WORKING WITH THE IRS
TEST BANK, CHAPTER 13
Multiple Choice
Choose the best answer for each of the following questions:
1. The Commissioner of the Internal Revenue Service (IRS) is appointed by the:
a. President of the United States
b. Secretary of the Treasury
c. Senate
d. Congress
Answer: A
Rationale:
The President of the United States appoints the Commissioner of the Internal Revenue
Service (IRS). This appointment is subject to confirmation by the Senate. The Commissioner
oversees the administration of the nation's tax laws and the operation of the IRS.
2. The IRS Oversight Board:
a. Has the authority to affect tax policy.
b. Has the authority to affect the processing of individual tax cases.
c. Can intervene in IRS personnel or procurement matters.
d. Can review and approve the IRS annual budget request.
Answer: D
Rationale:
The IRS Oversight Board does not have authority to directly affect tax policy or the
processing of individual tax cases. Its primary responsibility is to review and approve the IRS
annual budget request. It plays a role in overseeing the IRS's operations and ensuring its
accountability to taxpayers.
3. The IRS is now organized into what kind of lines:
a. Type of taxpayer
b. Remedy requested
c. Functional
d. Type of tax
Answer: A
Rationale:
The IRS is organized into lines based on the type of taxpayer, such as individual taxpayers,
businesses, exempt organizations, and government entities. This organizational structure
allows for specialized service and enforcement tailored to the needs of different taxpayer
groups.
4. The highest ranking legal adviser of the IRS is the:
a. Attorney General
b. Chief Attorney
c. District Attorney
d. Chief Counsel
Answer: D
Rationale:
The Chief Counsel of the Internal Revenue Service (IRS) serves as the highest-ranking legal
adviser of the IRS. The Chief Counsel provides legal guidance and representation to the IRS
in tax-related matters, including litigation, rulings, and regulations.
5. The National Taxpayer Advocate:
a. Represents the IRS in Tax Court cases.
b. Administers a taxpayer-intervention system.
c. Assists the IRS in preparing proposed legislation, treaties, regulations, and executive
orders.
d. Prepares IRS rulings and other written determinations.
Answer: B
Rationale:
The National Taxpayer Advocate administers a taxpayer-intervention system. This system
helps taxpayers resolve problems with the IRS and ensures that their rights are protected
during the tax administration process.
6. The two methods of judicial review of an administrative action taken by the Service in
determining whether a taxpayer owes taxes are:
a. Release method and the deficiency method.
b. Refund method and the assessment method.
c. The refund method and the deficiency method.
d. The protest method and the deferral method.
Answer: B
Rationale:
The two methods of judicial review of an administrative action taken by the IRS in
determining whether a taxpayer owes taxes are the refund method and the assessment
method. The refund method involves seeking a refund from the IRS, while the assessment
method involves challenging the IRS's assessment of taxes in court.
7. The Taxpayer Assistance Order (TAO) is issued by the:
a. Secretary of Treasury
b. Chief Counsel
c. National Taxpayer Advocate
d. Commissioner of IRS
Answer: C
Rationale:
The Taxpayer Assistance Order (TAO) is issued by the National Taxpayer Advocate. It is a
powerful tool used to provide immediate relief to taxpayers experiencing significant hardship
or unfair treatment by the IRS.
8. A form 911 is filed by the Taxpayer for which of the following:
a. National Research Program
b. Appeals Conference
c. Tax Court Hearing
d. Taxpayer Assistance
Answer: D
Rationale:
Form 911, also known as the "Request for Taxpayer Advocate Service Assistance," is filed by
taxpayers to request assistance from the Taxpayer Advocate Service. It is used when
taxpayers are experiencing significant hardship or unfair treatment by the IRS and need
assistance in resolving their tax issues.
9. To whom does the Chief Council of the Internal Revenue Service report to:
a. The Commissioner of the Internal Revenue Service
b. Secretary of the Treasury
c. The Regional Council in National Office
d. The Attorney General
Answer: A
Rationale:
The Chief Counsel of the Internal Revenue Service (IRS) reports to the Commissioner of the
IRS. The Chief Counsel provides legal advice and representation to the IRS on matters
related to tax administration and enforcement.
10. The procedure used to match the information recorded on a return with corresponding
data received from third parties is referred to as:
a. Information Document Reconciliation Program
b. Information Document Review Program
c. Information Document Check Program
d. Information Document Matching Program
Answer: D
Rationale:
The procedure used to match the information recorded on a return with corresponding data
received from third parties is referred to as the Information Document Matching Program.
This program helps the IRS identify discrepancies and potential errors in taxpayer returns by
comparing the information reported on tax returns with data provided by employers, financial
institutions, and other third parties.
11. In case of underpayment of taxes, if the deficiency is not paid in a timely fashion, interest
is imposed on the unpaid amount for a period that begins on the date of:
a. Filing return and ends on the date of payment or the last working day of the respective
year, whichever is later.
b. Filing return and ends on the date of payment.
c. The notice and demand and ends on the date of payment.
d. The notice and demand and ends on the date when the taxpayer receives the notice.
Answer: C
Rationale:
Interest on underpaid taxes begins to accrue from the date of the notice and demand by the
IRS, which typically occurs after the IRS has determined that there is a deficiency in taxes
owed. The interest continues to accrue until the taxpayer pays the outstanding amount or until
another resolution is reached.
12. If a return is identified as including an unallowable item, the IRS:
a. Computes the seemingly necessary adjustment in taxes, and the taxpayer is notified by
mail.
b. Sends a formal notice of deficiency to the taxpayer.
c. Considers the contact that it makes with a taxpayer under this circumstance to be an
examination.
d. Cancels the return and asks the taxpayer to file his return again.
Answer: A
Rationale:
When an unallowable item is identified on a taxpayer's return, the IRS typically computes the
necessary adjustment in taxes and notifies the taxpayer by mail. This adjustment is made
based on the information provided in the return and any additional documentation submitted
by the taxpayer.
13. In selecting returns for examination, the primary goal of the IRS is to review only those
returns that:
a. Belong to the taxpayers who were found guilty before.
b. Will result in a satisfactory increase in the tax liability.
c. Have been filed for the first time.
d. Contain mathematical/clerical errors.
Answer: B
Rationale:
The primary goal of the IRS in selecting returns for examination is to focus on those returns
that are likely to result in a significant increase in tax liability. The IRS aims to allocate its
resources efficiently by targeting returns with potential substantive issues or areas of
noncompliance.
14. The program that is designed to furnish the IRS with statistics concerning the type and
number of errors that are made on a representative sample of individual income tax returns is
the:
a. Unallowable Items Program
b. Mathematical/clerical Error Program
c. National Research Program
d. Discriminant Function Program
Answer: C
Rationale:
The National Research Program is designed to provide the IRS with statistics about the type
and frequency of errors on individual income tax returns. It helps the IRS identify areas of
noncompliance and improve tax administration by targeting enforcement efforts effectively.
15. An office examination is scheduled when a selected return for examination:
a. belongs to a taxpayer who was previously found guilty of manipulating return
b. belongs to a taxpayer who resides near to the IRS local office
c. requires a mere verification of record-keeping
d. involves one or more issues that will require some analysis and the exercise of the IRS
personnel’s judgment
Answer: D
Rationale:
An office examination is typically scheduled when a selected return for examination involves
one or more issues that require analysis and the exercise of IRS personnel's judgment. Unlike
simple verification of record-keeping, an office examination deals with substantive issues that
may require more in-depth review and analysis.
16. Which of the following examinations involves complex issues that require more advanced
knowledge of the internal revenue laws and accounting skills?
a. Correspondence Examination
b. Field Examination
c. Office Examination
d. Arithmetical Error Examination
Answer: B
Rationale:
A field examination involves complex issues that require advanced knowledge of the internal
revenue laws and accounting skills. Field examinations are conducted in person by IRS
agents and often involve more detailed scrutiny of a taxpayer's financial records and
transactions.
17. When the IRS examines the returns of large corporate taxpayers, it uses a team approach
in its field audits known as the:
a. Collective Examination Program
b. Grouped Examination Program
c. Coordinated Examination Program
d. Team Examination Program
Answer: C
Rationale:
When examining the returns of large corporate taxpayers, the IRS uses a team approach
known as the Coordinated Examination Program. This approach involves coordination
among different IRS personnel and departments to ensure a comprehensive and thorough
examination of the taxpayer's financial records and tax compliance.
18. A written RAR is prepared by the IRS agent and is given to the taxpayer:
a. before the commencement of the examination
b. at the beginning of the examination
c. during the examination
d. upon the conclusion of the examination
Answer: D
Rationale:
A written Report of Examination Changes (RAR) is prepared by the IRS agent and is given to
the taxpayer upon the conclusion of the examination. The RAR summarizes the findings of
the examination, including any proposed adjustments to the taxpayer's return and the basis for
those adjustments.
19. When a taxpayer does not agree with the IRS agent’s proposed adjustments a:
a. 30-day letter is issued
b. RAR is issued
c. 10-day notice is issued
d. 21-day notice is issued
Answer: A
Rationale:
When a taxpayer does not agree with the IRS agent's proposed adjustments, a 30-day letter is
issued. This letter informs the taxpayer of their right to appeal the proposed adjustments
within 30 days by requesting a conference with the IRS Office of Appeals.
20. A statutory notice of deficiency is also known as a:
a. 30-day letter
b. 10-day letter
c. 90-day letter
d. 21-day letter
Answer: C
Rationale:
A statutory notice of deficiency is also known as a 90-day letter. It is an official notice issued
by the IRS to inform the taxpayer of the proposed deficiency in tax and their right to
challenge the deficiency in Tax Court within 90 days.
21. How much time from the date of issue of 30-day letter does a taxpayer get to request for a
conference with an appeals officer?
a. 30 days
b. 90 days
c. 10 days
d. 21 days
Answer: A
Rationale:
A taxpayer typically has 30 days from the date of issue of a 30-day letter to request a
conference with an appeals officer. This provides the taxpayer with an opportunity to discuss
the proposed adjustments with an impartial appeals officer and potentially resolve the issues
without going to Tax Court.
22. Your client has just received an IRS summons to appear for an interview. Which of the
following statements is false concerning this interview:
a. Provided your client gives prior notice to the IRS, the taxpayer may tape-record the
interview.
b. The IRS may tape record the interview but must provide a transcript of the recording to the
taxpayer if he requests a copy and pays for the copying charges.
c. Notes may not be taken by either the IRS agent or the taxpayer during the interview.
d. The IRS investigator must explain various taxpayer rights to your client before
commencing the interview.
Answer: C
Rationale:
The false statement is option c. Both the IRS agent and the taxpayer are allowed to take notes
during the interview. However, it's essential to note that while the IRS may tape-record the
interview, taxpayers should verify the IRS's recording practices and may choose to taperecord the interview themselves with prior notice.
23. If a taxpayer and the IRS cannot agree on the proposed adjustments after an appeals
conference, the regional director of appeals will issue a:
a. 30-day letter
b. 90-day letter
c. 21-day letter
d. 10-day letter
Answer: B
Rationale:
If a taxpayer and the IRS cannot reach an agreement on proposed adjustments after an
appeals conference, the regional director of appeals will issue a 90-day letter. This letter
formally notifies the taxpayer of the IRS's final determination and their right to petition the
Tax Court within 90 days if they disagree with the decision.
24. The Tax Court will review a taxpayer’s case, provided that he or she files a petition with
the court within:
a. 10 days of the date of his or her statutory notice of deficiency
b. 60 days of the date of his or her statutory notice of deficiency
c. 30 days of the date of his or her statutory notice of deficiency
d. 90 days of the date of his or her statutory notice of deficiency
Answer: D
Rationale:
The taxpayer must file a petition with the Tax Court within 90 days of the date of the
statutory notice of deficiency to initiate a review of their case by the Tax Court. Filing within
this timeframe preserves the taxpayer's right to challenge the deficiency in court.
25. A taxpayer’s return is classified for audit after receiving a high DIF score and being
manually screened by an IRS classifier. Which of the following statements best describes
whether the taxpayer will be contacted by an auditor or revenue agent:
a. Yes, the taxpayer will be contacted since a high DIF score always will mean some type of
audit.
b. Yes, the taxpayer will be contacted because only the National Office has the power to
decide that after screening the return need not be audited.
c. No, the taxpayer will not necessarily be contacted since after the Service Center review, it
may be decided that an audit is unwarranted.
d. No, the taxpayer will not necessarily be contacted by an auditor or revenue agent since
after the return is screened by the Service Center, it then is randomly selected for audit.
Answer: C
Rationale:
The most accurate statement is option c. While a high DIF score may trigger an audit, the IRS
may decide not to conduct an audit after reviewing the return further, especially if it
determines that an audit is unwarranted based on additional information or the absence of
substantive issues.
26. Which of the following issues would most typically not be handled as a correspondence
examination:
a. Mathematical errors.
b. Clearly defined unallowable deductions.
c. Errors detected through matching of forms 1099 and W-2.
d. Questions concerning gambling income.
Answer: D
Rationale:
Correspondence examinations typically handle issues that can be resolved through the
exchange of documents and written communication. While mathematical errors, unallowable
deductions, and errors detected through form matching can often be addressed through
correspondence, questions concerning gambling income may require more in-depth review
and analysis, making them less suitable for correspondence examination.
27. Which of the following would be an advantage to filing a protest in an IRS audit:
a. The cost involved in filing the protest.
b. Preserves the option for further litigation.
c. The protest will delay the ultimate resolve of the issue.
d. The protest will provide greater information to the taxpayer.
Answer: B
Rationale:
Filing a protest in an IRS audit preserves the taxpayer's option for further litigation. By
formally protesting the IRS's proposed adjustments, the taxpayer maintains the right to
challenge the IRS's determination in Tax Court if necessary, ensuring that their case receives
a full and fair review by an impartial judge.
28. A “DIF” score is a type of:
a. Fraud definition used by the Service.
b. Discriminate analysis used to identify questionable returns.
c. Negligent penalty score.
d. Score used for an information purpose in collateral agreements.
Answer: B
Rationale:
A "DIF" score refers to Discriminant Function System score, which is a type of discriminant
analysis used by the IRS to identify potentially questionable returns for further review and
potential audit. The DIF score is based on various factors and helps the IRS prioritize returns
for examination based on their likelihood of containing errors or noncompliance.
True or False
Indicate which of the following statements are true or false by circling the correct answer.
1. The IRS is responsible for administering and enforcing the internal revenue laws of the
United States.
Answer: False
Rationale:
The Department of the Treasury is responsible for administering and enforcing the internal
revenue laws of the United States.
2. The IRS was established by Congress on July 1, 1682, to meet the fiscal needs of the Civil
War.
Answer: False
Rationale:
The IRS was established by Congress on July 1, 1862, to meet the fiscal needs of the Civil
War.
3. The IRS Oversight Board is made up of only IRS officials.
Answer: False
Rationale:
The IRS Oversight Board members include members from the private sector as well.
4. The Chief Counsel is appointed by the President and reports to the Commissioner of the
IRS.
Answer: True
Rationale:
The Chief Counsel of the IRS is indeed appointed by the President of the United States and
reports directly to the Commissioner of the IRS. This organizational structure ensures that the
Chief Counsel, as the highest-ranking legal adviser within the IRS, can provide legal
guidance and support to the Commissioner and other IRS officials on a wide range of taxrelated matters. Additionally, the Chief Counsel oversees the Office of Chief Counsel, which
provides legal services to the IRS and ensures the proper interpretation and application of tax
laws. This reporting relationship underscores the importance of legal oversight and
compliance within the IRS hierarchy.
5. The Tax Exempt and Government Entities (TEGE) Division of the IRS comprises three
business divisions: employer plans; export organizations, and government entities.
Answer: False
Rationale:
The Tax Exempt and Government Entities (TEGE) Division of the IRS comprises three
business divisions: employee plans; exempt organizations, and government entities.
6. The IRS has increased the number of tax return processing centers with the increase in
electronic filing of returns.
Answer: False
Rationale:
As electronic filing of returns has increased, the IRS has reduced the number of tax return
processing centers.
7. A taxpayer may be represented before the IRS only by attorneys.
Answer: False
Rationale:
A taxpayer may be represented by an attorney, Certified Public Accountant (CPA), or other
person who is permitted to represent a taxpayer before the IRS and who has obtained a
properly executed power of attorney.
8. In absence of an administrative summons, a taxpayer cannot be required to accompany the
representative to an interview.
Answer: True
Rationale:
Without the issuance of an administrative summons by the IRS, a taxpayer cannot be legally
compelled to accompany their representative to an interview. This requirement ensures that
taxpayers are not unduly coerced into participating in interviews or providing information to
the IRS without proper legal authority. Administrative summons is a formal legal document
issued by the IRS that compels an individual to provide testimony, documents, or other
evidence relevant to a tax investigation or audit. Without such a summons, the taxpayer
retains the right to decline participation in interviews or provide information voluntarily. This
safeguard protects the taxpayer's rights and ensures that IRS investigations adhere to legal
procedures and due process.
9. The IRS examines each and every return critically in order to generate additional revenue
for the Treasury.
Answer: False
Rationale:
The IRS attempts to select for examination only those returns that will generate additional
revenues for the Treasury.
10. The number of routine math errors has increased sharply due to increase in electronic
filing.
Answer: False
Rationale:
The number of routine math errors has declined sharply due to increase in electronic filing.
11. The IRS treats an adjustment in tax resulting from an unallowable item identified in return
as a correction of a mathematical or clerical error.
Answer: True
Rationale:
The IRS typically views adjustments in tax due to unallowable items as corrections of
mathematical or clerical errors rather than deliberate misreporting. This approach simplifies
the process of rectifying errors and ensures consistency in handling tax discrepancies.
12. Generally, the IRS selects returns for examination through the use of mathematical
models, including correlations and discriminant functions.
Answer: True
Rationale:
The IRS often employs mathematical models, such as correlations and discriminant
functions, to identify returns for examination. These models help the IRS efficiently target
returns that are more likely to contain errors or discrepancies, enhancing the effectiveness of
tax compliance efforts.
13. ‘Economic reality’ factors are considered by the IRS in selection of returns for audit only
where it has some other evidence that the taxpayer has over reported taxable income for the
year.
Answer: False
Rationale:
‘Economic reality’ factors can be considered by the IRS in selection of returns for audit, but
only where the agency has some other evidence that the taxpayer has underreported taxable
income for the year.
14. In cases where an IRS examiner questions only one or two items on a selected return, an
examination is typically conducted by mail, called a correspondence examination.
Answer: True
Rationale:
Correspondence examinations are commonly used by the IRS when only a few specific items
on a tax return are under question. Conducting the examination by mail streamlines the
process, allowing the IRS to address discrepancies without requiring an in-person meeting
with the taxpayer.
15. A field examination is usually limited to an examination of corporations and individual
business returns.
Answer: True
Rationale:
Field examinations, where an IRS agent conducts an examination in person at the taxpayer's
place of business or another location, are indeed typically limited to corporations and
individual business returns. This approach allows for a more thorough review of complex
financial records and operations that are often associated with businesses rather than
individual taxpayers.
16. A field audit by the IRS is always conducted at the taxpayer’s premises.
Answer: False
Rationale:
It is sometimes possible to have the field audit conducted at the office of the taxpayer’s
representative.
17. An RAR contains a brief explanation of the proposed adjustments and lists the balance
due or the overpayment.
Answer: True
Rationale:
The Revenue Agent's Report (RAR) is a document issued by the IRS after completing an
examination. It typically includes a summary of proposed adjustments to the taxpayer's
return, along with any resulting balance due or overpayment. This summary helps the
taxpayer understand the changes being proposed by the IRS.
18. A taxpayer’s appeal must be in written form if the total proposed additional tax and
penalties exceed $2,500.
Answer: True
Rationale:
According to IRS guidelines, if a taxpayer wishes to appeal a decision regarding additional
tax and penalties, the appeal must generally be submitted in written form if the total amount
in question exceeds $2,500. This requirement ensures that appeals are properly documented
and allows for a clear understanding of the issues at hand.
19. The objective of the Appeals Office is to resolve tax controversies without litigation on a
basis that is fair and impartial to both the government and the taxpayer.
Answer: True
Rationale:
The Appeals Office of the IRS serves as an independent entity tasked with resolving tax
disputes in a fair and impartial manner. By providing an avenue for taxpayers to appeal IRS
decisions, the Appeals Office aims to reach resolutions that satisfy both parties without the
need for litigation, saving time and resources for all involved.
20. The Appeals Office has the exclusive and final authority to settle cases that originate in
any district irrespective of its jurisdiction.
Answer: False
Rationale:
The Appeals Office has the exclusive and final authority to settle cases that originate in a
district that is located within its jurisdiction.
21. Individual Taxpayers have around a 20% chance of being audited.
Answer: False
Rationale:
Exhibit 13- An individual taxpayer has between a 1% to 6% chance of an audit.
22. Form 911 is a Request for Taxpayer Advocate Assistance.
Answer: True
Rationale:
Form 911, indeed, is used by taxpayers to request assistance from the Taxpayer Advocate
Service, an independent organization within the IRS that helps taxpayers resolve problems
with the IRS when standard procedures have failed to resolve the issue. This form initiates
the process of seeking assistance from the Taxpayer Advocate.
23. A Power of Attorney is necessary when a qualified representative goes to the IRS to
represent a Taxpayer.
Answer: True
Rationale:
A Power of Attorney is a legal document that authorizes someone, such as a tax professional
or another representative, to act on behalf of a taxpayer in dealings with the IRS. Having a
Power of Attorney in place is crucial for ensuring that the representative can effectively
advocate for the taxpayer's interests and handle tax matters on their behalf.
24. There is a general common law privilege of confidentiality for non-criminal tax matters
that exists between a Taxpayer and his or her Tax Practitioner.
Answer: True
Rationale:
In the United States, there exists a general common law privilege of confidentiality between a
taxpayer and their tax practitioner, such as an attorney or certified public accountant,
regarding non-criminal tax matters. This privilege helps foster trust and open communication
between taxpayers and their advisors, allowing for effective representation and advice.
25. The National Research Program (NRP) provides statistics that are used in the
development and update of the DIF formulas.
Answer: True
Rationale:
The National Research Program (NRP) is a program conducted by the IRS to gather data on
tax compliance through audits of randomly selected taxpayers. The statistics and findings
from the NRP are indeed utilized in the development and refinement of Discriminant
Function (DIF) formulas, which are mathematical models used by the IRS to select tax
returns for examination based on their likelihood of containing errors or discrepancies.
Short Answer
1.What are the major duties of the IRS Oversight Board?
Answer: The Major duties of the IRS Oversight Board are as follows:
• Review and approve IRS mission, strategic plans, and annual planning documents.
• Review IRS operational functions, including modernization, outsourcing, and training
efforts.
• Recommend to the President candidates for Commissioner.
• Review the process of selecting, evaluating, and compensating senior IRS executives.
• Review and approve the IRS annual budget request.
• Ensure the proper treatment of taxpayers.
2. What are the guiding principles of the IRS?
Answer: The guiding principles for the IRS are as follows:
• Understand and solve problems from the taxpayers’ point of view.
• Enable its managers to be accountable to taxpayers.
• Use balanced measures of performance to measure taxpayer satisfaction, business results,
and employee satisfaction.
• Foster open, honest communications.
• Insist on total integrity.
3. What are the functions performed by the Mathematical/Clerical Error Program?
Answer: The Mathematical/Clerical Error Program is one of a number of special programs
that are conducted by IRS computers. This program checks every return for mathematical
errors, re-computes the tax due after properly applying the numbers that are included in the
return, and summarily assesses any additional tax that is due or allows refunds or credits
based on (previously) miscomputed deductions or credits. A summary assessment may be
made concerning any deficiency that results from a mathematical or clerical error.
4. “If a taxpayer cannot resolve his or her dispute with the IRS administratively, he or she
may seek judicial relief.” Explain how a taxpayer can seek relief through the judicial system.
Answer: If a taxpayer cannot resolve his or her dispute with the IRS administratively, he or
she may seek judicial relief. The taxpayer can choose from among the U.S. Tax Court, the
pertinent district court, and the U.S. Court of Federal Claims to initiate the lawsuit against the
government. The Tax Court will review the taxpayer’s case provided that he or she files a
petition with the court within 90 days of the date of his or her statutory notice of deficiency.
The district courts and the Court of Federal Claims cannot hear the taxpayer’s case unless he
or she is suing for a refund. Consequently, the taxpayer first must pay the disputed tax, and
then file an (unsuccessful) claim for refund to obtain a judicial review in either of these latter
two forums.
5.What are the “Pros” and “Cons” of filing a protest to an IRS Audit?
Answer: The advantages to filing a protest are as follows:
(1) The filing of a protest allows for another review of the issue by an independent Appeals
Officer.
(2) There is no reason to retain an attorney when filing a protest. Anyone authorized to
practice before the IRS may represent the taxpayer.
(3) The filing of a protest will delay the resolution of the issue.
(4) The matter at issue can still be taken to U. S. Tax Court, the District Court or Court of
Federal Claims.
The disadvantages would be as follows:
(1) The interest and penalties continue to run if a protest is not filed.
(2) Professional assistance is usually required if a protest is not filed.
(3) Should a protest not be filed, new issues can be discovered.
Essay Questions
1.Explain how the Discriminant Function System works.
Answer: Computer and manual methods are used to select returns for examination. Computer
programs select certain returns for examination, based on the potential that exists for changes
in the tax treatment of certain items on the return. Generally, this is done through the use of
mathematical models, including correlations and discriminant functions
Once a return has been processed through the IRS automated computer program, each return
is rated by computer for its audit potential by means of a mathematical model, the
discriminant function formula (DIF). This formula assigns numeric weights to certain
(undisclosed by the IRS) return items, generating a composite score for the return. In this
regard, the higher the DIF score, the greater the potential for additional tax payments upon
audit. Statistics provided by the Commissioner show a high correlation between DIF scores
and such tax modifications, but the specifics of the formula are not disclosed.
When the computer selects a return that has a high probability for an adjustment, as indicated
by a high DIF score, an employee at the service center manually inspects the return to
confirm its audit potential. If an acceptable explanation for the DIF score cannot be found
after this manual examination of the return and its attachments, including explanatory data
that the computer did not consider, the return is forwarded to the Examination Division at the
appropriate local IRS office.
2. Enumerate how the IRS conducts Field Examination.
Answer: Examinations that present complex issues that require more advanced knowledge of
the internal revenue laws and accounting skills usually are conducted on the taxpayer’s
premises. A field examination is more comprehensive than a correspondence or office audit,
and it usually is limited to an examination of corporation and individual business returns. In a
field examination, the revenue agent reviews completely the entire financial operations of the
taxpayer, including the business history of the taxpayer; the nature, amount, and location of
taxpayer assets; the nature of the business operations; the extant accounting methods and
system of internal control; and other financial attributes of the entity.
While an office audit ordinarily is limited to the items that are specified in the audit
notification letter, a field examination may be open-ended. The agent is free to pursue any
unusual items that are recorded in the tax return(s) or the records of the taxpayer (i.e.,
journals, ledgers, and worksheets) and to investigate other areas of which he or she may be
suspicious.
The IRS prefers to conduct the field audit on the taxpayer’s premises because the taxpayer’s
books and records may be more accessible and the agent is better able to observe the
taxpayer’s business facilities and the scope of its operations. However, it is sometimes
possible to have the audit conducted at the office of the taxpayer’s representative instead.
Only one such inspection of taxpayer books and records may be made for a tax year. The
Code includes a broad set of restrictions as to access to the taxpayer’s physical office by the
IRS. Taxpayers refusing to admit IRS personnel are subject to a $500 fine.
The IRS uses a team approach in its field audits, known as the Coordinated Examination
Program, when it examines the returns of large corporate taxpayers. During this type of
examination, a large group of IRS agents is used to investigate the operations of the taxpayer.
Normally, such an investigation spans more than one IRS district as well.
3. What are the ‘dos and don’ts’ in negotiating with a government auditor?
Answer: Most practitioners develop over time a list of ‘dos and don’ts’ in negotiating with a
government auditor. In the very best case, one will have dealt with the same auditor many
times and will have become familiar with the nuances of that particular auditor’s mode of
operation. Whether this is the case or not, the following guidelines, dictated as much by
common courtesy and decorum as by ethics and hardcore negotiating techniques, are likely to
be useful.
• Do conduct yourself courteously and professionally, showing that you have prepared
yourself for the audit
• Do review the strengths and weaknesses of your position before the agent arrives
• Do cooperate with the auditor and promptly respond to all requests
• Do establish internal timetables and responsibilities for completing the audit
• Do provide the auditor with adequate work accommodations
• Don’t impede the audit process
• Don’t allow the auditor free access to and through the taxpayer’s building
• Don’t let the agent browse through taxpayer information
• Don’t volunteer comments or information not requested by the agent
• Don’t attempt to bully or intimidate the auditor
• Do assign one person to be the primary on-premises contact with the auditor— he or she
cannot interview taxpayer employees on a random basis
• Do verify the auditor’s credentials before providing any information
• Do request that all communications be in writing
• Do keep track of time spent (by taxpayer, practitioner, and auditor) on the audit
• Do meet at least daily with the auditor to review issues
• Do agree to disagree on major irreconcilable issues
• Do conduct a concluding conference to discuss audit recommendations
• Do obtain copies of all government workpapers affecting the potential assessment
• Do request clarification on the rest of the appeals process
4. Why would a Taxpayer choose to go to District Court or the Court of Federal Claims and
not to U.S. Tax Court?
Answer: Since the District Court and the Court of Federal Claims are refund actions, the tax
must be paid before initiating the action. This would mean that all interest and penalties are
not accruing during the litigation. Another reason for filing in District Court is the availability
of a jury of one’s peers. When filing an action in U. S. Tax Court, there is no option for a jury.
The final reason for going to the Court of Federal Claims is that of an appellate route. The U.
S. Tax Court and District Court of Appeals limit their cases to a geographic appellate circuit
while the Federal Claims Court appeals their actions to the Federal Circuit Court of Appeals.
The different circuits may have different precedent on similar tax issues.
Test Bank for Federal Tax Research
Roby B. Sawyers, Steven Gill, Debra Sanders, William A. Raabe, Gerald E. Whittenburg
9781111221645, 9781337282987, 9781285439396
