1- A question on a state income tax return asks the taxpayer if he or she made any out-of-state Internet or mail-order catalog purchase during the year . The question requires a yes or no answer and if the taxpayer answer yes the amount of such purchases is to be listed
a. Does such an inquiry have any relevance to the state income tax? If not why is it begin asked?
b. Your client Harriet want to leave the question unanswered . As the preparer of her return , how do you respond?
2- Assess the probability of an audit in each of the following independent situations.
a. As a result of a jury trial, Linda was awarded $3.5 million because of job discrimination. The award included $3 million for punitive damages.
b. Mel operates a combination check-cashing service and pawnshop.
c. Jayden, a self-employed trial lawyer, routinely files a Schedule C (Form 1040) that, due to large deductions, reports little (if any) profit from his practice.
d. Bernard is the head server at an upscale restaurant and recently paid $1.8 million for a residence in an exclusive gated community.
e. Homer has yearly Adjusted gross income (AGI) of around $70,000 and always claims the standard deduction. He works for a builder installing wallboard in new homes.
f. Gloria lost a Form 1099-DIV that she received from a corporation that paid her a dividend.
g. Cindy, a former vice president of a bank, has been charged with embezzling large sums of money.
h. Giselle is a cocktail waitress at an upscale nightclub. She has been audited several times in past years.
i. Marcus was recently assessed a large state income tax deficiency by the state of California for his utilization of an abusive tax shelter.
j. Guy, a professional gambler, recently broke up with his companion of ten years and married her teenage daughter.
3- On a Federal income tax return filed five years ago, Andy inadvertently omitted a large amount of gross income.
a. Andy seeks your advice as to whether the IRS is barred from assessing additional income tax in the event he is audited. What is your advice?
b. Would your advice differ if you are the person who prepared the return in question? Explain.
c. Suppose Andy asks you to prepare his current year?s return. Would you do so? Explain
4- Discuss the probable justification for each of the following aspects of the tax law:
a) a tax credit is allowed for amounts spent to furnish care for minor children while the parent works.
b) deductions for interest on a home mortgage and property taxes on a personal residence.
c) the income splitting benefits of filing a joint return.
d) gambling losses in excess of grambling gains
e) Net operating losses of current years can be carried back to profitable years.
f) a taxpayer who sells property on an installment basis can recognize gain on the sale over the period the payments are received.
g) The exclusion from federal tax of certain interest income from state and local bonds .
h) prepaid income is taxed to the recipient in the year received and not in the year it is earned.
5- Edward leases real estate to Janet for a period of 20 years. Janet makes capital improvements to the property. When the lease expires, Edward reclaims the property, including the improvements made by Janet
a) Under current law, at what point does Edward recognize income as a result of Janet?s improvements?
b) Has the law in part (a) always been the rule?
c) What is the justification, if any, for the current rule?
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a) No the inquiry has no relevance with the state income tax laws. The taxpayer will be required to pay the state an amount of tax of equivalent use.
b) Is has been advised to not to leave any question unanswered. Harriet should not leave the column blank.
Random selection is made by IRS for audit of taxpayers. The selection is based on computer screening, using statistical formulas, etc. The chances are there if the documents do not match for instance for W-2 do not match with the information provided or if in examinations some related transactions are found involving issues with other taxpayers like investors or partners.
a) For Linda there are chances of audit as the amount of reward is quite large and approximately 85% of the award received is with respect to punitive damages.
b) For Mel there exist chances of audit as using check-cashing service involves embezzlement of cash and non-billing of sales of made.
c) For Jayden the possibility of audit is there are he has claimed large deductions.
d) For Bernard also there is a possibility of audit as for a head server at a restaurant spending an amount of $ 1.8 million for home in an exclusive community generates the chances of audit.