South-Western Federal Taxation 2022: Individual Income Taxes 45th edition by James C. Young Solution

34.  (LO 4)
a.  Both the national sales tax and the VAT are taxes on consumption. Both taxes impose more
of a burden on low-income taxpayers who must spend a larger proportion of their incomes on
essential purchases relative to higher-income taxpayers. As a result, the taxes are regressive
in effect.
b.  The regressive effect might be partly remedied by granting some sort of credit, rebate, or
exemption to low-income taxpayers.
35.  (LO 4, 5)
a.  Serena may have record-keeping issues related to the cash transactions. The short-term
holiday workers should be on the payroll because they are employees, and Serena owes FICA
and FUTA on their wages and must file Forms 940 and 941 with the IRS. Serena must also
timely issue a W–2 wage form to each of her employees.
b.  High. First, Serena is self-employed. Second, she operates partially on a cash basis. Third, the
opportunity to understate income and/or overstate expenses is high. Fourth, she has some
workers who appear to be misclassified and for whom she may not have issued tax reporting
forms.
36.  (LO 5)
a.  A correspondence audit is probably involved. These audits involve a limited number of issues
(i.e., taxpayer failed to report some dividend income) and most often are easily resolved.
b.  An audit that is conducted in an IRS office is called an office audit.
c.  The revenue agent’s report (RAR) accepts the taxpayer’s return as filed.
d.  When a special agent becomes involved, this usually means that fraud is suspected.
1-6  2022 Individual Income Taxes/Solutions Manual
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37.  (LO 5) In many unresolved audit disagreements at the agent level, the taxpayer should consider an
appeal to the Independent Office of Appeals. Although it is part of the IRS, it is authorized to resolve
audit disputes. It has greater settlement authority than does the agent. In many cases, a compromise
reached at the Independent Office of Appeals can avoid a costly and time-consuming judicial
proceeding.
38.  (LO 5) The purpose of a statute of limitations is to preclude parties from prosecuting stale claims. The
passage of time makes the defense of such claims difficult because witnesses and other evidence may
no longer be available. In the Federal tax area, statutes of limitations cover additional assessments by
the IRS and the pursuit of refund claims by taxpayers.
39.  (LO 5)
a.  The normal three-year statute of limitations will begin to run on the original due date of the
return (usually, the fifteenth day of the fourth month after year-end; April 15). When the
return is filed early, the normal filing date controls.
b.  Now the statute of limitations starts to run on the filing date. If the due date controlled (see
part a. above), the taxpayer could shorten the assessment period by filing late.
c.  If a return that is due is not filed, the statute of limitations does not start to run. It does not
matter that the failure to file was due to an innocent error on the part of the taxpayer or
adviser.
d.  Regardless of the fact that an innocent misunderstanding was involved, there is no statute of
limitations when a return is not filed.
40.  (LO 5) No. Interest is not paid if the refund is made within 45 days of when the return was filed.
However, a return is not considered filed until its due date. As a result, the period from April 15 to
May 28, 2021, does not satisfy the 45-day requirement.
41.  (LO 5, 6)
a.  Normally, the three-year statute of limitations applies to additional assessments the IRS can
make. However, if a substantial omission from gross income is made, the statute of
limitations is increased to six years. A substantial omission is defined as omitting in excess of
25% of the gross income reported on the return.
b.  No, it would not. The proper procedure would be to advise Andy to disclose the omission to
the IRS. Absent the client’s consent, do not make the disclosure yourself.
c.  If Andy refuses to make the disclosure and the omission has a material carryover effect to the
current year, you should withdraw from the engagement.
42.  (LO 5) $4,000, determined as follows:
Failure to pay penalty [0.5%  $40,000  2 months]  $ 400
Plus:
Failure to file penalty [5%  $40,000  2 months]  $4,000
Less failure to pay penalty for the same period (400)  3,600
Total penalties  $4,000
43.  (LO 5)
a.  $100,000 (20%  $500,000).
b.  $375,000 (75%  $500,000). The answer presumes that civil (not criminal) fraud is involved.