Case:

The following information have been taken from the tax self assessment for taxpayer Omar Hassan

Revenues:

Monthly salary from employee 2300 NIS

Profit for his trading shop 33000 NIS

Revenue from legal consultation office 58000 NIS

Gift from non governmental organization 7000 NIS

Expenses:

Cost of good sold 15000 NIS

Salaries for the trading shop 12000 NIS

Salaries for the legal office 10000 NIS

Expenses related to legal office 19000NIS

Personal living cost 8000 NIS

Depreciation for car and furniture 4000 NIS

additional information:

- The taxpayer live in Gaza

- Gift is nontaxable income

- The tax officer accepted 60% of legal office expenses

- The tax officer accepted 20% of depreciation

- The taxpayer is married and has two sons, one of them university student, his parent and grandmother depending on him.

- He paid tax prepayments during the year 1700 NIS

- The exchange price for dollar = 4 NIS

* Required:

calculate the annual income tax.

And determine the tax payment, or refund.

Answer

Annual salary 2300*12 = 27600 NIS

Profit for his trading shop 33000 NIS

Revenue from legal consultation office 58000 NIS

Gift from non governmental organization 7000 NIS

Total income =125600 NIS

Nontaxable income 7000 NIS

Total of taxable income 118600 NIS =29650$

Deductions

Cost of good sold 15000 NIS

Salaries for the trading shop 12000 NIS

Salaries for the legal office 10000 NIS

Expenses related to legal office 11400 NIS (19000*60%)

Depreciation for car and furniture 800 NIS (4000*20%)

Total of deductions = 49200 NIS = 12300$

Exemption

Resident 3000$

Wife 500$

Son 500$

University student 2500$

Parent 500*2= 1000$

Grandmother = 0$ ?

Total of exemption = 7500$

Net taxable income 9800$

9800*8% = 784$

Tax prepayment 425$ ( 1700 NIS/4 )

Tax payment = 359$

Case:

Assume that you are tax officer and you have the following information about accounting document for X company for the constructive material on 31/12/2005

The company is keeping all purchase invoices and the sale invoices were given to costumers and by examine the store for the company there are materials that are sold, but there is ability to classify these materials into categories according to percent from the total profit for sales.

These categories are :

1- metal 10%

2- concrete 16%

3- stone 18%

4- Constructive materials 20%

5- pipes 28%

6- paint 30%

According to these categories and the purchase invoices we have the following data

statement Purchase during the year

1-Metal 1000,000

2-Concrete material 300,000

3-Stone 400,000

4-constructive material 200,000

5-pipes 100,000

6-paint 100,000

Total 2100000

Trading account on 31\12\2005

200,000 Beginning inventory

2100000 Sales

1800000 Purchase 200,000 Ending inventory

300,000 Total profit

2300000 2300000

Profit and loss account on 31\12\2005

80,000 Managerial expense

300,000 Total profit

20,000 Financing expense

200,000 Net profit

300,000 300,000

What are the steps that must be followed to insure the correct sales with assuming the profit percents have been taken from the owner were correct.

The tax officer did not accept the calculations, but the taxpayer rejected and said that the profit percent for purchases about 17 %

The answer:

Purchases according to invoices 2100000

Purchases according to trading account 1800000

Hidden purchases 300000

Now estimate the volume of sales according to purchases

Sales = purchases / 1- profit percent

1- sales of metal 1000000/ 1-10% = 1111111

2- sales of concrete 300000/ 1-16% = 357143

3- sales of stone 400000 / 1-18% = 487805

4- Sales of constructive materials 200000/ 1/20% = 250000

5- sales of pipes 100000 /1- 28% = 138889

6- sales of paint 100000 /1-30% = 142857

Total of sales after correction 2487805

Correct trading account on 31\12\2005

200,000 Beginning inventory

2487805 Sales

2100000 Purchase 200,000 Ending inventory

387805 Total profit

2687805 2687805

correct Profit and loss account on 31\12\2005

80,000 Managerial expense

387805 Total profit

20,000 Financing expense

287805 Net profit

387805 387805

You have the following information for the year 2005

Taxpayer has been taxed with the amount 12000 NIS after making the deductions and exemptions, and he paid during the year 10 premiums 900 NIS for each as prepayments, he did not offer the self assessment until 1/5/2006.

and after that date he decided to pay the accrued tax, so he offered the self assessment and made the needed calculation and deducted the prepayments amount.

But the tax officer wanted extra payment, because of the instructions given in the income tax law:

1. Pay penalty because of not offering the self assessment 2% monthly.

2. Pay penalty because of not paying the tax 3% monthly.

3. Interest of delaying the tax payment 10% yearly.

4. Add penalty 2% monthly because of changing foreign currency

• Required:

1. Determine the accrued tax must be paid to tax revenue service (tax officer)

2. Determine the saved amount if he paid the tax on time.

3. Calculate the amount if the payment was on 25/1/2006.

1- Accrued tax for the year 2005 12000 NIS

Prepayments during the year (900*10) 9000 NIS

Accrued balance 3000 NIS

Penalty for not offering the self assessment (3000*2%*4) 240 NIS

Penalty for not making the payment (3000*3%*4) 360 NIS

The accrued amount after penalties 3600 NIS

Add interest 10% yearly (4 months ) 3600*10%* 4/12 120 NIS

Add foreign currency changes 3600*2%*4 288 NIS

The accrued tax 4008 NIS

   

2- the saved amount if the tax paid on time 1008 NIS

   

3- if the payment was on 25/1/2006 (12000*6%) 720 NIS

And the accrued tax is 2280 NIS

• List the methods that are used for the estimation of income tax and name the party which makes this estimation.

1. Self assessment estimation or self tax estimation, by the taxpayer, by using personal information or balance sheet.

2. Arbitrary estimation (random), by the tax officer or the internal revenue services

3. External look for taxpayer, by the tax officer by looking for his car, home, shop, school or university and so on.

4. Supplementary tax, by both taxpayer and tax officer, or by the court in some cases.

You have the profit and loss account for X sharing company 31/12/2007

VALUE NIS

STATEMENT VALUE NIS

STATEMENT

15000 Rent 100000 Total income

1500 Capital interest 100 Credit interest of withdraw

700 Construction error (penalty) 2000 Collected bad debits

7000 Amortization for goodwill

8000 Establishment cost

3000 Car expenses

10000 Salaries for partners

6000 Reserve for expansion

1000 Loss of re-evaluation

10000 Furniture

39900 Net profit

102100 Total 102100 Total

Additional information- Goodwill has been estimated- Establishment cost must be amortized for 5 years.- 40% of car expense is accepted because of using it for

personal needs.- The collected bad debts include 800 NIS were recognized

for the previous year as bad debts.- The furniture was purchased on 1/1/2007 and the

depreciation rate 10% annually.

Required:1- determine the taxable income 2- determine the accrued tax 3- Show the recording entry for annual accrued tax.

VALUE NIS

STATEMENT VALUE NIS

STATEMENT

15000 Rent 100000 Total income

- Capital interest - Credit interest of withdraw

- Construction error (penalty) 800 Collected bad debits

- Amortization for goodwill

1600 Establishment cost

1200 Car expenses

10000 Salaries for partners

- Reserve for expansion

- Loss of re-evaluation

1000 Furniture

72000 Net profit

100800 Total 100800 Total

Taxable income =72000Tax vale = 72000* 15% = 10800

The recording entry 72000 profit & loss account

10800 accrued tax61200 retained earring

Currency of Dollar ??

Assume that the same company owned by Omar and he is married and has 3 sons and the company registered as an individual firm make the same required. Dollar currency 3.8 NIS

Case:

The net profit for an individual company 60000 NIS,

By examining the accounting documents, the tax officer discovered that:-

• Begging inventory 190000 NIS• Purchase 950000 NIS• Ending inventory 90000 NIS

Given information according to the owner’s accounting documents:

• Whole sales 700000 NIS with profit percent 10% • Retail sales 300000 NIS with profit percent 20%

Required:

1. Calculate the taxable profit assuming that there is fraud (unrealistic) with whole sales and retail sales.

2. Assume the owner is married and has 4 sons one of them university student, calculate the exemption.

3. Calculate the difference between the calculation of the owner and the tax officer

• Exchange price for dollar 4.2 NIS

Answer

The cost of sales = 190000 + 950000 – 90000 = 1050000

Cost of whole sales = 700000 * 90% = 630000

Cost of retail sales = 300000 * 80% = 240000

Hidden cost = 1050000 – 870000 = 180000

Hidden whole sales 180000*70% /90% = 140000

Hidden retail sales 180000* 30% / 80% = 67500

Total of hidden sales = 140000+ 67500 = 207500

Hidden profit 207500 – 180000 = 27500

Calculated Total profit 60000 recorded by the owner and 27500 hidden = 87500 NIS, and this taxable number.

87500 / 4.2 = 20833 $

Deduct the exemption

3000 $ resident

500 $ wife

1500 $ sons *3

2500 $ university student

7500 $ total of exemption

Net taxable income after exemption = 20833 – 7500 = 13333 $

10000 * .08 = 800+ 3333 * .12 = 400

Tax payment 1200$

According to owner’s calculation

60000 / 4.2 = 14286 $

Deduct the same exemption 7500 $

Net taxable income after exemption 6786 $

6786 $ * .08 = 543 $

The difference = 1200 $ - 543 $ = 657 $