Federal Income Tax Research Case

In: Business and Management

Submitted By hwittman
Words 1047
Pages 5
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? 2) What is the taxable income and liability including the interest income from the embezzled funds? 3) What is the taxable income and liability including the interest income from the embezzled funds and the funds itself? 4) Based on the Internal Revenue Code, what amount of taxable income and liability is correct for reporting purposes? 5) Will Elizabeth receive relief from the liability of not reporting the correct amount of income under “Innocent Spouse” rules?

Authorities: Reg. § 1.6015-2 Rev. Rul. 61-185, 1961-2 CB 9, IRC Sec. 61

Conclusion: 1) Taxable Income for the couple is $263,800 and tax liability is $62,958.50. 2) Taxable income for the couple, including interest from embezzled funds, is $289,274 and tax liability is $71,364.92. The additional tax cost will be $8,406.42. 3) Taxable income for the couple, including the embezzled funds and interest, is $796,700 and tax liability is $262,245.60. The additional tax cost will be $199,287.10 4) The couple should report their income including the embezzled funds and interest from those funds. The amount reported should be that from conclusion 3. 5)…...

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