Tax Strategies Flashcards

Which indirect method of proving income compares a taxpayer's net worth at the beginning and end of a period, adjusted for nondeductible expenditures?

Answer: Net worth method

The net worth method, approved in Holland v. United States (1954), infers income from increases in net worth plus nondeductible expenditures.

In a net worth case, what is the most common defense a taxpayer raises to explain an apparent increase in wealth?

Answer: Cash hoard accumulated in prior years

Taxpayers often claim a pre-existing cash hoard, so investigators must establish a firm opening net worth.

Under IRC Section 7201, what is the maximum prison term for willful attempt to evade or defeat tax?

Answer: 5 years

Tax evasion under Section 7201 is a felony punishable by up to 5 years imprisonment.

Spies v. United States (1943) is significant because it established that tax evasion requires which element beyond a willful failure to file or pay?

Answer: An affirmative act of evasion

Spies held that an affirmative act, such as keeping a double set of books, elevates a misdemeanor to felony evasion.

What is the civil fraud penalty under IRC Section 6663 as a percentage of the underpayment attributable to fraud?

Answer: 75%

Section 6663 imposes a 75% penalty on the portion of an underpayment attributable to fraud.

What burden of proof must the IRS meet to establish civil tax fraud?

Answer: Clear and convincing evidence

Under IRC Section 7454 and case law, the IRS must prove civil fraud by clear and convincing evidence.

Which of the following is generally considered legal tax avoidance rather than tax evasion?

Answer: Contributing to a 401(k) to reduce taxable income

Using tax-advantaged retirement plans as the Code permits is lawful avoidance.