Assume that you are the CPA in charge of prepar-ing the tax return for each of t
ID: 2744287 • Letter: A
Question
Assume that you are the CPA in charge of prepar-ing the tax return for each of the taxpayers in the problem.Based on the Statements on Standards for TaxServices (which can be found at http://www.aicpa.org/Research/Standards/Tax/Pages/default.aspx), explain what you should do in each case. Your discussion should indicate which, if any, of the eight statements is applicable and your obligations with regard to each applicable statement. If the facts are not sufficient to determine whether a statement applies to a situation, discuss the circumstances in which the statement would apply.
a.Tom knows that farm rent received in cash or farm produce is income subject to tax. To avoid showing a cash receipt on his records, he rented 50 acres for 5 steers to be raised by the tenant. He used 2 of the steers for food for his family and gave 3 to relatives. Because he did not sell the livestock, he did not report taxable income.
b. Betty applied for and received a Social Security number for Kate, her pet cat. Surprised by how easy it was to get a Social Security number, she decided to claim a dependent exemption on her tax return for Kate. Other than being a cat, Kate met all the tests for a dependent.
c. Glen has put money in savings accounts in 50 banks. He knows a bank is not required to report to the IRS interest it pays him that totals less than $10. Because the banks do not report the payments to the IRS, Glen does not show the interest he receives as taxable income. Although Glen’s accountant has told him all interest he receives is taxable, Glen insists that the IRS will never know the difference.
d. Bob entered a contract to sell a parcel of land at a $25,000 gain in 2012. To avoid reporting the gain in 2012, he closed the sale and delivered title to the land to the buyers on January 2, 2013.
e. Asha’s taxable income for 2013 puts her in the 33% marginal tax bracket. She has decided to purchase new equipment for her business during 2014. A special election allows Asha to treat the $25,000 of the cost of the equipment as a current period expense. Because she expects to be in a lower tax bracket next year, Asha buys and begins using $25,000 worth of the equipment during December 2013. She claims a $25,000 expense deduction under the special election for 2013.
Please answer the question in full third attempt now. This part must be done in the answer. Based on the Statements on Standards for TaxServices (which can be found at http://www.aicpa.org/Research/Standards/Tax/Pages/default.aspx), explain what you should do in each case. Your discussion should indicate which, if any, of the eight statements is applicable and your obligations with regard to each applicable statement.
Explanation / Answer
a. Tom's actions would probably be considered tax evasion. Tom knew that farm produce (5 steers) received as rent is income, but he took steps to conceal and not report the income. As a result, he underpaid his income tax
b. Betty's actions would probably be considered tax evasion. Claiming fictitious dependent deductions is an act often associated with tax protesters. The tax law allows the exemption deduction only for a qualified "individual" which does not include Kate. Betty intentionally claimed a deduction for an amount she knew was not deductible. As a result, Betty underpaid her tax.
c. Glen's actions would probably be considered tax evasion. All income that is not specifically excluded must be reported as income regardless of the amount. Glen had reason to know the interest income was taxable, he took steps to conceal the income and to omit it from his tax return. As a result, Glen underpaid his tax.
d. Bob's actions are considered tax avoidance and are an acceptable method of planning the timing of income reporting. A sale of land occurs when title passes to the buyer. Bob properly reported the gain in 2013.
e. Asha's actions would be considered tax avoidance. The $25,000 expense election is available for property placed in service in a trade or business during the year. Asha's decision to purchase the equipment in 2014 to accelerate the tax deduction is an acceptable tax planning technique.