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The Top 50 Mistakes Practitioners Make and How To Fix Them: Dealing with the Internal Revenue Service
Taxation in the United States is a system of voluntary compliance. The Sixteenth Amendment of the U.S. Constitution created a system of taxation that was intended to be fair and equitable. Its purpose was to fund the government.
Since its creation in 1913, the U.S. tax system has been constantly changing. The Internal Revenue Code has grown from just a few code sections to a document consisting of thousands of pages. Taxpayers, whether they are individuals, married couples, small businesses, partnerships, corporations, or trusts are overwhelmed by the myriad of tax laws and the procedures that have been developed to assist in the proper administration of the law.
The tax law is not perfectly black and white; in many instances it is gray. Taxpayers often do not know if they should take a position that may be contrary to the law or that possibly is not even addressed in the law. Because the tax system constantly changes with the needs of society, the tax professional’s job is quite challenging.
Tax professionals must not rest on their past laurels. They must keep current on new developments in the tax system, which is a challenging task. This book will assist taxpayers and tax professionals alike when they are dealing with matters before the Internal Revenue Service.
What is a tax professional?
Some individuals say that they are tax professionals because they have been preparing tax returns for 30 years. However, a tax professional is more than just a professional tax preparer. While tax preparation has been greatly simplified and improved with the advent of various tax software systems, it is still challenging. This book deals with the two other major aspects of being a tax professional: tax planning and handling tax controversy.
Why do people make mistakes when dealing with the Internal Revenue Service?
A list of reasons, which is not all-inclusive, is shown below.
Knowledge of processes. One of the IRS’s responsibilities is the development of revenue procedures and methods for dealing with tax administration. While the Internal Revenue Manual is a public document, many taxpayers and even tax professionals are unaware of the guidance that it provides. Availability of time. Sometimes it is just easier to pay a tax bill than it is to research taxpayer rights under the system. Taxpayers do not want to spend time researching or, in appropriate situations, appealing IRS decisions. They may find it difficult to justify the time expenditure when they have so many other demands in their lives.
Tax law can be gray. Although there is nothing wrong with taxpayers advocating for themselves, they should ensure that they have authority for taking their positions.
IRS oversight of tax practitioners
The IRS has delegated a substantial amount of responsibility for the administration of the tax system to tax practitioners. It has created the Office of Professional Responsibility to monitor, teach, and enforce the proper administration of the tax law by tax professionals.
This book will provide in-depth coverage of Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service, which is a very significant document. It will help tax professionals to understand the dictates of the Internal Revenue Service and how they can be applied in actual situations.
This book is comprised of 50 case studies dealing with a wide range of tax practice issues. It is important to emphasize that tax practice encompasses not only the representation of clients before the IRS but also the actual preparation of tax returns and other documents. The thought-provoking case studies will help the practitioner to understand mistakes that were made in the past and how to avoid making them again in the future. The case studies will also assist taxpayers in understanding their rights under the law and thereby enable them to work more effectively with tax professionals.
Each of the 50 case studies uses the following format:
- The facts
- The mistake
- The law or other authority
- The conclusion
- The book also includes three appendices. Appendix A: Rev. Proc. 2012-15 deals with disclosure; Appendix B: Circular 230, Regulations Governing Practice Before the Internal Revenue Service; Appendix C: Glossary
VI. The 50 mistakes
Chapter 1 – Collection
- How many tax returns must a delinquent taxpayer file?
- The IRS may not pursue a taxpayer in an attempt to get him to file every delinquent return.
- It may not be too late to ask the IRS for tax relief
- Requests for abatement are permitted in appropriate situations.
- Offers in compromise: will the IRS negotiate a debt?
- Factors that enable taxpayers to obtain an offer in compromise
- Filing for bankruptcy: IRS ramifications
- The timing of a bankruptcy filing is essential to the ability to discharge IRS debt
- IRS bypass of a taxpayer’s representative
- Maintaining power of attorney rights and duties
- How to treat erroneous income information
- How to correct incorrectly filed income documents
- Defending against the responsible officer penalty
- Defending an IRS-designated responsible officer in a payroll situation
- Is there any relief for an innocent spouse?
- IRS guidelines for obtaining tax relief
- Injured spouse
- How to avoid losing tax refunds
- Creating equity: Mitigation of statutory limitations
- Protecting clients’ interests by giving them the same rights as the IRS
- Form 911: Taxpayer Assistance Order
- Asking the IRS to help in a crisis or emergency situation
- Quick release of a tax lien
- How to expedite the release of a harsh IRS action
Chapter 2 – Examination and Criminal Tax Procedure
- Hobby or business: delaying the IRS decision
- How to give clients time to prove that they are in a real business
- The nasty impact of preferential dividends
- The story of IRS adjustments that impacted multiple taxpayers
- Whose expense is it anyway?
- The simple and avoidable mistake that caused a tax fiasco
- Office-in-home and commuting expenses
- How one taxpayer lost the business use of his automobile
- Automobile mileage expenses: Fantasy or reality?
- A technique to determine realistic auto mileage use
- Choosing the right location: Office in home
- The tax impact of an employee renting his home to his employer
- What happens during an examination with an IRS revenue agent?
- An overview of the IRS examination process
- Reasonable fees for tax controversies
- The IRS requires tax practitioners to charge reasonable fees.
- The mystery unraveled: How the IRS selects returns for examination
- A look at the IRS’s examination criteria
- Barred deficiencies
- A look at general and restricted consents to extend the statute of limitations
- Indirect methods: The IRS approach to finding unreported income
- The IRS has the right to go beyond the books and records to determine correct income.
- Tax authority: On what can you rely?
- Reliable tax authorities for taking various tax positions
- Third party inquiries
- The method the IRS uses to secure information from third parties
- How to avoid accumulated earnings tax
- How to protect corporate clients from the egregious accumulated earnings tax
- Tax preparation dilemmas: Circular 230
- How far the practitioner must go to validate information used in the preparation of a tax return
- S corporation salaries
- A popular IRS adjustment
- Loans from officer-shareholders
- How to ensure that loan payments made by the business are not treated as salaries or dividends
- Tax crimes
- Techniques for dealing with the IRS Criminal Investigation Division
Chapter 3 – Appeals
- Preparing an IRS appeals protest letter
- How to prepare an adequate protest letter that will benefit the client
- Negotiating a settlement with the IRS
- Appeals officers have more authority than IRS examiners and are authorized to make settlements with taxpayers.
- Employee vs. independent contractor
- Determination of who is an employee and who is an independent contractor under §530
Chapter 4 – Technical Assistance
- Electing a fiscal year: S corporations
- How to correct an IRS error and avoid a loss of time and money
- Request for employment tax ruling
- Requesting the IRS to determine employment status
- Partnerships and their choices
- Partnership and LLC options when choosing tax-filing status
- Sources of technical assistance
- The IRS provides invaluable assistance to practitioners seeking information about specialized occupations and industries
- Abatement of IRS interest
- How to save a client money when the IRS has been dilatory
- 39. Useful phone numbers
- How to avoid wasting time when IRS telephone assistance is needed
- A road to survival: Creating a public charity
- A tactful approach to help certain clients achieve economic survival
- 41. Low income taxpayer clinics
- It may be hard to believe, but the IRS does give grants
- A qualified appraisal by a qualified appraiser
- The requirements for validating fair market value
Chapter 5 – Penalties
- IRS penalties: Is it permissible to make a mistake?
- IRS guidelines for avoiding and abating penalties
- Automatic abatement of late filing penalties for a partnership return
- The automatic abatement of a penalty
- Is it worth it to disclose a questionable position?
- The value of disclosing a questionable position on a tax return
- A simplified method for reporting tip income
- The IRS has devised methods to improve future compliance.
- Accused of promoting abusive tax shelters
- A tax practitioner receives an IRS letter that could wipe out his practice.
- Trusting the survival of a business to a payroll service
- The importance of exercising due diligence when delegating responsibility
- Inadequate records letter
- The ultimate form of criticism of a practitioner’s accounting skills
- Penalty for failure to make timely deposits
- What can happen when the IRS fails to get its money upfront and in a timely manner
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