Ch 12
The tax laws of the United States are administered by the Federal Trade Commission. True False
False The tax laws of the United States are administered by the Internal Revenue Service (IRS).
the nature of the penalty and amount of the penalty that could be imposed: Larry is a tax protester and files his tax return in the name of "Mickey Mouse."
Filing a frivolous tax return; $5,000.
the nature of the penalty and amount of the penalty that could be imposed: Anne writes a check for $900 in payment of her taxes that she knows will not clear the bank due to insufficient funds in her account.
Bad check; $25, since the check is less than $1,250.
As a result of an IRS audit, a taxpayer may be required to pay additional taxes, but the taxpayer is never paid a refund. True False
False As a result of an IRS audit, there may be no change to the tax return, additional taxes owed, or a refund of taxes.
Tax returns are selected for audit through a random process known as the Discriminant Function System. True False
False For computer scoring, the IRS uses the Discriminant Function System (DIF) and Unreported Income DIF (UIDIF) to select taxpayers for audit using mathematical formulas to assign a DIF score to each return.
Interest paid on an underpayment of taxes (other than an underpayment of estimated taxes) is not subject to the consumer interest limitation. True False
False Interest paid on an underpayment of tax is considered consumer interest and, therefore, no deduction is allowed.
Tax returns are processed at the IRS national office in Washington, DC. True False
False Tax returns are processed at IRS Campus Processing Sites.
The Wage and Investment Office of the IRS handles small business taxpayers. True False
False The Wage and Investment Office handles taxpayers that do not file business forms.
The IRS charges a fixed 10 percent interest rate on underpayments of taxes. True False
False The interest rate applicable to underpayments and overpayments of taxes is adjusted each quarter based on the short-term federal rate.
The statute of limitations for the deduction of a worthless security is 5 years. True False
False The statute of limitations for the deduction of a bad debt or a worthless security is 7 years.
Joan filed her individual income tax return 3 months after it was due. She did not request an extension of time for filing. Along with her return, Joan remitted a check for $800, which was the balance of the taxes she owed with her return. Disregarding interest, calculate the total penalties that Joan will be required to pay, assuming the failure to file was not fraudulent.
$462.00 Failure-to-pay penalty(0.5% x $800 x 3 months)$ 12.00 Failure-to-file penalty(5% x $800 x 3 months = $120.00)$120.00 (FTF) 120 - (FTP) 12 = 108 (MIN fail to file =$450*) so must use min. $450 = $12 (failure to pay)
Wilson filed his individual tax return on the original due date, but failed to pay $2,790 in taxes that were due with the return. If Wilson pays the taxes exactly 5 months late (not over 60 days), calculate the amount of his failure-to-pay penalty.
$69.75 $69.75 ($2,790.00 x .5% x 5 months)
the nature of the penalty and amount of the penalty that could be imposed: Gerald understated his tax liability by $10,000. The total amount of tax that should have been shown on his return was $70,000.
Accuracy-related penalty, substantial understatement; $2,000 = $10,000 x 20%.
Jack filed his tax return 8 months and 28 days late and did not request an extension of time for filing. Jack's return indicated that he is to receive a $9,345 refund in taxes. Calculate the amount of Jack's penalty for failure to file his tax return on time, assuming the failure-to-file was not fraudulent.
Answer: $0. Both the failure-to-file and the failure-to-pay penalties are zero if there is no tax due or if a refund is due from the IRS on the late tax return. Because the taxpayer is entitled to a refund, there is no penalty.
A "correspondence audit" by the IRS is conducted through the mail. True False
True
A tax preparer may be subject to a penalty for failing to provide a copy of the taxpayer's tax return to the client. True False
True
Tax evasion involves the use of illegal methods to reduce or avoid income tax. True False
True
Tax penalties are not deductible by taxpayers. True False
True
Taxpayers are required by law to maintain records to facilitate an IRS audit. True False
True
Taxpayers who are unable to pay their taxes may enter into a payment plan with the IRS if the amount they owe is within certain limits. True False
True
The IRS may issue summons for a taxpayer's bank account records. True False
True
The Taxpayer Bill of Rights is summarized in IRS Publication 1. True False
True
The statute of limitations for a tax return generally is 3 years. True False
True
The tax law contains a penalty for filing a "frivolous" tax return. True False
True
Patricia has taxable income of $40,000 on which she pays income tax of $4,604. If Patricia's taxable income increases by $2,000, she will pay an additional tax of $440. What is Patricia's marginal tax rate? a. 22.00 percent b. 15.00 percent c. 14.84 percent d. 25.00 percent
a. 22.00 percent $440 ÷ $2,000
If the IRS owes a taxpayer a refund, the law generally provides that the IRS must pay interest on the refund if it is not paid within ________ days of the date the taxpayer filed his or her tax return or claim for refund. a. 45 b. 60 c. 90 d. 30 e. None of these choices are correct.
a. 45
Both spouses are responsible, jointly and individually, for paying the full amount of any tax, interest, or penalties due on a joint return. Which of the following is correct in reference to the preceding statement? a. Innocent spouses may be relieved of the liability for tax, interest, and penalties b. This does not apply to spouses who have divorced after the return was filed c. Spouses are responsible jointly but not individually d. Spouses are responsible individually but not jointly e. None of these choices are correct
a. Innocent spouses may be relieved of the liability for tax, interest, and penalties
If a tax preparer notes an error on a client's tax return, under Circular 230, the tax preparer should: a. Notify the client of the error and the consequences of not correcting it b. Prepare an amended tax return and file such return immediately c. Report the mistake to the IRS immediately d. Contact local authorities and consider whistleblower rewards
a. Notify the client of the error and the consequences of not correcting it
Piper has taxable income of $30,000 on which the income tax is $4,500. If Piper's taxable income increases to $35,000, the income tax will increase to $5,100. Which of the following is true? a. Piper's average tax rate is higher than the marginal rate. b. Piper's average and marginal tax rates are the same. c. Piper's average tax rate 12 percent. d. Piper's marginal tax rate is 15% percent.
a. Piper's average tax rate is higher than the marginal rate.
A taxpayer's rights are explained in: a. Publication 1 b. Publication 556 c. Publication 17 d. Publication 5 e. None of these choices are correct
a. Publication 1
Krista is a CPA who helps her clients minimize their overall tax liability. What function is she performing? a. Tax planning b. Tax deferral c. Tax preparation d. Tax evasion
a. Tax planning
A tax return with a large casualty loss would be most likely selected for audit through which method? a. The Discriminant Function System b. Information from another governmental agency c. Information from an informant d. The National Research Program
a. The Discriminant Function System
The IRS does not have to furnish the taxpayer with information concerning which of the following items? a. The way the taxpayer's return was selected for audit b. The IRS collection process c. The procedures for appealing an IRS ruling d. The refund claims process e. All of these choices must be provided to the taxpayer
a. The way the taxpayer's return was selected for audit
Jim has a house payment of $2,000 per month of which $1,700 is deductible interest and real estate taxes with the remaining $300 representing a repayment of the principal balance of the note. Jim's marginal tax rate is 30 percent. What is Jim's after-tax cost of his house payment? a. $510 b. $1,490 c. $900 d. $600 e. Some other amount
b. $1,490 After-tax cost of house payment = [Total payment - (Deductible portion x marginal rate)]. As stated, Jim's mortgage payment includes $1,700 of interest, which is deductible, with the remainder representing a repayment of principal on his loan ($300). His marginal tax rate is 30%. His after-tax cost of the home mortgage is $1,490 [$2,000 - ($1,700 x 30%)].
Craig commits fraud on his tax return. It is determined that he was $40,000 deficient in his tax because of the fraud. What would his penalty be? a. $500 b. $30,000 c. $0 d. $40,000
b. $30,000 75% × $40,000
A taxpayer incorrectly reports income and has a substantial understatement of income tax in the amount of $20,000 (but no fraud). The accuracy-related penalty for this error is: a. $15,000 (75 percent) b. $4,000 (20 percent) c. $1,000 (5 percent) d. $20,000
b. $4,000 (20 percent) $4,000 = $20,000 x 20%.
Martha inadvertently failed to file her tax return for eleven months. The tax due on the return was $1,000. Her failure to file penalty will be: a. 25 percent of the tax due b. $450 c. 55 percent of the tax due d. $5,000
b. $450 Martha's penalty would be $250 (5% of $1,000 x 5 months max); however, after 60 days, the minimum penalty is $450 in 2022.
The taxpayer penalty for writing a check to pay for taxes that has insufficient funds is: a. 5 percent of the amount of the total tax liability of the taxpayer b. 2 percent of the amount of the check unless the check is for $1,250 or less c. The same amount the bank charges the IRS for a returned check d. Double the check amount
b. 2 percent of the amount of the check unless the check is for $1,250 or less
Glen's taxable income is $50,000 and he pays income tax of $6,617. If his income were $60,000, he would pay taxes of $8,817. What is Glen's marginal tax rate? a. 25.00% b. 22.00% c. 18.23% d. 12.00% e. Some other amount
b. 22.00% 22.00% = ($8,817 - $6,617)/($60,000 - $50,000).
Anthony deducts a bad debt on his 2022 tax return. How many years is the statute of limitations for the bad debt deduction? a. 0 years b. 7 years c. 3 years d. 6 years
b. 7 years
Taxpayers have the right to have an IRS examination take place at: a. Any city of the taxpayer's choosing b. A reasonable time and place c. The IRS office d. A neutral site e. None of these choices are correct
b. A reasonable time and place
In which of the following situations does the burden of proof in a tax matter not automatically shift to the IRS? a. The IRS uses statistics to reconstruct an individual's income b. A taxpayer who did not maintain records c. A court proceeding against an individual taxpayer involves a penalty or addition to tax d. The IRS uses statistics to reconstruct an individual's income and a court proceeding against an individual taxpayer involves a penalty or addition to tax e. The IRS uses statistics to reconstruct an individual's income, a court proceeding against an individual taxpayer involves a penalty or addition to tax, and a taxpayer who did not maintain records
b. A taxpayer who did not maintain records
At which of the following IRS locations are tax returns processed? a. Local offices b. Campus Processing Sites c. Regional offices d. The national office
b. Campus Processing Sites
Which of the following does not result in a minimum $55 fine for an income tax preparer? a. Failing to keep any record of the returns prepared b. Cashing a refund check for a customer c. Failure to provide a tax preparer identification number d. Failing to provide a copy of their prepared return to a customer
b. Cashing a refund check for a customer
Which of the following is the most common type of audit for an individual taxpayer? a. Field audit b. Correspondence audit c. Telephone audit d. Office audit e. Service center audit
b. Correspondence audit
If a calendar year taxpayer's 2022 individual income tax return is mailed on June 15, when would the statute of limitations normally run out? a. June 15, 2025 b. June 15, 2026 c. April 15, 2026 d. April 15, 2025
b. June 15, 2026
Which of the following is the best definition of tax planning? a. Preparing a client's tax return b. Planning taxpayers' financial affairs in an effort to minimize tax liability c. Researching complex tax issues d. Planning taxpayers' financial affairs to find the best way to avoid tax by successfully bending tax law
b. Planning taxpayers' financial affairs in an effort to minimize tax liability
Which of the following best describes the interest and interest rates for under and overpayments of income tax liability? a. The interest charged on underpayments is deductible b. The overpayment rate and underpayment rate are generally equal and underpayment interest is not deductible and overpayment interest is taxable c. The underpayment rate is higher than the overpayment rate d. The interest paid on overpayments is tax-exempt income
b. The overpayment rate and underpayment rate are generally equal and underpayment interest is not deductible and overpayment interest is taxable
If taxpayers make all of their income from a job and various investments, which division of the IRS would likely investigate their returns if they were audited? a. Small Business Office b. Wage and Investment Division (W&I) c. Large and Midsize Business Office d. Criminal Investigation Office
b. Wage and Investment Division (W&I)
Jim has a house payment of $1,230 per month of which $1,046 is deductible interest and real estate taxes with the remaining $184 representing a repayment of the principal balance of the note. Jim's marginal tax rate is 30 percent. What is Jim's after-tax cost of his house payment? a. $314 b. $55 c. $916 d. $1,175 e. Some other amount.
c. $916 After-tax cost of house payment = [Total payment - (Deductible portion x marginal rate)]. As stated, Jim's mortgage payment includes $1,046 of interest, which is deductible, with the remainder representing a repayment of principal on his loan ($184). His marginal tax rate is 30%. His after-tax cost of the home mortgage is $916 [$1,230 - ($1,046 x 30%)].
Melodie's taxable income is $39,000 and she pays income tax of $4,475. If Melodie's taxable income increases to $43,000, she would pay income taxes of $5,077. What is Melodie's marginal tax rate? a. 22.00% b. 18.25% c. 15.05% d. 17.00% e. Some other amount
c. 15.05% 15.05% = ($5,077 - $4,475)/($43,000 - $39,000).
Which of the following has a 6-year statute of limitations? a. Travel and entertainment b. Worthless securities c. A return in which the taxpayer omitted gross income in excess of 25 percent of the gross income shown on the return d. Salaries e. Depreciation
c. A return in which the taxpayer omitted gross income in excess of 25 percent of the gross income shown on the return
If a taxpayer's 2022 individual income tax return is due on April 18, 2023 and was filed on January 14, 2023, the statute of limitations would normally run out on: a. January 14, 2024. b. 0. c. April 18, 2026. d. April 18, 2024. e. None of these choices are correct.
c. April 18, 2026.
When the IRS has completed their examination and the result is an assessment of additional tax, which of the following is not a viable option for the taxpayer? a. Disagree with the assessment and request an appeal b. Agree to the assessment and pay the additional tax c. Do not pay the tax and request a District Court hearing d. Fail to act and wait for the 90-day letter and either pay the tax and file a claim for a refund or petition the Tax Court
c. Do not pay the tax and request a District Court hearing
If a taxpayer's 2022 individual income tax return is due on April 18, 2023 and was filed on June 3, 2023, the statute of limitations would normally run out on: a. April 18, 2026 b. June 3, 2024 c. June 3, 2026 d. April 18, 2025 e. None of these choices are correct
c. June 3, 2026
Which of the following types of audit taxpayers is somewhat controversial because of the way in which taxpayers are selected? a. Discriminant Function System selected audit b. Office audit c. National Research Program selected audit d. Correspondence audit
c. National Research Program selected audit
Which of the following is true regarding the return audit process? a. The lower the DIF score a return gets, the higher the likelihood for audit. b. An office audit is performed at tax preparer's office. c. Returns may be selected for audit through related examinations. d. Seventy-five percent of taxpayers are audited every year.
c. Returns may be selected for audit through related examinations.
Which characteristic of tax planning involves deferring payment of taxes to a future year? a. Entity b. Character c. Timing d. Jurisdiction
c. Timing
The burden of proof remains on the taxpayer for corporations, trusts, and partnerships with net worth exceeding: a. $1 million b. $5 million c. $3 million d. $7 million e. Some other amount
d. $7 million
Which of the following tax preparers may not represent their clients in all IRS proceedings? a. An attorney b. A certified public accountant c. An enrolled agent d. All of these choices may represent their clients in IRS proceedings
d. All of these choices may represent their clients in IRS proceedings
If a taxpayer's 2022 individual income tax return is due on April 18, 2023 and was filed on March 3, 2023, the statute of limitations would normally run out on: a. April 18, 2025 b. March 3, 2026 c. March 3, 2024 d. April 18, 2026 e. None of these choices are correct
d. April 18, 2026 Generally, the statute is 3 years from the later of the actual filing date or the original due date.
Which of the following is not a penalty that may be imposed by the IRS? a. Penalty for negligence b. Failure-to-file penalty c. Failure-to-pay penalty d. Early filing penalty e. All of these penalties may be imposed by the IRS
d. Early filing penalty
Which of the following is not a reason a penalty may be assessed on a tax preparer? a. Endorsing or cashing a refund check issued to a taxpayer b. Failing to sign a tax return c. Failing to keep a copy of the prepared return d. Failing to give the taxpayer the preparer's workpapers
d. Failing to give the taxpayer the preparer's workpapers
If a U.S. Tax Court agrees with the taxpayer on appeal that the IRS position was largely unjustified, which of the following is correct? a. The taxpayer may recover administrative but not litigation costs. b. The taxpayer may recover litigation but not administrative costs. c. The taxpayer must still pay administrative and litigation costs. d. To be eligible to recover some of the administrative and litigation costs, the taxpayer must have tried to resolve the case administratively, including going through the appeals process, and must have given the IRS the information necessary to resolve the case. e. None of these choices are correct.
d. To be eligible to recover some of the administrative and litigation costs, the taxpayer must have tried to resolve the case administratively, including going through the appeals process, and must have given the IRS the information necessary to resolve the case.
Which of the following statements best describes the purpose of the Taxpayer Bill of Rights? a. To provide the IRS with additional enforcement powers b. To grant to taxpayers the right to choose the time and method of payment of delinquent taxes c. To inform taxpayers of the right methods for completing their income tax returns d. To inform taxpayers of their rights in dealing with the IRS
d. To inform taxpayers of their rights in dealing with the IRS
In which of the following ways are tax returns selected for audits? a. Through the Discriminant Function System b. Through information matching c. Through news sources d. Through informants e. All of these choices are true
e. All of these choices are true
Which of the following is not a source of information from which the IRS identifies possible audit targets? a. Whistleblowers b. A computer scoring system that identifies possible errors on tax returns c. News sources d. The client records of a particularly abusive tax scheme promoter e. All of these items could be sources for IRS audit selection
e. All of these items could be sources for IRS audit selection
Which of the following have privileged communication with a client in a noncriminal tax matter? a. CPAs b. Enrolled Agents c. Attorneys d. CPAs and Attorneys e. CPAs, Enrolled Agents, and Attorneys
e. CPAs, Enrolled Agents, and Attorneys
The IRS does not have the authority to: a. Examine a taxpayer's books and records b. Place a lien on taxpayer property c. Summon taxpayers to make them appear before the IRS d. Summon third parties for taxpayer records e. None of the above-The IRS has the authority to do all these
e. None of the above-The IRS has the authority to do all these
Which of the following is a responsibility of a local office of the IRS? a. Developing IRS rules and regulations b. Appellate procedures c. Intelligence operations d. Advising the Treasury Department on legislation e. None of these choices are correct
e. None of these choices are correct
