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Unformatted text preview: 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 taxpayers 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 IRSs 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? 2-1 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 returns characteristics. Returns with higher DIF scores are then reviewed to determine if an audit is the best course of action....
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- Fall '10