Essentials of Federal Taxation 2016 Edition 7th Edition Spilker Solutions Manual

Essentials of Federal Taxation 2016

Edition 7th Edition Spilker Solutions
Manual
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 Solutions Manual – McGraw-Hill’s Taxation

(5) [LO2] Explain the difference between the DIF system and the National Research
Program. How do they relate to each other?

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
 Solutions Manual – McGraw-Hill’s Taxation

The DIF system is basically a scoring system that assigns a score to each tax
return that represents the probability that the tax liability on the return has
been underreported (i.e., a higher score, a higher likelihood of
underreporting). The IRS derives the weights assigned to specific tax return
attributes from historical IRS audit adjustment data from the National
Research Program (NRP).

The NRP analyzes randomly selected returns to ensure that the DIF scorings
are representative of the population of tax returns. The DIF system then
uses these (undisclosed) weights to score each tax return based on the tax
return’s characteristics. Returns with higher DIF scores are then reviewed
to determine if an audit is the best course of action.

(6) [LO2] Describe the differences between the three types of audits in terms of their
scope and taxpayer type.

The three types of IRS audits consist of correspondence, office, and field
examinations. Correspondence examinations are the most common. These
audits (as the name suggests) are conducted by mail and generally are limited
to one or two items on the taxpayer’s return. Among the three types of
audits, correspondence audits are generally the most narrow in scope and
least complex.

Office examinations are the second most common audit. As the name
suggests, the IRS conducts these audits at the local IRS office. These audits
are typically broader in scope and more complex than correspondence
examinations. Small businesses, taxpayers operating sole proprietorships,
and middle to high-income individual taxpayers are likely candidates for
office examinations. In these examinations, the taxpayer receives a notice
that identifies the items subject to audit, requests substantiation for these
items as necessary, and notifies the taxpayer of the date, time, and location of
the exam. Taxpayers may attend the examination alone, or simply let their
tax adviser or attorney attend on the taxpayer’s behalf.

Field examinations are the least common audit. The IRS conducts these
audits at the taxpayer’s office (i.e., place of business), or the location where
the taxpayer’s books, records and source documents are maintained. Field
examinations are generally the broadest in scope and most complex of the
three audit types. They can last many months to multiple years and
generally are limited to business returns and the most complex individual
returns.

(7) [LO2] Simon just received a 30-day letter from the IRS indicating a proposed
assessment. Does he have to pay the additional tax? What are his options?

Simon does not have to pay the additional tax at this time. The 30-day letter

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
 Solutions Manual – McGraw-Hill’s Taxation

instructs the taxpayer that he or she has 30 days (1) to request a conference
with an appeals officer, who is independent (resides in a separate IRS
division) from the examining agent or (2) to agree to the proposed
adjustment. If the taxpayer chooses to go to the appeals conference and
reaches an agreement with the IRS at the appeals conference, the taxpayer
can then sign the Form 870. If the taxpayer and IRS do not agree on the
proposed adjustment at the appeals conference, or the taxpayer chooses not
to request an appeals conference, the IRS will then send the taxpayer a 90-
day letter (statutory notice of deficiency).

(8) [LO2] Compare and contrast the three trial-level courts.

The U.S. District Court is the only court that provides for a jury trial; the
U.S. Tax Court is the only court that allows tax cases to be heard before the
taxpayer pays the disputed liability and the only court with a small claims
division (hearing claims involving disputed liabilities of $50,000 or less); the
U.S. Tax Court judges are tax experts, whereas the U.S. District Court and
U.S. Court of Federal Claims judges are generalists. Both the U.S. Tax
Court and local U.S. District Court cases appeal to the specific circuit court
based on the taxpayer’s residence. In contrast, all U.S. Court of Federal
Claims cases appeal to the U.S. Circuit Court of Appeals for the Federal
Circuit.

(9) [LO3] Compare and contrast the three types of tax law sources and give examples
of each.

The three types of tax law sources include statutory authority issued by
Congress (e.g., the Internal Revenue Code, committee reports), judicial
authority (i.e., rulings by the U.S. District Court, U.S. Tax Court, U.S. Court
of Federal Claims, U.S. Circuit Court of Appeals, or U.S. Supreme Court),
and administrative authority (e.g., regulations, revenue rulings, and revenue
procedures). In addition to being issued by different groups, the format and
purposes of each of these authorities are different. Whereas statutory
authorities are tax laws enacted by Congress, judicial and administrative
authorities generally interpret enacted tax laws.

(10) [LO3] The U.S. Constitution is the highest tax authority but provides very little
in the way of tax laws. What are the next highest tax authorities beneath the U.S.
Constitution?

The Internal Revenue Code of 1986 and Supreme Court decisions represent
the highest tax authority beneath the U.S. Constitution. However, the
Supreme Court does not establish law, but instead, simply interprets and
applies the Code (and other authorities).

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
 Solutions Manual – McGraw-Hill’s Taxation

(11) [LO3] Jackie has just opened her copy of the Code for the first time. She looks
at the table of contents and wonders why it is organized the way it is. She
questions whether it makes sense to try and understand the Code’s organization.
What are some reasons why understanding the organization of the Internal
Revenue Code may prove useful?

One must understand the organization of a code section (i.e., into

subsections, paragraphs, subparagraphs, and clauses) to be able to cite the
respective law correctly (e.g., IRC Sec. 162(b)(2)). Many provisions in the
Code apply only to specific parts of the Code. If one does not understand
what laws are encompassed in the chapter, it would be very difficult to
interpret the code section and determine its applicability to a research
question. Finally, the Code has been arranged such that, in general, similar
code sections are grouped together. Understanding this organization allows
the researcher to be much more efficient in locating relevant code sections.

(12) [LO3] Laura Li, a U.S. resident, works for three months this summer in Hong
Kong. What type of tax authority may be especially useful in determining the tax
consequences of her foreign income?

The tax treaty between the U.S. and Hong Kong.

(13) [LO3] What are the basic differences between regulations, revenue rulings, and
private letter rulings?

Regulations are the Treasury Department’s official interpretation of the

Internal Revenue Code and have the highest authoritative weight among
regulations, revenue rulings, and private letter rulings. Regulations are
issued in three different forms: proposed, temporary, and final. In addition
to being issued in three different forms, regulations also serve three basic
purposes: interpretative, procedural, and legislative. Unlike regulations,
revenue rulings address the specific application of the Code and regulations
to a specific factual situation. Thus, while revenue rulings have less
authoritative weight, they provide a much more detailed interpretation of the
Code as it applies to a specific transaction and fact pattern. Letter rulings
are less authoritative but more specific than revenue rulings and regulations.
Letter rulings generally may not be used as precedent by taxpayers.
However, they may be cited as authority to avoid the substantial
understatement of tax penalty under IRC Sec. 6662 imposed on taxpayers
and related tax practitioner penalty under IRC Sec. 6694. Private letter
rulings represent the IRS’s application of the Code and other tax authorities
to a specific transaction and taxpayer. Private letter rulings are issued in
response to a taxpayer request and are common for proposed transactions
with potentially large tax implications.

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
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