IRS, Income-Shifting Strategies, Tax Evasion and Avoidance, and Dependency Requirements

Discussion Questions
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Discussion Questions
Response to question 1
A tax is understood as a required contribution to the revenue of the state, and is imposed by government on earnings of workers or business profits, or is to added to the cost of some transactions, services, and goods (Botkin, 2009).
Payment for driver’s license – this does not constitute a tax since it is not a mandatory contribution to the state’s revenue.
Payment for required house appraisal – this does not constitute a tax also because it is not a mandatory contribution to the state’s revenue.
Payment for hotel use of one percent of bill pay for projects of the city – this constitutes a tax; it is an obligatory contribution to the state’s revenue.
Payment for rental car of three percent of bill pay for roads – this is a tax since it is an obligatory contribution to the state’s revenue.
Response to question 2
The Health Savings Account contribution is basically deductible above-the-line, which means that its will get subtracted on page 1 of the Form 1040 before the taxpayer’s adjusted gross income (AGI) is calculated. Whether or not the taxpayer can itemize the medical expenditures would not have an effect on whether the taxpayer can deduct the HSA contribution or not (Lee, 2012).
Virtually every taxpayer loses part, or sometimes all, of the medical deduction on their income taxes. For the taxpayer to enjoy the writeoff, he/she should be able to itemize deductions. Even so, the taxpayer’s medical deductions are subject to a 7.5 percent haircut of his or her AGI. For instance, if a taxpayer’s AGI is $100,000, he or she will need over $7,500 in medical deductions in order to enjoy any deduction at all. The initial $7,500 the taxpayer spends is not actually eligible or qualified to be deducted (Lee, 2012). Being able to take the deductible above-the-line would in fact be nice, not a hardship.
Response to question 3
An audit could be carried out through an in-person interview or by mail and review of the records of the taxpayer. There are 4 different types of IRS Audits and they include (i) Correspondence audit: the least serious of all audits. The IRS sends a letter in the mail that asks for more information regarding an element of a tax return. (ii) Office audit: this interview takes place at the office of the IRS. Office audit is typically more serious and thus the taxpayer will have to come with his/her tax attorney, accountant or preparer (Internal Revenue Service, 2014a). (iii) Field audit: in essence, this is the most serious of all the audits and it will involve the IRS visiting the taxpayer at his or her office or home. It is more serious than other audits since the auditor of the IRS would ask to see other things. (iv) Random audits: these audits are carried out in order to find out the areas that are most probable to generate extra taxes. They are highly comprehensive (Intern...