Determine taxable income and dependency status

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znexrvn419

Business Finance

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come to the general consensus on Debbie's taxable income and Sally's dependency status using the attached information. show Debbie's taxable income calculations and include supporting details for Sally's dependency status.

Tax information.pdf  ( refer to pages 5-16)

FINAL_TaxResearch_LD.pdf  ( refer to pages 2-4)

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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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