Federal Income Tax Research Case

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Date: June 2015 Preparer: Hannah Wittman Subject: Embezzlement and Innocent Spouses Facts: In April of 2015, Elizabeth filed a joint tax return with her husband Gary. Both spouses are 67 years old and have no dependents. After filing their tax return, Elizabeth realized that Gary has 500,000 of embezzled funds in a bank account that she was unaware of. Although the embezzled funds earned $25,000 of interest, they were not reported on the couple’s 2014 tax return. The following income and deductions were reported on the tax return. Gross Income $295,000 Deductions for AGI $8,500 Itemized Deductions $13,700 Issues: 1) What is the couple’s taxable income and liability using the amounts reported on the tax return?…show more content…
The embezzled funds significantly increase the taxable income and tax liability, adding an additional tax cost of $199,287.10 compared to what was originally filed on the 2014 tax return. In the Internal Revenue Code, Reg. § 1.6015-2 discusses the protocol towards the liability of innocent spouses who filing jointly. Based on the this regulation, Elizabeth may make a request to the IRS to be relieved of joint and several liability for the amount of income that was understated on the 2014 tax return. In order to make this request, Elizabeth will have the burden of proof to ensure that she filed jointly in the year of the embezzlement, that the understatement of income occurred because of Gary, at the time of signing the 2014 tax return Elizabeth had no knowledge or reason to know about the embezzled funds, and it must be proven unjust for Elizabeth to hold liability for the understatement. Because Gary held all the embezzled funds in a bank account that Elizabeth had no prior knowledge of or reason to know of, she should be excused of the full understatement amount following her request to the IRS. Gross Income | $295,000.00 | Deductions for AGI | $8,500.00 | AGI | $286,500.00 | Greater of Standard or itemized deduction | $14,800.00 | Personal and Dependency deduction | $7,900.00 | Taxable Income | $263,800.00 | Tax Liability | $62,958.50 | Appendix A: Gross Income | $320,000.00 | Deductions for AGI | $8,500.00 |
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