17. Your client owns a 3-bedroom home with a 2-car garage in a suburb of Tucson,

Question

17. Your client owns a 3-bedroom home with a 2-car garage in a suburb of Tucson, Arizona. Although the home office rules are strict on deducting expenses, you have determined that your client satisfies these rules. Her home office occupies the spare bedroom in her home, and it comprises about 480 square feet of her 2,400 square foot home. The garage is an additional 480 square feet.

Your client is interested in claiming the maximum allowable deductions for her home office. In reviewing your client’s tax return for last year, you noticed that she claimed a deduction equal to the full amount of her mortgage payment on the house. Your client did not, however, deduct any other expenses associated with her home office. She did not maintain detailed records and was concerned that the IRS might think that she was exaggerating her other expenses if she just “ballparked them” without adequate supporting documentation.

a. Are there any issues that you want to challenge or research? Explain?

b. Should you inform the tax return preparer who filed her return last year about these errors? Explain?

c. What other advice should you give to your client? Explain?

d. Assume that the prior-year tax return preparer is a friend of yours, but he really screwed up and should compensate your client if she incurs tax penalties and interest. Would you inform your client about her rights against your friend? Should you inform your friend about this? Explain?

Explanation / Answer

a. Are there any issues that you want to challenge or research? Explain?

Improper returns filing without adequate documentation support is real and cause of concern for me and I will advise my client against the same. Also, she has not properly disclosed the situation of her home office and the usage of the garage which she is utilizing as a home office. All these issues need to be considered and properly documented and filed with the tax return papers.

b. Should you inform the tax return preparer who filed her return last year about these errors? Explain?

I will immediately inform the tax return preparer about these issues and errors and the incomplete information that was furnished. As per laws, not submitting full information regarding the expenses and the use of a property is an offense and the authorities might take some action against my client. This might result in tax penalties and accumulated interests. So as a good citizen, I will advise my client to immediately furnish all the related documents to the tax preparer.

c. What other advice should you give to your client? Explain?

I will advise my client to complete the entire paperwork and furnish all the information regarding the usage of the property and home office related information. Also, all the incomplete documentation needs to be completed as soon as possible.

d. Assume that the prior-year tax return preparer is a friend of yours, but he really screwed up and should compensate your client if she incurs tax penalties and interest. Would you inform your client about her rights against your friend? Should you inform your friend about this? Explain?

I will definitely inform my client about this and maintain the transparency as per the laws and regulations. I will also inform my friend so that he can correct the things and the interests of both my client and friend are taken care of and no rules and laws are passed, which might create a problem later on.

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