Reference no: EM132628431

Problem - Travis and Amy Carter are married and live in a state that imposes both a sales tax and an income tax. They have two children, April (age 17) and Martin (age 18). Travis is a mining engineer who specializes in land reclamation. After several years with a mining corporation, Travis established a consulting practice that involves a considerable amount of travel. Amy is a registered nurse who, until recently, was a homemaker. In November of this year, she decided to reenter the job market and accepted a position with a medical clinic. The Carters live only a few blocks from Ernest and Mary Walker, Amy Carter's parents. The Walkers are retired and live on interest, dividends, and Social Security benefits.

Various developments occurring during the year with possible tax ramifications are summarized below.

The ad valorem property taxes on the Carters' residence are increased, whereas those on the Walkers' residence are lowered.

When Travis registers an automobile purchased last year in another state, he is required to pay a sales tax to his home state.

As an anniversary present, the Carters gave the Walkers a recreational vehicle (RV).

When Travis made a consulting trip to Chicago, the client withheld Illinois state income tax from the payment made to Travis for his services.

Travis employs his children to draft blueprints and prepare scale models for use in his work. Both April and Martin have had training in drafting and topography.

Early in the year, the Carters are audited by the state on an income tax return filed a few years ago. Later in the year, they are audited by the IRS on a Form 1040 they filed for the same year. In each case, a tax deficiency and interest were assessed.

The Walkers are audited by the IRS. Unlike the Carters, they did not have to deal with an agent, but settled the matter by mail.

Required - Explain these developments, and resolve the issues raised.