Taxation of Individuals 5th Edition Spilker Solutions Manual

Taxation of Individuals 5th Edition

Spilker Solutions Manual
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Taxation of Individuals 5th Edition Spilker Solutions Manual

Chapter 02 - Tax Compliance, the IRS, and Tax Authorities

Chapter 2
Tax Compliance, the IRS, and Tax Authorities

SOLUTIONS MANUAL

Discussion Questions

(1) [LO1] Name three factors that determine whether a taxpayer is required to file a tax
return.

Filing status (e.g., single, married filing joint, etc.), age, and the taxpayer’s gross
income.

(2) [LO1] Benita is concerned that she will not be able to complete her tax return by
April 15. Can she request an extension to file her return? By what date must she do
so? If so, what is the latest date that she could file her return this year without
penalty?

Benita can file an automatic six month extension to file her tax return. This
extension must be filed by April 15th. October 15th is the latest date she can
file her return without penalty. If October 15th falls on a Saturday, Sunday, or
holiday, the extended due date will be the 1st day after October 15th that is not
a Saturday, Sunday, or holiday.

(3) [LO1] Agua Linda, Inc., is a calendar-year corporation. What is the original due date
for the corporate tax return? What happens if the original due date falls on a
Saturday?

The original due date for Agua Linda, Inc.’s corporate tax return is March
15th. If the 15th falls on a Saturday, Sunday, or holiday, the due date will be
the 1st day after March 15th that is not a Saturday, Sunday, or holiday. In this
example, Agua Linda, Inc.’s due date is March 17th (i.e., the Monday after
Saturday the 15th).

(4) [LO2] Approximately what percentage of tax returns does the IRS audit? What are
the implications of this number for the IRS’s strategy in selecting returns for audit?

Currently, less than 2 percent of all tax returns are audited. The IRS must be
strategic in selecting returns for audit in an effort to promote the highest level
of voluntary taxpayer compliance.

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

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Chapter 02 - Tax Compliance, the IRS, and Tax Authorities

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?

2-2
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Chapter 02 - Tax Compliance, the IRS, and Tax Authorities

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

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