Chapter 26 Tax Practice And Ethics

Click here go to purchase the Solutions Manual

---

Problems
19. LO.5 Gordon paid the $10,000 balance of his Federal income tax three months late.
Ignore daily compounding of interest. Determine the interest rate that applies relative to this amount, assuming that:
a. Gordon is an individual.
b. Gordon is a C corporation.
c. The $10,000 is not a tax that is due, but is a refund payable by the IRS to Gordon (an individual).
d. The $10,000 is not a tax that is due, but is a refund payable by the IRS to Gordon (a C corporation).
20. LO.6 Rita forgot to pay her Federal income tax on time. When she actually filed, she reported a balance due. Compute Rita’s failure to file penalty in each of the following cases.
a. Two months late, $1,000 additional tax due.
b. Five months late, $3,000 additional tax due.
c. Eight months late, $4,000 additional tax due.
d. Two and a half months late, $3,000 additional tax due.
e. Five months late due to fraud by Rita, $4,000 additional tax due.
f. Ten months late due to fraud by Rita, $15,000 additional tax due.
21. LO.6 Wade filed his Federal income tax return on time but did not remit the balance due. Compute Wade’s failure to pay penalty in each of the following cases.
The IRS has not issued a deficiency notice.
a. Four months late, $3,000 additional tax due.
b. Ten months late, $4,000 additional tax due.
c. Five years late, $5,000 additional tax due.
22. LO.6 Compute the failure to pay and failure to file penalties for John, who filed his
2015 income tax return on December 20, 2016, paying the $10,000 amount due at that time. On April 1, 2016, John received a six-month extension of time in which to file his return. He has no reasonable cause for failing to file his return by
October 15 or for failing to pay the tax that was due on April 15. John’s failure to comply with the tax laws was not fraudulent.
23. LO.6 Olivia, a calendar year taxpayer, does not file her 2015 Form 1040 until December
12, 2016. At this point, she pays the $40,000 balance due on her 2015 tax liability of $70,000. Olivia did not apply for and obtain any extension of time for filing the 2015 return.When questioned by the IRS on her delinquency, Olivia asserts: “If I was too busy to file my regular tax return, I was too busy to request an extension.”
a. Is Olivia liable for any penalties for failure to file and for failure to pay?
b. If so, compute the penalty amounts.
24. LO.6 Maureen, a calendar year individual taxpayer, files her 2014 return on
November 4, 2016. She did not obtain an extension for filing her return, and the return reflects additional income tax due of $15,000.
a. What are Maureen’s penalties for failure to file and to pay?
b. Would your answer to part (a) change if Maureen, before the due date of the return, had retained a CPA to prepare the return and it was the CPA’s negligence that caused the delay? Explain.
25. LO.6 Blair underpaid her taxes by $250,000. A portion of the underpayment was shown to be attributable to Blair’s negligence ($100,000). A court found that the rest of the deficiency constituted civil fraud ($150,000).
a. Compute the total fraud and negligence penalties incurred.
b. Blair pays the penalties four years after committing the improper acts. Her aftertax rate of return on available cash is 7%. What is the present value of Blair’s penalty obligations?
26. LO.6 Compute the overvaluation penalty for each of the following independent cases involving the fair market value of charitable contribution property. In each case, assume a marginal income tax rate of 35%.
Taxpayer Corrected IRS Value Reported Valuation
a. Individual $ 40,000 $ 50,000
b. C corporation 30,000 50,000
c. S corporation 40,000 50,000
d. Individual 150,000 200,000
e. Individual 150,000 250,000
f. C corporation 150,000 750,000
27. LO.6 Compute the undervaluation penalty for each of the following independent cases involving the value of a closely held business in the decedent’s gross estate. In each case, assume a marginal estate tax rate of 40%.
Reported Value Corrected IRS Valuation
a. $ 20,000 $ 25,000
b. 100,000 150,000
c. 150,000 250,000
d. 150,000 500,000
28. LO.6 Singh, a qualified appraiser of fine art and other collectibles, was advising
Colleen when she was determining the amount of the charitable contribution deduction for a gift of a sculpture to a museum. Singh sanctioned a $900,000 appraisal, even though he knew the market value of the piece was only $300,000.
Colleen assured Singh that she had never been audited by the IRS and that the risk of the government questioning his appraisal was negligible.
But Colleen was wrong, and her return was audited. The IRS used its own appraisers to set the value of the sculpture at $400,000. Colleen is in the 33% Federal income tax bracket, while Singh’s fee for preparing the appraisal was $20,000.
a. Compute the penalty the IRS can assess against Singh. (Do not consider the valuation penalty as to Colleen’s return.)
b. What is the penalty if Singh’s appraisal fee was $7,500 (not $20,000)?
29. LO.6 The Eggers Corporation filed an amended Form 1120, claiming an additional $400,000 deduction for payments to a contractor for a prior tax year. The amended return was based on the entity’s interpretation of a Regulation that defined deductible advance payment expenditures. The nature of Eggers’s activity with the contractor did not exactly fit the language of the Regulation. Nevertheless, because so much tax was at stake, Eggers’s tax department decided to broaden its interpretation and claim the deduction.
Eggers’s tax department estimated that there was only a 15% chance that Eggers’s interpretation would stand up to a Tax Court review.
a. What is the amount of tax penalty that Eggers is risking by taking this position?
b. What would be the result if there was a 45% chance that Eggers’s interpretation of the Regulation was correct?
30. 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.
a. Compute any appraiser’s penalty to which Vargas might be exposed.
b. Express the computation of this penalty as an Excel formula.
31. 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.
32. LO.6 Kold Services Corporation estimates that its 2017 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 2017 minimum quarterly estimated tax payments that will avoid an underpayment penalty.
a. For 2016, 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 2016 liability.
b. For 2016, taxable income was $450,000, and tax liability was $153,000.
c. For 2015, taxable income was $2 million, and tax liability was $680,000. For
2016, taxable income was $400,000, and tax liability was $136,000.
33. 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.
34. LO.7 Jane filed her 2016 Form 1040 on April 4, 2017. What is the applicable statute of limitations in each of the following independent situations?
a. Jane incurred a bad debt loss that she failed to claim.
b. Jane inadvertently omitted a large amount of gross income.
c. Same as part (b), except that the omission was deliberate.
d. Jane innocently overstated her deductions by a large amount.
e. No return was filed by Jane.
35. LO.7 Loraine (a calendar year taxpayer) reported the following transactions, all of which were properly included in a timely filed return.
Gross receipts $ 975,000
Cost of sales (850,000)
Gross profit $ 125,000
Capital gain $ 40,000
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?
c. How does the situation change in the context of fraud by Loraine?
36. LO.5, 7 On April 3, 2015, Luis filed his 2014 income tax return, which showed a tax due of $75,000. On June 1, 2017, he filed an amended return for 2014 that showed an additional tax of $10,000. Luis paid the additional amount. On May 18, 2018, Luis filed a claim for a 2014 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?
37. LO.8 Rod’s Federal income tax returns (Form 1040) for the indicated years were prepared by the following persons.
Year Preparer
1 Rod
2 Ann
3 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?
38. 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
39. 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 generate 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.
40. 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.
41. 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 in 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 has lost the receipts, you should deduct an odd amount on her return (e.g., $499), because an even amount ($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 in 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 in a prior year’s return, the CPA should not prepare the current year’s return for the client.