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

Answer:

Fewer than 1% of all individual tax returns are audited in a given tax year. However, certain types of both taxpayers and income—including, for instance, high-income individuals, cash- oriented businesses, real estate transactions, and estate- and gift-taxable transfers—are subject to much higher probabilities of audit. The ethical tax professional does not "play the audit lottery" and lower his/her reporting standards because of a perception that such actions "will not be caught," nor should the tax professional allow clients to do so.

Explanation:

Fewer than 1% of all individual tax returns as well as all corporate tax return are been audited in a given tax year.

However, certain types of both taxpayers and the income for example high-income individuals, cash- oriented businesses, real estate transactions, estate as well as gift-taxable transfer are often subject to much higher probabilities of audit.

Furthermore the ethical tax professional does not "play the audit lottery" and lower his/her reporting standards because of a perception that such actions "will not be caught," nor should the tax professional allow clients to do so which is why thethe IRS has developed ways of document matching/ maximizing income in which Treasury can help determine if a transaction has been properly and effectively reported by comparing all related party information, third party information and yearly averages to relevant taxpayers' returns for the year.