ACCT 542 California State Uni

Assume that the IRS disallowed $300,000 of expenses from three years of Jim’s corporate
income tax returns and that because the corporation was an S-corporation, the additional taxable
income was flowed through to Jim and Jane’s personal tax returns (form 1040), which had been
filed jointly for all three years.

Jim calls and wants to come in to discuss his options in dealing with the following situation: he
received a letter from the IRS auditor asking for consent to be assessed about $100,000 in
additional tax, $20,000 in penalties, and $15,000 in interest on the tax and penalties. The letter
states he has 30 days to request an appeal and file a Protest stating clearing why he disagrees
with the auditor’s determination and what evidence he has shown to support his corporate

He would like you to represent him and Jane as to their jointly filed form 1040.

The IRS disallowed the following approximate expenses, for the reasons stated below, over a 3
year period:

a) Travel: $ 75,000 — insufficient proof to show business purpose of travel $ 50,000
b) Auto: $ 50,000 – insufficient proof of business use of auto

c) Meals @50%): $ 60,000 – insufficient proof of business entertainment expenses

d) Promotional Expenses: $ 30,000 — business gifts

e) Insurance: $250,000 – unreasonable/excessive captive insurance paid

1) Explain what documentation Jim would need to provide to you to support that these

deductions should be allowed.

[note: the following questions will require you review my 2 page handout (e-mailed to you
and/or handed out on the first day of class). Also do some Google searches to find the answers]

2) What if the 30 days has passed, and the IRS Issues a Notice of Deficiency. How much time
do Jim and Jane have to avoid assessment of the tax and have the IRS auditor’s finding re-

3) What steps do Jim and Jane need to take now to avoid assessment of the tax until a re-
determination can be made?

4) Where (what website) do you find the forms necessary to complete to avoid the assessment of
the tax until there is a re-determination of the auditor’s findings?

5) What will happen during the time Jim and Jane file papers for a re-determination of the
auditor’s findings and the time the final tax assessment is entered into the IRS computer and a
balance due letter is mailed?

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