SOLUTIONS MANUAL - Copyright © 2018 McGraw-Hill Education. All r...

Solutions Manual – McGraw-Hill’s Taxation Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.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? Assuming she requests an extension, 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 April 15th. If the 15th falls on a Saturday, Sunday, or holiday, the due date will be the 1st day after April 15th that is not a Saturday, Sunday, or holiday. In this example, Agua Linda, Inc.’s due date is April 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?Taxation of Individuals 2018 Edition 9th Edition Spilker Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Solutions Manual – McGraw-Hill’s Taxation Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.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

Solutions Manual – McGraw-Hill’s Taxation Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.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).

Solutions Manual – McGraw-Hill’s Taxation Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.(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.