Federal Income Tax Comprehensive Project
You have recently been hired by the accounting firm of Debits & Credits LLP. Your first assignment is the 2016 Individual federal tax return of John and Jane Harrison. The return has been prepared by an overseas staff member. Your assignment is to:
1. Use the provided client information to review the accuracy of the Harrison's 2016 tax return as prepared by the overseas staff member. a. Provide a "to-do" list for the overseas staff member, including a list of items on the return which are incorrect, and clear explanations. b. Provide the staff member with corrected amounts for Form 1040. You can prepare a revised Form 1040 or note on the staff member's prepared Form 1040 the correct amounts for each line which is incorrect.
2. In excel, use your corrected amounts to compare the Harrison's 1040 to the IRS Statistics of Income (SOl). Compute the variances using the SOl for Married Filing Jointly filers who itemized in 2015 (use the by filing status tables). For any variances greater than $5,000, note whether the variance increases, decreases or has no impact on the taxpayers' audit risk. Explain your answer.
3. Your manager is excited you are using the SOl to assess audit risk for the Harrison return, and is interested to know what other information can be retrieved from the SOL He has asked you to use the IRS SOl for Individual Income Tax to answer the following questions (use the by AGI tables). Provide answers using the All Returns information. a. At what dollar amount of AGI do exemptions start to decrease? Why might that be? b. At what dollar amount of AGI do itemized deductions substantially increase? Why might that be? c. At what dollar amount of AGI does the percentage of social security that is taxable flatten out? Why might that be? d. At what dollar amount of AGI do Keogh deductions substantially increase? Why might that be? e. At what dollar amount of AGI do Student loan interest deductions start to decrease? Why might that be? f. Describe the pattern of AMT in relation to AGI. Why might this pattern exist? g. At what dollar amount of AGI does the Nonrefundable Education Credit start to decrease? Why might that be? h. Based on the statistics, is there a tax credit which does not appear to phase out with AGI?
Note: Data on the SOl tables may need to be manipulated when completing parts 2 and 3. Amounts reported in the tables are rounded to the nearest 1,000. In addition, Income/Deduction/Credit items in the tables are the total amounts for each item reported on all tax returns. The total number of returns which reported each item is also listed. To compute income/deduction/credit amount per return, the total amount should be divided by number of returns reporting the item and then multiplied by 1,000. Client Information
Client: John Harrison (date ofbirth 08/10/1966 & social security #456-78-0123) Spouse: Jane Harrison (date ofbirth 06/01/1968 & social security #321-45-7891)
Address: 610 Market Street, Wilmington, NC 28403
Children: Amy (date ofbirth 01/15/1998 & social security #055-44-3235) Chris (date of birth 07/22/2002 & social security #041-11-3268) Mike (date of birth 08/02/2006 & social security #068-11-1789)
Health Insurance: All family members were covered all year under Jane's employer provided plan.
Additional: • John is self-employed. He has owned and run a cash-basis doggy daycare for the past 3 years. During 2016, the daycare purchased no depreciable assets, and made no payments requiring 1099s. ·
• John has a SEP-IRA and would like to contribute $5,000.
• Jane is a Human Resources executive. She is covered by her employer's retirement plan.
• Amy is a full-time college sophomore. She lives on campus but comes home over school breaks.
• John's uncle died and left John $50,000 in life insurance proceeds.
• On January 1, the family moved to Wilmington, NC for Jane's job. Jane's old office was 20 miles from their old home in Raleigh, NC. Her new office in Wilmington is 160 miles from their old home in Raleigh, NC. The cost of moving the household and the family was $12,440, not including meals.
• Following the move, John and Jane were unable to sell their home in Raleigh (9 Madison Way, Raleigh, NC 27612). They began renting it out January 1, 2016. John actively manages the property, and made no payments which required forms 1099. The income and expenses related to this activity were: Rental Income $20,400 Repairs & Maintenance Expense $ 331 Real Estate Tax Expense $ 3,840 Mortgage Interest Expense $12,270 *Depreciation Expense $ 8,779
*The fair market value of the house on January 1, 2016 was $251,900, original cost $280,000. • Jane and John provide the following list of additional expenses they paid during 2016. They have written documentation and/or receipts for all expenses.
Alimony (Mark Thomas, #245-11-1756) $ 8,000 Charitable Contributions - Cash $ 8,800 Charitable Contributions - Clothing $ 200 to Salvation Army Childcare Expenses (for Mike) $ 2,500 to Children "R" US, EIN#12-3456789 Credit Card Interest $ 1,500 Dental Expenses $ 5,200 Doctors, Prescriptions $ 1,800 Gym membership $ 600 Income Tax Preparation Fee $ 1,000 Political Contributions $ 4,500 UnionDues $ 800 2016 Estimated tax payments to the IRS $ 4,000 •
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f Employee's addi'IISS and ZIP coda 15 Slltl Empl~'sstateiDnumbar 16 Slsho_.a.tlpos,e\c, 17 StateincomeliJc 18 Loelll wa;.. , tlpa, eto. tO l.oaallnoometalt -~-l.JL\lHtlL L~~--~-- '------J,SSQ ___ _ ...... ______...... ~ ·-····-···------· I Wage and Tax Department of tha Treasury-lntamal Ravenua SeMea Fonn W•2 Statement Copy B-To Be Flied With Employee's FEDERAL Tax Return. This Information Is being furnished to the Internal Revenue Service. Hairy Pup-Ins, LLC 4 Windrift Lane Wilmington, NC 28406
Revenue $98,640
Advertising Expense $1,250 Dog Supplies Expense 4,500 Employee Wage Expense 16,670 Dog Food Expense 18,890 Insurance Expense 1,620 License Fees Expense 800 Utilities Expense 5,600 Website & Video Expense 2,630 Depreciation Expense ------=-7_,2=8=0 Total Expenses 59,240
Net Income $39.400 - r:"'t'-:"""'~"""il'" r-.,Tl"'""-: -. r.,r,·•::-~J a.--tt.h-bedl3:456789 ~ r.t., \. ~ .. \"' .l .. ., ""'Uftal"nulll • TAX' AND YEAR-END STATEMENT ~ . > · - •"'II ..,. ·· · ;.1,-_..~,., "! - · • ... · Reapient's 1dentificati_on :!cMC\ + 'l"CU1~ - ~n<;;~ Number:---· 0\~
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I Form ,098 (K ee p for y o~r records www.lrs. /fcrm1098 De Pan ment of the Tl"l!llsury -lmemal Revenue Service \ \ LER S name,' street ad ess, city or town, state Ol prov OMB No. 1645-1574 foreign postal code, 111\d I!Jiephontt number A e,~ C.ri n€..9\ e, Tuition 2 Amounta .~ eel for ~© 1, f>. 0. <2>~ 1~ \\0 qualified IIJ!Uon and Statement r&lated expenses ~ \ \:x.m~ I N 'Y 11.'20\ $ Form 1098-T L.ER"'Sl8c ra ldentlncalion no. opy B 88"-'1qoo '\ \ 0 For Student SnJDENT'S name Thla Is Important talc Information and I& being ~~ $ fumlshO(j to the II Adjustmen1s to 7 Chock it the amcUII Internal Revenue &t:hoillrshiP6 or g1"111118 In bOll 1 or 2 lnolucles Service. Thi8 fonn for a prior year amounts for 1111 academic must be used to period beginning January complele Form 8863 - March2CI17.,. D to claim aducaiiQn credits. Give~ to the und · IIIX preparer or usult to prepsns the tax return. Fonm 1098-T (keep for your records) www.lrs.gov/form1098t Department of the "r rtiiiSUry - Internal R9'11enue SeNtce