (2009).Ethics and Tax Procedure Corner. J. Passthrough Entities, 12, 11. Harris, K. L., &Litwin, B. H. (2009).Ethics and Tax Procedure Corner. J. Passthrough Entities, 12, 13. Sands, W. S., & Lewis, H. M. (2010).Ethics and Tax Procedure Corner. J. Passthrough Entities, 13, 17. Staudenraus, S., &Spaeth, G. (2009). Ethics and Tax Procedure Corner. J. Passthrough Entities, 12, 39. Read More