1. Serena operates a lawn maintenance service in Southern California. As most of her employees are itinerant, they are paid on a day-to-day basis. Because of cash-flow problems, Serena requires her customers to pay cash for the services she provides.
a. What are some of the tax problems Serena might have?
b. Assess Serena's chances of audit by the IRS.
2. On a Federal income tax return filed five years ago, Andy inadvertently omitted a large amount of gross income.
a. Andy seeks your advice as to whether the IRS is barred from assessing additional income tax in the event he is audited. What is your advice?
b. Would your advice differ if you are the person who prepared the return in question? Explain.
c. Suppose Andy asks you to prepare his current year's return. Would you do so? Explain.
3. Lori files her income tax return 45 days after the due date of the return without obtaining an extension from the IRS. Along with the return, she remits a check for $40,000, which is the balance of the tax she owes. Disregarding the interest element, what are Irene's penalties for failure to file and for failure to pay?
4. For tax year 2008, the IRS assesses a deficiency against Rhett for $500,000. Disregarding the interest component, what is Rhett's penalty if the is deficiency is attributable to:
a. Negligence?
b. Fraud?
5. The state highway department condemns some of Chad's grazing land. The land cost Chad $20,000, and the condemnation award is the land's fair market value of $100,000. Shortly after the condemnation, Chad buys replacement grazing land. What is his recognized gain if the replacement land cost:
a. $70,000
b. $110,000
c. $20,000
d. What, if any, is the justification for deferring the recognition of gain on an involuntary conversion?