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