Federal Taxation: Chapter 15: Administrative Procedures
Which of the following activities is protected by accountant-client privilege? A. communications related to tax return preparation B. advice given regarding tax issues in a divorce C. communications related to criminal tax evasion D. written communications between a CPA and a corporation regarding a tax shelter
B
Which of the following statements regarding Circular 230 is false? A. Circular 230 defines practice before the IRS. B. Circular 230 applies to all tax return preparers. C. Circular 230 applies to CPAs, enrolled agents, enrolled actuaries, and attorneys. D. Circular 230 provides guidance as to the level of authority necessary for a CPA to take a tax return position.
B
Which, if any, of the following could result in penalties against an income tax return preparer? I. Knowing or reckless disclosure or use of tax information obtained in preparing a return. II. A willful attempt to understate any client's tax liability on a return or claim for a refund. A. II only B. both I and II C. neither I nor II D. I only
B
Which of the following is not a reason for relief from the substantial understatement penalty? A. disclosure of the relevant facts pertaining to the questionable tax return position B. substantial authority for the tax return position C. reliance on a tax return preparer D. reasonable cause and a good faith effort to comply with the tax law
C
Which of the following items can be omitted from a taxpayer's request for a ruling? A. a detailed explanation of the transaction B. the location of the IRS district office that has examination jurisdiction C. the particular conclusion desired by the taxpayer D. names, addresses, and taxpayer identification numbers of all interested parties
C
Which one of the following statements about letter rulings is false? A. Rulings become public information. B. The IRS issues revenue procedures periodically, which prescribe the information that must be supplied with a ruling request. C. If a taxpayer requests and pays for a ruling, the IRS must respond to his request by issuing a ruling. D. A ruling is a response to a taxpayer's specific set of facts.
C
Why do taxpayers frequently litigate in the Tax Court? A. Taxpayers can use Tax Court without an attorney, whereas other courts require an attorney. B. Tax Court is the only court that makes the burden of proof go directly to the IRS and not the taxpayer. C. Taxpayers frequently litigate in the Tax Court because, to access it, they do not have to pay the amount in question and in certain circumstances can use the small cases procedure. D. Taxpayers litigate in Tax Court because it is the highest level of court law and decisions can be made quickly without fear of being overturned.
C
A letter ruling is a written determination that interprets and applies the tax laws to the taxpayer's specific set of facts. True False
True
A taxpayer who fails to file and fails to pay taxes is subject to a combined 5% monthly penalty on the underpayment. True False
True
If the taxpayer has credible evidence, the IRS bears the burden of proof in a tax dispute. True False
True
The IRS will issue a 90-day letter (a Statutory Notice of Deficiency) if the taxpayer does not file a protest letter within 30 days of the date of the 30-day letter. True False
True
The maximum failure to file penalty is a total of 25% of the underpayment. True False
True
The statute of limitations is unlimited for a tax return that is never filed. True False
True
The 90-day letter (Statutory Notice of Deficiency) gives the taxpayer 90 days to file a petition with the Tax Court or to pay the disputed tax. True False
True
Treasury Department Circular 230 regulates the practice of attorneys, CPAs, enrolled agents, and enrolled actuaries before the IRS. True False
True
A client believes that obtaining an extension for filing an income tax return would give him additional time to pay the tax at no additional cost. Is the client correct? A. No. The client is incorrect. An automatic extension does not extend the due date for the payment of the tax. The taxpayer will owe interest and penalties on any tax not paid by the original due date for the return. However, a corporation will not be assessed a penalty if it pays at least 90% of its tax due by the original due date of the return and pays the balance by the extension due date. B. No. The client is incorrect. An automatic extension extends the due date for the payment of the tax, but the taxpayer will owe interest and penalties on any tax not paid by the original due date for the return. A corporation will not be assessed a penalty if it pays at least 50% of its tax due by the original due date of the return and pays the balance by the extension due date. C. Yes. The client is correct. The IRS is more concerned that all taxpayers file their tax returns for each year at some time in the future than they are with compliance to due dates. D. Yes. The client is correct. Filing an extension does extend the due date for the payment of taxes and will not put the client in jeopardy of paying interest and penalties.
A
A calendar-year individual taxpayer files last year's income tax return on July 1 of the current year. No extension was requested, and there is not a reasonable cause for the late filing. The return shows a balance due of $800 of tax. The late filing penalty is A. $120 B. $0 C. $80 D. $40
A
A six-year statute of limitation rule applies if the taxpayer A. understates gross income by 25%. B. understates taxable income by 25%. C. understates AGI by 25%. D. none of the above
A
Describe how the IRS verifies tax returns at its service centers. A. IRS service centers verify the tax calculation by checking to see whether amounts are properly carried from one line to another on the return and whether items such as signatures or social security numbers are missing. B. IRS service centers verify that the name, address, and filing status match that of last year's return and update the files if any changes have occurred. C. IRS service centers verify that all income, deductions, and credits have been reported to ensure the taxpayer receives the most advantageous tax liability. D. All of the above.
A
Gerald requests an extension for filing his last year's individual income tax return. His tax liability is $10,000, of which $8,000 was withheld, leaving a balance due of $2,000 when he files on August 1 of the current year. His penalty for failure to pay the tax on time is A. $40 B. $400 C. $0 D. $300
A
Identify which of the following statements is false. A. As a practical consideration, taxpayers always find it preferable to obtain an advance ruling on questionable tax situations. B. Third parties may not cite private letter rulings as authority for the tax consequences of their transactions. C. The request for a ruling may contain a suggested conclusion (or answer) that the taxpayer proposes that the IRS adopt in the described situation. D. The IRS issues annually a revenue procedure that prescribes how a letter ruling should be requested and the information to be contained in the ruling request.
A
In general, when does the limitations period for tax returns expire? List four exceptions to the general rule. A. Three years after the later of the due date for the return or the date on which the return was filed. Four exceptions include civil fraud, criminal fraud, omission from gross income exceeding more than 25%, and no return being filed. These exceptions have periods of six years or no limitations at all. B. Four years after the date of filing the tax return, even if the return was filed early. Four exceptions include no return being filed, criminal fraud, math errors, and error of information on the return. These exceptions have periods of four years or six years depending upon the seriousness of the error. C. Six years after the date of filing the tax return, up to the original due date of the return, not taking into consideration extensions. Four exceptions include civil fraud, math errors, errors of information furnished on the return, and omission from gross income exceeding more than 50%. These exceptions have periods of ten years or no limitations at all. D. None of the above.
A
The IRS provides advice concerning an issue that arises during an audit by issuing A. a technical advice memorandum. B. an audit memorandum. C. a revenue ruling. D. a private letter ruling.
A
The Internal Revenue Service is part of the A. Treasury Department. B. Congress. C. Federal Bureau of Investigation. D. U.S. Customs Department.
A
What course(s) of action is (are) available to a taxpayer upon receipt of the following notices: IRS rejection of a claim for a refund A. Taxpayer has two years to sue the IRS for a refund in a U. S. district court or the U.S. Court of Federal Claims. B. The taxpayer has 90 days from the day the IRS rejection letter is received to petition the U.S. district court or the U.S. Court of Federal Claims. C. The taxpayer has two years to apply to the IRS for a refund through the Tax Court or the U.S. district court. D. Taxpayer has one year to petition the Tax Court for a claim of refund.
A
Assume that a taxpayer owes additional taxes as a result of an audit. Give two reasons why the IRS might not impose a substantial understatement penalty on the additional amount owed. (Select the two reasons why the IRS might not impose a substantial understatement penalty.) A. The taxpayer made adequate disclosure on the return or in a statement attached to the return, and a reasonable basis exists for the position. B. It might conclude that the taxpayer has substantial authority for the position adopted on the return. C. The taxpayer made adequate disclosure on the return or in a statement attached to the return, and the taxpayer was subject to an understatement penalty on his or her prior year's tax return. Thus, the taxpayer would be exempt from another penalty. D. It might conclude that the taxpayer was not aware that a penalty could be imposed.
A & B
A calendar-year individual taxpayer files last year's income tax return on October 17 of the current year. No extension was requested, and there is not a reasonable cause for the late filing. The return shows a balance due of $1,500 of tax. The late filing penalty is A. $75 B. $375 C. $0 D. $450
B
A taxpayer's return is audited and additional taxes are assessed. The IRS also asserts that a negligence penalty should be assessed. The taxpayer concurs with the additional $15,000 tax liability; $7,000 of this amount is attributable to negligence. What is the amount of the penalty for negligence? A. $5,600 B. $1,400 C. $1,750 D. $700
B
How long does a taxpayer have to file a petition with the U.S. Tax Court following the date of the Statutory Notice of Deficiency? A. 180 days B. 90 days C. three months D. 30 days
B
Identify which of the following statements is false. A. If the taxpayer being audited does not concur with the proposed assessment, the Service is required to send the taxpayer a 30-day letter detailing the proposed changes and the available appeals process. B. During the audit process, if the taxpayer concurs with the assessment of tax by the IRS and signs Form 870 (Waiver of Restrictions on Assessment and Collection of Deficiency in Tax), then the taxpayer is precluded from filing a refund suit. C. Interest on a deficiency accrues from the due date of the return through the payment date. D. A Technical Advice Memorandum may be requested by an IRS auditor if the transaction in question involves an especially complex tax issue.
B
Identify which of the following statements is true. A. A taxpayer can request and always receive an exemption from an audit by the IRS if his return was audited in at least one of the two previous years and the previous audit did not result in any change to his tax liability. B. If a taxpayer has been audited in at least one of the two previous years on the same item and the earlier audit did not result in any additional tax owed, the taxpayer may qualify for the special audit relief rule. C. The signing of Form 870 allows the taxpayer to wait for 30 interestminus−free days after the billing date to pay the tax. D. All of the above are true.
B
Identify which of the following statements is true. A. The failure-to-pay penalty is waived if the additional tax due with the filing of the extended return does not exceed 15% of the tax owed for the year. B. Individuals having substantial income from sources not subject to regular withholding generally should make quarterly estimated tax payments to the IRS. C. If both the failure-to-file and the failure-to-pay penalties are owed, the taxpayer will incur a maximum addition to tax of 5.5% per month. D. All of the above are false.
B
If a return's due date is extended, a taxpayer A. also extends the period in which to pay taxes without interest. B. still should pay the tax by the original return due date. C. has 30 days following the original due date to pay estimated taxes without penalty. D. has 30 days following the original due date to pay estimated taxes without interest.
B
In April of the current year, Stan does not have sufficient assets to pay his tax liability for the previous year. However, he expects to pay the tax by August of the current year. He wonders if he should request an extension for filing his return instead of simply filing his return and paying the tax in August. What is your advice? A. Providing Stan requests an extension for filing his return he will only be liable for a failure-to-pay penalty if the additional tax due is more than $1,000. B. To avoid the failure-to-file penalty, Stan should request an extension for filing. If Stan is delinquent in paying his taxes on time, he will still owe the failure-to-pay penalty. C. As long as Stan files a tax return by April 15, the failure-to-file and failure-to-penalties do not apply if the balance is paid by October 15. D.The failure-to-file and failure-to-pay penalty both apply if Stan does not request an extension for filing his return; however, only the higher of the two penalties will be due.
B
List the courts in which a taxpayer can begin tax-related litigation. A. The Circuit Court of Appeals, Tax Court, or an Appellate Court. B. The Tax Court, the U.S. Court of Federal Claims, or a U.S. district court. C. The U.S. Court of Federal Claims, U.S. district court, or U.S. Supreme Court. D. The Tax Court, U.S. Supreme Court, or the U.S. Court of Federal Claims.
B
On his individual return, Al reports salary and exemptions for himself and seven dependents. His itemized deductions consist of mortgage interest, real estate taxes, and a large loss from breeding dogs. On his individual return, Ben reports self-employment income, a substantial loss from partnership operations, a casualty loss deduction equal to 25% of his AGI, charitable contribution deductions equal to 30% of his AGI, and an exemption for himself. Al's return reports higher taxable income than does Ben's. Which return is more likely to be selected for audit under the DIF program? Explain. A. Both returns could likely be selected to be audited. Ben's, because it includes a large loss from partnership operations, and Al's, because he has a large number of exemptions plus a loss that the IRS might think is a nondeductible hobby loss. B. Ben's, because it includes a number of items that probably depart from the DIF statistical norm. Al's, however, has a large number of exemptions plus a loss that the IRS might think is a nondeductible hobby loss. C. Ben's, because he is reporting a lower taxable income amount. D. Al's, because of the large loss from breeding dogs. Ben's, however, reports a large percentage of AGI for charitable contributions which lowers his audit risk.
B
The IRS audited Tony's return, and Tony agreed to pay additional taxes plus the negligence penalty. Is this penalty necessarily imposed on the total additional taxes that Tony owes? Explain. A. Yes. The negligence penalty is levied on the entire tax liability plus interest based on which quarter of the year the liability was incurred. B. No. The negligence penalty is levied on just the portion of the underpayment attributable to negligence. C. No. The negligence penalty is levied on 10% of the underpayment attributable to negligence. D. Yes. The negligence penalty is levied on the entire tax liability for the year.
B
The IRS notifies Tom that it will audit his current year return for an interest deduction. The IRS audited Tom's return two years ago for a charitable contribution deduction. The IRS, however, did not assess a deficiency for the prior year return. Is any potential relief available to Tom with respect to the audit of his current year return? A. Yes. The accountant of record can write to the IRS on behalf of a client and have the audit canceled. B. No. Even though the IRS audited his return for two years earlier, that audit dealt with a different issue. Therefore, the IRS can challenge the interest expense deduction on the current year return. C. No. The IRS can audit a return as many times as it chooses for any reason. D. Yes. The IRS cannot audit a return if it was never previously audited for any other issue.
B
The IRS will issue a ruling A. only if regulations have been issued on the subject. B. to clarify the tax treatment of a transaction. C. on a completed transaction for which a return has been filed. D. on prospective transactions only.
B
Tracy wants to take advantage of a "terrific business opportunity" by engaging in a transaction with Homer. Homer, domineering and impatient, wants Tracy to conclude the transaction within two weeks and under the terms proposed by Homer. Otherwise, Homer will offer the opportunity to another party. Tracy is unsure about the tax consequences of the proposed transaction. Would you advise Tracy to request a ruling? Explain. A. No. A ruling will not give Tracy tax consequences about engaging in new business opportunities. B. No. The IRS cannot respond by the time Tracy must finalize the transaction. C. Yes. Tracy can request an expedited ruling from the IRS that will fall within the time Homer is proposing. D. Yes. If Tracy requests the ruling, Homer will also be responsible for a portion of the tax if it is unfavorable to Tracy.
B
A taxpayer can automatically escape the penalty for underpayment of taxes by A. having a casualty loss. B. owing taxes in the previous year. C. owing less than $1,000 in taxes over and above the taxes withheld from wages. D. none of the above
C
According to Circular 230, what should a CPA do upon discovery of an error in a client's prior-year return? A. Do nothing. B. Notify the IRS of the error. C. Inform the client of the error and its tax consequences. D. File an amended return for the client.
C
Distinguish between the circumstances that give rise to the civil fraud penalty and those that give rise to the negligence penalty. A. The negligence penalty is imposed where the tax underpayments result from negligence or disregard of the rules and regulations, but without the intent to commit fraud. The civil fraud penalty is levied where the taxpayer has accidentally misstated their tax liability. B. The civil fraud penalty is imposed where the tax underpayments result from fraudulent activity or blatant disregard of the rules and regulations. The negligence penalty is levied where the taxpayer has deliberately neglected to report all income and deductions. (e.g., systematic omissions of gross income, fictitious deductions, or falsification of records). C. The negligence penalty is imposed where the tax underpayments result from negligence or disregard of the rules and regulations, but without the intent to commit fraud. The civil fraud penalty is levied where the taxpayer has deliberately deceived (e.g., systematic omissions of gross income, fictitious deductions, or falsification of records). D. None of the above.
C
Identify which of the following statements is false. A. In addition to interest, taxpayers may be subject to penalties for failure to file on time and failure to pay taxes by the due date for the return. B. A different interest rate is charged to corporate and noncorporate taxpayers. C. The failure-to-pay penalty is imposed at a rate of 5% per month (or fraction of a month) with a maximum penalty of 25%. D. The failure-to-file penalty is levied against taxpayers who do not file a return by its due date at a rate of 5% per month (or fraction of a month) with a maximum additional penalty of 25%.
C
Identify which of the following statements is true. A. The statute of limitations, which stipulates the time frame within which either the government or the taxpayer may request a redetermination of tax due, usually expires six years after the date on which the return is filed. B. If a taxpayer omits from gross income an amount in excess of 25% of the gross income shown on his return, the statute of limitations is five years. C. The statute of limitations limits the time during which a taxpayer may claim a refund of an overpayment of tax. D. All of the above are true.
C
If Brad files his last year's individual tax return on July 5 of the current year after having requested an extension, what is the amount of his failure-to-pay penalty if his total tax is $10,000 and he paid $9,500 through timely withholding and $500 with the return? A. $6 B. $60 C. $0 D. none of the above
C
Is the tax return preparer limited to the person who signs the return? Explain. A. No. When a return is signed under a firm's company name, not only the signing preparer is considered the tax return preparer, but the firm too. B. Yes. The signing preparer is the final one who is considered the tax return preparer and who gives all advice to the taxpayer. C. No. A nonsigning preparer who gives advice to a taxpayer or another preparer, with that advice leading to a substantial position on a tax return, will be considered the preparer with respect to that item. D. Yes. A signing preparer has the primary responsibility for the overall substantive accuracy of the return.
C
What is the principal purpose of the innocent spouse provisions? A. To let a spouse who has no income on a tax return not be responsible for filing a return or be held accountable if a return is not filed. B. The innocent spouse provision is to allow each spouse to not be held accountable for the other's income or deductions listed on the return. C. To relieve a spouse from joint and several liability for taxes attributable to omissions of income or deductions improperly claimed by the other spouse if it would be unfair to hold the innocent spouse liable. D. The innocent spouse provision protects one spouse when the other spouse omits more than 25% of gross income even though the income is known to the spouse who did not earn it.
C
What course(s) of action is (are) available to a taxpayer upon receipt of the following notices: The 30-day letter A. Taxpayer has 30 days from the date of the letter to file a petition with the Tax Court. B. Taxpayer has 30 days from the day they receive the letter to appeal to the IRS with a protest letter. C. Taxpayer has 30 days from the date of the letter to request a conference with an IRS appeals officer, or to file a protest letter. D.None of the above.
C
A taxpayer will receive a 30-day letter A. after a response to the 90-day letter with a protest. B. to notify him that the return was selected for audit. C. only if the taxpayer is more than 30 days late in filing the tax return. D. only if the taxpayer does not sign Form 870.
D
According to Treasury Department Circular 230, what standard should a CPA meet to properly take a position on a tax return? A. Integrity. For a CPA to take a position on a tax return, he or she must act fairly and with integrity in practice before the taxpayer. B. Communication. For a CPA to take a position on a tax return, he or she must advise the client of the implications of conclusions reached, including the applicability of accuracy-related penalties. C. Substantial authority and reasonable basis. For a CPA to take a position on a tax return, he or she must believe that the position has substantial authority, and that the position has a reasonable basis if the position is properly disclosed. D. Substantial authority or reasonable basis. For a CPA to take a position on a tax return, he or she should believe that the position has substantial authority, or that the position has a reasonable basis if the position is properly disclosed.
D
Identify which of the following statements is false. A. Any tax not paid by the due date for the return is subject to an interest charge. B. Interest on underpayments is calculated using daily compounding and covers a time period from the original due date of the return until the date of payment. C. Interest is imposed on any tax not paid by the due date of the return (determined without regard to extensions). D. Interest is charged on underpayments, or paid on overpayments, at a rate of three percentage points higher than the federal short-term rate.
D
In which of the situations below will a taxpayer not be assessed interest on the tax remitted? A. A timely return is filed but the taxpayer must delay payment of the taxes. B. The return is audited and additional tax is owed. C. An extension is obtained and the tax is paid within the extension period. D. None of the above situations.
D
Name some of the IRS administrative pronouncements. A. The IRS issues internal revenue code, Circular 230 guidance, letter rulings, notices, and revenue procedures. B. The IRS issues Circular 230 guidance, notices, revenue procedures, revenue rulings, penalty provisions of tax law, and Cumulative Bulletins. C. The IRS issues Cumulative Bulletins, revenue rulings, determination letters, and penalty provisions of tax law. D. The IRS issues revenue rulings, revenue procedures, determination letters, announcements, notices, and information releases.
D
Tax return preparers can be penalized for the following activities except A. failure to provide the preparer's identification number on the return. B. failure to give a copy of the return to the taxpayer. C. failure to sign a return. D. failure to maintain IRS continuing education requirements.
D
What course(s) of action is (are) available to a taxpayer upon receipt of the following notices: The 90-day letter A. Taxpayer has 90 days to petition to the U.S. district court to request a refund. B. Taxpayer has 90 days to pay the tax the IRS assessed in the letter. C. Taxpayer has 90 days from the day they receive the letter to file a petition with the Tax Court. D. Taxpayer has 90 days from the date of the letter to file a petition with the Tax Court.
D
Your client wants to avoid any penalty for underpayment of estimated taxes by making timely deposits. Determine the amount of the minimum quarterly estimated tax payments required to avoid the penalty. Assume your client's adjusted gross income last year was $140,000. Last year's tax liability $40,000 This year's estimated total tax 44,000 Taxes to be withheld for this year 9,000 A. $7,750 B. $11,000 C. $8,750 D. $7,650
D
The statute of limitations, which stipulates the time frame within which either the government or the taxpayer may request a redetermination of tax due, usually expires 6 years after the date on which the return is filed. True False
False
The "automatic" extension period for filing an individual return is seven months. True False
False