tax problems - questin and answer ,.,. ch 26
Question # 00030730
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Updated on: 11/05/2014 04:46 AM Due on: 12/12/2014
35. LO.6 Kaitlin donated a painting to the local art museum. As she is subject to a 35% marginal tax rate, she needs a large charitable contribution deduction for the year. She engaged Vargas (who was referred to her by the staff of the museum) to provide an appraisal of the painting before she filed her Form 1040 for the year. Kaitlin told Vargas, “Be kind to me on this appraisal, and I’ll send several more clients to you in the future.”
Kaitlin paid Vargas a $45,000 fee for his services.
Vargas completed his appraisal and determined that the painting was worth $500,000 under current market conditions. Still, in light of Kaitlin’s promise of future business,
Vargas sent Kaitlin an official appraisal reporting a $900,000 value for the artwork. Vargas had never compromised his integrity, but this time the temptation was too much.
Kaitlin used the appraisal to claim a $900,000 deduction for her charitable gift.
Kaitlin will incur a valuation penalty now that her Form 1040 has been audited and the
IRS has determined that the correct amount of the deduction is $500,000. But is Vargas also exposed to a Federal tax penalty? Explain.
36. LO.6 Trudy’s AGI last year was $200,000. Her Federal income tax came to $65,000, which she paid through a combination of withholding and estimated payments. This year, her AGI will be $300,000, with a projected tax liability of $45,000, all to be paid through estimates.
a. Ignore the annualized income method. Compute Trudy’s quarterly estimated tax payment schedule for this year.
b. Assume instead that Trudy’s AGI last year was $100,000 and resulted in a Federal income tax of $20,000. Determine her quarterly estimated tax payment schedule for this year.
37. LO.6 Kold Services Corporation estimates that its 2014 taxable income will be $500,000. Thus, it is subject to a flat 34% income tax rate and incurs a $170,000 liability.
For each of the following independent cases, compute Kold’s 2014 minimum quarterly estimated tax payments that will avoid an underpayment penalty.
a. For 2013, taxable income was ($200,000). Kold carried back all of this loss to prior years and exhausted the entire net operating loss in creating a zero 2013 liability.
b. For 2013, taxable income was $450,000, and tax liability was $153,000.
c. For 2012, taxable income was $2 million, and tax liability was $680,000. For 2013, taxable income was $400,000, and tax liability was $136,000.
38. LO.6 The Leake Company, owned equally by Jacquie (chair of the board of directors) and Jeff (company president), is in very difficult financial straits. Last month, Jeff used the $300,000 withheld from employee paychecks for Federal payroll and income taxes to pay a creditor who threatened to cut off all supplies. To keep the company afloat, Jeff used these government funds willfully for the operations of the business, but even that effort was not enough. The company missed the next two payrolls, and today other creditors took action to shut down Leake altogether.
How much will the IRS assess in taxes and penalties in this matter and from whom?
How can you as a tax professional best offer service to Jacquie, Jeff, and Leake? Address these matters in a memo for the tax research file.
39. LO.7 Keely filed her 2013 Form 1040 on April 4, 2014. What is the applicable statute of limitations in each of the following independent situations?
a. The taxpayer incurred a bad debt loss that she failed to claim.
b. A taxpayer inadvertently omitted a large amount of gross income.
c. Same as (b), except that the omission was deliberate.
d. A taxpayer innocently overstated her deductions by a large amount.
e. What if no return was filed by the taxpayer?
40. LO.7 Loraine, a calendar year taxpayer, reported the following transactions, all of which were properly included in a timely return.
Gross receipts $ 975,000
Less: Cost of sales (850,000)
Gross profit $ 125,000
Capital gain $ 40,000
Less: Capital loss (25,000) 15,000
Total income $ 140,000
a. Presuming the absence of fraud, how much of an omission from gross income is required before the six-year statute of limitations applies?
b. Would it matter if cost of sales had been inadvertently overstated by $150,000? Explain.
c. How does the situation change in the context of fraud by Loraine?
41. LO.5, 7 On April 3, 2010, Luis filed his 2009 income tax return, which showed a tax due of $75,000. On June 1, 2012, he filed an amended return for 2009 that showed an additional tax of $10,000. Luis paid the additional amount. On May 18, 2013, Luis filed a claim for a 2009 refund of $25,000.
a. If Luis’s claim for a refund is correct in amount, how much tax will he recover?
b. What is the period that government-paid interest runs with respect to Luis’s claim for a refund?
c. How would you have advised him differently?
42. LO.7 Chee owed $4,000 in Federal income tax when she filed her Form 1040 for 2013.
She attached a sticky note to the 1040 that read, “My inventory computations on last year’s (2012) return were wrong, so I paid $1,000 too much in tax.” Chee then included a check for $3,000 with the Form 1040 for 2013. Write a memo for the tax research file commenting on Chee’s actions.
43. LO.8 Rod’s Federal income tax returns (Form 1040) for the indicated years were prepared by the following persons.
Year Preparer 2011 Rod 2012 Ann 2013 Cheryl
Ann is Rod’s next-door neighbor and owns and operates a pharmacy. Cheryl is a licensed
CPA and is engaged in private practice. In the event Rod is audited and all three returns are examined, who may represent him before the IRS at the agent level? Who may represent Rod before the Appeals Division?
44. LO.8 Christie is the preparer of the Form 1120 for Yostern Corporation. On the return, Yostern claimed a deduction that the IRS later disallowed on audit. Compute the tax preparer penalty that could be assessed against Christie in each of the following independent situations.
Form 8275 Disclosure on the Return of the Disputed
Deduction?
Tax Reduction
Resulting from the
Deduction
Probability That the Courts
Would Approve the
Deduction
Christie’s Fee to
Complete Yostern’s
Return
a. No $40,000 65% $7,000
b. No 40,000 35 7,000
c. No 40,000 35 1,500
d. Yes 40,000 35 7,000
e. Yes 40,000 15 4,000
45. LO.8 Discuss which penalties, if any, might be imposed on the tax adviser in each of the following independent circumstances. In this regard, assume that the tax adviser:
a. Suggested to the client various means by which to acquire excludible income.
b. Suggested to the client various means by which to conceal cash receipts from gross income.
c. Suggested to the client means by which to improve her cash flow by delaying for six months or more the deposit of the employees’ share of Federal employment taxes.
d. Failed, because of pressing time conflicts, to conduct the usual review of the client’s tax return. The IRS later discovered that the return included fraudulent data.
e. Failed, because of pressing time conflicts, to conduct the usual review of the client’s tax return. The IRS later discovered a mathematical error in the computation of the personal exemption.
46. LO.8 Compute the preparer penalty the IRS could assess on Gerry in each of the following independent cases.
a. On March 21, the copy machine was not working, so Gerry gave original returns to her 20 clients that day without providing any duplicates for them. Copies for Gerry’s files and for use in preparing state tax returns had been made on March 20.
b. Because Gerry extended her vacation a few days, she missed the Annual Tax Update seminar that she usually attends. As a result, she was unaware that Congress had changed a law affecting limited partnerships. The change affected the transactions of 25 of Gerry’s clients, all of whom understated their tax as a result.
c. Gerry heard that the IRS was increasing its audits of corporations that hold assets in a foreign trust. As a result, Gerry instructed the intern who prepared the initial drafts of the returns for five corporate clients to leave blank the question about such trusts.
Not wanting to lose his position, the intern, a senior accounting major at State University, complied with Gerry’s instructions.
47. LO.8 You are the chair of the Ethics Committee of your state’s CPA Licensing Commission.
Interpret controlling AICPA authority in addressing the following assertions by your membership.
a. When a CPA has reasonable grounds for not answering an applicable question on a client’s return, a brief explanation of the reason for the omission should not be provided, because it would flag the return for audit by the IRS.
b. If a CPA discovers during an IRS audit that the client has a material error on the return under examination, he should immediately withdraw from the engagement.
c. If the client tells you that she paid $500 for office supplies but lost the receipt, you should deduct an odd amount on her return (e.g., $499), because an even amount (i.e., $500) would indicate to the IRS that her deduction was based on an estimate.
d. If a CPA knows that the client has a material error on a prior year’s return, he should not, without the client’s consent, disclose the error to the IRS.
e. If a CPA’s client will not correct a material error on a prior year’s return, the CPA should not prepare the current year’s return for the client.
Kaitlin paid Vargas a $45,000 fee for his services.
Vargas completed his appraisal and determined that the painting was worth $500,000 under current market conditions. Still, in light of Kaitlin’s promise of future business,
Vargas sent Kaitlin an official appraisal reporting a $900,000 value for the artwork. Vargas had never compromised his integrity, but this time the temptation was too much.
Kaitlin used the appraisal to claim a $900,000 deduction for her charitable gift.
Kaitlin will incur a valuation penalty now that her Form 1040 has been audited and the
IRS has determined that the correct amount of the deduction is $500,000. But is Vargas also exposed to a Federal tax penalty? Explain.
36. LO.6 Trudy’s AGI last year was $200,000. Her Federal income tax came to $65,000, which she paid through a combination of withholding and estimated payments. This year, her AGI will be $300,000, with a projected tax liability of $45,000, all to be paid through estimates.
a. Ignore the annualized income method. Compute Trudy’s quarterly estimated tax payment schedule for this year.
b. Assume instead that Trudy’s AGI last year was $100,000 and resulted in a Federal income tax of $20,000. Determine her quarterly estimated tax payment schedule for this year.
37. LO.6 Kold Services Corporation estimates that its 2014 taxable income will be $500,000. Thus, it is subject to a flat 34% income tax rate and incurs a $170,000 liability.
For each of the following independent cases, compute Kold’s 2014 minimum quarterly estimated tax payments that will avoid an underpayment penalty.
a. For 2013, taxable income was ($200,000). Kold carried back all of this loss to prior years and exhausted the entire net operating loss in creating a zero 2013 liability.
b. For 2013, taxable income was $450,000, and tax liability was $153,000.
c. For 2012, taxable income was $2 million, and tax liability was $680,000. For 2013, taxable income was $400,000, and tax liability was $136,000.
38. LO.6 The Leake Company, owned equally by Jacquie (chair of the board of directors) and Jeff (company president), is in very difficult financial straits. Last month, Jeff used the $300,000 withheld from employee paychecks for Federal payroll and income taxes to pay a creditor who threatened to cut off all supplies. To keep the company afloat, Jeff used these government funds willfully for the operations of the business, but even that effort was not enough. The company missed the next two payrolls, and today other creditors took action to shut down Leake altogether.
How much will the IRS assess in taxes and penalties in this matter and from whom?
How can you as a tax professional best offer service to Jacquie, Jeff, and Leake? Address these matters in a memo for the tax research file.
39. LO.7 Keely filed her 2013 Form 1040 on April 4, 2014. What is the applicable statute of limitations in each of the following independent situations?
a. The taxpayer incurred a bad debt loss that she failed to claim.
b. A taxpayer inadvertently omitted a large amount of gross income.
c. Same as (b), except that the omission was deliberate.
d. A taxpayer innocently overstated her deductions by a large amount.
e. What if no return was filed by the taxpayer?
40. LO.7 Loraine, a calendar year taxpayer, reported the following transactions, all of which were properly included in a timely return.
Gross receipts $ 975,000
Less: Cost of sales (850,000)
Gross profit $ 125,000
Capital gain $ 40,000
Less: Capital loss (25,000) 15,000
Total income $ 140,000
a. Presuming the absence of fraud, how much of an omission from gross income is required before the six-year statute of limitations applies?
b. Would it matter if cost of sales had been inadvertently overstated by $150,000? Explain.
c. How does the situation change in the context of fraud by Loraine?
41. LO.5, 7 On April 3, 2010, Luis filed his 2009 income tax return, which showed a tax due of $75,000. On June 1, 2012, he filed an amended return for 2009 that showed an additional tax of $10,000. Luis paid the additional amount. On May 18, 2013, Luis filed a claim for a 2009 refund of $25,000.
a. If Luis’s claim for a refund is correct in amount, how much tax will he recover?
b. What is the period that government-paid interest runs with respect to Luis’s claim for a refund?
c. How would you have advised him differently?
42. LO.7 Chee owed $4,000 in Federal income tax when she filed her Form 1040 for 2013.
She attached a sticky note to the 1040 that read, “My inventory computations on last year’s (2012) return were wrong, so I paid $1,000 too much in tax.” Chee then included a check for $3,000 with the Form 1040 for 2013. Write a memo for the tax research file commenting on Chee’s actions.
43. LO.8 Rod’s Federal income tax returns (Form 1040) for the indicated years were prepared by the following persons.
Year Preparer 2011 Rod 2012 Ann 2013 Cheryl
Ann is Rod’s next-door neighbor and owns and operates a pharmacy. Cheryl is a licensed
CPA and is engaged in private practice. In the event Rod is audited and all three returns are examined, who may represent him before the IRS at the agent level? Who may represent Rod before the Appeals Division?
44. LO.8 Christie is the preparer of the Form 1120 for Yostern Corporation. On the return, Yostern claimed a deduction that the IRS later disallowed on audit. Compute the tax preparer penalty that could be assessed against Christie in each of the following independent situations.
Form 8275 Disclosure on the Return of the Disputed
Deduction?
Tax Reduction
Resulting from the
Deduction
Probability That the Courts
Would Approve the
Deduction
Christie’s Fee to
Complete Yostern’s
Return
a. No $40,000 65% $7,000
b. No 40,000 35 7,000
c. No 40,000 35 1,500
d. Yes 40,000 35 7,000
e. Yes 40,000 15 4,000
45. LO.8 Discuss which penalties, if any, might be imposed on the tax adviser in each of the following independent circumstances. In this regard, assume that the tax adviser:
a. Suggested to the client various means by which to acquire excludible income.
b. Suggested to the client various means by which to conceal cash receipts from gross income.
c. Suggested to the client means by which to improve her cash flow by delaying for six months or more the deposit of the employees’ share of Federal employment taxes.
d. Failed, because of pressing time conflicts, to conduct the usual review of the client’s tax return. The IRS later discovered that the return included fraudulent data.
e. Failed, because of pressing time conflicts, to conduct the usual review of the client’s tax return. The IRS later discovered a mathematical error in the computation of the personal exemption.
46. LO.8 Compute the preparer penalty the IRS could assess on Gerry in each of the following independent cases.
a. On March 21, the copy machine was not working, so Gerry gave original returns to her 20 clients that day without providing any duplicates for them. Copies for Gerry’s files and for use in preparing state tax returns had been made on March 20.
b. Because Gerry extended her vacation a few days, she missed the Annual Tax Update seminar that she usually attends. As a result, she was unaware that Congress had changed a law affecting limited partnerships. The change affected the transactions of 25 of Gerry’s clients, all of whom understated their tax as a result.
c. Gerry heard that the IRS was increasing its audits of corporations that hold assets in a foreign trust. As a result, Gerry instructed the intern who prepared the initial drafts of the returns for five corporate clients to leave blank the question about such trusts.
Not wanting to lose his position, the intern, a senior accounting major at State University, complied with Gerry’s instructions.
47. LO.8 You are the chair of the Ethics Committee of your state’s CPA Licensing Commission.
Interpret controlling AICPA authority in addressing the following assertions by your membership.
a. When a CPA has reasonable grounds for not answering an applicable question on a client’s return, a brief explanation of the reason for the omission should not be provided, because it would flag the return for audit by the IRS.
b. If a CPA discovers during an IRS audit that the client has a material error on the return under examination, he should immediately withdraw from the engagement.
c. If the client tells you that she paid $500 for office supplies but lost the receipt, you should deduct an odd amount on her return (e.g., $499), because an even amount (i.e., $500) would indicate to the IRS that her deduction was based on an estimate.
d. If a CPA knows that the client has a material error on a prior year’s return, he should not, without the client’s consent, disclose the error to the IRS.
e. If a CPA’s client will not correct a material error on a prior year’s return, the CPA should not prepare the current year’s return for the client.
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Solution: tax problems - questin and answer ,.,. ch 26