Question

Your tax client Chen asks whether it is likely that her Form 1040 will be audited this year. You suspect that Chen might modify the information she reports on her return based on your answer. Address Chen's question, and provide her with a justification to comply fully with the tax law's reporting requirements.

About 1% of (all corporate tax returns/ all individual tax returns/ all tax returns) are audited in a given tax year. However, certain types of both taxpayers and income are subject to much higher probabilities of audit. The ethical tax professional (does/ does not) play the "audit lottery" and lower his or her reporting standards because of a perception that such actions "will not be caught." In addition, the tax professional (should/ should not) allow clients to do so.

For example, the IRS has developed ways of (document matching/ maximizing income) where Treasury can determine if a transaction has been properly reported by comparing (related party information/ third party information/ yearly averages) to relevant taxpayers' returns for the year.

Answer 1

Solution:-

About 1% of all individual tax returns are audited in a given tax year. However, certain types of both taxpayers and income are subject to much higher probabilities of audit. The ethical tax professional does not play the "audit lottery" and lower his or her reporting standards because of a perception that such actions "will not be caught." In addition, the tax professional should not allow clients to do so.

For example, the IRS has developed ways of document matching where Treasury can determine if a transaction has been properly reported by comparing third party information to relevant taxpayers' returns for the year.