Taxchapter2.docx

Taxchapter2.docx

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Taxchapter2

Chapter2

TaxCompliance,theIRS,andTaxAuthorities

SOLUTIONSMANUAL

DiscussionQuestions:

（1）[LO1]Namethreefactorsthatdeterminewhetherataxpayerisrequiredtofileataxreturn.

Filingstatus（e.g.,single,marriedfilingjoint,etc.）,age,andthetaxpayer’sgrossincome.

（2）[LO1]BenitaisconcernedthatshewillnotbeabletocompletehertaxreturnbyApril15.Cansherequestanextensiontofileherreturn?

Bywhatdatemustshedoso?

Ifso,whatisthelatestdatethatshecouldfileherreturnthisyearwithoutpenalty?

Benitacanfileanautomaticsixmonthextensiontofilehertaxreturn.ThisextensionmustbefiledbyApril15th.October15thisthelatestdateshecanfileherreturnwithoutpenalty.IfOctober15thfallsonaSaturday,Sunday,orholiday,theextendedduedatewillbethe1stdayafterOctober15ththatisnotaSaturday,Sunday,orholiday.

（3）[LO1]AguaLinda,Inc.,isacalendar-yearcorporation.Whatistheoriginalduedateforthecorporatetaxreturn?

WhathappensiftheoriginalduedatefallsonaSaturday?

TheoriginalduedateforAguaLinda,Inc.’scorporatetaxreturnisMarch15th.Ifthe15thfallsonaSaturday,Sunday,orholiday,theduedatewillbethe1stdayafterMarch15ththatisnotaSaturday,Sunday,orholiday.Inthisexample,AguaLinda,Inc.’sduedateisMarch17th（i.e.,theMondayafterSaturdaythe15th）.

（4）[LO2]ApproximatelywhatpercentageoftaxreturnsdoestheIRSaudit?

WhataretheimplicationsofthisnumberfortheIRS’sstrategyinselectingreturnsforaudit?

Currently,lessthan2percentofalltaxreturnsareaudited.TheIRSmustbestrategicinselectingreturnsforauditinanefforttopromotethehighestlevelofvoluntarytaxpayercompliance.

（5）[LO2]ExplainthedifferencebetweentheDIFsystemandtheNationalResearchProgram?

Howdotheyrelatetoeachother?

（6）

TheDIFsystemisbasicallyascoringsystemthatassignsascoretoeachtaxreturnthatrepresentstheprobabilitythatthetaxliabilityonthereturnhasbeenunderreported（i.e.,ahigherscore,ahigherlikelihoodofunderreporting）.TheIRSderivestheweightsassignedtospecifictaxreturnattributesfromhistoricalIRSauditadjustmentdatafromtheNationalResearchProgram（NRP）.

TheNRPanalyzesrandomlyselectedreturnstoensurethattheDIFscoringsarerepresentativeofthepopulationoftaxreturns.TheDIFsystemthenusesthese（undisclosed）weightstoscoreeachtaxreturnbasedonthetaxreturn’scharacteristics.ReturnswithhigherDIFscoresarethenreviewedtodetermineifanauditisthebestcourseofaction.

（7）[LO2]Describethedifferencesbetweenthethreetypesofauditsintermsoftheirscopeandtaxpayertype.

ThethreetypesofIRSauditsconsistofcorrespondence,office,andfieldexaminations.Correspondenceexaminationsarethemostcommon.Theseaudits（asthenamesuggests）areconductedbymailandgenerallyarelimitedtooneortwoitemsonthetaxpayer’sreturn.Amongthethreetypesofaudits,correspondenceauditsaregenerallythemostnarrowinscopeandleastcomplex.

Officeexaminationsarethesecondmostcommonaudit.Asthenamesuggests,theIRSconductstheseauditsatthelocalIRSoffice.Theseauditsaretypicallybroaderinscopeandmorecomplexthancorrespondenceexaminations.Smallbusinesses,taxpayersoperatingsoleproprietorships,andmiddletohigh-incomeindividualtaxpayersarelikelycandidatesforofficeexaminations.Intheseexaminations,thetaxpayerreceivesanoticethatidentifiestheitemssubjecttoaudit,requestssubstantiationfortheseitemsasnecessary,andnotifiesthetaxpayerofthedate,time,andlocationoftheexam.Taxpayersmayattendtheexaminationaloneorwithrepresentation（e.g.,taxadviser,attorney,etc.）.

Fieldexaminationsaretheleastcommonaudit.TheIRSconductstheseauditsatthetaxpayer’soffice（i.e.,placeofbusiness）,orthelocationwherethetaxpayer’sbooks,recordsandsourcedocumentsaremaintained.Fieldexaminationsaregenerallythebroadestinscopeandmostcomplexofthethreeaudittypes.Theycanlastmanymonthstomultipleyearsandgenerallyarelimitedtobusinessreturnsandthemostcomplexindividualreturns.

（8）[LO2]Simonjustreceiveda30-dayletterfromtheIRSindicatingaproposedassessment.Doeshehavetopaytheadditionaltax?

Whatarehisoptions?

Simondoesnothavetopaytheadditionaltaxatthistime.The30-dayletter

instructsthetaxpayerthatheorshehas30days

（1）torequestaconferencewithanappealsofficer,whoisindependent（residesinaseparateIRSdivision）fromtheexaminingagentor

（2）toagreetotheproposedadjustment.IfthetaxpayerchoosestogototheappealsconferenceandreachesanagreementwiththeIRSattheappealsconference,thetaxpayercanthensigntheForm870.IfthetaxpayerandIRSdonotagreeontheproposedadjustmentattheappealsconference,orthetaxpayerchoosesnottorequestanappealsconference,theIRSwillthensendthetaxpayera90-dayletter（statutorynoticeofdeficiency）.

（9）[LO2]Compareandcontrastthethreetrial-levelcourts.

TheU.S.DistrictCourtistheonlycourtthatprovidesforajurytrial;theU.S.TaxCourtistheonlycourtthatallowstaxcasestobeheardbeforethetaxpayerpaysthedisputedliabilityandtheonlycourtwithasmallclaimsdivision（hearingclaimsinvolvingdisputedliabilitiesof$50,000orless）;theU.S.TaxCourtjudgesaretaxexperts,whereastheU.S.DistrictCourtandU.S.CourtofFederalClaimsjudgesaregeneralists.BoththeU.S.TaxCourtandlocalU.S.DistrictCourtcasesappealtothespecificcircuitcourtbasedonthetaxpayer’sresidence.Incontrast,allU.S.CourtofFederalClaimscasesappealtotheU.S.CircuitCourtofAppealsfortheFederalCircuit.

（10）[LO3]Compareandcontrastthethreetypesoftaxlawsourcesandgiveexamplesofeach.

ThethreetypesoftaxlawsourcesincludestatutoryauthorityissuedbyCongress（e.g.,theInternalRevenueCode,committeereports）,judicialauthority（i.e.,rulingsbytheU.S.DistrictCourt,U.S.TaxCourt,U.S.CourtofFederalClaims,U.S.CircuitCourtofAppeals,orU.S.SupremeCourt）,andadministrativeauthority（e.g.,regulations,revenuerulings,andrevenueprocedures）.Inadditiontobeingissuedbydifferentgroups,theformatandpurposesofeachoftheseauthoritiesaredifferent.WhereasstatutoryauthoritiesaretaxlawsenactedbyCongress,judicialandadministrativeauthoritiesgenerallyinterpretenactedtaxlaws.

（11）[LO3]TheConstitutionisthehighesttaxauthoritybutprovidesverylittleinthewayoftaxlaws.WhatarethenexthighesttaxauthoritiesbeneaththeU.S.Constitution?

TheInternalRevenueCodeof1986andSupremeCourtdecisionsrepresentthehighesttaxauthoritybeneaththeU.S.Constitution.However,theSupremeCourtdoesnotestablishlaw,butinstead,simplyinterpretsandappliestheCode（andotherauthorities）.

（12）[LO3]JackiehasjustopenedherCodeforthefirsttime.ShelooksatthetableofcontentsandwonderswhytheCodeisorganizedthewayitis.Shequestions

whetheritmakessensetotryandunderstandtheCode’sorganization.WhataresomereasonswhyunderstandingtheorganizationoftheInternalRevenueCodemayproveuseful?

Onemustunderstandtheorganizationofacodesection（i.e.,intosubsections,paragraphs,subparagraphs,andclauses）tobeabletocitetherespectivelawcorrectly（e.g.,IRCSec.162（b）

（2））.ManyprovisionsintheCodeapplyonlytospecificpartsoftheCode.Ifonedoesnotunderstandwhatlawsareencompassedinthechapter,itwouldbeverydifficulttointerpretthecodesectionanddetermineitsapplicabilitytoaresearchquestion.Finally,theCodehasbeenarrangedsuchthat,ingeneral,similarcodesectionsaregroupedtogether.Understandingthisorganizationallowstheresearchertobemuchmoreefficientinlocatingrelevantcodesections.

（13）[LO3]LauraLi,aU.S.resident,worksforthreemonthsthissummerinHongKong.Whattypeoftaxauthoritymaybeespeciallyusefulindeterminingthetaxconsequencesofherforeignincome?

ThetaxtreatybetweentheU.S.andHongKong.

（14）[LO3]Whatarethebasicdifferencesbetweenregulations,revenuerulings,andprivateletterrulings?

RegulationsaretheTreasuryDepartment’sofficialinterpretationoftheInternalRevenueCodeandhavethehighestauthoritativeweight.Regulationsareissuedinthreedifferentforms:

proposed,temporary,andfinal.Inadditiontobeingissuedinthreedifferentforms,regulationsalsoservethreebasicpurposes:

interpretative,procedural,andlegislative.Unlikeregulations,revenuerulingsaddressthespecificapplicationoftheCodeandregulationstoaspecificfactualsituation.Thus,whilerevenuerulingshavelessauthoritativeweight,theyprovideamuchmoredetailedinterpretationoftheCodeasitappliestoaspecifictransactionandfactpattern.Letterrulingsarelessauthoritativebutmorespecificthanrevenuerulingsandregulations.PrivateletterrulingsrepresenttheIRS’sapplicationoftheCodeandothertaxauthoritiestoaspecifictransactionandtaxpayer.Privateletterrulingsareissuedinresponsetoataxpayerrequestandarecommonforproposedtransactionswithpotentiallylargetaximplications.

（15）[LO3]UnderwhatcircumstanceswouldtheIRSissueanacquiescence?

anonacquiescence?

Anactionordecision?

ExceptforSupremeCourtcases,whenevertheIRSloses,itmayissueanacquiescenceornonacquiescenceasguidanceforhowtheIRSintendstorespondtotheloss.AlthoughanacquiescenceindicatesthattheIRShasdecidedto“follow”thecourt’sadverserulinginthefuture,itdoesnotmean

thattheIRSagreeswith