R2 - Individual Taxation - Other Items
Statute of Limitations
GR: 3 years from the later of -due date of return -date the return is filed *25% understatement of gross income 6 years from the later of -due date of return -date the return is filed *Fraud and false returns No statute of limitations *Refunds for individuals -Bad debts - 7 years
Estimated Tax and Inadequate withholding
*Estimated taxes - required minimum -$1,000 or more tax liability -Inadequate tax estimates: *90% of current year's tax OR 100% of last year's tax (applies even if an individual files a tax return with a 0 tax liability in the prior year) Exception: if taxpayer had adjusted gross income in excess of $150k in prior year, 110% of the price
A CPA's adjusted gross income (AGI) for the preceding 12-month tax year exceeds $150,000. Which of the following methods is (are) available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty? I. The annualization method. II. The seasonal method. a. Neither I nor II. b. I only. c. Both I and II. d. II only.
Choice "b" is correct. In computing the amount of estimated payments due, an individual taxpayer may choose between the annualized method (90% of current year's tax), or the prior year method (100% of last year's tax) unless the taxpayer's adjusted gross income exceeds $150,000 then they must use 110% of last year's tax. Therefore, the taxpayer in this example can use the annualized method. The seasonal method is not permitted.
Sam's year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of year 3 estimated tax payments that Sam can make? a. $33,000 b. $45,000 c. $30,000 d. $50,000
Explanation Choice "a" is correct. To avoid penalties, if a taxpayer owes $1,000 or more in tax payments beyond withholdings, such taxpayer will need to have paid in for taxes the lesser of: 90% of the current year's tax ($50,000 x 90%) = $45,000, or 100% of the previous year's tax ($30,000 x 100%) = $30,000 However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year, 110% of the prior year's tax liability is used to compute the safe harbor for estimated payments. (Previous year's tax $30,000 x 110% = $33,000).
Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income tax return for Year 8. By December 31, Year 8, Krete's employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, Year 9, Krete timely filed an extension request to file her individual tax return and paid $300 of additional taxes. Krete's Year 8 income tax liability was $16,500 when she timely filed her return on April 30, Year 9, and paid the remaining income tax liability balance. What amount would be subject to the penalty for the underpayment of estimated taxes? a. $500 b. $0 c. $16,500 d. $200
Explanation Choice "b" is correct. Provided the taxes due after withholdings were not over $1,000, there is no penalty for underpayment of estimated taxes. Note that there would be a failure to pay penalty on the $200 that was not paid until April 30, but this is a separate penalty.
If an individual paid income tax in the current year but did not file a current year return because his income was insufficient to require the filing of a return, the deadline for filing a refund claim is: a. Two years from the date a return would have been due. b. Three years from the date the tax was paid. c. Two years from the date the tax was paid. d. Three years from the date a return would have been due.
Explanation Choice "c" is correct. Two years from the date the tax was paid. Rule: A taxpayer may file a claim for refund within three years from the time the return was filed, or two years from the time the tax was paid, whichever is later. Since no return has been filed, the refund claim must be filed within two years from the time the tax was paid.
