Tag Archives: Tax Definitions

Circular 230

Circular 230

Circular 230 means: an U.S. Internal Revenue Service (IRS) publication that sets forth the requirements and responsibilities of professional preparers of tax returns. The statement details educational, ethical, and procedural guidelines.

Treasury Department Circular No. 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.

Treasury Department Circular 230 (Rev. 8-2011)
Treasury Department Circular 230 (Rev. 4-2008)
Treasury Department Circular 230 (Rev. 6-2005) (previous version, for archival or historical purposes only)

Contents of the Treasury Department Circular 230 (Rev. 6-2005)

Important Note: This is the old circular 230.

Title 31 Code of Federal Regulations, Subtitle A, Part 10, revised as of June 20, 2005
PART 10 — PRACTICE BEFORE THE INTERNAL REVENUE SERVICE
Sec.
10.0 Scope of part
Subpart A — Rules Governing Authority to Practice
10.1 Director of Practice
10.2 Definitions
10.3 Who may practice
10.4 Eligibility for enrollment
10.5 Application for enrollment
10.6 Enrollment
10.7 Representing oneself; participating in rulemaking; limited practice; special appearances; and return preparation
10.8 Customhouse brokers
Subpart B — Duties and Restrictions Relating to Practice Before the Internal Revenue Service
10.20 Information to be furnished
10.21 Knowledge of client’s omission
10.22 Diligence as to accuracy
10.23 Prompt disposition of pending matters
10.24 Assistance from or to disbarred or suspended persons and former Internal Revenue Service employees
10.25 Practice by former Government employees, their partners and their associates
10.26 Notaries
10.27 Fees
10.28 Return of client’s records
10.29 Conflicting interests
10.30 Solicitation
10.31 Negotiation of taxpayer checks
10.32 Practice of law
10.33 Best practices for tax advisors
10.34 Standards for advising with respect to tax return positions and for preparing or signing returns
10.35 Requirements for covered opinions
10.36 Procedures to ensure compliance
10.37 Requirements for other written advice
10.38 Establishment of advisory committees
Subpart C — Sanctions for Violation of the Regulations
10.50 Sanctions
10.51 Incompetence and disreputable conduct
10.52 Violation of regulations
10.53 Receipt of information concerning practitioner
Subpart D — Rules Applicable to Disciplinary Proceedings
10.60 Institution of proceeding
10.61 Conferences
10.62 Contents of complaint
10.63 Service of complaint; service and filing of other papers
10.64 Answer; default
10.65 Supplemental charges
10.66 Reply to answer
10.67 Proof; variance; amendment of pleadings
10.68 Motions and requests
10.69 Representation; ex parte communication
10.70 Administrative Law Judge
10.71 Hearings
10.72 Evidence
10.73 Depositions
10.74 Transcript
10.75 Proposed findings and conclusions
10.76 Decision of Administrative Law Judge
10.77 Appeal of decision of Administrative Law Judge
10.78 Decision on appeal
10.79 Effect of disbarment, suspension, or censure
10.80 Notice of disbarment, suspension, censure or disqualification
10.81 Petition for reinstatement
10.82 Expedited suspension upon criminal conviction or loss of license for cause
Subpart E — General Provisions
10.90 Records
10.91 Saving Clause
10.92 Special Orders
10.93 Effective date
Addendum

Circular 230 Issue

You may find information about Circular 230 in this Tax Platform of the American Encyclopedia of Law.

Grantor Trust

Grantor Trust

Grantor Trust means:
a trust that has beneficiaries other than the grantor but, because interests or certain powers over the trust, are retained, all income of the trust is taxed to the grantor. Former IRC (check if this IRC provision is current here) §§671-677.

Description and Definition of Grantor Trust

A trust in which the grantor retains some interest and control and as a result is taxed on any income from the trust.

Resources

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Further Reading

Audit

Tax Audit

Audit means: an examination and verification, in a taxation context, of a taxpayer’s books and records by the U.S. Internal Revenue Service. Examination and verification carried out by an outside agency (such as an accountancy firm or the tax authorities) of a taxpayer’s books and accountants and/or the general accuracy of returns and declarations, either as a routine operation, or where evasion is suspected. The examination can be conducted online or by correspondence, at the taxpayer’s home or place of business, or at an U.S. Internal Revenue Service (IRS) office. Former IRC (check if this IRC provision is current here) §6102.

The taxpayer is asked to prove that he or she has correctly reported his or her income and deductions. Most audits are done by mail and involve specific issues, not the entire return.

Tax Audits, Tax Collections, and trouble with the IRS

How long do I need to keep certain tax records?

Learn about the How long do I need to keep certain tax records? issue in this American Tax Encyclopedia.

How to avoid an IRS audit?

Learn about the How to avoid an IRS audit? issue in this American Tax Encyclopedia.

I received a tax notice from the IRS. What should I do?

Learn about the I received a tax notice from the IRS. What should I do? issue in this American Tax Encyclopedia.

I received a CP 2000 tax notice from the IRS. What should I do?

Learn about the I received a CP 2000 tax notice from the IRS. What should I do? issue in this American Tax Encyclopedia.

I just received an IRS tax notice that’s wrong?

Learn about the I just received an IRS tax notice that’s wrong? issue in this American Tax Encyclopedia.

What to do if there’s Form 1099 discrepancies?

Learn about the What to do if there’s Form 1099 discrepancies? issue in this American Tax Encyclopedia.

What are the tax penalties and interest? Can they be avoided?

Learn about the What are the tax penalties and interest? Can they be avoided? issue in this American Tax Encyclopedia.

How to prepare for an IRS audit?

Learn about the How to prepare for an IRS audit? issue in this American Tax Encyclopedia.

What are my appeal rights?

Learn about the What are my appeal rights? issue in this American Tax Encyclopedia.

How does the Bankruptcy Code affect tax obligations?

Learn about the How does the Bankruptcy Code affect tax obligations? issue in this American Tax Encyclopedia.

How does that Statute of Limitations affect tax obligations?

Learn about the How does that Statute of Limitations affect tax obligations? issue in this American Tax Encyclopedia.

What’s an Offer in Compromise?

Learn about the What’s an Offer in Compromise? issue in this American Tax Encyclopedia.

Is there any tax relief for Innocent Spouses?

Learn about the Is there any tax relief for Innocent Spouses? issue in this American Tax Encyclopedia.

I have not filed tax returns for several years. What should I do?

Learn about the I have not filed tax returns for several years. What should I do? issue in this American Tax Encyclopedia.

How to obtain an IRS Private Letter Ruling?

Learn about the How to obtain an IRS Private Letter Ruling? issue in this American Tax Encyclopedia.

The Taxpayer Bill of Rights

Learn about the The Taxpayer Bill of Rights issue in this American Tax Encyclopedia.

More Related about Tax Audits, Tax Collections, and trouble with the IRS

IRS Appeals

Learn about the IRS Appeals issue in this American Tax Encyclopedia.

IRS Problem Resolution Office

Learn about the IRS Problem Resolution Office issue in this American Tax Encyclopedia.

IRS Taxpayer Advocate

Learn about the IRS Taxpayer Advocate issue in this American Tax Encyclopedia.

How to avoid an IRS audit?

By Julian Block (2013), former IRS Special Agent and tax Editor of Mutual Funds Magazine.

Many Taxpayers fear an IRS audit. This topic will give you some tips on avoiding an IRS audit in the first place, or, if you’re already involved in an IRS audit, surviving it with a minimum loss. Recently, 150,000 taxpayers avoided an IRS audit when the IRS postponed plans to conduct line-by-line tax audits as part of its Taxpayer Compliance Measurement Program (TCMP). However, the decision to postpone the TCMP tax audits in no way affects the IRS’ standard tax auditing program. The IRS says most people are picked based on a computer analysis to determine which tax returns are most likely to be in error.

If you’re audited by the IRS this year, you won’t be alone. About 1.5 percent of all taxpayers are audited. As you can see, percentage wise, the IRS audits very few tax returns. Most tax returns singled out by the IRS for audit contain either tax deductions that appear to be too high in relationship to the person’s income, or tax items that are erroneous, tax items that require proof or an explanation, or are on the IRS’ list of hot tax issues. It is important that the IRS audits tax returns effectively, and the IRS puts a general fear in all taxpayers of being audited to encourage voluntary compliance with the income tax laws. The U.S. tax system depends on voluntary compliance. With today’s computers there are now more ways than ever that the IRS can monitor your tax compliance.

Although the IRS audit targets change with the times, below you’ll find some helpful hints as to which tax areas have commanded the IRS’ audit attention in recent years. There are a host of strategies you can use to ensure you aren’t selected for an IRS audit.

IRS Audit Statistics

  • Income for Tax Returns is: Less Than $25,000 . In this case, the Tax Returns Filed were 59,211,700 . The Tax Returns Examined were 1,076,945 . Therefore, the Percent Examined was: .81%
  • Income for Tax Returns is: $25,000 to $50,000 . In this case, the Tax Returns Filed were 27,263,000 . The Tax Returns Examined were 259,794 . Therefore, the Percent Examined was: .58%
  • Income for Tax Returns is: $50,000 to $100,000 . In this case, the Tax Returns Filed were 17,019,200 . The Tax Returns Examined were 196,582 . Therefore, the Percent Examined was: .62%
  • Income for Tax Returns is: Greater Than 100,000 . In this case, the Tax Returns Filed were 4,540,800 . The Tax Returns Examined were 129,32 . Therefore, the Percent Examined was: 1.66%
  • The High-Risk Tax Audit Areas

    The odds are low that your tax return will be picked for an IRS audit. The IRS does not have sufficient personnel and resources to examine every tax return, so the IRS selects those tax returns which, upon preliminary inspection, have high audit potential — those that are most likely to result in a substantial tax deficiency. In recent years, less than 2% of all individual income tax returns have been audited. However, your chances for an IRS audit are higher depending upon certain types of income, certain amounts of income, your profession, the types of transactions, and the types of tax deductions claimed on your tax return.

    High-Risk Tax Audit Areas – High Wages

    Generally, as your income increases, so does your chance of an IRS audit. The odds of an IRS audit for someone in the $25,000 to $100,000 income bracket are less than one in 100. For those making more than $100,000, the odds increase to more than one and one half in 100.

    Your chances of being audited by the IRS are greater under the following circumstances:

    You have large amounts of itemized deductions on your tax return that exceed IRS targets.
    You claim tax shelter investment losses on your tax return.
    You have complex investment or business expenses on your tax return.
    You own or work in a business which receives cash and/or tips in the ordinary course of business.
    Your business expenses are large in relation to your income on your tax return.
    You have rental expenses on your tax return.
    A prior IRS audit resulted in a tax deficiency.
    You have complex tax transactions without explanations on your tax return.
    You are a shareholder or partner in an audited partnership or corporation.
    You claim large cash contributions to charities in relation to your income on your tax return.
    An informant has given information to the IRS.

    You must report all your income, and you should take all your tax deductions, even if they increase your chances for an IRS audit. Don’t be scared off by these factors. However, also realize that your chances for an IRS audit do increase with certain tax items, and prepare your tax return accurately and completely.

    High-Risk Tax Audit Areas – Large Amounts of Itemized Tax Deductions

    If your itemized tax deductions on your tax return exceed a target range as set by the IRS, the chances of being audited by the IRS increase. This does not mean that you should not take tax deductions on your tax return that you are entitled to, but you should realize that your chances for an audit increase if your tax deductions exceed the averages for your income level.

    Another issue to consider is excessive itemized tax deductions on your tax return. The IRS doesn’t describe the criteria by which it determines when tax deductions are excessive. Some tax experts calculate average tax deductions by income, and use these figures as a rough benchmark to determine if a taxpayer’s tax deductions on his/her tax return exceed the norm.

    Tax experts caution that these averages may not be useful, since tax deductions vary widely by state and region. And the medical tax deductions, for instance, would by definition be much higher than the average taxpayer would take because the IRS data reflect cases where taxpayers had medical deductions exceeding 7.5% of their taxable income.

    You should take valid tax deductions on your tax return if they are amply backed up.

    High-Risk Tax Audit Areas – High DIF

    When your tax return is filed, IRS computers compare it against the national Discriminate Information Function (DIF) system average. The IRS calculates the DIF score by using a closely-guarded formula. Tax returns with the highest DIF scores are scrutinized by experienced IRS examining officers who determine which tax returns provide the best chance for collecting additional taxes, interest, and tax penalties.

    High-Risk Tax Audit Areas – Unreported Taxable Income

    Unreported taxable income is a common red flag. The IRS discovers unreported taxable income when its computers match the taxable income you reported on your tax return with information gathered from banks and others. For example, if you failed to report on your tax return the interest earned on your bank savings account, the IRS typically will catch you when it matches the bank’s interest payment records, called 1099 forms, against your tax return.

    One good way to make sure you don’t miss unreported taxable income is to review last year’s tax return to make sure you have 1099’s, etc. from mutual funds, banks and other sources.

    The IRS electronically matches the figures you report for dividends, interest, securities transactions and other taxable income with tax information supplied by banks, brokerage firms, and other payers. To avoid problems, it’s best to report your dividend and interest income exactly as it appears on your 1099 forms and make adjustments on the tax return if the numbers are incorrect. If your brokerage account files a 1099 for all your dividends, don’t list separate amounts on your tax return. By the same token, if you receive separate 1099s, don’t report your taxable earnings in one lump sum.

    High-Risk Tax Audit Areas – Self Employment

    Because the IRS believes most under-reporting of taxable income and abuse of tax deductions occurs among those who are self employed, these individuals are audited by the IRS far more frequently than employees collecting a salary. The same holds true for taxicab drivers, waiters and waitresses, and others who traditionally receive payment in cash. Also, the IRS will sometimes conduct tests of certain individuals to determine if a taxpayer’s reported taxable income can support his or her lifestyle.

    The IRS publishes manuals to familiarize its auditors with about 100 different businesses, particularly ones that have a high number of self employed individuals. These guides, which are available to the general public, can help you pinpoint what auditors are looking for and how best to protect yourself. To learn if a guide is available for your business click here:
    Audit Guides or call the IRS Freedom of Information Act Reading Room at (202) 622-5164, or write Box 795, Ben Franklin Station, Washington, DC 20044.

    High-Risk Tax Audit Areas – Home Office Tax Deductions

    Home office tax deductions have been targeted by the IRS. Since the tax rules for deducting home office expenses on your tax return are complicated, you should consult a tax expert, such as a CPA, to determine whether you qualify to deduct home office expenses on your tax return.

    A good example is the office in the home. By claiming such an item on your tax return, you increase your chances for an IRS audit. However, if you’re clearly entitled to claim the office in the home on your tax return under the tax rules, then you should do it if it’s substantial enough to make a tax difference. However, if the tax savings are minimal, then it may be wise not to claim the tax deduction at all.

    High-Risk Tax Audit Areas – Unreported alimony

    Over the years, the IRS has found that not all taxpayers report alimony receipts as taxable income. As a result, the IRS now matches tax deductions for alimony payments by one former spouse with the taxable alimony income reported by the other.

    High-Risk Tax Audit Areas – Automobile Logs

    One of the biggest and most commonly audited items by the IRS for individuals in their own business, and employees of companies who use their car in business, is the tax deduction for business transportation. It is important that you keep good records of all tax deductible automobile expenses and a mileage log showing business miles driven.

    Also, try to keep a daily log of business mileage. Ideally, such log would show the date, beginning and ending odometer readings, the location, the business purpose, and the client. Such detail is hard for today’s business person to keep, but it’s important to have something in writing in case you’re audited. At a minimum, make sure you write down the automobile’s odometer reading at the beginning and the end of the tax year and have a daily record that you could go back to and use to reconstruct a claimed business mileage tax deduction on your tax return.

    Self-defense pays off

    You should take every tax deduction you’re entitled to on your tax return, and you should not be frightened by the potential of an IRS tax audit. However, you must exercise common sense and weigh the risk you are taking by claiming or using certain tax deductions on your tax return with the reward that you receive in terms of tax savings.

    Don’t be frightened by the chance for an IRS tax audit since it is slight, but also don’t randomly increase your chances for an IRS tax audit with items that have minimal tax benefit to you. Use your own judgment and common sense along with the advice of your tax professionals.

    CPAs say the best way to avoid a tax audit is to file a complete and accurate tax return. Double check your math, and make sure you have used the correct IRS tax forms and IRS tax schedules. And if you think the IRS may question a large tax deduction or tax credit, attach an explanation to your tax return when you file it.

    IRS tax publications about avoiding an IRS tax audit

    For further information on the appeals process, refer to Tax Topic 151, Your Appeal Rights. Also see IRS Publication 1,Your Rights as a Taxpayer, IRS tax Publication 5, Appeal Rights, IRS Publication 556, Examination of Returns, Appeal Rights.., and IRS Publication 17, Your Federal Income Tax.

    Description and Definition of Audit

    An audit, in reference to U.S. federal income taxes, is an IRS examination of your tax return. It is generally limited to a three-year period after you file by the statute of limitations.

    Audit Issue

    You may find information about Audit in this Tax Platform of the American Encyclopedia of Law.

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    Further Reading

    Resources

    See Also

    See Offshore Bank in the American Encyclopedia and Offshore Bank in the World Encyclopedia.

    See Tax Evasion in the U.S. Encyclopedia of Law and Tax Evasion in the World Encyclopedia of Law.

    Tax-sheltered Annuity

    Tax-sheltered Annuity

    Tax-sheltered Annuity means:
    a retirement plan invested in annuities or a mutual fund custodial account for employees of a public school system or an exempt educational, charitable, or religious organization. The employee's rights must be nonforfeitable, and the retirement plan must follow the qualified plan nondiscrimination and compensation rules. Employer contributions to a tax-sheltered annuity are excludable from an employee's income to an extent based on a percentage of annual compensation and years of service. Former IRC (check if this IRC provision is current here) §403(a).

    Description and Definition of Tax Sheltered Annuity

    A retirement annuity offered to employees of tax-exempt organizations and educational systems. Also known as a Section 403(b) plan. Generally, the plan is funded by employee salary reduction contributions and it's earnings are tax deferred until withdrawal.

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    Severance Pay

    Severance Pay

    Severance Pay means:
    an income bridge provided by some employers for employees going from employment to unemployment. Severance pay is taxable in the year received.

    Description and Definition of Severance Pay

    Money paid by an employer at the end of employment. Severance pay is taxable.

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    Wash Sale

    Wash Sale

    Wash Sale means:
    a sale or other disposition of stock or securities at a loss accompanied by a purchase of substantially identical stock or securities during a period beginning 30 days before the date of sale or other disposition and ending 30 days after that date-a total of 61 days. The taxpayer is denied a tax deduction for any loss incurred on a wash sale. If the disposition during the 61-day period is at a gain, it is not a wash sale, and the gain will be taxable. This rule does not apply to individuals who are traders or dealers in securities or to corporations that are dealers in securities if the sale or other disposition is made in the ordinary course of their businesses. When a loss is disallowed because of its being a wash sale, the basis of the substantially identical stock or securities acquired during the 6l-day period is the cost thereof plus the amount of the loss disallowed. Former IRC (check if this IRC provision is current here) §1091.

    Description and Definition of Wash Sale

    The sale and repurchase of securities within 30 days. Sales on which losses are disallowed because you recover your market position within a 61-day period. If you sell stock at a loss and purchase substantially identical stock within 30 days before or after the sale you cannot claim the loss for tax purposes. The law forbids the deduction of the loss.

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    Bond

    Bond

    Bond means:
    an obligation to pay. Most federal, municipal, and corporate bonds pay interest twice a year (semiannually). Interest on municipal bonds is generally nontaxable for federal income tax purposes and in the municipality of issue. Interest on federal government bonds is taxable for federal purposes but tax-free for state income tax purposes. Corporate bond interest is generally fully taxable. Former IRC (check if this IRC provision is current here) §§150(a)(l) and 171(d).

    U.S. and other Developed Countries International Tax Meaning

    Interest-bearing debt obligation to a government or entrepreneur. The rate of interest is usually fixed.

    See the entries Income Tax and State Income Tax in the American Encyclopedia of Law.

    Description and Definition of Bond

    A written promise to repay a loan plus interest. Bonds usually have a maturity of more than one year. If you invest in bonds you will usually receive interest twice a year. Investors can buy bonds from a company or government entity, essentially loaning the company or government money. Municipal bonds are federal income tax free.

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    Applicable Federal Rate

    Applicable Federal Rate

    Applicable Federal Rate means:
    an interest rate determined monthly and based on the rate paid by the federal government on borrowed funds. An AFR is provided for short-term, mid-term, and long-term debt. If a seller-financed mortgage provides a rate that is less than the AFR, interest will be imputed at the AFR. Former IRC (check if this IRC provision is current here) § 1274(d).

    See also other Tax Terms and Definitions in U.S.A.

    below-market loan.

    Description and Definition of Applicable Federal Rate

    The Applicable Federal Rate is the interest rate fixed by the U.S. Treasury Department for determining imputed interest. If you are receiving or making payments for a loan or installment sale, but little or no interest is stated on the contract, the IRS assumes a rate of interest based on the published applicable federal rate.

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    Foreign Earned Income Exclusion

    Foreign Earned Income Exclusion

    Foreign Earned Income Exclusion means:
    an allowed exclusion of up to $70,000 of foreign earned income by a qualifying person working abroad for at least 330 full days out of any period of 12 consecutive months. The person must have a tax home in a foreign country and meet either a bona fide residence test or a physical presence test. Former IRC (check if this IRC provision is current here) §911(a)(1).

    Description and Definition of Foreign Earned Income Exclusion

    Up to $72,000 of foreign earned income is exempt from tax if a foreign residence or physical presence test is met.

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    Disposition

    Disposition

    Disposition means:
    a transaction, such as a sale, that gives rise to a gain or loss under Former IRC (check if this IRC provision is current here) §1001.

    Disposable Earnings and California Tax

    For more information about taxes in California, click here.

    Description and Definition of Disposition

    The sale, exchange, or other disposition of property that causes a gain or a loss. Dispositions include like-kind exchanges and involuntary conversions.

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