Solutions Manual—Taxation of Individuals and Business Entities by Spilker, et al.
Full Product: https://coursecost.com/product/solution-manual-for-mcgraw-hills-taxation-of-
individuals-and-business-entities-2023-14th-edition-by-brian-spilker-author-benjamin-ayers-john-
barrick-troy-lewis-john-robinson-connie-weaver/
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 – form
4868, Application for Automatic Extension of Time To File U.S. Individual
Income 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 1 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.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1
, Solutions Manual—Taxation of Individuals and Business Entities by Spilker, et al.
Full Product: https://coursecost.com/product/solution-manual-for-mcgraw-hills-taxation-of-
individuals-and-business-entities-2023-14th-edition-by-brian-spilker-author-benjamin-ayers-john-
barrick-troy-lewis-john-robinson-connie-weaver/
(5) [LO2] Explain the difference between the DIF system and the National Research
Program. How do they relate to each other?
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 narrowest 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
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
2
, Solutions Manual—Taxation of Individuals and Business Entities by Spilker, et al.
Full Product: https://coursecost.com/product/solution-manual-for-mcgraw-hills-taxation-of-
individuals-and-business-entities-2023-14th-edition-by-brian-spilker-author-benjamin-ayers-john-
barrick-troy-lewis-john-robinson-connie-weaver/
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
instructs the taxpayer that they have 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.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
3
Full Product: https://coursecost.com/product/solution-manual-for-mcgraw-hills-taxation-of-
individuals-and-business-entities-2023-14th-edition-by-brian-spilker-author-benjamin-ayers-john-
barrick-troy-lewis-john-robinson-connie-weaver/
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 – form
4868, Application for Automatic Extension of Time To File U.S. Individual
Income 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 1 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.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1
, Solutions Manual—Taxation of Individuals and Business Entities by Spilker, et al.
Full Product: https://coursecost.com/product/solution-manual-for-mcgraw-hills-taxation-of-
individuals-and-business-entities-2023-14th-edition-by-brian-spilker-author-benjamin-ayers-john-
barrick-troy-lewis-john-robinson-connie-weaver/
(5) [LO2] Explain the difference between the DIF system and the National Research
Program. How do they relate to each other?
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 narrowest 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
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
2
, Solutions Manual—Taxation of Individuals and Business Entities by Spilker, et al.
Full Product: https://coursecost.com/product/solution-manual-for-mcgraw-hills-taxation-of-
individuals-and-business-entities-2023-14th-edition-by-brian-spilker-author-benjamin-ayers-john-
barrick-troy-lewis-john-robinson-connie-weaver/
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
instructs the taxpayer that they have 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.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
3
