Case Study Problem – Mal Manley
Legal Law

Case Study Problem – Mal Manley

A client, Mal Manley, fills out his client questionnaire from the previous year and in it provides information for the preparation of his individual income tax return. The IRS has never audited Mal’s returns. Mal reports that he made more than 100 relatively small cash contributions totaling $24,785 to charities. In recent years, Mal’s charitable contributions have averaged around $15,000 per year. For the prior year, Mal’s adjusted gross income was approximately $350,000, approximately 10% more than the prior year.

Required: According to the Statements of Standards for Tax Services, can you accept at face value Mal’s information about his charitable contributions? Now suppose the IRS recently audited Mal’s tax return two years ago and denied the 75% deduction for charitable contributions for that year because the deduction was not verified. Also suppose that Mal indicates that, in the previous year, he contributed $25,000 (instead of $24,785). How do these factual changes affect your previous decision?

Pursuant to the Statements on Standards for Tax Services, information of nominal value on claimed contributions may be accepted unless it appears to be incorrect, incomplete, or inconsistent. You should also be sure to inquire about information provided by the taxpayer if it appears to be inconsistent or exaggerated. In Mal’s case, the information he claims to have provided is inconsistent with his charitable contributions from years past. In the previous year, Mal reported 100 small charitable contributions totaling $24,785, whereas in the previous two years, Mal had only averaged $15,000 in charitable giving per year. Additionally, the 60 percent increase in charitable contribution from the prior year does not accurately reflect Mal’s 10 percent increase in adjusted gross income.

With the assumption of the denial of 75 percent of Mal’s previously reported contributions by the IRS, the situation changes to one in which more documentation must be requested to support the charitable contribution claim. The earlier denial of such an overwhelmingly large portion of the claimed contributions allows the reasonable assumption that this year’s claims may also be grossly exaggerated. In these types of situations, especially given the recent increase in quote claims, one should not hesitate to request receipts or any other possible documentation for most quotes claimed.

Assuming that Mal indicates that he contributed $25,000 and not $24,785 in the prior year, this would not affect prior decisions based on Mal’s charitable contributions.

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