Tax Issues/Ethics Letter
Assume a relative asks for your tax advice (after all, you told them to "just ask!"),
or assume you are responding to a client as you write a letter on one of the
following cases. For each case, identify the tax issues, which issues may be ethical
issues, what advice you would give the taxpayer, and measure the tax cost/savings
of your advice (assume a marginal tax rate of 15%). Realize that they are looking
to you for an answer, so your letter should provide an answer of what they should
do with the reasoning of why and the support for your reasoning.
Case 1. Chris wants help in figuring her gross income for the year. She was
unemployed as the year began and collected $2,000 unemployment. She later got
a job as a manager for Ark Communications, Inc. She earned $55,000 in base
salary. He boss gave her a bonus check of $5,000 at Christmas. She decided to
hold onto the check and not cash it so that it would not be taxable for this year.
She also got fringe benefits on her job including a gym membership that costs $400
a year. She received a gold watch worth $300 for managing her department with
the least accidents during the year.
But her good luck did not end there. She found $5,000 in cash in the parking
lot one day and kept it, of course. She also won $8,000 in a drawing at a local
grocery store which sent her a 1099. But, she also won about $6,000 cash playing
poker with a group of friends on Friday nights and her friends don’t issue 1099s.
Case 2. Your sister Crystal called; she lives in Maryland. She said she went to a
paid tax preparer that has a booth in their Walmart store. The preparer displayed a
document showing she was a Registered Tax Return Preparer in good standing who
had passed an IRS exam.
Normally Crystal files single with a standard deduction. The preparer, Sue, asked
her if she received any income other than the $46,200 she earned at a local
publishing house. Crystal told her she received about $5,200 total in several cash
payments from people she knew who were writing books and wanted her to edit
them. Sue told her that since Crystal was not receiving a form 1099 for the cash
payments, she would not need to report that amount. She also told Crystal that
there were "standard amounts" that would be accepted by IRS for itemized
deductions even if Crystal did not have receipts. Sue estimated that Crystal could
take the "standard ' amounts totaling $7,150 in itemized deductions.
Consequently, Crystal was going to get a much bigger refund that she expected but
she really needs the money because she has some elective medical procedures that
she will pay for. She wants to know what she should do in this situation?
Case 3. In March, Jim, a firefighter, was injured in the line of duty. The
injury was a result of interference from a shop owner. He incurred medical
expenses of $14,800 related to the injuries. The shop owner’s insurance
company offered, and Jim accepted, $34,800 and acknowledged that the
$20,000 above medical costs was to avoid court proceedings and a
potentially higher punitive damage awards. Jim prepared and filed his
income tax return for the year and included the medical expenses but did
not include the insurance settlement since it came after the tax return was
filed. What is the ethical issue in this case? What advice would you
give Jim? What are the tax costs of his options?
Case 4. Maggie and her husband Hank own a condo in Del Mar, California.
During the horse racing season, they rent their condo to wealthy Saudi’s
who come to Del Mar for two weeks. Maggie and Hank receive $16,000 for
the two weeks in rent and they go to Sacramento and visit relatives during
the rental period; they live in the condo when not rented. This year, the
renter’s asked Maggie and Hank if they could stay an additional two days
because one of their children was too ill to travel. Maggie and Hank agreed
but did not charge additional rent. When Maggie and Hank returned to their
Del Mar condo, they found the renter’s left a wonderful fruit and flower
basket with a card thanking them for their hospitality and a check for $2,000
which was in addition to the $16,000 rent already paid. In talking to Maggie
and Hank, you learned that the prorated portion of mortgage interest and
real estate taxes for 16 of 365 days is $1,155. Other expenses during the 16
days (utilities, maintenance, etc.) totaled $1,940, and the prorated
depreciation was $1,826. Their marginal tax bracket is 25%. What is the
ethical issue in this case? What options do Maggie and Hank have in
reporting the rental income? What is the cost of each option? What is your
Grading of Letter The letter must be in a business format, and use proper grammar,
punctuation and spelling. Cite tax authority for your decisions/advice in the body of
the letter or in footnotes. Length depends on your topic and arguments but
generally, 2-5 pages. The general rule in business is to make it long enough to get
the message across and no longer. Simulated address for the letter is:
Client or relative name
4700 College Oak Drive
Sacramento, CA. 95841
Do not send the letter using the simulated address.
The letter must be prepared in any word processing program, but the file must be
readable to be graded.
Correctly identified tax issue(s) 15
Provided criteria from knowledgeable tax sources--how to treat tax issue 15
Identified and discussed potential ethics issue* 10
Clearly presented viable option(s) for taxpayer 10
Made a recommendation to taxpayer* 10
Measured tax cost/savings of option(s) 5
Format, punctuation, spelling, capitalization, etc. 10
*Advice to taxpayer that is incorrect or unethical will result in a grade no higher