Chapter 2 Flashcards
Molto Stancha Corporation had zero earnings this fiscal year; in fact, it lost money. Must the corporation file a tax return?
Yes, all corporations are required to file an income tax return regardless of their taxable income.
Ahmed does not have enough cash on hand to pay his taxes. He was excited to hear that he can request an extension to file his tax return. Does this solve his problem? What are the ramifications if he doesn’t pay his tax liability by April 15?
Extensions allow the taxpayer to delay filing a tax return but do not extend the due date for tax payments.
If a taxpayer fails to pay the entire balance of tax owed by the original due date of the tax return, the IRS charges the taxpayer interest on the underpayment from the due date of the return until the taxpayer pays the tax. The interest rate charged depends on taxpayer type (e.g., individual vs. corporation) and varies quarterly with the federal short-term interest rate. The interest rate for tax underpayments for individuals equals the federal short-term rate plus three percentage points.
Latoya filed her tax return on February 10th this year. When will the statute of limitations expire for this tax return?
The statute of limitations generally ends three years from the later of (i) the date the tax return was actually filed (3 years from February 10th of this year) or (ii) the tax return’s original due date (3 years from April 15th of this year). Accordingly, Latoya’s statute of limitations for the tax return will end 3 years from April 15th.
Using the facts from the previous problem, how would your answer change if Latoya understated her income by 40 percent? How would your answer change if Latoya intentionally failed to report as taxable income any cash payments she received from her clients.
A six-year statute of limitations applies to IRS assessments if the taxpayer omits items of gross income that exceed 25 percent of the gross income reported on the tax return. Thus, Latoya’s statute of limitations would end 6 years from April 15th if she understated her income by 40 percent. The statute of limitations remains open indefinitely for fraudulent returns (e.g., if Latoya intentionally fails to report cash payments received as income).
Jamarcus, a full-time student, earned $2,500 this year from a summer job. He had no other income this year and will have zero federal income tax liability this year. His employer withheld $300 of federal income tax from his summer pay. Is Jamarcus required to file a tax return? Should Jamarcus file a tax return?
Jamarcus is not required to file an income tax return because his gross income of $2,500 is well below the gross income threshold for a single taxpayer. However, he should file a tax return to receive a refund of the $300 previously withheld.
Yong’s tax return was audited because he calculated his tax liability incorrectly. What IRS audit procedure identified his tax return for audit?
All returns are checked for mathematical and tax calculation errors. This process is referred to as the document perfection program.
Randy deducted a high level of itemized deductions two years ago relative to his income level. He recently received an IRS notice requesting documentation for his itemized deductions. What audit procedure likely identified his tax return for audit?
The Discriminant Function System (DIF system). The IRS likely selected Randy’s return for audit because his high level of itemized deductions relative to his income resulted in a high DIF score.
Campbell’s tax return was audited because she failed to report interest she earned on her tax return. What IRS audit selection method identified her tax return?
Information matching. This program compares the taxpayer’s tax return to information submitted to the IRS from other taxpayers (banks, employers, mutual funds, brokerage companies, mortgage companies, etc). Information matched includes items such as wages (Form W-2 submitted by employers), interest income (Form 1099-INT submitted by banks), dividend income (Form 1099-DIV submitted by brokerage companies, etc.), etc
Paula could not reach an agreement with the IRS at her appeals conference and has just received a 90-day letter. If she wants to litigate the issue but does not have sufficient cash to pay the proposed deficiency, what is her best court choice?
The U.S. Tax Court, the only court that allows tax cases to be heard before the taxpayer pays the disputed liability.
