Deficiency Question: Large Corp filed its 2010 return reporting a $10,000,000 in

Question

Deficiency Question:

Large Corp filed its 2010 return reporting a $10,000,000 income tax liability. LC gets audited. During the audit LC discovers it understated its depreciation by $3,000,000. The exam team agrees and issues a $1,000,000 refund for 2010 (based upon allowing the $3,000,000 depreciation). A year later into the audit, the Agent disallows $500,000 of T and E expenses. LC agrees and consents to a $200,000 assessment (the result of the $500,000 disallowance), which the IRS makes 2 days later. The audit ends. LBI determines that LC’s correct liability is $15,000,000. What is the deficiency that LB&I will propose?

Explanation / Answer

Tax deficiency can be canculated by using the formula :

Tax Deficiency = Correct Tax liability - (Income tax liability shown in return - rebates granted + assessment consented)

= 15,000,000 - (10,000,000 - 1,000,000 + 200,000) = 15,000,000 - 9,200,000 = $5,800,000

NOTE: Dear student kindly inform if you found answer wrong as there is some ambiguity in my mind relating the question. If the above answer is wrong then I will answer with different logic.

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