Chapter 14.2, Problem 13E

Auditing Itemized Tax Deductions. To the Internal Revenue Service, the reasonableness of total itemized deductions depends on the taxpayer’s adjusted gross income. Large deductions, which include charity and medical deductions, are more reasonable for taxpayers with large adjusted gross incomes. If a taxpayer claims larger than average itemized deductions for a given level of income, the chances of an IRS audit are increased. Data (in thousands of dollars) on adjusted gross income and the average or reasonable amount of itemized deductions follow.

1. a. Develop a scatter diagram for these data with adjusted gross income as the independent variable.
2. b. Use the least squares method to develop the estimated regression equation.
3. c. Predict the reasonable level of total itemized deductions for a taxpayer with an adjusted gross income of $52,500. If this taxpayer claimed itemized deductions of $20,400, would the IRS agent’s request for an audit appear justified? Explain.