Individual Taxation - Becker Flashcards
Chris Baker’s adjusted gross income on her current year tax return was $160,000. The amount covered a 12-month period. For the next tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of:
I. 90% of the tax on the return for the current year paid in four equal installments.
II. 110% of prior year’s tax liability paid in four equal installments.
Both. Payment of the lesser of the two above will provide “safe harbor” to the taxpayer.
Martinsen, a calendar-year individual, files a year 1 tax return on March 31, Year 2. Martinsen reports $20,000 of gross income. Martinsen inadvertently omits $500 interest income. The IRS may assess additional tax up until which of the following dates?
Generally, the statute of limitations on assessments is three years from the later of the due date of the return or the date the return was filed (including amended returns). The IRS has up to six years to assess additional tax if the misstatement is an understatement of 25% or more of gross income. In this case, the misstatement is $500 on $20,000 of gross income, or 2.5%. Therefore, the statute of limitations for Martinsen is the general rule. In this case, the due date of the return was April 15, Year 2. Martinson filed on March 31, Year 2. Under the general rule, the IRS has until three years from April 15, Year 2 (or, April 15, Year 5) to assess additional tax.
A calendar-year individual filed an income tax return on April 1. This return can be amended no later than:
Rule: An individual may file an amended tax return (Form 1040X) within three (3) years of the date the original return was filed or within two (2) years of the date the tax was paid, whichever is later. An original return filed early is considered filed on the due date of the return.
Choice “d” is correct. In this question, the return was filed early (April 1), so the return is considered filed as of the due date, on April 15. There is no information on when the tax was paid, but it can be reasonably assumed that the tax was properly paid on April 1 with the return. So the latter of the two dates is three years. The question that arises is “three years from when,” and here the question falls somewhat short.
Three of the answers to this question are worded in terms of “the” calendar year. These answers have to mean the prior calendar year. Three years from April 15 (when the return was considered to be filed) would be three years, three months, and 15 days from the end of the prior calendar year.
Sam’s year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of year 3 estimated tax payments that Sam can make?
To avoid penalties, if a taxpayer owes $1,000 or more in tax payments beyond withholdings, such taxpayer will need to have paid in for taxes the lesser of:
90% of the current year’s tax ($50,000 x 90%) = $45,000, or
100% of the previous year’s tax ($30,000 x 100%) = $30,000
However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year, 110% of the prior year’s tax liability is used to compute the safe harbor for estimated payments. (Previous year’s tax $30,000 x 110% = $33,000).
If an individual paid income tax in the current year but did not file a current year return because his income was insufficient to require the filing of a return, the deadline for filing a refund claim is
Two years from the date the tax was paid.
Rule: A taxpayer may file a claim for refund within three years from the time the return was filed, or two years from the time the tax was paid, whichever is later. Since no return has been filed, the refund claim must be filed within two years from the time the tax was paid.
Ms. Marsh filed her 20X0 individual income tax return on February 15, 20X1. All her tax was paid during the year through withholding. The return was due on April 15, 20X1. During January 20X2, she discovered that she had not taken a properly substantiated charitable contribution that would have reduced her total tax by $250 on her 20X0 tax return. By what date must she file her amended return to claim a refund of the tax paid?
A taxpayer can file a claim for refund by the later of three years from the time the return was filed, 3 years from the original due date of the return, or two years from the time the tax was paid (if not when the return was filed). Three years from the time the return was filed is February 15, 20X4, 3 years from the original due date of the return is April 15, 20X4, and two years from the time the tax was paid would be December 31, 20X2 (all withholding is deemed paid ratably over the year so the last dollars would be deemed paid December 31, 20X0). The later date is April 15, 20X4.
According to the AICPA Statements on Standards for Tax Services, which of the following factors should a CPA consider in choosing whether to provide oral or written advice to a client?
In determining whether to provide advice in writing, the tax preparer should consider, among other factors, the sophistication of the tax client.
Which of the following statements is correct with respect to the AICPA’s Statements on Standards for Tax Services (SSTS)?
In general, a preparer should recommend a tax return position only if the preparer has a good faith belief that the position has a realistic possibility of being sustained administratively or judicially on its merits.
Wilma A. Guess, a CPA and a member of the AICPA, is preparing a federal tax return for her client, William H. Bates, one of the wealthiest businessmen in the town of Poughkeepsie, New York. Because of his extremely busy schedule, Bates keeps very few records for his various business operations. Guess has been preparing Bates’ returns for the past 15 years. According to the AICPA’s Statements on Standards for Tax Services, which of the following statements is correct for this situation?
Guess may use estimates provided by Bates if it is not practical for Bates to obtain exact data.
While preparing a client’s individual federal tax return, the CPA noticed that there was an error in the previous year’s tax return that was prepared by another CPA. The CPA has which of the following responsibilities to this client?
When an AICPA member becomes aware of an error in a previously filed return, he should promptly notify the taxpayer.
