Taxation - 1 - Assignment Example

Taxation al Affiliation) Question One: Types of Taxes Income Taxes Income taxes are paid by anyone who earns an income byany means. Income taxes are subject to tax credits and deductions. Some people are exempted from paying income tax such as the low income earning group and individuals with disabilities.Property Taxes  Property taxes are proceeds from property owners. These properties may include land, commercial real estate or a home. The state or county government often collects property taxes, which supplement their budgets.

Unlike income taxes, which are subject to credits or deductions, property taxes are often rigid. Examples of property taxes include licensing fees on recreational vehicles, and parking fees on cars.Consumptive Taxes Consumptive taxes are levies on sales of commodities that are subject to use by a business or an individual. While some people understand that a small fee is added on to the buying of commodities in stores, many overlook additional taxes. An example of a consumptive tax is hunting or fishing.

Travel fees and toll road levies are also part of consumptive taxes. Question Two: Types of AuditThe IRS carries out three different types of audits: fields audit, office audits, and correspondence audits. If one is audited, the IRS notifies them in writing indicating the type of audit they are conducting.Office AuditIn an office audit, a taxpayer physically takes their documentation to an IRS branch office where IRS examiners review the details of the taxpayer’s documentation. Instances of IRS office audits include circumstances where a taxpayer claims abnormally high deductions and the IRS wants to see the conforming support documents to verify that the information is accurate.

Correspondence AuditA correspondence audit is the mildest audit and normally occurs due to minor mistakes on a taxpayer’s tax returns. Usually, a taxpayer mails the relevant forms and documentations to IRS to complete correspondence audit. The IRS then reviews the full information send by the Customer and closes the audit after addressing all issues.Field AuditUnder Field audit, IRS auditors visit the office or home of the taxpayer to verify that the tax returns were accurate. The main dissimilarity between a field audit and an office audit is that a field audit happens on the premise of the taxpayer while an office audit happens in the IRS branch office.

Individuals may request the IRS to perform the field audit at the premise of the taxpayer’s accountant.Circumstances for Extension of the Period of AuditThe following circumstances can lead to the extension of the audit period beyond three year limitation:a) When there is a substantial omission of items in the return documents of the taxpayer. Substantial omission is anything above 25% of the gross income.b) When there is evidence that the taxpayer attempted to avoid tax or failure to file returns.

Question Three The main aim of audits from a government’s point of view is to ensure that every taxpayer adheres to the same tax laws and that the taxpayers are reporting and paying taxes correctly. IRS Tax Audits seek to verify and understand the information contained in taxpayers’ tax returns.Self-employed individuals who receive the majority of their income in gratuities, and owners of businesses that receive many cash such as a pizza are at high risk of audits. It is not easy to verify and report tax fraud on tax returns of these individuals.

IRS pays more focus to these individuals because the probability that their returns are inaccurate is higher than individuals who are paid employees.Additionally, IRS pays more attention at professionals who run businesses such as accountants, lawyers, and doctors. These individuals are a prime target because they often run their businesses on their own and are in charge of accounting functions and bookkeeping of the business activities. Question Three Tax Evasion Vs Tax Avoidancea) This is an example of tax avoidance using the entity variable.

The Irish rock band U2 transferred part of its publishing company to a financial management company based in Netherlands where the royalty income of the company will not be taxed.b) This would be tax avoidance. Mr. P is considering the time period variable to lessen the burden of tax. The government has increased the rate of tax for the current year to 34%. It makes good business sense to record the sale of the asset in the previous year so that he can pay a lower tax rate of 28%. ReferenceDealing with a Tax Audit.

Preparation, Process and Appeals | Lawfirms.com. (n.d.). Retrieved November 26, 2014, from http://www.lawfirms.com/resources/tax/irs-and-tax-audits/the-audit-process.htm