Tax Strategies Flashcards

An investigator shows that a subject's assets grew far faster than his reported income over three years. Which indirect method of proving income is this?

Answer: Net worth method

The net worth method compares the change in net worth plus nondeductible expenses against reported income to estimate unreported income.

Under federal law, which IRS form must a business file when it receives more than $10,000 in cash in one transaction or related transactions?

Answer: Form 8300

Form 8300 reports cash payments over $10,000 received in a trade or business.

What separates tax avoidance from tax evasion?

Answer: Avoidance uses legal means to reduce tax, while evasion willfully uses illegal means to escape tax owed

Tax avoidance is lawful tax planning, while evasion under 26 U.S.C. § 7201 is a felony that requires willfulness.

A client's attorney retains an accountant so the accountant's analysis of the client's tax records stays privileged. What is this arrangement commonly called?

Answer: A Kovel arrangement

Under United States v. Kovel (2d Cir. 1961), attorney-client privilege can cover an accountant the attorney hires to help give legal advice.

Which federal statute generally makes tax returns and return information confidential and limits the IRS from disclosing them to third parties?

Answer: 26 U.S.C. § 6103

Section 6103 of the Internal Revenue Code protects the confidentiality of returns and return information.

An investigator doing an asset search finds a federal tax lien against the subject. Where is the notice of lien usually found?

Answer: In public records at the county recorder or secretary of state's office

A Notice of Federal Tax Lien is filed in public records so creditors are on notice, which makes it useful for asset searches.

For a civil tax assessment, how long is the IRS's general statute of limitations when the taxpayer filed a non-fraudulent return with no substantial omission?

Answer: Three years from the filing date

Under 26 U.S.C. § 6501(a), the IRS generally has three years after a return is filed to assess tax.