Assess the probability of an audit in each of the following independent situations:
a. As a result of a jury trial, Linda was awarded $3.5 million because of job discrimination. The award included $3 million for punitive damages.
b. Mel operates a combination check-cashing service and pawnshop.
c. Jayden, a self-employed trial lawyer, routinely files a Schedule C (Form 1040) that, due to large deductions, reports little (if any) profit from his practice.
d. Bernard is the head server at an upscale restaurant and recently paid $1.8 million for a residence in an exclusive gated community.
e. Homer has yearly AGI of around $70,000 and always claims the standard deduction. He works for a builder installing wallboard in new homes.
f. Gloria lost a Form 1099–DIV that she received from a corporation that paid her a dividend.
g. Cindy, a former vice president of a bank, has been charged with embezzling large sums of money.
h. Giselle is a cocktail waitress at an upscale nightclub. She has been audited several times in past years.
i. Marcus was recently assessed a large state income tax deficiency by the state of California for his utilization of an abusive tax shelter.
j. Guy, a professional gambler, recently broke up with his companion of 10 years and married her teenage daughter.
37. LO.5 With regard to the IRS audit process, comment on the following:
a. The audit is resolved by mail.
b. The audit is conducted at the office of the IRS.
c. A “no change” RAR results.
d. A special agent joins the audit team.
38. LO.5 Aldo has just been audited by the IRS. He does not agree with the agent’s findings but believes that he has only two choices: pay the proposed deficiency or resort to the courts. Do you agree with Aldo’s conclusion? Why or why not?
39. LO.5 What purpose is served by a statute of limitations? How is it relevant in the case of tax controversies?
40. LO.5 Regarding the statute of limitations on additional assessments of tax by the IRS, determine the applicable period in each of the following situations. Assume a calendar year individual with no fraud or substantial omission involved.
a. The income tax return for 2012 was filed on February 22, 2013.
b. The income tax return for 2012 was filed on June 25, 2013.
c. The income tax return for 2012 was prepared on April 5, 2013, but was never filed. Through some misunderstanding between the preparer and the taxpayer, each expected the other to file the return.
d. The income tax return for 2012 was never filed because the taxpayer thought no additional tax was due.