In-Depth Analysis and Guidance on IRS Examination for Form 1040

Scenario

You are a tax advisor and your client, Joaquin Smith, has reached out to you requesting some advice. She is a single taxpayer and full-time Tennessee resident who reported the followingincome items on her Form 1040 Individual Income Tax Return filed two years ago.

W-2 wages (engineering services) $75,000

Interest income from savings $5,500

Dividend income from corporate stocks $12,500

Loss from real estate rental activities $50,000

Joaquin works full time as an engineer in her state of residency but owns commercial real estate in Louisiana. The expenses relating to this commercial real estate were much more than inprevious years due to a substantial increase in repairs, maintenance, insurance, and property taxes. Joaquin coordinates all repairs and maintenance on the buildings and secures tenants forthe building.Last year, Joaquin received notification that her Form 1040 from two years ago was under examination by the IRS. Upon completion of the examination, the IRS decided to limit the amount ofthe loss due to passive loss limitations to $25,000.DirectionsCreate a memorandum for your client advising them of the IRS examination and audit process. Organize your memo with headings that include “Facts,” “Issues,” “Analysis Supported by the TaxLaw,” and “Conclusions/Recommendations.

”Specifically, you must address the following:

1. Describe why the client was targeted for an IRS audit.

2. Discuss whether the IRS’s loss limitation calculation is accurate. Justify your reasoning using passive activity loss limitation rules.

3. Describe the procedural requirements that the client must take in the audit process.

4. Explain why the IRS chose to conduct an examination on the client’s Form 1040 over an audit.

5. Describe the nexus issues that should be considered in this case.

6. Based on the nexus issues, determine the appropriate tax jurisdictions for each of the income and loss items.

7. Explain Tennessee and Louisiana tax treatment of residents versus nonresidents.

8. Identify the required tax forms in Louisiana and Tennessee with the state’s Department of Revenue.

9. Justify your rationale for selecting each individual tax form for Louisiana and Tennessee.

10. Describe how this audit may impact your client’s investment property loss.

What to Submit

Submit a 2-page memo as a Microsoft Word document with single spacing, 12-point Times New Roman font, and one-inch margins. Sources should be cited according to APA style.