Chapter 6 Flashcards
What is direct method
this is the transaction method - involves probing missing income by pointing to specific items not on the tax return
What is indirect method
This is the method that uses the economic reality and financial status techniques - reconstructed through circumstantial evidence
Ketler case
didn’t - files returns for 2 years. It was reconstructed using 1099 - this was a bank deposit analysis
Economic reality lifestyle audits
these are indirect techniques - started in 1995 - used too much - so congress limited their use.
minimum income probes
this is used of individuals to see if these have the minimum amount of income to file. Look if there is unreported income - if non then it is satisfied
Lifestyle probe
auditing is like an iceberg - look at
attitudes feelings values norms interaciosn suportivenes satidfaction
behaviors is very important.
Listening
great tool - can learn a lot from hanging around the water cooler.
Lindquist -
you have got to have knowledge of fraud - how it looks and works - you are a bloodhound
lifestyle things that indicate fraud and unreported income
home, cars, boats , private education, vacations
cautions about lifestyle s
could happen because of debt or inheritance
Ames
US traitor - FBI had lavish lifestyle and no one suspected
Howard David advice
- find out who did it be creative - think like a fraudster do not be predictable Fraud often involves conspiracy I/C lapses occur when people are out of their normal routine
when do you use indirect method
when there are inadequate books and records or they don’t show the taxable income
What are the 4 indirect methods
C E N B
1 - cash T
2 source and application of funds
3 - net worth
4 - bank deposits
used on a case by case basis - one does not work for all
market specialization program
This trains examiners in different areas so they become highly specialized
You can use the audit technique guides
How does cash t work
Cash in ———- cash out - find understatement’’
What is the funds method
expenditure method -
- List application of funds first
- Subtract the source
If cash sources are greater than cash receipts - the difference equal unreported income
What is the net worth method
Indirect method
What are the 6 elements of a valid contract
OACCW
Offer Acceptance Capacity - old enough and not crazy Consideration - something exchanged Writing - statute of frauds
How do you pierce the corporate veil
- corp debt incurred when company was insolvent
- no BoD meeting
- Corp records not well maintained
- commingling of funds and activities
- no pay dividends
- undercapitalization because shareholders took out unreasonable amounts of money
When do you use the indirect method
self employed - because no third party source to confirm
- they are time consuming and costly to IRS
- there are limits to the use of indirect methods
when do you use indirect method II
if no method of accounting is regularly used or if the method does not reflect income - you can use indirect
Why is indirect bad
- it has been overzealously used, expenses and a burden
What are procurement fraud techniques
bribes and kickbacks
- bid rigging
- defective pricing
- phantom vendors
- product substitution
- conflict of interest
- false claims
- cost discharging
