Chapter 2: Tax Compliance, the IRS and Tax Authorities I) Explain how the IRS us

Question

Chapter 2: Tax Compliance, the IRS and Tax Authorities I) Explain how the IRS uses "matching"to identify possible discrepancies in reported income of taxpayers. Provide an example of the type of item that might be matched' by the IRS. 2) You didn't know it until now, but your best friend was audited and she has received a "30 Day" letter. What are your friend's options? What would you tell your friend to do? What would your answer depend on? 3) Define which committees in the House and Senate are responsible for tax legislation. Who are the current leaders of those committees? Do you think it will be easier or more difficult to enact tax legislation if the leaders of each respective committee belong to the same political party? 4) In Ferguson v. Commissioner, did the Court decide that the taxpayer was or was not taxable on the gain in certain stock transferred to a charity? Were penalties assessed? 5) What is the due date for filing an individual income tax return? Can a taxpayer get additional time to file? If so, how and for how long?

Explanation / Answer

1) The income reported by the taxpayers in their return is verified by the IRS by various ways. Businesses and various organizations have to file information returns with IRS ,i.e., Information Retun- W-2s which is for reporting the wages, 1099s which is for reporting the interest, dividends, secutities transactions & other non-employee compensation and Schedule- K1s which is for reporting the revenue and expenses from partnership firm, S corpratations, etc. The IRS makes use of "Inforamation Returns Processing System" in order to match the information filed by the employers and third parties with the information filled by the individuals in their tax return. For e.g., wages paid by an employer to an individual will be matched with the amount of wages earned shown by an individual in his ITR.

2) A 30 days letter signifies the taxpayer's right to signify the proposed changes within 30 days. The letter states the steps a tax payer should take and make the necessary changes in the information furnished by him in his ITR. If my best friend is audited and receives a 30 days letter I will suggest him to get his documents or paperwork in line. In case any information is missed out by him I will suggest him to make the necessary changes in his ITR within the stipulated time or in case any further information is required to be furnished to the IRS I will ask him to send the copies of the same to the department. (For e.g. copy of all expenses claimed as deduction may need to be sent to IRS). I will suggest him to reach to an agreement with Appeals officer by providing all relevant information and by making the necessary change in ITR, if required.

3) The "Senate Finance Committee" is responsible for tax legislation in the House and Senate.This committee is responsible for all tax related matters in Senate legislation. Mr. Orrin Hatch from Utah is the current chairman of Senate Finance Committee from 2015 till present.It will be easier to enact tax legislation if the leaders of each respective committee belong to the same political party since there won't be any major opposition; however in such a situation the democracy will be hampered.

4) In Ferguson V Commissioner case, the court decided the taxpayer was taxable on the gain in the stocks transferred to the charity underthe anticipatory assignment of income doctorine.This is so because the stock of AHC was converted from interest in an organisation to the right to receive the amount in cash before the date of gifts.Yes the penalties and 120% of interest were charged.

5) The due dates for filing an ITR Return is 31st July of the relevant AY in case of individuals, HUF, BOI, AOP and 30th September of the relevant AY in case of company. Yes the taxpayer can get an additional time to file ITR after due but he has to pay the interest. The last date for filing the ITR is one year from the end of the relevant assessment year. For e.g. the due date for filing an ITR for FY 2016-17 is 31st July 2017; however the same can be filed until 31st March 2018.

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