I. Title:
Preparation of an Individual Income Tax Return
II. Introduction:
In a prior learning demonstration, you conducted tax research for Jerome Horowitz
(Nickname: Jerry), one of the firm’s clients for many years. You still work for the same
firm and Jerry is one of the firm’s clients assigned to you. Having just conducted tax
research to answer Jerry’s questions and provide him with guidance, you are very
familiar with his background and tax issues. Thus, you feel ready to prepare a federal
tax return for Jerry and his wife Debra (Debbie). Fortunately, the firm has copies of
Jerry Horowitz’s tax documents from prior years.
This hypothetical tax case has one main activity:
1) Preparing an individual federal income tax return using IRS Form 1040.
Throughout this learning demonstration, your professor will play the role of a senior
partner in the taxation department with whom you discuss various issues and submit
draft documents for approval in advance of communicating with clients.
To successfully complete this Learning Demonstration, you must demonstrate your
knowledge of and abilities to complete the following goals and competencies:
Goal 1: Communication: Learners demonstrate ability to communicate clearly both
orally and in writing.
o Competencies:
! 1.1 Organize document or presentation clearly in a manner
that promotes understanding
! 1.2 Develop coherent paragraphs or points so that each is internally
unified and so that each functions as part of the whole document or
presentation
! 1.3 Provide sufficient, correctly cited support that substantiates the
writer’s ideas
! 1.4 Tailor communications to the audience
! 1.5 Use sentence structure appropriate to the task, message and
audience
! 1.6 Follow conventions of Standard Written English
Goal 2: Critical Thinking: Learners demonstrate ability to apply logical, systematic
decision-making processes to formulate clear, defensible ideas and to draw ethical
conclusions.
o Competencies:
! 2.1 Articulate and frame the issue
! 2.2 Collect and evaluate information
! 2.3 Evaluate the underlying causes or conditions of elements
contributing to an issue
1
!
!
2.4 Use systems thinking to arrive at a decision in the context
of an issue
2.5 Apply ethical principles when determining actions.
Goal 3: Quantitative Reasoning: Learners demonstrate the ability to use mathematical
operations and analytical concepts and operations to address problems and to inform
decision-making
o Competency
! 3.1 Construct models that represent real-world problems or
processes
! 3.2 Develop visible representation of data
! 3.3 Analyze data using mathematical/algebraic operations
! 3.4 Use calculated results to inform the problem or process
Goal 4: Leadership, Facilitation, and Collaboration: Learners lead, facilitate, and
collaborate with a variety of individuals and diverse teams to achieve organizational
objectives.
o Competency
! 4.1 Demonstrate an ability to plan a particular objective or goal
Goal 9: Functional Competencies for Federal Taxation: Learners demonstrate an
applied understanding of U.S. federal income tax laws for individuals and business
entities used in the professions and in accordance with U.S. Internal Revenue Code.
! Competencies:
o 9.1 Legal and regulatory: Students demonstrate a general understanding
of the Internal Revenue Code.
o 9.2 Measurement and reporting. Prepare a federal individual income tax
return.
o 9.4 Decision Making: Apply tax laws, regulations, and court cases to
individual situations, identifying and communicating planning
opportunities and compliance needs.
o 9.5 Communication: Effectively communicate relevant tax information
based on specific reporting requirements of the U.S. Internal Revenue
Service or other U.S. taxing authorities in U.S. commonwealths and
territories.
If you feel the need to refresh your memory regarding Jerry, Debbie, and her daughter
Sally, please review the Tax Research learning demonstration completed earlier in the
semester.
III. Steps to Completion
1. Prepare Form 1040
After careful consideration based on your tax advice regarding filing status, Jerry and
Debbie decided to use the filing status married filing jointly. Use the feedback you
received from the senior partner, final guidance you provided Jerry, and information in
Appendices A through G to prepare Form 1040 for Jerry and Debbie Horowitz.
2
Do not prepare a state tax return.
You may use forms found on the IRS Website:
http://apps.irs.gov/app/picklist/list/formsInstructions.html
IV. Deliverables
Format:
You will combine all files into one PDF document. If you are unfamiliar with combining
multiple documents to create one PDF file, the following site explains how using 16
different methods: http://www.wikihow.com/Merge-PDF-Files.
Naming convention:
Name the PDF file using the following convention:
FirstName_LastName_Form1040.pdf
LEO Assignment folder:
Submit the PDF document in your LEO assignment folder.
Form 1040: Married Filing Jointly
1. Individual tax return assuming Jerry and Debbie chose the filing status, Married
Filing Jointly.
V. Frequently Asked Questions/Helpful Hints
To be added later.
VI. Rubric
To be added later.
3
List of Appendices:
!
Appendix A: Jerry, Debbie, and Sally’s Personal information
!
Appendix B: List of forms and documents Jerry dropped off in a shoebox
!
Appendix C: Debbie’s earnings and other tax issues
!
Appendix D: Financial information for Jerry’s Jiant Jumps Company
!
Appendix E: Cancelled checks
!
Appendix F: Tax documents
!
Appendix G: Invoices and receipts
4
Appendix A: Jerry, Debbie, and Sally’s Personal information
Name
Social Security Number
Date of Birth
Address
Telephone number
Healthcare insurance
Name
Social Security Number
Date of Birth
Telephone number
Address
Healthcare insurance
Name
Social Security Number
Date of Birth
Telephone number
Address
Healthcare insurance
Jerome Horowitz
100-00-0001
April 2, 1965
100 Lawrence Way
Pikesville, MD 21208
240-000-0000
Covered by his employer’s medical insurance plan.
Debra Francois-Horowitz
100-00-0002
July 6, 1975
240-000-0000
100 Lawrence Way
Pikesville, MD 21208
Covered by her husband’s medical insurance plan.
Sally Draper
100-00-0003
June 2, 1999
410-000-0000
112 Windward Way
Annapolis, MD 21401
Covered by her father’s insurance plan.
5
Appendix B: List of forms and documents Jerry dropped off in a shoebox
Form / Source
Document
W-2
W-2
From
Wages from managing short term rentals for JPM Real
Estate Company, Inc.
Maryland income taxes withheld
Amount
$300,000
16,800
1099-INT
Interest Citibank personal checking account
2,450
1099-INT
Interest received on Maryland State Municipal Bonds
1,875
1099-DIV
Qualified dividends from various investments
36,250
Sales Tax (Jerry didn’t keep receipts for purchases,
this is his best guess)
10,485
Property taxes paid
12,650
None
Real Property
Tax Bill
Form 1098
Home mortgage interest paid
Thank you card Charitable donation to Red Cross in cash
CPA Firm
Invoice
Cancelled
check
Tax preparation fees
Cancelled
check
Cost to join Weight Watchers to maintain overall
health
Estimated federal tax payment to the IRS
8,265
12,600
2,000
$50,000
2,600
Receipt
Dog Groomer
1099-B
Purchased 200 shares of Comcast Stock on
2/15/20Y1
50,000
1099-B
Sold 200 shares of Comcast Corp Stock on 4/15/20Y5
15,000
Jerry’s Jiant
Jumps Income
Statement
Net Income from Jerry's Jiant Jumps Company (Sole
proprietorship)
165
330,000
6
Appendix C: Debbie’s earnings and other tax issues
Debbie has one child named Sally from her marriage to Donald. Sally is a teenager;
she lived with Debbie the first six months and her dad, Donald Draper for last six
months of 20Y5. Debbie paid over 50% of the support for Sally.
Debbie is a homemaker who earned no income in 20Y5 other than annual alimony
payments of $120,000 and child support payments of $36,000.
In 20Y5, Debbie received the following from a property settlement associated with her
divorce decree:
Beverly Hills mansion
Bentley coupe
Home furnishings
$ 5,750,000
$
200,000
$
800,000
7
Appendix D: Financial information for Jerry’s Jiant Jumps Company
Jerry’s Jiant Jumps Company is a sole proprietorship with the following Income
Statement for 20Y5.
Jerry’s Jiant Jumps Company
Income Statement
For the Year Ending Dec. 31, 20Y5
Revenue:
Jumping fees earned
Total Revenue
Operating Expenses:
Advertising
Rent on land
Insurance
Office expenses
Non-employee compensation
Supplies
Total Expenses
Net Income
$
622,000
$
$
622,000
$
$
292,000
330,000
14,100
36,000
60,000
6,900
125,000
50,000
8
Appendix E: Cancelled checks
9
Appendix F: Tax documents
10
11
12
13
14
Appendix G: Invoices and receipts
15
To: Debbie Horowitz
Thank you for your generous cash donation of $12,600 on December 20, 20Y5.
Your donation will be used to help millions around the world. We look forward to
another generous donation from you at next year’s Annual Philanthropists Gala.
16
I. Title:
Requisite Tax Research to Prepare an Individual Income Tax Return
II. Introduction:
In this learning demonstration, you work for one of the four largest multinational
accounting and auditing firms. Your professional goal is to become a senior partner of
the firm someday. To achieve this goal, you plan to work in each department of the firm
for at least one year. Your current position is in the taxation department, where you will
conduct tax research to prepare an individual income tax return in a subsequent
learning demonstration.
This hypothetical tax case has one (1) main activity:
! Conducting tax research
Throughout this learning demonstration, your professor will play the role of a senior
partner in the taxation department with whom you discuss various issues and submit
draft documents for approval in advance of communicating with clients.
To successfully complete this Learning Demonstration, you must demonstrate your
knowledge of and abilities to complete the following goals and competencies:
Goal 1: Communication: Learners demonstrate ability to communicate clearly both
orally and in writing.
o Competencies:
! 1.1 Organize document or presentation clearly in a manner
that promotes understanding
! 1.2 Develop coherent paragraphs or points so that each is internally
unified and so that each functions as part of the whole document or
presentation
! 1.3 Provide sufficient, correctly cited support that substantiates the
writer’s ideas
! 1.4 Tailor communications to the audience
! 1.5 Use sentence structure appropriate to the task, message and
audience
! 1.6 Follow conventions of Standard Written English
Goal 2: Critical Thinking: Learners demonstrate ability to apply logical, systematic
decision-making processes to formulate clear, defensible ideas and to draw ethical
conclusions.
o Competencies:
! 2.1 Articulate and frame the issue
! 2.2 Collect and evaluate information
! 2.3 Evaluate the underlying causes or conditions of elements
contributing to an issue
! 2.4 Use systems thinking to arrive at a decision in the context
of an issue
1
!
2.5 Apply ethical principles when determining actions.
Goal 3: Quantitative Reasoning: Learners demonstrate the ability to use mathematical
operations and analytical concepts and operations to address problems and to inform
decision-making
o Competency
! 3.1 Construct models that represent real-world problems or
processes
! 3.2 Develop visible representation of data
! 3.3 Analyze data using mathematical/algebraic operations
! 3.4 Use calculated results to inform the problem or process
Goal 4: Leadership, Facilitation, and Collaboration: Learners lead, facilitate, and
collaborate with a variety of individuals and diverse teams to achieve organizational
objectives.
o Competency
! 4.1 Demonstrate an ability to plan a particular objective or goal
Goal 9: Functional Competencies for Federal Taxation: Learners demonstrate an
applied understanding of U.S. federal income tax laws for individuals and business
entities used in the professions and in accordance with U.S. Internal Revenue Code.
! Competencies:
o 9.1 Legal and regulatory: Students demonstrate a general understanding
of the Internal Revenue Code.
o 9.4 Decision Making: Apply tax laws, regulations, and court cases to
individual situations, identifying and communicating planning
opportunities and compliance needs.
o 9.5 Communication: Effectively communicate relevant tax information
based on specific reporting requirements of the U.S. Internal Revenue
Service or other U.S. taxing authorities in U.S. commonwealths and
territories.
As the newest member on the tax department team, the senior partner assigns you to
conduct tax research for Jerome Horowitz (nickname: Jerry), a client who has been with
the firm for many years. You will need to research various tax issues the client
confronts given activities that occurred over the past 5 years. Unfortunately, the firm
does not have copies of Jerry Horowitz’s tax documents from prior years.
Jerry Horowitz, is a divorced man, decided to take the plunge and get married one more
time. Before he tied the knot this time, he wanted to protect his personal assets and
individual wealth. Jerry was hesitant to bring up the subject of a prenuptial agreement
to his fiancée Debra Francois (nickname: Debbie). To sweeten the upcoming awkward
discussion, he surprised Debbie by having roses delivered to her office one Friday
afternoon. Debbie was gleeful the rest of the workday as her co-workers admired and
made jovial comments about her marrying the best catch in town; Jerry was handsome,
from a wealthy family, and known for his daredevil bungee jumping hobby. Rumor has
it that Jerry has made millions working for JPM Real Estate Company. After work, Jerry
took her to dinner at one of the finest restaurants downtown.
2
Knowing the Internal Revenue Service (IRS) has audited Debbie multiple times; Jerry
hired a tax attorney to write the prenuptial agreement. Aaron Levine, Esq. was highly
respected in the community and had the reputation of being the best tax attorney
around. Levine prepared an equitable and fair prenuptial agreement to protect the
respective assets of both Jerry and Debbie in the case of divorce or death. Jerry was
substantially older than Debbie and was most concerned about leaving all real property
to his grown children upon his death. Debbie would receive the proceeds from a one
million dollar life insurance policy if Jerry passed away first.
After cocktails and dinner, Jerry garnered the courage to discuss the prenuptial
agreement with Debbie. Fortunately, Debbie was a fair-minded woman and completely
understood that her past dealings with the IRS could be an issue moving forward. Both
Jerry and Debbie agreed they wanted to use the “married filing joint” status on their
future income tax returns. She was glad Jerry had taken care of having Levine prepare
the prenuptial agreement, which she agreed to sign at Levine’s office that night.
On December 31, 20X5, Jerry and Debbie had a fabulous wedding ceremony
overlooking the turquoise waters of the Caribbean. They took a honeymoon by cruising
from St. Thomas, in the U.S. Virgin Islands to Jamaica and back of a 95-foot sloop. The
weather, food, and crew provided a dream come true honeymoon. Debbie was ecstatic!
Before marrying Jerry, Debbie had been married to an outside salesperson named
Donald Draper. He pushed the envelope a little too far when it came to deducting the
entertainment and travel costs associated with his job. Draper did not keep accurate
records or save receipts associated with business travel expenses. Like Debbie, he too
had trouble with the IRS. Specifically, the IRS claimed that Donald was not keeping
accurate business or tax records and even more incriminating, he was fabricating travel
and entertainment expenses. Since Donald and Debbie selected the “married filing
jointly” status on their 20X1 and 20X2 tax returns, the IRS indicted both Donald and
Debbie on criminal tax fraud. Debbie was unaware that Donald was fabricating
expenses on their jointly filed tax return. Unfortunately, the new bride continued to be
under investigation by the IRS even after her tropical honeymoon.
Imagine the surprised look on Debbie’s face when Jerry received a letter from the IRS
dated January 8, 20X5, stating the IRS is auditing him for tax years 1989 and 1999.
Unaware he too had IRS problems, Debbie felt even more relieved she had signed the
prenuptial agreement. Jerry manages JPM Real Estate Company, Inc. where he earns
a very nice salary, which he reported on his personal income tax return. Sometimes,
Jerry sold a few properties as an independent real estate agent. When he
remembered, he reported these commissioned earnings on Schedule C of his tax
return. The IRS letter asserted that Jerry understated his gross income 26% and 31%
for the 1989 and 1999 tax years respectively.
Jerry always had a passion for jumping off high objects since he was a toddler, thus it
was no surprise when he started a bungee jumping business about 5 years ago, which
he named Jerry’s Jiant Jumps Company. He never filed any official paperwork for the
company since it started out as a hobby. Given his upcoming audit, Jerry decided to
clean up as much of his sloppy business practices as possible. Therefore, he began
the online application process for an IRS Employer Identification Number (EIN). The
3
application required the business address: 1858 Bungee Drop Lane, Terrapin Falls, MD
20783 and Jerry’s social security number 100-00-0001. Jerry did not intend to put
Debbie’s name or social security number 100-00-0002, on the application since he
owned 100% of the company. Jerry was certain he was using a cash basis accounting
method but unsure of which business form to select on the EIN application, so he could
not finalize the EIN application process. Wisely, Jerry decided it was time for an
accountant’s perspective.
At the beginning of February, Jerry came to the CPA firm with a box of tax documents
and a list of questions. Jerry’s previous accountant had retired from the firm, so it was
no surprise when a senior partner introduced the two of you and assigned you as
Jerry’s new accountant.
In your role as Jerry’s accountant, your first step is to conduct tax research to answer all
of his questions and provide Jerry with much needed guidance regarding his upcoming
audit.
III. Steps to Completion
Conduct Tax Research:
To begin, you should review the Tax Research Tutorial
(http://businesslibrary.uflib.ufl.edu/taxresearch), and read the process to conduct tax
research as described in the IRS document: REVIEW OF TAX RESEARCH
MATERIALS (http://www.irs.gov/pub/irs-tege/eotopich87.pdf). You may also find the
Georgetown University Law Library Tax Research-Federal Guide to be helpful in
learning more about federal taxation research:
http://www.law.georgetown.edu/library/research/guides/federal_tax.cfm. Other useful
sites include: FindLaw.com and CornellLaw.com.
There are three types of primary authoritative documents:
1. Statutory
a. Internal Revenue Code
b. Tax legislative process
2. Administrative
a. Treasury regulations
b. Revenue rulings
c. Revenue procedures
d. Private letter rulings
e. General counsel memorandums
f. Internal revenue manual
3. Judicial.
a. Tax court
b. U.S. District Court
c. U.S. Claims Court
d. U.S. Circuit Court of Appeals
e. U.S. Court of Appeals for the Federal Circuit
f. U.S. Supreme Court
g. Actions on decisions
4
To the extent possible, please support your research with appropriate legal citations that
refer to primary authority as shown in the list above. If you cannot find primary
authority to support your research, then it may be necessary to refer to secondary
authority. Secondary authority would include tax reference services, journal articles,
and textbooks.
Once you feel confident you understand how to conduct tax research and correctly cite
the authoritative sources, research with the following topics.
1. Business Formation Type:
Review business formation literature to gain a better understanding of the
advantages and disadvantages of sole proprietorships and corporations.
Confirm and be prepared to defend your decision with the senior partner.
Upon approval from the senior partner, prepare a transcript of a telephone
conversation you plan to have with Jerry. Include the advantages and
disadvantages of each possible formation and your recommendation for the
best alternative.
Jerry accepted your recommendation and completed the online IRS EIN
application process. The IRS issued Jerry’s Jiant Jumps Company EIN: 96123456789 with a Business Code of 713900.
2. Legality of Audit:
Research relevant tax literature to determine the legality of the IRS
conducting an audit of Jerry’s 1989 and 1999 tax returns even though the IRS
did not notify Jerry of the audit until March 1, 20X5. Prepare a transcript of a
telephone conversation you plan to have with the senior partner. State the
issues and the rules of law regarding each issue using the Issue, Rule,
Application, and Conclusion method, commonly referred to as the IRAC
Method. If needed, review resources on the IRAC Method to prepare this tax
research memorandum.
3. Business vs. Hobby:
Review the Internal Revenue Code rules on operating a business versus a
hobby to determine whether Jerry’s Jiant Jumps is a business or a hobby.
Prepare a transcript of a telephone conversation you plan to have with Jerry
describing the consequences of your determination. Ask the senior partner to
review your notes before calling Jerry.
4. Employee vs. Independent Contractor:
Review IRS regulations related to employees versus independent contractors.
Prepare a memorandum to Jerry explaining potential problems and or
penalties he may face with regard to the treatment of his workers as
independent contractors. State the issues and the rules of law regarding
each issue. Consult with the senior partner to determine if your memorandum
accounts for all potential issues before sending it to Jerry.
5. Tax Fraud:
Investigate criminal tax fraud literature and prepare brief notes for a telephone
conversation you plan to have with Debbie advising her of your
5
recommendations to mitigate or protect her from the charges. Consult with
the senior partner to determine if your notes account for all potential issues
before calling Debbie.
6. Exemptions:
Review IRS rules regarding claiming exemptions to determine whether
Debbie or her ex-husband Donald can claim Sally Draper as an exemption in
20X5. Prepare notes for a telephone conversation with Debbie advising her
of your recommendations via a telephone call. Include information regarding
special forms that may need to be filed as part of the federal tax return.
Consult with the senior partner to determine if your notes account for all
potential issues before calling Debbie.
Now that you have completed conducting tax research to answer Jerry’s questions and
provide him with research-based recommendations, it is time to prepare the
deliverables.
IV. Deliverables
Format:
You will combine all research files into one PDF document. If you are unfamiliar with
combining multiple documents to create one PDF file, the following site explains how
using 16 different methods: http://www.wikihow.com/Merge-PDF-Files.
Naming convention:
Name the PDF file using the following convention:
FirstName_LastName_TaxResearch.pdf
LEO Assignment folder:
Submit the PDF document in your LEO assignment folder.
1. Tax Research Deliverables
a. Transcripts for telephone calls:
i. Business Formation Type: Explaining positive and negative tax
consequences of all potential business formations for Jerry’s Jiant
Jumps Company.
ii. Legality of Audit: Tax research findings using the IRAC Method
regarding the legality of Jerry’s 1989 and 1999 Form 1040 audit.
iii. Business vs. Hobby: Describing business versus hobby rules and
consequences for violating those rules.
b. Memorandum to Jerry:
i. Employee vs. Independent Contractor: Explaining whether his
workers are employees or independent contractors.
c. Transcripts for telephone calls to Debbie:
i. Criminal Tax Fraud: Advising Debbie of your recommendations to
mitigate and protect her from the IRS charges of criminal tax fraud;
and
ii. Exemption: Provide information to Debbie regarding the eligibility
of claiming her daughter Sally as an exemption.
6
V. Frequently Asked Questions/Helpful Hints
To be added later.
7
I. Title:
Preparation of an Individual Income Tax Return
II. Introduction:
In a prior learning demonstration, you conducted tax research for Jerome Horowitz
(Nickname: Jerry), one of the firm’s clients for many years. You still work for the same
firm and Jerry is one of the firm’s clients assigned to you. Having just conducted tax
research to answer Jerry’s questions and provide him with guidance, you are very
familiar with his background and tax issues. Thus, you feel ready to prepare a federal
tax return for Jerry and his wife Debra (Debbie). Fortunately, the firm has copies of
Jerry Horowitz’s tax documents from prior years.
This hypothetical tax case has one main activity:
1) Preparing an individual federal income tax return using IRS Form 1040.
Throughout this learning demonstration, your professor will play the role of a senior
partner in the taxation department with whom you discuss various issues and submit
draft documents for approval in advance of communicating with clients.
To successfully complete this Learning Demonstration, you must demonstrate your
knowledge of and abilities to complete the following goals and competencies:
Goal 1: Communication: Learners demonstrate ability to communicate clearly both
orally and in writing.
o Competencies:
! 1.1 Organize document or presentation clearly in a manner
that promotes understanding
! 1.2 Develop coherent paragraphs or points so that each is internally
unified and so that each functions as part of the whole document or
presentation
! 1.3 Provide sufficient, correctly cited support that substantiates the
writer’s ideas
! 1.4 Tailor communications to the audience
! 1.5 Use sentence structure appropriate to the task, message and
audience
! 1.6 Follow conventions of Standard Written English
Goal 2: Critical Thinking: Learners demonstrate ability to apply logical, systematic
decision-making processes to formulate clear, defensible ideas and to draw ethical
conclusions.
o Competencies:
! 2.1 Articulate and frame the issue
! 2.2 Collect and evaluate information
! 2.3 Evaluate the underlying causes or conditions of elements
contributing to an issue
1
!
!
2.4 Use systems thinking to arrive at a decision in the context
of an issue
2.5 Apply ethical principles when determining actions.
Goal 3: Quantitative Reasoning: Learners demonstrate the ability to use mathematical
operations and analytical concepts and operations to address problems and to inform
decision-making
o Competency
! 3.1 Construct models that represent real-world problems or
processes
! 3.2 Develop visible representation of data
! 3.3 Analyze data using mathematical/algebraic operations
! 3.4 Use calculated results to inform the problem or process
Goal 4: Leadership, Facilitation, and Collaboration: Learners lead, facilitate, and
collaborate with a variety of individuals and diverse teams to achieve organizational
objectives.
o Competency
! 4.1 Demonstrate an ability to plan a particular objective or goal
Goal 9: Functional Competencies for Federal Taxation: Learners demonstrate an
applied understanding of U.S. federal income tax laws for individuals and business
entities used in the professions and in accordance with U.S. Internal Revenue Code.
! Competencies:
o 9.1 Legal and regulatory: Students demonstrate a general understanding
of the Internal Revenue Code.
o 9.2 Measurement and reporting. Prepare a federal individual income tax
return.
o 9.4 Decision Making: Apply tax laws, regulations, and court cases to
individual situations, identifying and communicating planning
opportunities and compliance needs.
o 9.5 Communication: Effectively communicate relevant tax information
based on specific reporting requirements of the U.S. Internal Revenue
Service or other U.S. taxing authorities in U.S. commonwealths and
territories.
If you feel the need to refresh your memory regarding Jerry, Debbie, and her daughter
Sally, please review the Tax Research learning demonstration completed earlier in the
semester.
III. Steps to Completion
1. Prepare Form 1040
After careful consideration based on your tax advice regarding filing status, Jerry and
Debbie decided to use the filing status married filing jointly. Use the feedback you
received from the senior partner, final guidance you provided Jerry, and information in
Appendices A through G to prepare Form 1040 for Jerry and Debbie Horowitz.
2
Do not prepare a state tax return.
You may use forms found on the IRS Website:
http://apps.irs.gov/app/picklist/list/formsInstructions.html
IV. Deliverables
Format:
You will combine all files into one PDF document. If you are unfamiliar with combining
multiple documents to create one PDF file, the following site explains how using 16
different methods: http://www.wikihow.com/Merge-PDF-Files.
Naming convention:
Name the PDF file using the following convention:
FirstName_LastName_Form1040.pdf
LEO Assignment folder:
Submit the PDF document in your LEO assignment folder.
Form 1040: Married Filing Jointly
1. Individual tax return assuming Jerry and Debbie chose the filing status, Married
Filing Jointly.
V. Frequently Asked Questions/Helpful Hints
To be added later.
VI. Rubric
To be added later.
3
List of Appendices:
!
Appendix A: Jerry, Debbie, and Sally’s Personal information
!
Appendix B: List of forms and documents Jerry dropped off in a shoebox
!
Appendix C: Debbie’s earnings and other tax issues
!
Appendix D: Financial information for Jerry’s Jiant Jumps Company
!
Appendix E: Cancelled checks
!
Appendix F: Tax documents
!
Appendix G: Invoices and receipts
4
Appendix A: Jerry, Debbie, and Sally’s Personal information
Name
Social Security Number
Date of Birth
Address
Telephone number
Healthcare insurance
Name
Social Security Number
Date of Birth
Telephone number
Address
Healthcare insurance
Name
Social Security Number
Date of Birth
Telephone number
Address
Healthcare insurance
Jerome Horowitz
100-00-0001
April 2, 1965
100 Lawrence Way
Pikesville, MD 21208
240-000-0000
Covered by his employer’s medical insurance plan.
Debra Francois-Horowitz
100-00-0002
July 6, 1975
240-000-0000
100 Lawrence Way
Pikesville, MD 21208
Covered by her husband’s medical insurance plan.
Sally Draper
100-00-0003
June 2, 1999
410-000-0000
112 Windward Way
Annapolis, MD 21401
Covered by her father’s insurance plan.
5
Appendix B: List of forms and documents Jerry dropped off in a shoebox
Form / Source
Document
W-2
W-2
From
Wages from managing short term rentals for JPM Real
Estate Company, Inc.
Maryland income taxes withheld
Amount
$300,000
16,800
1099-INT
Interest Citibank personal checking account
2,450
1099-INT
Interest received on Maryland State Municipal Bonds
1,875
1099-DIV
Qualified dividends from various investments
36,250
Sales Tax (Jerry didn’t keep receipts for purchases,
this is his best guess)
10,485
Property taxes paid
12,650
None
Real Property
Tax Bill
Form 1098
Home mortgage interest paid
Thank you card Charitable donation to Red Cross in cash
CPA Firm
Invoice
Cancelled
check
Tax preparation fees
Cancelled
check
Cost to join Weight Watchers to maintain overall
health
Estimated federal tax payment to the IRS
8,265
12,600
2,000
$50,000
2,600
Receipt
Dog Groomer
1099-B
Purchased 200 shares of Comcast Stock on
2/15/20Y1
50,000
1099-B
Sold 200 shares of Comcast Corp Stock on 4/15/20Y5
15,000
Jerry’s Jiant
Jumps Income
Statement
Net Income from Jerry's Jiant Jumps Company (Sole
proprietorship)
165
330,000
6
Appendix C: Debbie’s earnings and other tax issues
Debbie has one child named Sally from her marriage to Donald. Sally is a teenager;
she lived with Debbie the first six months and her dad, Donald Draper for last six
months of 20Y5. Debbie paid over 50% of the support for Sally.
Debbie is a homemaker who earned no income in 20Y5 other than annual alimony
payments of $120,000 and child support payments of $36,000.
In 20Y5, Debbie received the following from a property settlement associated with her
divorce decree:
Beverly Hills mansion
Bentley coupe
Home furnishings
$ 5,750,000
$
200,000
$
800,000
7
Appendix D: Financial information for Jerry’s Jiant Jumps Company
Jerry’s Jiant Jumps Company is a sole proprietorship with the following Income
Statement for 20Y5.
Jerry’s Jiant Jumps Company
Income Statement
For the Year Ending Dec. 31, 20Y5
Revenue:
Jumping fees earned
Total Revenue
Operating Expenses:
Advertising
Rent on land
Insurance
Office expenses
Non-employee compensation
Supplies
Total Expenses
Net Income
$
622,000
$
$
622,000
$
$
292,000
330,000
14,100
36,000
60,000
6,900
125,000
50,000
8
Appendix E: Cancelled checks
9
Appendix F: Tax documents
10
11
12
13
14
Appendix G: Invoices and receipts
15
To: Debbie Horowitz
Thank you for your generous cash donation of $12,600 on December 20, 20Y5.
Your donation will be used to help millions around the world. We look forward to
another generous donation from you at next year’s Annual Philanthropists Gala.
16
I. Title:
Requisite Tax Research to Prepare an Individual Income Tax Return
II. Introduction:
In this learning demonstration, you work for one of the four largest multinational
accounting and auditing firms. Your professional goal is to become a senior partner of
the firm someday. To achieve this goal, you plan to work in each department of the firm
for at least one year. Your current position is in the taxation department, where you will
conduct tax research to prepare an individual income tax return in a subsequent
learning demonstration.
This hypothetical tax case has one (1) main activity:
! Conducting tax research
Throughout this learning demonstration, your professor will play the role of a senior
partner in the taxation department with whom you discuss various issues and submit
draft documents for approval in advance of communicating with clients.
To successfully complete this Learning Demonstration, you must demonstrate your
knowledge of and abilities to complete the following goals and competencies:
Goal 1: Communication: Learners demonstrate ability to communicate clearly both
orally and in writing.
o Competencies:
! 1.1 Organize document or presentation clearly in a manner
that promotes understanding
! 1.2 Develop coherent paragraphs or points so that each is internally
unified and so that each functions as part of the whole document or
presentation
! 1.3 Provide sufficient, correctly cited support that substantiates the
writer’s ideas
! 1.4 Tailor communications to the audience
! 1.5 Use sentence structure appropriate to the task, message and
audience
! 1.6 Follow conventions of Standard Written English
Goal 2: Critical Thinking: Learners demonstrate ability to apply logical, systematic
decision-making processes to formulate clear, defensible ideas and to draw ethical
conclusions.
o Competencies:
! 2.1 Articulate and frame the issue
! 2.2 Collect and evaluate information
! 2.3 Evaluate the underlying causes or conditions of elements
contributing to an issue
! 2.4 Use systems thinking to arrive at a decision in the context
of an issue
1
!
2.5 Apply ethical principles when determining actions.
Goal 3: Quantitative Reasoning: Learners demonstrate the ability to use mathematical
operations and analytical concepts and operations to address problems and to inform
decision-making
o Competency
! 3.1 Construct models that represent real-world problems or
processes
! 3.2 Develop visible representation of data
! 3.3 Analyze data using mathematical/algebraic operations
! 3.4 Use calculated results to inform the problem or process
Goal 4: Leadership, Facilitation, and Collaboration: Learners lead, facilitate, and
collaborate with a variety of individuals and diverse teams to achieve organizational
objectives.
o Competency
! 4.1 Demonstrate an ability to plan a particular objective or goal
Goal 9: Functional Competencies for Federal Taxation: Learners demonstrate an
applied understanding of U.S. federal income tax laws for individuals and business
entities used in the professions and in accordance with U.S. Internal Revenue Code.
! Competencies:
o 9.1 Legal and regulatory: Students demonstrate a general understanding
of the Internal Revenue Code.
o 9.4 Decision Making: Apply tax laws, regulations, and court cases to
individual situations, identifying and communicating planning
opportunities and compliance needs.
o 9.5 Communication: Effectively communicate relevant tax information
based on specific reporting requirements of the U.S. Internal Revenue
Service or other U.S. taxing authorities in U.S. commonwealths and
territories.
As the newest member on the tax department team, the senior partner assigns you to
conduct tax research for Jerome Horowitz (nickname: Jerry), a client who has been with
the firm for many years. You will need to research various tax issues the client
confronts given activities that occurred over the past 5 years. Unfortunately, the firm
does not have copies of Jerry Horowitz’s tax documents from prior years.
Jerry Horowitz, is a divorced man, decided to take the plunge and get married one more
time. Before he tied the knot this time, he wanted to protect his personal assets and
individual wealth. Jerry was hesitant to bring up the subject of a prenuptial agreement
to his fiancée Debra Francois (nickname: Debbie). To sweeten the upcoming awkward
discussion, he surprised Debbie by having roses delivered to her office one Friday
afternoon. Debbie was gleeful the rest of the workday as her co-workers admired and
made jovial comments about her marrying the best catch in town; Jerry was handsome,
from a wealthy family, and known for his daredevil bungee jumping hobby. Rumor has
it that Jerry has made millions working for JPM Real Estate Company. After work, Jerry
took her to dinner at one of the finest restaurants downtown.
2
Knowing the Internal Revenue Service (IRS) has audited Debbie multiple times; Jerry
hired a tax attorney to write the prenuptial agreement. Aaron Levine, Esq. was highly
respected in the community and had the reputation of being the best tax attorney
around. Levine prepared an equitable and fair prenuptial agreement to protect the
respective assets of both Jerry and Debbie in the case of divorce or death. Jerry was
substantially older than Debbie and was most concerned about leaving all real property
to his grown children upon his death. Debbie would receive the proceeds from a one
million dollar life insurance policy if Jerry passed away first.
After cocktails and dinner, Jerry garnered the courage to discuss the prenuptial
agreement with Debbie. Fortunately, Debbie was a fair-minded woman and completely
understood that her past dealings with the IRS could be an issue moving forward. Both
Jerry and Debbie agreed they wanted to use the “married filing joint” status on their
future income tax returns. She was glad Jerry had taken care of having Levine prepare
the prenuptial agreement, which she agreed to sign at Levine’s office that night.
On December 31, 20X5, Jerry and Debbie had a fabulous wedding ceremony
overlooking the turquoise waters of the Caribbean. They took a honeymoon by cruising
from St. Thomas, in the U.S. Virgin Islands to Jamaica and back of a 95-foot sloop. The
weather, food, and crew provided a dream come true honeymoon. Debbie was ecstatic!
Before marrying Jerry, Debbie had been married to an outside salesperson named
Donald Draper. He pushed the envelope a little too far when it came to deducting the
entertainment and travel costs associated with his job. Draper did not keep accurate
records or save receipts associated with business travel expenses. Like Debbie, he too
had trouble with the IRS. Specifically, the IRS claimed that Donald was not keeping
accurate business or tax records and even more incriminating, he was fabricating travel
and entertainment expenses. Since Donald and Debbie selected the “married filing
jointly” status on their 20X1 and 20X2 tax returns, the IRS indicted both Donald and
Debbie on criminal tax fraud. Debbie was unaware that Donald was fabricating
expenses on their jointly filed tax return. Unfortunately, the new bride continued to be
under investigation by the IRS even after her tropical honeymoon.
Imagine the surprised look on Debbie’s face when Jerry received a letter from the IRS
dated January 8, 20X5, stating the IRS is auditing him for tax years 1989 and 1999.
Unaware he too had IRS problems, Debbie felt even more relieved she had signed the
prenuptial agreement. Jerry manages JPM Real Estate Company, Inc. where he earns
a very nice salary, which he reported on his personal income tax return. Sometimes,
Jerry sold a few properties as an independent real estate agent. When he
remembered, he reported these commissioned earnings on Schedule C of his tax
return. The IRS letter asserted that Jerry understated his gross income 26% and 31%
for the 1989 and 1999 tax years respectively.
Jerry always had a passion for jumping off high objects since he was a toddler, thus it
was no surprise when he started a bungee jumping business about 5 years ago, which
he named Jerry’s Jiant Jumps Company. He never filed any official paperwork for the
company since it started out as a hobby. Given his upcoming audit, Jerry decided to
clean up as much of his sloppy business practices as possible. Therefore, he began
the online application process for an IRS Employer Identification Number (EIN). The
3
application required the business address: 1858 Bungee Drop Lane, Terrapin Falls, MD
20783 and Jerry’s social security number 100-00-0001. Jerry did not intend to put
Debbie’s name or social security number 100-00-0002, on the application since he
owned 100% of the company. Jerry was certain he was using a cash basis accounting
method but unsure of which business form to select on the EIN application, so he could
not finalize the EIN application process. Wisely, Jerry decided it was time for an
accountant’s perspective.
At the beginning of February, Jerry came to the CPA firm with a box of tax documents
and a list of questions. Jerry’s previous accountant had retired from the firm, so it was
no surprise when a senior partner introduced the two of you and assigned you as
Jerry’s new accountant.
In your role as Jerry’s accountant, your first step is to conduct tax research to answer all
of his questions and provide Jerry with much needed guidance regarding his upcoming
audit.
III. Steps to Completion
Conduct Tax Research:
To begin, you should review the Tax Research Tutorial
(http://businesslibrary.uflib.ufl.edu/taxresearch), and read the process to conduct tax
research as described in the IRS document: REVIEW OF TAX RESEARCH
MATERIALS (http://www.irs.gov/pub/irs-tege/eotopich87.pdf). You may also find the
Georgetown University Law Library Tax Research-Federal Guide to be helpful in
learning more about federal taxation research:
http://www.law.georgetown.edu/library/research/guides/federal_tax.cfm. Other useful
sites include: FindLaw.com and CornellLaw.com.
There are three types of primary authoritative documents:
1. Statutory
a. Internal Revenue Code
b. Tax legislative process
2. Administrative
a. Treasury regulations
b. Revenue rulings
c. Revenue procedures
d. Private letter rulings
e. General counsel memorandums
f. Internal revenue manual
3. Judicial.
a. Tax court
b. U.S. District Court
c. U.S. Claims Court
d. U.S. Circuit Court of Appeals
e. U.S. Court of Appeals for the Federal Circuit
f. U.S. Supreme Court
g. Actions on decisions
4
To the extent possible, please support your research with appropriate legal citations that
refer to primary authority as shown in the list above. If you cannot find primary
authority to support your research, then it may be necessary to refer to secondary
authority. Secondary authority would include tax reference services, journal articles,
and textbooks.
Once you feel confident you understand how to conduct tax research and correctly cite
the authoritative sources, research with the following topics.
1. Business Formation Type:
Review business formation literature to gain a better understanding of the
advantages and disadvantages of sole proprietorships and corporations.
Confirm and be prepared to defend your decision with the senior partner.
Upon approval from the senior partner, prepare a transcript of a telephone
conversation you plan to have with Jerry. Include the advantages and
disadvantages of each possible formation and your recommendation for the
best alternative.
Jerry accepted your recommendation and completed the online IRS EIN
application process. The IRS issued Jerry’s Jiant Jumps Company EIN: 96123456789 with a Business Code of 713900.
2. Legality of Audit:
Research relevant tax literature to determine the legality of the IRS
conducting an audit of Jerry’s 1989 and 1999 tax returns even though the IRS
did not notify Jerry of the audit until March 1, 20X5. Prepare a transcript of a
telephone conversation you plan to have with the senior partner. State the
issues and the rules of law regarding each issue using the Issue, Rule,
Application, and Conclusion method, commonly referred to as the IRAC
Method. If needed, review resources on the IRAC Method to prepare this tax
research memorandum.
3. Business vs. Hobby:
Review the Internal Revenue Code rules on operating a business versus a
hobby to determine whether Jerry’s Jiant Jumps is a business or a hobby.
Prepare a transcript of a telephone conversation you plan to have with Jerry
describing the consequences of your determination. Ask the senior partner to
review your notes before calling Jerry.
4. Employee vs. Independent Contractor:
Review IRS regulations related to employees versus independent contractors.
Prepare a memorandum to Jerry explaining potential problems and or
penalties he may face with regard to the treatment of his workers as
independent contractors. State the issues and the rules of law regarding
each issue. Consult with the senior partner to determine if your memorandum
accounts for all potential issues before sending it to Jerry.
5. Tax Fraud:
Investigate criminal tax fraud literature and prepare brief notes for a telephone
conversation you plan to have with Debbie advising her of your
5
recommendations to mitigate or protect her from the charges. Consult with
the senior partner to determine if your notes account for all potential issues
before calling Debbie.
6. Exemptions:
Review IRS rules regarding claiming exemptions to determine whether
Debbie or her ex-husband Donald can claim Sally Draper as an exemption in
20X5. Prepare notes for a telephone conversation with Debbie advising her
of your recommendations via a telephone call. Include information regarding
special forms that may need to be filed as part of the federal tax return.
Consult with the senior partner to determine if your notes account for all
potential issues before calling Debbie.
Now that you have completed conducting tax research to answer Jerry’s questions and
provide him with research-based recommendations, it is time to prepare the
deliverables.
IV. Deliverables
Format:
You will combine all research files into one PDF document. If you are unfamiliar with
combining multiple documents to create one PDF file, the following site explains how
using 16 different methods: http://www.wikihow.com/Merge-PDF-Files.
Naming convention:
Name the PDF file using the following convention:
FirstName_LastName_TaxResearch.pdf
LEO Assignment folder:
Submit the PDF document in your LEO assignment folder.
1. Tax Research Deliverables
a. Transcripts for telephone calls:
i. Business Formation Type: Explaining positive and negative tax
consequences of all potential business formations for Jerry’s Jiant
Jumps Company.
ii. Legality of Audit: Tax research findings using the IRAC Method
regarding the legality of Jerry’s 1989 and 1999 Form 1040 audit.
iii. Business vs. Hobby: Describing business versus hobby rules and
consequences for violating those rules.
b. Memorandum to Jerry:
i. Employee vs. Independent Contractor: Explaining whether his
workers are employees or independent contractors.
c. Transcripts for telephone calls to Debbie:
i. Criminal Tax Fraud: Advising Debbie of your recommendations to
mitigate and protect her from the IRS charges of criminal tax fraud;
and
ii. Exemption: Provide information to Debbie regarding the eligibility
of claiming her daughter Sally as an exemption.
6
V. Frequently Asked Questions/Helpful Hints
To be added later.
7
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