1. Sheila has a second home being used as rental property. Her tenant moved out near the end of last year. She has been renting the home for $1,750 per month for the last few years. Sheila's friend, Barry, needed a place to live as he was recently divorced. Sheila agreed to let Barry live there for the next 12 months if he paid enough to cover the mortgage. The mortgage is $1,000 per month. Barry lived in the house and paid, as agreed, for the entire year. How would Sheila report her rental income and expenses? a) Report $12,000 as rental income on Schedule E, PartI, and then report the rental expenses on Schedule E, Part Il b) Sheila doesn't have to report the income or expenses since it was rented to a friend. c) Report $12,000 as other income on Form 1040, line 21, and report the deductible expenses limited to the rental income on Schedule A, line 23 d) Report $12,000 on Form 1040, line 21, and none of the expenses would be deductible 2. James owns a house, which is available to rent all year. After his last tenant moved out, James needed to get the property ready for the next tenant. James replaced the old air conditioner units with a central air conditioning system for $6,200. He also paid $200 to repair damage done to a bedroom wall. James also replaced a broken window in the kitchen for $85 and repainted the property for $750. How much did James spend on repairs? a) $1,035 b) 285 c) $7,235 d) $6,200 3. John owes federal taxes for the current tax year. John may owe an underpayment penalty if a) He owes more than $1,000 to the IRS as a current year tax liability. b) His tax balance due is more than 20% of his total current tax year liability c) He paid estimated tax payments as required d) He plans to make estimated tax payments for next year 4. After 10 years of marriage, Bill and Wilma divorced last year. They just received a notice from the IRS stating there is a substantial amount of tax due on a joint return they filed 2 years ago. The return had been prepared by Bill and they received a $1,500 refund. The IRS notice stated that Bill had lottery winnings of $44,000 that were not included on the return, resulting in a payment due of $7,500 plus interest. Wilma had no knowledge of Bill's lottery winnings and feels it is unfair she should have to pay. What can she do? a) b) c) d) Since this was joint return, signed by Wilma, she cannot do anything She can file an injured spouse claim. She can file for innocent spouse relief She should apply to the IRS for equitable relief