Taxation principles

Seminar: Taxation Current Issues
Chapter 26
Answer to Question No 1:
Understanding the organisation and selection of IRS employees is very critical for tax professionals who have to deal with several client groups and a number of different tax issues. This understanding prepares tax advisors with the requisite knowledge of the IRS, which makes them competent for the job to a large extent. IRS day-to-day learning is a smart practice for tax professionals.
Answer to Question 3:
The IRS and policymakers use the tax gap as a metric to track overall fiscal policy. The discrepancy between the federal income tax collection and the tax sum of the IRS projects is known. It goes on the full compliance with all tax laws.
Answer to question number 4:
a. Commissioner
b. National Taxpayer Advocate
c. Wage and investments, Small business and self-employed, large business and international, and Tax-exempt/ government entities.
d. The placement in the IRS organization of the Appeals and Criminal Investigation functions is under commissioner.
Answer to question number 5:
Following issues an IRS official should take into account during his answering process:
– Figures that are written in the form,
– The level of inline filing of forms
– How realistic the deductions are?
– The accuracy concern in filing and other related services.
Answer to question number 7:
No. Matheus is not the candidate for the informant award program operated by IRS because he did not informed IRS about her wife’s tax forgery. The Whistleblower-informant award program of the IRS operates to discover as many hidden tax defaulter as possible through participation of common people. The program declares 15% to 30% award for any informant who can give valid information about noncompliant taxpayer. There are two conditions; firstly, the information must lead to the collection of tax, penalties, interest or other form of money. Secondly, the noncompliant taxpayer’s annual income must exceed $200,000.
Matheus might be awarded the informant award by blowing a whistle about his wife’s tax cheating information to the IRS.
Answer to question number 8:
a. Penalties for overvaluation.
b. Overstating deductions.
c. Valuation understatement.
Answer to question number 10:
a. Offer in compromise is an offer from IRS to the taxpayer to receive reduced tax facility under some conditions and closing agreement is the final settlement between the IRS and the taxpayer regarding tax issues.
b. Failure to file penalty is imposed if a person fails to file is return to IRS within due date and if the person owes taxes than he must face failure to pay consequences.
c. 30-day letter notifies about the right to appeal against or accept the proposed changes whereas a 90-day letter notifies the deficiency in the 30-day letter and allows 90-days to come in terms with the appeal.
d. Negligence indicates failure to understand complex tax laws that might have led to wrong tax return filing and pay. Fraud indicates willful attempt to escape from tax obligation.
e. Criminal tax fraud are tax offenders who do not pay taxes, and civil tax frauds takes fraudulent measure to evade tax.
Answer to question number 11:
a. The outer boundary for the appeal process, both for the government and the taxpayer is known as the statutes of limitations. The statutes recognize that the progression of time may weaken a potential tax law because it fades memories of the witnesses, causes loss of evidences as well as affect tax administration badly. Statutes of limitations restrict both parties in terms of issues of disputes and supporting means in order to help quicker determination of the final tax.
b. In case information collection is difficult, provision for certain exceptions are kept. Upon mutual consents, tax statutes can be extended with the apprehension that both parties may abuse it.
Answer to question number 13:
a. Yes
b. No
c. Yes
d. No
e. No
f. No
Answer to question number 15:
Penalty for failure to pay
Penalty for Failure to Pay = Tax amount x Penalty rate x No. of months late
= $3000 × (1/2 of 1%) × 1 months
= $3000 × (1/2 ×0.01) ×1 months
= $3000 ×0.005 ×1
= $15 ×1
= $15
Penalty for failure to file
Penalty for Failure to File = (Tax amount × Penalty rate × No. of months late)- Penalty for failure to pay
= ($3000 × 5% × 1 months) – $15
= ($3000 × 0.05 × 1) – $15
= ($15 × 1) – $15
= $150 – $15
= $135
Answer to question number 16:
Overvaluation = $26,000 × ($38,000 –$12,000), which exceeds 200% or an amount of $24,000. Obviously, the penalty will be doubled. Marcella’s penalty for overvaluation is thus $2,912 or double to the regular penalty, which is equal to $1,456 being the 20% of $7,280, which was underpaid.
Answer to question number 17:
a. Civil fraud penalty is 75% of the underpayment. In case of Rivera, $40,000 underpayment is due to civil fraud. Therefore, the amount of civil fraud penalty = 75% of $40,000 = $30,000
b. Penalty = $4,5000 × 9% × 5
= $4,5000 × 0.45
= $20,250
Answer to question number 18:
Sheridan cannot recover any on the amended return because he filed the claim of amendment more than 3-years after the payment of tax. An amendment claim must occur within 3-years of actual tax due date.
Answer to question number 19:
a. For individual, the federal short term rate for the first quarter of 2017 is 4% per month plus 3% on the compounded amount.
b. For C corporation, the federal short term rate for the first quarter of 2017 is 3% per month plus 3% on the compounded amount.
c. 0%
d. 0%
Answer to question number 22:
Failure to pay:
Under payment : $10,000
Rate of Penalty : 5%
Outstanding penalty per month : 5% = 0.05
Month’s outstanding : 8
Total Penalty : ($10,000 × 0.005 × 8)
= 400
Failure to file:
Under payment : $10,000
Rate of Penalty : 5%
Total Penalty : ($10,000 × 0.05 × 2) – failure to file
= $1,000 – $100 = $900
Answer to question number 25:
a. Fraud and negligence penalty rates are 25% and 20% respectively. This gives total fraud and total negligence penalties:
Total fraud penalty = 25% × $150,000 = 37,500
Total negligence penalty = 20% × $100,000 = 20,000
b. Penalty = $57,500 × 7% × 4
= $57,500 × 0.28
= $16,100
Answer to question number 27:
a. $0. Additional tax imposed at 40% rate on ($25,000 –$20,000) = $5,000 is $2,000, which is less than $5,000.
b. $10,000; Additional tax imposed at 40% rate on ($150,000 –$100,000) = $50,000 is $20,000. Since the reported value ($100,000) is more than 65% of the corrected value ($150,000), 20% penalty on additional tax is imposed. ($50,000 × 20%) = $10,000.
c. $8,000; Additional tax imposed at 40% rate on ($250,000 –$150,000) = $100,000 is $40,000. Since the reported value ($150,000) is 60% (not more than 65%) of the corrected value ($250,000), 20% penalty on additional tax is imposed. ($40,000 × 20%) = $8,000.
d. $10,000; Additional tax imposed at 40% rate on ($500,000 –$150,000) = $350,000 is $140,000. Since the reported value ($150,000) is 30% (not more than 40%) of the corrected value ($500,000), 40% penalty on additional tax is imposed. ($140,000 × 40%) = $56,000.
Answer to question number 30:
a. Yes. Federal tax penalty also imposes upon Vargas. Initially, he has calculated that the cost painting as $500,000 but he could not retain his integrity by letting Kaitlin to tempt him with forthcoming clients as well as his services charges. He is a qualified evaluator, so he is accountable to 10% of the tax undervaluation but to the least the amount of $1,000 or 125% of the gross income received. For the first choice, he needs to provide 10% of the tax undervaluation that is $400,000 = ($900,000 – $500,000). The 10% of $400,000 is $40,000, which will be multiplied by the 35% marginal tax rate that will give $14,000 = ($400,000 × 10% × 35%). For the second option is that he needs to pay $56,250 = ($45,000 × 125%). In this case, he is going to pay the smaller of the two that is $14,000.
b. Excel Formula: =if ((10% × (A1–B1) > (A2 × B2 × 35%)), A3, A4)
Answer to question number 39:
a) Suggesting the means of acquiring exempt income is not a crime
b) Suggesting how to conceal is a crime and the tax adviser can be penalized by termination of tax advisory certification
c) Delaying employee share to be deposited with the government is a fault on the hands of the company so company has to pay tax on the employees share deducted by the company and deposited. Further the advisor will be having explain the reason for suggesting such illegal act to the client, pay an amount as penalty equivalent the evaded tax.