CLI Tax Strategies 2

Question 1

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?

Accepted Answer

Net worth method

Answer

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

Question 2

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?

Accepted Answer

Form 8300

Answer

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

Question 3

What separates tax avoidance from tax evasion?

Accepted Answer

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

Answer

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

Question 4

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?

Accepted Answer

A Kovel arrangement

Answer

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

Question 5

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

Accepted Answer

26 U.S.C. § 6103

Answer

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

CLI - Certified Legal Investigator Practice Test

CLI - Certified Legal Investigator Practice Test

CLI Tax Strategies 2