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Deductions Situations Addressed

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There is a significant amount of gray area when interpreting tax regulations. There are several resources available to assist tax preparers in addressing these issues, such as the AICPA's "Statements on Standards for Tax Services."

You are asked by a new client to include an unsubstantiated amount as a deduction that will make a significant impact on the client's tax liability.

How would you address the situation?

Would you address the situation differently if your manager insisted that you include the amount?

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This falls under tax preparer due diligence. This is an area that is regulated by both the AICPA and the IRS. Circular 230 (IRS) covers due diligence in its entirety. Basically, the tax preparer must be aware and thoroughly understand the tax laws surrounding the types of deductions being used. Due diligence is then used in determining if the records provided to the tax preparer are accurate representations, and if the documents provided to substantiate the deduction by the taxpayer do not appear ...

Solution Summary

This solution discusses unsubstantiated income tax deductions. A comprehensive discussion is provided.

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Federal taxation ethics cases

An Indirect Route to a Contribution Deduction
In July, a plane crashed into a residential community in Middleboro, destroying and damaging many homes. Tanya's church, a qualified charitable organization, initiated a fundraising drive to help the Middleboro citizens whose homes had been affected. Tanya donated $50,000 to first Middleboro church and suggested to the pastor that $25,000 of her contribution should be given to her sister, Tanesha, whose home had suffered extensive damage. The pastor appointed a committee to award funds to needy citizens. The committee solicited applications from the community and awarded Tanesha $15,000.

- Discuss the factors that should be considered when determining deductions for charitable contributions.
- Evaluate whether or not Tanya is justified in deducting the full $50,000 of her charitable deduction when the charity awards only $15,000 of the gift to Tanya's sister and victim of the plane crash.
- Persuade the classmate your position is stronger by refuting his or her points.

Between a Rock and a Hard Place.
Robert Ryan, a candidate for governor, has released his income tax return to the public. As Ryan's former tax advisor, you examine the return closely and realize that a considerable amount of his income was not reported on the return. You confide to a friend in the tabloid newspaper business that you are aware that a candidate for high public office has filed a fraudulent tax return. Your friend assures you that you will be able to sell your story for at least $25000 to a tabloid and still remain anonymous. Another friend, a CPA, argues that you should inform Ryan and give him an opportunity to correct the problem. You tell your friend that you are concerned that Ryan will be very vindictive if you approach him about the issue.

- Discuss how the $25,000 would be taxed if you chose to sell your story to a tabloid newspaper.
- Evaluate the pros and cons of each decision and then indicate what you would do.
- Evaluate the ethical aspects of your decision.

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