ACCT 542 Homework Project Spring Semester 2021

ACCT 542 Homework Project
Spring Semester 2021
Accompanying these instructions is a mock 2014 tax return of Joe D. Plummer. This
homework project has 4 due dates beginning next week and each week thereafter. I have
highlighted the due dates below.
Instructions
Pretend you are an IRS Revenue Agent and have been assigned Mr. Plummer’s tax return for
examination (audit). The return contains various entries which you will need to carefully
examine.
This is not a group project. You should email me your responses to the questions before each
class begins on the dates specified below.
The return was filed on 4/15/2015 and contains the following forms and schedules: Form 1040
& Schedules A, B, C & SE. It was prepared by the taxpayer himself on Turbo Tax. Assume it
was filed with the IRS as you see it, even though it contains some missing information. Assume
it was signed by the taxpayer, and had a W-2 attached to it issued by ABC Construction Corp.,
555 South Victoria Ave., Ventura, CA and that the W-2 was for $1,500,000.
Review Form 1040 and each schedule carefully. See if any of the information from one
schedule might relate to another schedule – in other words, given what you see in one
schedule, does that information correspond or conflict with information on another schedule.
What makes this exam different from most of your past exams at CSUN is that there is no right
and wrong answer. This project requires that you make certain inferences from the information
you are provided and then make some factual assumptions or suppositions about the taxpayer,
his lifestyle, his assets, his business dealings, his sources of income, his expenses, the nature
of his business, the nature of his income, etc.
This project requires you to use your common sense and everyday experiences, as well as your
basic business, accounting and tax knowledge. What I am looking for most is your analysis,
followed by the organization of your answers.
1) Prepare a written Pre-Audit Analysis as follows (due Feb 10 before class) :
a. Identify and prepare a list of all the items on the tax return that appear to be strange,
unusual, questionable, excessively large or excessively small in relation to other information on
the return, etc. To do this, provide a one or two sentence explanation for each such item. That
is, tell me why you identified the item & what the item tells you about the taxpayer (meaning,
about his assets, about his income, about his standard of living/life style, etc.) Also, tell me if
you are drawing any inferences from the dollar value of the item, how it is labeled/described on
the tax return, how it is being reported or deducted.
2) Prepare an Audit Plan (due Feb 17 before class)
a. Prepare a list of twelve (12) deductions shown on the return that you want to audit. For each
of these deductions that you list, provide a one or two sentences for each explaining why you
have identified the deduction. In other words, explain why you feel there is a possibility the
deduction may be improper/non-deductible, excessive/not reasonable, etc.
b. Prepare a list of five (5) income items shown on the return that you plan ask about during
your interview of the taxpayer or his representative. For each item, explain in one or two
sentences why you selected these items and what inferences you are drawing from the amount
of income, from the manner in which it is reported, from the label that is placed on it, from the
category of income it falls under, etc.
3) Document Request and Background Research
c. For each of the 12 deduction items and 5 income items that you have selected for audit, list
in a few sentences list:
i. What documents you are requesting that the taxpayer provide to you
during the audit appointment(s) for each of the items you identified that you
are examining/auditing.
ii. What public records you will review before your interview to be armed
with information so that you know whether the taxpayer or his
representative is being truthful.
iii. What internal IRS reports/transcripts can you review in order to
determine if the taxpayer reported all of his income and to determine the
source of his income in case the source is not clear on the return.
iv. With respect to the 12 deductions, make one or two assumptions of
what the taxpayer might tell you or the documents he might provide that
would make the deduction entirely non-deductible (other than lack of proof
of payment) or partially non-deductible. Tell me what your assumption(s)
is/are and how that would influence the outcome of whether that particular
expense is deductible.
v. With respect to the 5 income items, make one or two assumptions
about what the taxpayer might tell you about the source or nature of the
income. In other words, give me one or two examples of what the taxpayer
might say that may lead you to believe that:
1. there may be other unreported income
2. there may be related persons or entities whose information may
shed more light on this taxpayer and/or his income from other
sources. If so,
a. what information or documents will you ask for relating to
such related persons or entities.
b. are there any related party documents you wish to review,
if so please explain in one or two sentences what these
documents might be and what they might reflect about the
taxpayer, his business dealings, etc.
4) The Pre-Audit Phone Call
Assume that you will be using a classic investigative technique – the Surprise Phone Call.
You call the taxpayer at his home or his work. You identify yourself, gently state that his 2014
return has been selected for review, and that you are calling to set up an appointment in the
next few weeks to meet with him at his residence for a few hours. After he recovers from the
initial shock of the news, you ask him if he has few minutes to go over some preliminary matters
before you come out so as to help narrow your audit to no more than what is absolutely
necessary. Assume he agrees to answer your questions.
List fifteen (15) questions you would like to ask in order of importance to pin the facts down
before the taxpayer gets a chance to speak to a representative. Remember, once he hires a
representative, your questions will primarily be answered by the representative.
Good luck and keep in mind the following general directives of the IRS:
The mission of the IRS is to “Provide America’s taxpayers top quality service by helping them
understand and meet their tax responsibilities and by applying the tax law with integrity and
fairness to all.” This mission statement describes the IRS’ role and the public’s expectation
about how the IRS should perform that role.
ï‚· In the United States, the Congress passes tax laws and requires taxpayers to comply.
 The taxpayer’s role is to understand and meet his or her tax obligations.
 The IRS’ role is to help the large majority of compliant taxpayers with the tax law, while
ensuring that the minority who are unwilling to comply pay their fair share.
How this plays out in the tax audit world is as follows:
1. It is the Revenue Agent’s duty to help achieve the taxpayer’s compliance with the tax laws.
2. The Revenue Agent must be courteous but firm with taxpayers
3. When a tax issue can go either way, the Revenue Agent must protect the interests of the
government.
4. Unless otherwise told to do so, a Revenue Agent must not spend too much time on matters that
will not yield tax dollars for the government.
5. The Revenue Agent must try to close the case in 6 months or less when possible, and if that is
not possible, he/she must articulate to management why additional time is needed.
And these more specific guidelines from the Internal Revenue Manual [next page]
Section 4.10.2.3 (08-01-2007) — In-depth Pre-contact Analysis
1. The examiner is responsible for determining the scope of the audit, beginning with the issues identified by
the classifier on the classification check sheet. The examiner must perform a pre-contact analysis including
a thorough review of the case file to identify large, unusual, or questionable items (LUQs) beyond those
selected on the classification check sheet. The examiner should take the following actions:
A. Review the complete tax return including line items, credits, the balance sheet, elections and
schedules, and any other items attached to the return.
B. [omitted]
C. Review internal and external data from the following sources:
IRP Transcripts,
Asset locator / people locator, and
Internet Research.
D. [omitted]
—————————————
Section 4.10.2.3.1 (08-01-2007) – Large Unusual Questionable Items (LUQs) Defined
1. The definition of a large, unusual, or questionable item will depend on the examiner’s perception of the
return as a whole and the separate items that comprise the return. Some factors to be considered when
identifying LUQs are:
A. Comparative size of the item — an expense item of $6,000.00 with total expenses of $30,000.00
would be a large item; however, if total expenses are $300,000.00, the item would not be generally
considered a large item.
B. Absolute size of the item — despite the comparability factor, size by itself may be significant. For
example, a $50,000 item may be significant even though it represents a small percentage of
taxable income.
C. Inherent character of the item — although the amount of an item may be insignificant, the nature of
the item may be significant; e.g., airplane expenses claimed on a plumber’s Schedule C.
D. Evidence of intent to mislead — this may include missing schedules, incomplete schedules, misclassified entries, or obviously incorrect items on the return.
E. Beneficial effect of the manner in which an item is reported — expenses claimed on a business
schedule rather than claimed as an itemized deduction.
F. Relationship to other items — incomplete transactions identified on the tax return. For example, the
taxpayer reported sales of stock but no dividend income.
G. Whipsaw issues — occur when there is a transaction between two parties and characteristics of
the transaction will benefit one party and harm the other. Examples include alimony vs. child
support, sale vs. rental/royalty, employee vs. independent contractor, gift vs. income.
H. [omitted]
I. Missing items — consideration should be given to items which are not shown on the return but
would normally appear on the returns of similar taxpayers. This applies not only to the examination
of income, but also to expenses, deductions, etc., that would result in tax changes favorable to the
taxpayer.