Research Problems
Research Problem 1. Lopez always had taken his Form 1040 data to the franchise tax preparers in a local mall, but this year, his friend Cheryl asked to prepare his return.
Cheryl quoted a reasonable fee, and Lopez reasoned that, with finances especially tight in Cheryl’s household, she could use the money.
Lopez delivered his Forms W–2, 1099, and other documentation and said, “I’ll pick up the finished return from you on Monday.” Cheryl completed the return by that deadline, and without signing and reviewing the forms, Lopez allowed Cheryl to e-file it that day. The arrangement was that Cheryl would receive the refund through a special bank account and write Lopez a check for that amount, less her fee. When the refund came through about three weeks later, Cheryl wrote Lopez a check for $2,400, and all parties were satisfied. Lopez gladly used Cheryl to e-file the next year’s return using the same procedures.
To his surprise, Lopez received a letter from the IRS about 18 months later. The auditor had found that the return Cheryl had e-filed vastly overstated deductions, created false dependency exemptions (using Social Security numbers that did not exist), and wrongly calculated the earned income tax credit. According to the audit report, the refund issued was $4,500—Cheryl had pocketed the difference. Thus, the corrected tax liability meant that Lopez now owed $7,000 in tax, before considering interest and penalties.
Lopez contends that he relied on Cheryl’s expertise in the tax law and e-filing procedures.
Consequently, there was reasonable cause for the underpayment of tax, and the
IRS should waive the understatement and negligence penalties. The IRS has expressed sympathy for Lopez’s position, but it maintains that the penalty should stand. What do you think? Summarize your findings in a memo for the tax research file.
Research Problem 2. Blanche Creek (111 Elm Avenue, Plymouth, IN 46563) has engaged your firm because she has been charged with failure to file her 2015 Federal
Form 1040. Blanche maintains that the “reasonable cause” exception should apply.
During the entire tax filing season in 2016, she was under a great deal of stress at work and in her personal life. As a result, Blanche developed a sleep disorder, which was treated through a combination of pills and counseling.
Your firm ultimately prepared the 2015 tax return for Blanche, but it was filed far beyond the due date. Blanche is willing to pay the delinquent tax and related interest.
However, she believes that the failure to pay penalty is unfair, as she was ill.
Consequently, she could not be expected to keep to the usual deadlines for filing.
Write a letter to Blanche concerning these matters.
Research Problem 3. Your firm is preparing the Form 1040 of Norah McGinty, a resident, like you, of Oklahoma. You have contracted for the last three filing seasons with a firm in India, Tax Express Bangalore, to prepare initial drafts of tax returns using tax software that you provide to Tax Express. You find that the use of Tax Express Bangalore’s services significantly increases the profits of your Form 1040 practice.
Your firm uses Tax Express annually to help prepare Forms 1040 for about 500 of your clients. Three of your tax managers, JaJuan, Max, and Emma, spend several weeks in the autumn every year in India, training the Bangalore staff in Federal tax law changes and in the operations of your tax software packages.
Phil, a tax associate in your Norman office, is handling Norah’s return this year.
Phil works with Norah to complete the online tax questionnaire that summarizes her taxable events and the related dollar amounts. The questionnaire includes the Social
Security numbers of Norah and her two dependent children. The children are young, and their income levels do not require them to complete income tax returns.
Phil sends the completed questionnaire and electronic files of supporting documents to the Bangalore staff at the end of the work day on Monday, using a secure file transfer site. Upon arriving at work Thursday morning, Phil finds that Tax Express has completed the Form 1040, including a payment voucher. Phil reviews the return, makes a few minor changes to it, and then meets with Norah on Saturday to convey to her the finalized documents. Norah reviews the form, and she signs it and writes a check for the amount due, mailing the return to the IRS Service Center from her home on the following Monday.
In a memo for the tax research file, discuss any special rules from the Code and
Regulations that might affect your firm’s use of Tax Express Bangalore for your client
Norah McGinty.
Research Problem 4. Taxpayers generally “go to jail” on tax charges only when criminal activities have been involved. Find information about the criminal tax prosecutions the Treasury undertakes. Compare data for the last year of information available from the IRS and for five years prior to that.
How many criminal tax charges are initiated in a year? How much time does a criminal tax case take from the filing of charges to disposition by the IRS or a court? What issues tend to be the focus of a criminal tax prosecution? How much additional tax, interest, and penalty revenue does the Treasury collect due to its criminal prosecutions?
Summarize your findings for your classmates in no more than four PowerPoint slides.
Research Problem 5. Find a website that lists suggestions on how to deal with an IRS auditor during the first meeting with him or her. You might start at www.irs.gov by reading Publication 556. Then find at least three sites offered by tax professionals with different credentials and certifications. Summarize and evaluate each of the key points in an e-mail to your instructor.
Roger CPA Review Questions
1. Which of the following situations will result in a tax preparer’s penalty?
I. At a client’s insistence, the preparer takes and properly discloses a tax position which does not meet the reasonable basis standard.
II. The preparer discloses a client’s personally identifying information to outside parties in order to permit the electronic preparation and submission of the client’s return.
III. The preparer provides his Preparer Tax Identification Number but fails to sign a client’s tax return.
a. II only
b. I, II, and III
c. I only
d. I and III only
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Internet
Activity
2. In which of the following cases is a CPA not subject to a penalty stemming from a position taken on a tax return?
I. The position had a “reasonable chance of being sustained.”
II. The position had a “realistic possibility” of being sustained.
III. The position was “more likely than not” to be sustained.
a. I only
b. II only
c. III only
d. I, II, and III
3. Scott is preparing Allison’s Form 1040. Allison’s gross income for the tax year was $75,000. In calculating her deductions to arrive at adjusted gross income (AGI),
Allison estimates that she paid around $2,000 in student loan interest. Her student loan servicing company, Crippling Lifetime Debt (CLD), went out of business and her debt was transferred to other loan servicers. Allison monitored all of her account records online, which are no longer readily available because of CLD’s closing.
Based on Allison’s monthly payments which he viewed in her bank activity, Scott believes Allison’s estimate is reasonable. May Scott use Allison’s estimate to arrive at
Allison’s AGI?
a. Yes, because it is less than 10% of Allison’s AGI.
b. No, because the records at the new loan servicers will be able to confirm or dispute
Allison’s estimate.
c. Yes, because Scott believes the estimate is reasonable.
d. No, because it is an adjustment for AGI.
4. While preparing Margaret’s Form 1040, John discovers an error on her prior-year tax return, which Margaret prepared herself, in which Margaret’s adjusted gross income (AGI) was understated by $10,000, roughly 10% of AGI. What is John’s responsibility concerning the error?
a. Do nothing, since the understatement was less than 25% of Margaret’s AGI.
b. Correct the error on the current-year return, without Margaret’s knowledge.
c. Request that Margaret correct the error, and notify the IRS if she doesn’t.
d. Request that Margaret correct the error, and consider withdrawing from the engagement if she doesn’t.
5. Which of the following parties are not affected by Treasury Circular 230?
a. Attorneys
b. IRS Agents
c. CPAs
d. Enrolled Agents
Research Problem 1. Lopez always had taken his Form 1040 data to the franchise tax preparers in a local mall, but this year, his friend Cheryl asked to prepare his return.
Cheryl quoted a reasonable fee, and Lopez reasoned that, with finances especially tight in Cheryl’s household, she could use the money.
Lopez delivered his Forms W–2, 1099, and other documentation and said, “I’ll pick up the finished return from you on Monday.” Cheryl completed the return by that deadline, and without signing and reviewing the forms, Lopez allowed Cheryl to e-file it that day. The arrangement was that Cheryl would receive the refund through a special bank account and write Lopez a check for that amount, less her fee. When the refund came through about three weeks later, Cheryl wrote Lopez a check for $2,400, and all parties were satisfied. Lopez gladly used Cheryl to e-file the next year’s return using the same procedures.
To his surprise, Lopez received a letter from the IRS about 18 months later. The auditor had found that the return Cheryl had e-filed vastly overstated deductions, created false dependency exemptions (using Social Security numbers that did not exist), and wrongly calculated the earned income tax credit. According to the audit report, the refund issued was $4,500—Cheryl had pocketed the difference. Thus, the corrected tax liability meant that Lopez now owed $7,000 in tax, before considering interest and penalties.
Lopez contends that he relied on Cheryl’s expertise in the tax law and e-filing procedures.
Consequently, there was reasonable cause for the underpayment of tax, and the
IRS should waive the understatement and negligence penalties. The IRS has expressed sympathy for Lopez’s position, but it maintains that the penalty should stand. What do you think? Summarize your findings in a memo for the tax research file.
Research Problem 2. Blanche Creek (111 Elm Avenue, Plymouth, IN 46563) has engaged your firm because she has been charged with failure to file her 2015 Federal
Form 1040. Blanche maintains that the “reasonable cause” exception should apply.
During the entire tax filing season in 2016, she was under a great deal of stress at work and in her personal life. As a result, Blanche developed a sleep disorder, which was treated through a combination of pills and counseling.
Your firm ultimately prepared the 2015 tax return for Blanche, but it was filed far beyond the due date. Blanche is willing to pay the delinquent tax and related interest.
However, she believes that the failure to pay penalty is unfair, as she was ill.
Consequently, she could not be expected to keep to the usual deadlines for filing.
Write a letter to Blanche concerning these matters.
Research Problem 3. Your firm is preparing the Form 1040 of Norah McGinty, a resident, like you, of Oklahoma. You have contracted for the last three filing seasons with a firm in India, Tax Express Bangalore, to prepare initial drafts of tax returns using tax software that you provide to Tax Express. You find that the use of Tax Express Bangalore’s services significantly increases the profits of your Form 1040 practice.
Your firm uses Tax Express annually to help prepare Forms 1040 for about 500 of your clients. Three of your tax managers, JaJuan, Max, and Emma, spend several weeks in the autumn every year in India, training the Bangalore staff in Federal tax law changes and in the operations of your tax software packages.
Phil, a tax associate in your Norman office, is handling Norah’s return this year.
Phil works with Norah to complete the online tax questionnaire that summarizes her taxable events and the related dollar amounts. The questionnaire includes the Social
Security numbers of Norah and her two dependent children. The children are young, and their income levels do not require them to complete income tax returns.
Phil sends the completed questionnaire and electronic files of supporting documents to the Bangalore staff at the end of the work day on Monday, using a secure file transfer site. Upon arriving at work Thursday morning, Phil finds that Tax Express has completed the Form 1040, including a payment voucher. Phil reviews the return, makes a few minor changes to it, and then meets with Norah on Saturday to convey to her the finalized documents. Norah reviews the form, and she signs it and writes a check for the amount due, mailing the return to the IRS Service Center from her home on the following Monday.
In a memo for the tax research file, discuss any special rules from the Code and
Regulations that might affect your firm’s use of Tax Express Bangalore for your client
Norah McGinty.
Research Problem 4. Taxpayers generally “go to jail” on tax charges only when criminal activities have been involved. Find information about the criminal tax prosecutions the Treasury undertakes. Compare data for the last year of information available from the IRS and for five years prior to that.
How many criminal tax charges are initiated in a year? How much time does a criminal tax case take from the filing of charges to disposition by the IRS or a court? What issues tend to be the focus of a criminal tax prosecution? How much additional tax, interest, and penalty revenue does the Treasury collect due to its criminal prosecutions?
Summarize your findings for your classmates in no more than four PowerPoint slides.
Research Problem 5. Find a website that lists suggestions on how to deal with an IRS auditor during the first meeting with him or her. You might start at www.irs.gov by reading Publication 556. Then find at least three sites offered by tax professionals with different credentials and certifications. Summarize and evaluate each of the key points in an e-mail to your instructor.
Roger CPA Review Questions
1. Which of the following situations will result in a tax preparer’s penalty?
I. At a client’s insistence, the preparer takes and properly discloses a tax position which does not meet the reasonable basis standard.
II. The preparer discloses a client’s personally identifying information to outside parties in order to permit the electronic preparation and submission of the client’s return.
III. The preparer provides his Preparer Tax Identification Number but fails to sign a client’s tax return.
a. II only
b. I, II, and III
c. I only
d. I and III only
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Internet
Activity
2. In which of the following cases is a CPA not subject to a penalty stemming from a position taken on a tax return?
I. The position had a “reasonable chance of being sustained.”
II. The position had a “realistic possibility” of being sustained.
III. The position was “more likely than not” to be sustained.
a. I only
b. II only
c. III only
d. I, II, and III
3. Scott is preparing Allison’s Form 1040. Allison’s gross income for the tax year was $75,000. In calculating her deductions to arrive at adjusted gross income (AGI),
Allison estimates that she paid around $2,000 in student loan interest. Her student loan servicing company, Crippling Lifetime Debt (CLD), went out of business and her debt was transferred to other loan servicers. Allison monitored all of her account records online, which are no longer readily available because of CLD’s closing.
Based on Allison’s monthly payments which he viewed in her bank activity, Scott believes Allison’s estimate is reasonable. May Scott use Allison’s estimate to arrive at
Allison’s AGI?
a. Yes, because it is less than 10% of Allison’s AGI.
b. No, because the records at the new loan servicers will be able to confirm or dispute
Allison’s estimate.
c. Yes, because Scott believes the estimate is reasonable.
d. No, because it is an adjustment for AGI.
4. While preparing Margaret’s Form 1040, John discovers an error on her prior-year tax return, which Margaret prepared herself, in which Margaret’s adjusted gross income (AGI) was understated by $10,000, roughly 10% of AGI. What is John’s responsibility concerning the error?
a. Do nothing, since the understatement was less than 25% of Margaret’s AGI.
b. Correct the error on the current-year return, without Margaret’s knowledge.
c. Request that Margaret correct the error, and notify the IRS if she doesn’t.
d. Request that Margaret correct the error, and consider withdrawing from the engagement if she doesn’t.
5. Which of the following parties are not affected by Treasury Circular 230?
a. Attorneys
b. IRS Agents
c. CPAs
d. Enrolled Agents