1. In each of the following situations, explain why the taxpayer's action is or is not tax evasion:
a. Jamal owns an electrical appliance repair service. When a client pays him in cash, he gives the cash to his daughter Tasha. Jamal does not report the cash he gives to Tasha in his business income. Tasha has no other income, and the amount of cash that she receives from Jamal is small enough that she is not required to file a tax return.
b. Roberta and Dudley are married. Roberta usually prepares their tax return. How- ever, she was in the hospital and unable to prepare the return for 2009, so Dudley did it. In preparing their 2010 return, Roberta notices that Dudley included $1,000 of tax-exempt municipal bond interest in their 2009 gross income. To correct this mistake, Roberta takes a $1,000 deduction on the 2010 return.
c. In 2010, Hearthome Corporation receives notice that the IRS is auditing its 2008 return. In preparing for the audit, Hearthome's controller, Monique, finds a mis- take in the total for the 2008 depreciation schedule that resulted in a $5,000 over- statement of depreciation expense.
d. While preparing his tax return, Will becomes unsure of the treatment of a deduc- tion item. He researches the issue and can find no concrete tax law authority per- taining to the particular item. Will calls his buddy Dan, an accounting professor, for advice. Dan tells Will that if the law is unclear, he should treat the deduction in the most advantageous manner. Accordingly, Will deducts the full amount of the item, rather than capitalizing and amortizing it over 5 years.
e. Sonja is a freelance book editor. Most companies for which she works pay her by check. In working out the terms of a job, a new client agrees to pay her by giving her a new computer valued at $3,600. In preparing her tax return, Sonja notes that the client failed to report to the IRS the value of the computer as income for Sonja. Aware that her chances of getting caught are small, Sonja does not include the $3,600 value of the computer in her gross income.
In each of the following problems, identify the tax issue(s) posed by the facts presented. Determine the possible tax consequences of each issue that you identify.
2. Marla had $2,100 in state income taxes withheld from her 2010 salary. When she files her 2010 state income tax return, her actual state tax liability is $2,300.