Chapter 6

Question 1

What is direct method

Answer 1

this is the transaction method - involves probing missing income by pointing to specific items not on the tax return

Question 2

What is indirect method

Answer 2

This is the method that uses the economic reality and financial status techniques - reconstructed through circumstantial evidence

Question 3

Ketler case

Answer 3

didn’t - files returns for 2 years. It was reconstructed using 1099 - this was a bank deposit analysis

Question 4

Economic reality lifestyle audits

Answer 4

these are indirect techniques - started in 1995 - used too much - so congress limited their use.

Question 5

minimum income probes

Answer 5

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

Question 6

Lifestyle probe

Answer 6

auditing is like an iceberg - look at

attitudes
feelings
values
norms
interaciosn 
suportivenes
satidfaction

behaviors is very important.

Question 7

Listening

Answer 7

great tool - can learn a lot from hanging around the water cooler.

Question 8

Lindquist -

Answer 8

you have got to have knowledge of fraud - how it looks and works - you are a bloodhound

Question 9

lifestyle things that indicate fraud and unreported income

Answer 9

home, cars, boats , private education, vacations

Question 10

cautions about lifestyle s

Answer 10

could happen because of debt or inheritance

Question 11

Ames

Answer 11

US traitor - FBI had lavish lifestyle and no one suspected

Question 12

Howard David advice

Answer 12

- 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

Question 13

when do you use indirect method

Answer 13

when there are inadequate books and records or they don’t show the taxable income

Question 14

What are the 4 indirect methods

C E N B

Answer 14

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

Question 15

market specialization program

Answer 15

This trains examiners in different areas so they become highly specialized

You can use the audit technique guides

Question 16

How does cash t work

Answer 16

Cash in ———- cash out - find understatement’’

Question 17

What is the funds method

Answer 17

expenditure method -

• List application of funds first
• Subtract the source

If cash sources are greater than cash receipts - the difference equal unreported income

Question 18

What is the net worth method

Answer 18

Indirect method

Question 19

What are the 6 elements of a valid contract

OACCW

Answer 19

Offer
Acceptance
Capacity - old enough and not crazy
Consideration - something exchanged
Writing - statute of frauds

Question 20

How do you pierce the corporate veil

Answer 20

• 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

Question 21

When do you use the indirect method

Answer 21

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

Question 22

when do you use indirect method II

Answer 22

if no method of accounting is regularly used or if the method does not reflect income - you can use indirect

Question 23

Why is indirect bad

Answer 23

• it has been overzealously used, expenses and a burden

Question 24

What are procurement fraud techniques

Answer 24

bribes and kickbacks

• bid rigging
• defective pricing
• phantom vendors
• product substitution
• conflict of interest
• false claims
• cost discharging