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

 
196. Tracy has just been audited and the IRS agent has issued an RAR that assesses a large deficiency. Since Tracy disagrees with the result, her next step is to go to court. Do you agree?
ANSWER:  Tracy might save herself time and expense by going to the Independent Office of  Appeals of the IRS. Here, the IRS has the authority to negotiate a settlement based on the “hazards of litigation” (i.e., the probabilities of winning or losing). If a settlement is reached, resorting to the courts is avoided.
 
197. Brayden files his Federal income tax return by April 15 but does not pay the tax. Although he expects to pay interest on the large amount of tax he still owes, he feels that the timely filing has avoided any penalties. Is Brayden’s assumption correct?
ANSWER:  Although Brayden has avoided the failure to file penalty, the failure to pay penalty will apply. It is 0.5% per month up to a maximum of 25% of the tax due as shown on the return.
 
198. Melinda has been referred to you by one of your clients. In the past, she has prepared her own income tax returns, but she has become overwhelmed by the increased complexity of the tax law. Consequently, Melinda wants you to prepare her return for calendar year 2021. In reviewing her 2020 return, you note that she has claimed as a deduction the entire cost of a business building that should have been capitalized and depreciated. What course of action should you follow?
ANSWER:  You should recommend to Melinda that an amended return be filed for 2020 correcting the error. If she refuses, you should assess the gravity of the error and how it impacts on your ability to file an accurate return for 2021. If you cannot do so, then you must decline the engagement.
 
199. Your client, Connie, won $12,000 in a football office pool. She sees no reason to include it in her income for several reasons. First, the amount won will not be reported to the IRS. Second, as an average income employee, she is unlikely to be audited by the IRS. Third, she feels that she has probably lost this much in other past office pools. How do you respond?
ANSWER:  As a practitioner, you cannot play the audit lottery. You must presume that she will be audited regardless of the probabilities. Although the use of estimates is allowed, Connie’s assumptions as to her losses are not realistic. Even if they were reliable, gambling losses cannot be offset against gambling winnings but must be separately deducted. Thus, the $12,000 must be reported as income or you cannot prepare Connie’s return.
 
200. Under what conditions is it permissible, from an ethical standpoint, for a CPA firm to outsource tax return preparation to a third party?
ANSWER:  First, the clients’ confidentiality must be preserved. Second, the CPA firm must verify the accuracy of the work. Third, the clients must be advised as to the practice.
 
201. In terms of revenue neutrality, comment on a tax cut enacted by Congress that:
 
a.Contains revenue offsets.
b.Includes a sunset provision.
 
ANSWER:  a.
​Ideally, to achieve revenue neutrality, all tax cuts should be accompanied by revenue offsets.
b.
​
​A sunset provision does not account for the immediate revenue losses generated by a tax cut. It merely provides that such losses will not continue beyond a specified date when the tax cut expires and the former tax law is reinstated.
​
 
 
202. The tax law contains various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. On what grounds can these provisions be justified?
ANSWER:  Social and economic considerations are the justification. As to the latter, a better educated workforce carries a positive economic impact.
 
203. The tax law contains various provisions that encourage home ownership.
 
a.On what basis can this objective be justified?
b.Are there any negative considerations? Explain.
 
ANSWER:  a.Home ownership can be justified on economic and social grounds.
b.
 Granting tax advantages to persons who are purchasing their homes places the taxpayers who rent at a disadvantage. The result is inequality in treatment.
 
204. The tax law allows an income tax deduction (or a credit) for foreign income taxes. Explain why.
ANSWER:  The deduction (or a credit) for foreign income taxes can be justified on the grounds that it mitigates the double tax imposed on the same income.
 
205. The tax law allows, under certain conditions, deferral of gain recognition for involuntary conversions.