Joe Bob Operates a Gas Station/grocery Store Outside the Main

question 3

Essay

Joe Bob operates a gas station/grocery store outside the main entrance to a state park. Joe Bob is very independent and dislikes government interference in his business. He pays all his suppliers in cash as they make deliveries. He deposits customer checks to his bank account but retains cash received in the business to pay his expenses. Inventories are material to determining income but he "estimates" his inventory. He keeps a log of daily sales, purchases, and other pay-outs. When preparing his income tax return, his tax preparer carefully compares his gross profit ratio and net profit to sales ratio to other clients operating similar businesses. The accountant then adjusts Joe Bob's income so that the ratios are greater than those reported by comparable businesses. In addition, the tax preparer "adds a guess, usually $20,000 to $50,000, of undisclosed cash sales" that is disclosed on the face of Joe Bob's tax return. Thus, his net profit is increased by the same amount. Joe Bob has never objected to the amount of added income. Has Joe Bob evaded the income tax? Explain.

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Definitions:

Forward Contract

An agreement to buy or sell an asset at a specified future date for a price that is agreed upon today.

Exchange Rates

The value of one currency for the purpose of conversion to another, which fluctuates based on market conditions and economic factors.

Forward Contract

A non-standardized agreement between two parties to buy or sell an asset at a specified future date for a price that is agreed upon today.

Balance Sheet

A report that outlines a firm's assets, liabilities, and shareholders' equity at a particular moment.