Tax File Memorandum

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Tax File Memorandum
To:Peaceful Pastures Funeral Home
From:Whomever
Date:2/17/2013
Re:Peaceful Pastures Tax Payer Engagement

Confidential
I SPOKE WITH PEACEFUL TAX PAYER ABOUT THE AUDIT NOTICE THE IRS HAD SENT. IT CONTENDS THAT THE AMOUNT PREPAID UNDER PEACEFUL’S PROGRAM CONSTITUTES PREPAID INCOME THAT MUST BE INCLUDED IN PEACEFUL’S INCOME (AND THEREFORE SUBJECT TO TAX) IN THE YEAR IN WHICH IT IS RECEIVED. THE TAX PAYER WANTED TO KNOW IF THE IRS FINDINGS WERE CORRECT.

FACTS:
Peaceful, an accrual basis taxpayer, provides a full line of funeral services and sells goods related to those services. Peaceful has attempted to design an approach that allows customers to prepay for their funeral goods and services.

ISSUE:
The amount prepaid under Peaceful’s program constitutes prepaid income that must be included in Peaceful’s income (and therefore subject to tax) in the year in which it is received.

CONCLUSION:
Peaceful should go ahead and pay the audit based on the facts. The IRS is correct according to the tax code and laws.

ANALYSIS:
Prepaid income tax is a form of prepaid expense. The most common reason why prepayment on income taxes occurs is due to over-estimation of tax deposits. In this situation, taxes are estimated from the financial of the previous year. These estimated taxes are paid. Then, when the year-end taxes are found to be less than the taxes paid earlier, prepayment on income taxes has occurred. This prepayment can create one of two results: a tax refund or the credit written off towards the tax liability of the next period. 

According to the Perry Funeral Home, Inc. v. Commissioner, TC Memo 2003-340 , Code Sec(s) 451. PERRY FUNERAL HOME, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Case, Time for...
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