Deck 17: Tax Practice and Ethics

Question 1

The IRS is organized according to the industry classification of the taxpayer. One of the operating divisions of the IRS deals exclusively with manufacturing and exporting businesses.

Answer 1

False

Question 2

The taxpayer must pay a significant fee to have a letter ruling issued by the IRS.

Answer 2

True

Question 3

During any month in which both the failure-to-file and failure-to-pay penalties apply, both penalties must be paid in full.

Answer 3

False

Question 4

When the IRS issues a notice of tax due, the taxpayer has 90 days to either pay the tax or file a petition with the Tax Court. This is conveyed in the "ninety-day letter."

Question 5

The "IRS's attorney" is known as the Chief Counsel.

Question 6

The IRS employs over 80,000 personnel, making it one of the largest Federal agencies.

Question 7

The IRS can require that the taxpayer produce its financial accounting records, to determine if taxable income is computed correctly.

Question 8

Maria and Miguel Blanco are in the midst of negotiating a divorce. Because both parties are unwilling to share any current financial information, their joint Form 1040 for 2016 is not filed until October 31, 2017, when the respective divorce attorneys forced them to cooperate. The Blancos should not be subject to any Federal late-filing penalties, because the reasonable cause exception applies to their family discord.

Question 9

Cheng filed an amended return this year, claiming a refund relative to her tax computation on a prior-year's return. When the IRS approves the amended return and issues the refund, it also pays Cheng interest with respect to the overpayment.

Question 10

The tax professional can do more than just tax compliance work. He or she can work with the client in consultation over the strategy and tactics of dealing with a Federal tax audit.

Question 11

When a tax issue is taken to court, the burden of proof is on the IRS to show that its audit adjustments are correct.

Question 12

An IRS letter ruling might determine that an employee's compensation is unreasonable in amount.

Question 13

A negligence penalty is assessed when the taxpayer is found to have not made a reasonable attempt to comply with the tax law.

Question 14

After a tax audit, the taxpayer receives the Revenue Agent's Report as part of the "30-day letter."

Question 15

An IRS "office audit" takes place at the headquarters office of the corporate taxpayer.

Question 16

In a letter ruling, the IRS responds to a taxpayer request concerning the tax treatment of a proposed transaction.

Question 17

The government can appeal a decision of the Tax Court Small Cases Division, but the taxpayer cannot.

Question 18

Recently, the overall Federal income tax audit rate for the Form 1040 has been about 1%.

Question 19

IRS computers use document matching programs for both individuals and business taxpayers to keep the audit rate low.

Question 20

The IRS targets high-income individuals for an audit rate that is much higher than that of the general populace.

Question 21

Circular 230 requires that a tax preparer provide training for the tax staff as to the latest changes in the tax law.

Question 22

The Statements on Standards for Tax Services apply to members of the AICPA, a state bar association, and all Enrolled Agents.

Question 23

Circular 230 requires that a paid tax preparer apply a thorough quality review system in preparing tax returns for her clients.

Question 24

Because he undervalued property that he transferred by gift, Dan owes additional gift taxes of $4,000. The penalty for undervaluation does not apply in this situation, because the tax understatement was too small.

Question 25

In a criminal tax fraud case, the burden is on the taxpayer to show that he or she was innocent "beyond the shadow of any reasonable doubt."

Question 26

Fiona, a VITA volunteer for her college's tax clinic, is not a tax preparer as defined by the Code. Thus, Fiona is exempted from the Code's tax preparer penalties.

Question 27

Jenny prepared Steve's income tax returns for no compensation for 2013 and 2014. Jenny is Steve's mother. In 2016, the IRS notifies Steve that it will audit his returns for 2013 and 2014. Jenny cannot represent Steve during the audit of the returns, as she is not a "registered tax return preparer."

Question 28

Under Circular 230, Burke cannot complete a client's original Form 1040 and charge a fee equal to one-third of the resulting refund.

Question 29

Latrelle prepares the tax return for Whitehall Corporation. Latrelle includes a $5,000 deduction on the return. This type of deduction previously has been disallowed by the Tax Court, although there is a 15% chance that the holding will be reversed on an appeal by Whitehall. The return does not make any special disclosure that the deduction is being claimed. Whitehall paid Latrelle a fee of $8,000 for preparing the Form 1120. Latrelle will be assessed a preparer penalty of $4,000 for taking an unreasonable position on the Whitehall return.

Question 30

Circular 230 applies to all paid tax practitioners. But attorneys, CPAs, and enrolled agents are exempt from the Circular 230 rules, because each of the groups has its own code of professional conduct.

Question 31

Jaime's negligence penalty will be waived, under the reasonable cause exception. He told the court, "My taxes were wrong because I couldn't understand the tax law."

Question 32

In the case of bad debts and worthless securities, the statute of limitations on claims for refund is three years.

Question 33

Yang, a calendar year taxpayer, did not file a tax return for 2007 because she honestly believed that no additional tax was due. In 2016, Yang is audited by the IRS and the agent assesses a deficiency of $17,000 for 2007. Yang need not pay this deficiency, since the three-year statute of limitations expired on April 15, 2011, meaning that the IRS no longer can adjust Yang's tax for the 2007 tax year.

Question 34

CPA Norma and her client Colin hold a privilege of confidentiality from the IRS, as to their tax planning discussions about completing Colin's tax returns. The IRS cannot successfully subpoena records concerning these discussions.

Question 35

In the context of civil tax fraud litigation, the burden of proof is on the taxpayer to show the court by a "preponderance of the evidence" that he or she was not acting with an intent to evade a tax.

Question 36

Keepert uses "two sets of books." She only reports one-half of her cash sales on the records that she uses to complete her Federal income tax return. The statute of limitations for Keepert's return is six years.

Question 37

The AICPA's Statements on Standards for Tax Services provide principles-based guidelines as to how a tax professional should conduct business.

Question 38

A CPA can take a tax return position for a client that is contrary to current IRS interpretations of the law.

Question 39

As part of a tax return engagement for XYZ Partnership, Enrolled Agent Wang can draft an amendment to the XYZ partnership agreement.

Question 40

Under Circular 230, tax preparer Winston cannot disclose to a mortgage banker the income level of her client Pickett, or other information acquired by preparing the return, without Pickett's permission.

Question 41

Last year, Ned's property tax deduction on his residence was $22,500. Although he lives in the same house, he tells his CPA that this year's taxes will be only $7,500. The CPA can use this estimate in computing Ned's itemized deductions, under the Statements of Standards for Tax Services.

Question 42

Which statement is correct as to the conduct of IRS income tax audits?

A)Office audits are conducted at the office of the IRS.
B)An office audit involves a line-by-line review of the taxpayer's return.
C)The most common type of Federal income tax audit is the field audit.
D)A correspondence audit usually is concluded after a meeting with the taxpayer at the IRS auditor's office.

Question 43

Michelle, a calendar year taxpayer subject to a 25% marginal Federal income tax rate, claimed a Form 1040 charitable contribution deduction of $275,000 for a sculpture that the IRS later valued at $200,000. The applicable overvaluation penalty is:

A)$0.
B)$3,750.
C)$7,500.
D)$18,750.

Question 44

Which statement is incorrect as to the conduct of IRS income tax audits?

A)Most IRS examinations of Forms 1040 are conducted solely through the mail.
B)The "office audit" occurs less frequently than all other audit types.
C)The IRS publishes the factors its computers use for audit selection purposes annually in the Commissioner's Report.
D)For a Form 1040 that is filed on April 11, if the taxpayer has not received an audit notification from the IRS by the end of the year, the return still may be audited.

Question 45

The penalty for substantial understatement of tax liability does not apply if:

A)The taxpayer has substantial authority for the treatment taken on the tax return.
B)The relevant facts affecting the treatment are adequately disclosed in the return or on Form 8275.
C)The IRS failed to meet its burden of proof in showing the taxpayer's error.
D)All of the above statements are correct.

Question 46

Faye, a CPA, is preparing Judith's tax return. Last year, Judith's return included dividend income from the P&G Company. This year, Judith reports no such income. Faye should inquire as to whether Judith sold the P&G stock during the year.

Question 47

Which of the following statements does not reflect the rules governing the accuracy-related penalty for negligence?

A)The penalty rate is 20%.
B)The penalty applies whenever the taxpayer takes a return position that is contrary to a court decision.
C)The penalty applies when the taxpayer does not keep records adequate to compute the tax correctly.
D)The penalty is waived if the taxpayer uses Form 8275 to disclose a return position that is reasonable though contrary to the IRS position.

Question 48

Which statement does not correctly describe the IRS letter ruling process?

A)Letter rulings can benefit both taxpayers and the IRS.
B)Letter rulings are issued by the Secretary of the Treasury Department.
C)Letter rulings can be seen only by the taxpayer who requested the ruling; they are also known as "private letter rulings."
D)Some letter rulings are of such importance and general interest that they are later published (in anonymous form) as Revenue Rulings.

Question 49

Juarez (a calendar year taxpayer) donates a painting to a local art museum (a qualified charity). The painting cost Juarez $2,000 ten years ago and, according to one of Juarez's friends (an amateur artist), now is worth $40,000. On his income tax return, Juarez deducts $40,000 as a Form 1040 charitable contribution. Upon later audit by the IRS, it is determined that the true value of the painting was $30,000. Assuming that Juarez is subject to a 25% marginal Federal income tax rate, his penalty for overvaluation is:

A)$10,000 (minimum penalty).
B)$5,000.
C)$2,500.
D)$2,000.
E)$0.

Question 50

The tax professional can reduce the chances that staff personnel will incur IRS preparer penalties by adopting a "tone at the top" that stresses integrity, diligence, and other elements of an ethical tax practice.

Question 51

Which of the following statements correctly reflects the rules governing interest to be paid on an individual's Federal tax deficiency or claim for refund?

A)The IRS has full discretion in determining the rate that will apply.
B)The simple interest method for calculating interest is used.
C)IRS interest compounds daily.
D)Congress sets the IRS interest rate twice each year.

Question 52

Ling has hired CPA Gracie to complete this year's Form 1040. Ling uses online accounting software to keep the books for her interior design sole proprietorship. Ling tells Gracie that a $5,000 amount for business supplies is "close enough" to report for this year's deduction. Gracie can use this estimate in completing the Form 1040.

Question 53

Malik, Inc., a calendar year C corporation subject to a 35% marginal income tax rate, claimed a Form 1120 charitable contribution deduction of $30,000 for a sculpture that the IRS later valued at $10,000. The applicable overvaluation penalty is:

A)$0.
B)$7,000.
C)$10,000 (minimum penalty).
D)$20,000.

Question 54

Lisa, a calendar year taxpayer subject to a 33% marginal Federal income tax rate, claimed a Form 1040 charitable contribution deduction of $250,000 for a sculpture that the IRS later valued at $160,000. The applicable overvaluation penalty is:

A)$0.
B)$6,000.
C)$10,000 (maximum penalty).
D)$12,000.

Question 55

With respect to the Small Cases Division of the Tax Court,

A)The taxpayer (but not the IRS) can appeal a contrary judgment.
B)The IRS (but not the taxpayer) can appeal a contrary judgment.
C)Either the IRS or the taxpayer can appeal a contrary judgment.
D)Neither the IRS nor the taxpayer can appeal a contrary judgment.

Question 56

CPA Liam discovers that last year's Form 1120 for his client PollCo claimed a $100,000 advertising deduction for a gift to candidates of the Green Party. AICPA tax ethics rules require that an amended return immediately be filed, as political expenditures are not deductible.

Question 57

The Commissioner of the IRS is appointed by the:

A)Secretary of the Treasury Department.
B)U. S. President.
C)U. S. House of Representatives.
D)U. S. Senate.
E)SEC Commissioner.

Question 58

In preparing a tax return, a CPA should verify "to the penny" every item of information submitted by a client about its deduction for repairs and maintenance.

Question 59

It typically is advisable that an IRS audit be conducted at the office of the tax advisor, and not of the client.

Question 60

CPA Shearer is required by AICPA tax ethics rules to inform her client Martinez of significant changes in the Federal income tax laws.

Question 61

Concerning a taxpayer's requirement to make quarterly estimated tax payments:

A)A C corporation must make estimated payments if its Federal income tax liability for the year will exceed $250.
B)The due dates of the payments for a calendar-year C corporation are March, June, September, and December 15.
C)A C corporation's estimates must total at least 90% of the current-year tax, to avoid the penalty.
D)An individual must make estimated payments if his or her balance due for the Federal income tax for the year will exceed $1,000.

Question 62

Mikel prepared for compensation a Federal income tax return for Mona. Mona's return included an aggressive interpretation of the rules concerning the home office deduction. Mikel is not liable for a preparer penalty for taking an unreasonable tax return position if:

A)The tax reduction attributable to the disputed deduction did not exceed $5,000.
B)Mona is assessed her own penalty for an understatement of tax due to disregard of IRS rules.
C)The IRS found that the disputed deduction was frivolous, but Mona disclosed the position in an attachment to the return.
D)There was a reasonable basis for Mona's interpretation of the home office deduction rules, and Mona disclosed the position in an attachment to the return.

Question 63

Circular 230 allows a tax preparer to:

A)Take a position on a tax return that is contrary to a decision of the U.S. Supreme Court.
B)Avoid signing a tax return that is likely to be audited.
C)Charge a $5,000 fee to prepare a Form 1040EZ.
D)Operate the "Tax Nerd's Blog" on the Internet.

Question 64

The usual three-year statute of limitations on additional tax assessments applies in the following situation(s).

A)No return at all is filed.
B)An investment in a marketable security is worthless.
C)Taxpayer discovers an inadvertent overstatement of deductions equal to 30% of gross income.
D)Taxpayer inadvertently omits an amount of gross income equal to 30% of the gross income stated on the return.

Question 65

Which of the following is subject to tax return preparer penalties?

A)Meredith is the director of Federal taxes for a C corporation.
B)Sammy is a volunteer who prepares returns at the retirement home under the IRS Tax Counseling for the Elderly program.
C)Abbie prepares her mother's tax returns for $50 a year. A CPA, Abbie would charge a client $750 for completing a similar return.
D)Lizzie, the firm's administrative assistant, makes copies of returns and assembles the mailings that the client must make to the taxing agencies.

Question 66

Mickey, a calendar year taxpayer, was not required to file a Federal income tax return last year because his AGI was negative due to business losses. For this tax year, his AGI is $120,000 and his tax liability is $10,000. To avoid a penalty for tax underpayments for the current year, Mickey must make aggregate estimated tax payments of at least:

A)$10,000.
B)$9,000.
C)$1,000 (minimum amount).
D)$0.

Question 67

Lola, a calendar year taxpayer subject to a 40% marginal Federal gift tax rate, made a gift of a sculpture to Redd, valuing the property at $70,000. The IRS later valued the gift at $100,000. The applicable undervaluation penalty is:

A)$0.
B)$1,000 (minimum penalty).
C)$2,400.
D)$12,000.

Question 68

Gadsden, who is subject to a 40% marginal Federal gift tax rate, made a gift of a sculpture to Marvin, valuing the property at $150,000. The IRS later valued the gift at $400,000. The applicable undervaluation penalty is:

A)$0.
B)$20,000.
C)$25,000 (maximum penalty).
D)$40,000.

Question 69

Georgio, a calendar year taxpayer subject to a 33% marginal Federal income tax rate, claimed a Form 1040 charitable contribution deduction of $300,000 for a sculpture that the IRS later valued at $120,000. The applicable overvaluation penalty is:

A)$10,000 (maximum penalty).
B)$12,000.
C)$24,000.
D)$60,000.

Question 70

Jake, an individual calendar year taxpayer, incurred the following transactions. $\begin{array}{ll}\text { Gross receipts } && \$ 800,000 \\\text { Less: Cost of sales } && (300,000) \\\text { Net business income } && \$ 500,000\\\text { Capital gain } & \$ 30,000 \\\text { Capital loss } & \underline{(90,000)} & \underline{(60,000)} \\\text { Total income } & & \$ 440,000\end{array}$ Assuming that any error in timely reporting these amounts was inadvertent, how much omission from gross income would be required before the six-year statute of limitations would apply?

A)More than $110,000.
B)More than $132,500.
C)More than $207,500.
D)The six-year rule does not apply here.

Question 71

A tax preparer is in violation of Circular 230 if he or she:

A)Files a tax return that includes a math error.
B)Fails to inform the IRS of an error on the client's prior-year return.
C)Charges a fee to prepare an original Form 1120 equal to one-third of the taxpayer's refund due.
D)All of the above are Circular 230 violations.

Question 72

Concerning the penalty for civil tax fraud:

A)The burden of proof is on the taxpayer to establish that no fraud was committed.
B)Fraudulent behavior is more than mere negligence on the part of the taxpayer.
C)The penalty is 100% of the underpayment.
D)Fraud is defined in Code §§ 6663(b) and (f).

Question 73

The privilege of confidentiality applies to a CPA tax preparer concerning the client's information relative to:

A)Financial accounting tax accrual workpapers.
B)A tax research memo used to determine an amount reported on the tax return.
C)Building a defense against a penalty assessed for the use of a tax shelter.
D)Building a defense against a charge brought by the SEC.

Question 74

Minnie, a calendar year taxpayer, filed a return correctly showing a zero Federal income tax liability for last year, because her Form 1040 showed various deductions and credits. For this tax year, Minnie's AGI is $120,000 and her tax liability is $20,000. To avoid a penalty for the current year, Minnie must make aggregate estimated tax payments of at least:

A)$20,000.
B)$18,000.
C)$1,000 (minimum amount).
D)$0.

Question 75

A registered tax return preparer who is not also a CPA, attorney, or Enrolled Agent:

A)Can prepare returns and give tax advice.
B)Can represent the taxpayer before an IRS Appeals officer.
C)Must obtain a Preparer Tax Identification Number (PTIN).
D)Is subject only to selected Circular 230 rules.

Question 76

The tax penalty imposed on appraisers:

A)Can be as much as 200% of the appraisal fee that was charged.
B)Is waived if the taxpayer also was charged with his/her own valuation penalty.
C)Equals 25% of the appraised value of the property, with a $10,000 minimum penalty.
D)Applies if the appraiser knew that the appraisal would be used in preparing a Federal income tax return.

Question 77

Megan prepared for compensation a Federal income tax return for Joan. Joan's return included an aggressive interpretation of the rules concerning overnight business travel. Megan is not liable for a preparer penalty for taking an unreasonable tax return position if:

A)The tax reduction attributable to the disputed deduction did not exceed $5,000.
B)There was a reasonable basis for Joan's interpretation of the travel deduction rules.
C)There was substantial authority for Joan's interpretation of the travel deduction rules.
D)The IRS found that the travel deduction was frivolous, but Joan disclosed the position in an attachment to the return.

Question 78

Freddie has been assessed a preparer penalty for willful and reckless conduct. When he completed Peggy's Federal income tax return (she is in the 33% tax bracket), Freddie purposely omitted $100,000 of cash receipts that should have been reported as gross income. Freddie charged Peggy $4,000 to prepare the return. What is Freddie's preparer penalty?

A)$0, because Peggy incurred her own understatement penalty for the return.
B)$2,000
C)$4,000
D)$5,000

Question 79

Vera is audited by the IRS for three tax years. Her returns were prepared by the following parties, to each of whom Vera paid a professional fee. $$\begin{array} { l l } \text { Tax Year } & \text { Preparer } \\1 & \text { Sally (Vera's niece, a dentist) } \\2 & \text { Wesley (an Enrolled Agent) } \\3 & \text { Alex (a CPA) }\end{array}$$ Vera wants help in appearing before the IRS Revenue Agent for the audit. Which of the following statements is correct?

A)Sally may represent Vera for all tax years involved.
B)Wesley may represent Vera, but only for tax year 2.
C)Alex can represent Vera, but only for tax year 3.
D)Vera may represent herself for all tax years involved.

Question 80

Juanita, who is subject to a 40% marginal Federal gift tax rate, made a gift of a sculpture to Bianca, valuing the property at $150,000. The IRS later valued the gift at $300,000. The applicable undervaluation penalty is:

A)$24,000.
B)$12,000.
C)$10,000 (maximum penalty).
D)$0.