Federal Income Taxation

Assignment # 1 Chapter 1
Q11:Sophia lives several blocks from her parents in the same residential subdivision. Sophia is
surprised to learn that her ad valorem property taxes for the year were raised, while those of her
parents were lowered. What is a possible explanation for the difference?
Ans:
The property taxes on Sophie residence may have increased because of one or more of the
following reasons:
1.

Ad Valorem Taxes on realty: It may be that Sophie pays more ad valorem taxes than do her
parents, even though the properties involved are of approximately equal values. Realty
generally includes real estate and any capital improvements that are classified as fixtures.
Perhaps she made significant home improvements (e.g., kitchen/bathroom renovation) that
caused the assessed value of Sophies property to increase.

2.

Another reason could be the conversion of Sophies residence to commercial use.

3.

The reason for the decrease of her parents property taxes could be that one or both have
reached their senior age status - age 65 or older. Lower valuations (or tax rates) often are
allowed for senior citizen status (i.e., 65 years or older).

Q14: After his first business trip to a major city, Herman is alarmed when he reviews his credit
card receipts. Both the hotel bill and the car rental charge are in excess of the price he was
quoted. Was Herman overcharged, or is there an explanation for the excess amounts?
Ans:
It may a case of overcharge, but part of overcharge could be result of the following excise taxes.
Many state and local excise taxes parallel the Federal version. Over the last few years, two types
of excise taxes imposed at the local level have become increasingly popular: the hotel occupancy
tax and the rental car surcharge. So it could be that Herman was charged hotel occupancy tax and
rental car surcharge.
Hotel occupancy tax is imposed on the rental of a room or space in a hotel costing $15 or more
each day. The tax applies not only to hotels and motels, but also to bed and breakfasts,
condominiums, apartments and houses. Local hotel taxes apply to sleeping rooms costing $2 or
more each day.

Federal Income Taxation

Because they tax the visitor who cannot vote, they are a political windfall and are often used to
finance special projects that generate civic pride (e.g., convention centers and state-of-the-art
sports arenas).
Q36:With regard to the IRS audit process, comment on the following:
a. The audit is resolved by mail.
Ans: The audit by the IRS obviously was a correspondence or minor type. The reason for
the audit was probably a minor oversight, such as the omission of some interest or
dividend income, and these issues are not complicated enough to necessitate office
meetings.
b.

The audit is conducted at the office of the IRS.

The audit by the IRS obviously is a serious type conducted in office, which cannot be
easily resolved using mail correspondence.

c.

A no change RAR results.

Upon the conclusion of the audit, the examining agent issues a Revenue Agents Report
(RAR) that summarizes the findings. The RAR will result in a refund (the tax was
overpaid), a deficiency (the tax was underpaid), or a no change (the tax was correct)
finding. It means the tax filed was correct.

d.

A special agent joins the audit team.

If, during the course of an audit, a special agent accompanies (or takes over from) the
regular auditor, this means the IRS suspects fraud. If the matter has progressed to an
investigation for fraud, the taxpayer should retain competent counsel.

Q40: Brianna, a calendar year taxpayer, files her income tax return for 2014 on February 3, 2015.
Although she makes repeated inquiries, she does not receive her refund from the IRS until May
28, 2015. Is Brianna entitled to interest on the refund? Explain.
Ans:
No. Brianna is not entitled to interest on refund. No interest is due on refunds that arrive before
the 45-day deadline, which is always counted from filing deadline (April 15 for most individual
taxpayers). If Brianna has filed her return early, the 45-day clock does not start ticking until April
15, giving the agency until May 30 to issue an interest-free refund, if one is due. Brianna has
filed her return before it is due, the IRS still has 45 days from the deadline - generally April 15. A
return is not considered filed until its due date. Since she has received her refund on May 28
2015, Brianna is entitled to receive interest-free refund from the agency.