Writing Sample Scenario: You are a Revenue Agent and have been transferred a new case because your colleague Robert recently left the IRS for another position. Robert was a Revenue Agent in your office and was in the middle of a case prior to his departure. He had already conducted a taxpayer interview and a tour on site of the taxpayer's business before the case was passed to you. You have been given access to all of his resources, including the transcript of his interview with the taxpayer and the notes he took during his site visit. The case is Lillian Adams' tax return for tax year 20X9. She filed her Form 1040 jointly with her spouse, and the return includes a Schedule C for her business as a piano teacher. She gives private piano lessons to students of all ages. You have access to several prior years' tax returns and do NOT see this business reported previously. Therefore, this is the first year she has reported her music education business on her tax return. She has no other employment reported. You review her tax return and notice that she has a seemingly large amount of expenses for the gross revenue she collected during the tax year. For example, she lists a home office deduction as well as a business expense for her car. Robert's Notes/Observations during the Tour: The house is in a suburban neighborhood. The house appears to be 2,500 square feet and is clean and orderly. The piano is contained in a small nook under the stairs. The area looks small compared to the square footage that was listed on the Schedule C. It looks to be about 10 ft. x 10 ft. Lillian's 20-year-old niece is giving piano lessons to a student during the tour. Robert's Notes/Observations during the Tour: The house is in a suburban neighborhood. The house appears to be 2,500 square feet and is clean and orderly. small The piano is contained in a small nook under the stairs. The area le compared to the square footage that was listed on the Schedule Cooks to be about 10 ft. x 10 ft. Lillian's 20-year-old niece is giving piano lessons to a student during the tour. Someone who looks like the student's parent is waiting in the living room watching TV. There is an office upstairs with a desk that has business paperwork on it. There is one car parked in the garage, and both Lillian and her husband are The couple owns one (1) car. Interview Transcript between Robert and Lillian Robert: "How long have you been self-employed as a piano teacher? Is Mr. Adams also a piano teacher?" Lillian: "I was a stay-at-home mom until last year when I started giving piano lessons from my home. No, Mr. Adams is not a piano teacher." Robert: "What days and hours do you provide lessons? How long is each lesson?" Lillian: "I provide lessons Monday through Friday from 3pm until 7pm and Saturdays from 11am until 2pm. Lessons are usually an hour long for each student." Robert: "Do you have a calendar that includes the students' names and timeslots for their lessons in 20X9? Lillian: "I have an electronic calendar. I can provide that to you." Robert: "How do students pay for lessons? Do you accept cash, credit card, and/or electronic payments?" Lillian: "Students can pay in cash or check." Robert: "For the students that pay in the form of checks, do you ever deposit that money into a bank account? If so, what is the bank's name? Lillian: "My husband and I bank with Harper Bank. Checks are deposited unless we need cash. If we need cash, the check is cashed and NOT deposited." Robert "What percentage of lessons is paid in cash and what percentage is paid by check? How often and when are deposits made? Lillian: "I would say 50% of students pay in cash and 50% pay by check. We make weekly deposits." Robert "What type of accour do you have Robert: "What type of accounts do you have at Harper Bank? Do you have any receipts or bank statements of your deposits for the last year?" Lillian: "We have a checking and savings account. I do have receipts and statements. I can retrieve those for you tomorrow when I go to the bank Robert: "I saw someone else was providing piano lessons when I entered the home. Who is that individual to you?" Lillian: "That is my 20-year-old niece, Anna. She helps provide lessons during the weekdays." Robert: "What method of payment do you use to pay Anna for the lessons she teaches?" Lillian: "I give her cash and the amount is dependent upon how many lessons she teaches per week." Robert "Is the cash paid to your niece reported on your Schedule C as part of your gross receipts first?" Lillian: "What do you mean?" Robert: "Do you pay her before you report your earnings from your piano lessons to the government?" Lillian: "I just pay her from the cash I receive from the students' parents. Some students give me cash or checks, but usually there's enough cash for me to pay her from the cash received that week." Robert "Do you provide a W-2 to Anna and do you employ anyone else other than Anna?" Lillian: "I do not provide Anna with a W-2 and I do NOT employ anyone else. Robert: "Who prepared your tax return?" Lillian: "I did. My husband hates filing taxes. I usually get stuck filing everything myself each year." Robert "How did you calculate the business use of the home expense on your Schedule C? The tax return listed 300 square feet being used for your business, but your piano studio looks to be about 100 square feet." Lillian: "Yes, the square footage also includes a waiting area in the living room and an office upstairs where my business paperwork is completed and stored." Robert "I see the waiting area looks like your living room. Is the office upstairs exclusively for your piano business use? Unless these areas are used exclusively and regularly for business purposes, they cannot be included in the square footage calculation for the home office in the home. Lillian: "Oh I see, I did NOT know that. Yes, that's my living room, and I also use my office for other matters.... So the only area I can deduct is my actual piano studio?" Robert: "Unless there's another area of the house you use exclusively and regularly for business purposes, then yes, the only area you can deduct is the piano studio." Robert: "I noticed you and your husband only have one car. Did you keep a log for miles driven for both business and personal use for last year?" Lillian: "I did NOT. I did NOT know I had to keep track of miles for business and personal use." Robert "How many students do you travel to on a weekly basis?" Lillian: "I drive to teach two (2) of them per week, and the rest come over to my house." Robert: "For the students you travel to, how far do they each live from you?" Lillian: "One is about five (5) miles away, and the other is about seven (7) or eight (8) miles away" 6 Robert: "How did you determine the 1,200 business miles that is stated in Part IV of the Schedule C? Lillian: "I estimated I drive about 100 miles per month, round trip between the two (2) students." Robert "Ok, so that's about 1,200 miles per year. The amount shown on line 9 of the Schedule C shows 6,960 business miles. How did you determine this amount if the total miles driven for business is 1,200 per year? 1,200 miles per year at 58 cents for each mile equals $696." Lillian: "That must have been a typo while I was filling out the form. I must have been confused and entered in the incorrect number of miles. I apologize." Robert "That's ok. We will need to make an adjustment to your tax return to fix that error Information from Form 1040 Schedule C Description The information from Schedule C of Form 1040 below contains a list of lines which identify possible sources of income and expenses from the business. The form is broken up into three (3) sections. Part I is Income, Part II is Expenses, and Part IV is Information on Your Vehicle (Part Ill and Part V are omitted). For each line within Part I and Part II, there is a line number, an account description, the line number repeated, and the amount for the line (if any). Part IV contains several questions related to the taxpayer's vehicle and the associated responses. Profit or Loss From Business Year: 20X9 Name of proprietor: Lillian Adams Part Income Line Number Account Gross receipts or sales. See instructions for line 1 and check the box if this income was reported to you on Form W-2 and the "Statutory employee" box on that form was checked >>1 Line Amount Number 30,000 2 Returns and allowances 2 3 Subtract line 2 from line 1 3 30,000 4 Cost of goods sold (from line 42) 4 5 Gross profit. Subtract line 4 from line 3 5 30,000 6 Other income, including federal and state gasoline or fuel tax credit or refund (see instructions) 6 Gross income. Add lines 5 and 6 30,000 Part II Expenses Line Number Line Account Amount 8 Advertising 8 200 9 Car and truck expenses (see instructions) 6,960 10 Commissions and fees 10 11 Contract labor (see instructions) 11 12 Depletion 12 13 Depreciation and section 179 expense deduction (not included in Part III) (see instructions) 13 14 Employee benefit programs (other than on line 19) 14 15 Insurance (other than health) 15 16 Interest (see instructions): a Mortgage (paid to banks, etc.) b Other 17 Legal and professional services 18 Office expense (see instructions) 19 Pension and profit-sharing plans 16a 16b 17 300 18 19 23 NT 20 Rent or lease (see instructions): a Vehicles, machinery, and equipment 20a b Other business property 20b 21 Repairs and maintenance 21 1,500 22 Supplies (not included in Part III) 22 23 Taxes and licenses 23 24 Travel and meals a Travel 24a 200 b Deductible meals (see instructions) 24b 400 25 Utilities 25 26 Wages (less employment credits) 26 6,500 27a Other expenses (from line 48) 27a b Reserved for future use 27b 28 Total expenses before expenses for business use of home, Add lines 8 through 27a >> 28 16.060 29 Tentative profit (or loss). Subtract line 28 from line 7 29 13.940 30 Expenses for business use of your home, Do not report these expenses elsewhere, Attach Form 8829 unless using the simplified method (see instructions) Simplified method filers only: enter the total square footage of (a) your home: [1800] and (b) the part of your home used for business [300]. Use the Simplified Method Worksheet in the instructions to figure the amount to enter on line 30 30 1,500 31 Net profit or (loss), Subtract line 30 from line 29. If a profit, enter on both Schedule 1 (Form 1040 or 1040-SR), line 3 (or Form 1040-NR, line 13) and on Schedule SE, line 2 (If you checked the box on line 1, see instructions). Estates and trusts, enter on Form 1041, line 3. If a loss, you must go to line 32 31 12.440 34 31 32 32 Net profit or (loss), Subtract line 30 from line 29. * If a profit, enter on both Schedule 1 (Form 1040 or 1040-SR), line 3 (or Form 1040-NR, line 13) and on Schedule SE, line 2 (If you checked the box on line 1, see instructions). Estates and trusts, enter on Form 1041, line 3. * If a loss, you must go to line 32 If you have a loss, check the box that describes your investment in this activity (see instructions) If you checked 32a, enter the loss on both Schedule 1 (Form 1040 or 1040-SR), line 3 (or Form 1040-NR, line 13) 32a and on Schedule SE, line 2. (If you checked the box on line 1, see the line 31 instructions). Estates and trusts, enter on Form 1041, line 3 31 12,440 32a All investment is at risk. Some investment 32b If you checked 32b, you must attach Form 6198. Your loss may be limited. 32b is not at risk Part IV Information on Your Vehicle. Complete this part only if you are claiming car or truck expenses on line 9 and are not required to file Form 4562 for this business. See the instructions for line 13 to find out if you must file Form 45 43. When did you place your vehicle in service for business purposes? (month, day, year) >> [0 44. Of the total number of miles you drove your vehicle during 20X9, enter the number of miles y vehicle for a. Business [1,200] b. Commuting (see instructions) [0] c. Other [0] 45. Was your vehicle available for personal use during off-duty hours? 46. Do you (or your spouse) have another vehicle available for personal use? 47a. Do you have evidence to support your deduction? b. If "Yes," is the evidence written? Note: Part III and Part V have no entries and are not shown here. Note: Part III and Part V have no entries and are not shown here. Guidelines to assist in your evaluation: It is important that all taxable revenue (income) be reported to the Some taxpayers do NOT always report all taxable income for services rendered. This can especially occur when expenses are paid in cash. Office-in-home deductions are only applicable to areas that are used exclusively and regularly for business Using the simplified form of office-in-home deductions, the taxpayer multiplied $5.00 per the square footage of the business portion of the home (up to 300 square feet). This deduction is listed on Line 30 of Schedule C. Business miles can be claimed if they are for a legitimate business purpose and are NOT considered commuting or personal. Business miles on the Schedule C were calculated using the standard federal rate of 58 cents per mile driven for business This amount is listed under Line 9 for Car and Truck expenses. Some taxpayers make calculation errors on their tax returns; all calculations on the Schedule C should be double-checked. Given this information, your tasks are to go through the resources provided, determine the accuracy of the information on her tax return, and write a summary documenting your determination of the issues raised in the case. Word Count: 0, 1 - 750 words are required