Deck 26: Tax Practice and Ethics

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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 5

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.

Question 6

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 "90-day letter."

Question 7

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 2018 is not filed until October 31, 2019, 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 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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 13

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

Question 14

The IRS employs about 75,000 personnel, making it one of the largest Federal agencies.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

Taxpayer's must pay a significant fee to have a letter ruling issued by the IRS.

Question 21

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 22

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

Question 23

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 24

The Statements on Standards for Tax Services (SSTS) apply to members of the AICPA, a state bar association, and all enrolled agents.

Question 25

Yang, a calendar year taxpayer, did not file a tax return for 2010 because she honestly believed that no additional tax was due. In 2018, Yang is audited by the IRS and the agent assesses a deficiency of $17,000 for 2010. Yang need not pay this deficiency, since the three-year statute of limitations expired on April 15, 2014, meaning that the IRS no longer can adjust Yang's tax for the 2010 tax year.

Question 26

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

Question 27

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

Question 28

Latrelle, who prepares the tax return for Whitehall Corporation 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 29

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

Question 30

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

Question 31

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 32

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 33

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 34

Jenny prepared Steve's income tax returns for no compensation for 2017 and 2018. She is Steve's mother. In 2020, the IRS notifies Steve that it will audit his returns for 2017 and 2018. Jenny cannot represent Steve during the audit of the returns, because she is not a registered tax return preparer.

Question 35

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 36

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

Question 37

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

Question 38

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 39

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 40

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 41

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 42

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 43

An individual might be incarcerated upon a conviction for:

A) Using an improper appraisal to compute a tax deduction.
B) Filing a tax refund claim that the Tax Court denies.
C) Committing criminal tax fraud.
D) Failure to pay to the Treasury one pay period's withholdings from employees.

Question 44

Juarez (a calendar year taxpayer) donates a painting to a local art museum (a qualified charity). The painting cost Juarez $2,000 10 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 24% marginal Federal income tax rate, his penalty for overvaluation is:

A) $10,000 (minimum penalty).
B) $5,000.
C) $2,400.
D) $2,000.
E) $0.

Question 45

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 46

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 but contrary to the IRS position.

Question 47

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 48

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 49

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 that 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 50

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 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

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 these statements are correct.

Question 53

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 54

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

Question 55

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 56

This official does not report directly to the IRS Commissioner.

A) Treasury Secretary.
B) National Taxpayer Advocate.
C) Director of the Whistleblower Office.
D) Chief Appeals Officer.

Question 57

Malik, Inc., a calendar year C corporation subject to a 21% 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) $4,200.
C) $10,000 (minimum penalty).
D) $20,000.

Question 58

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

Question 59

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 because political expenditures are not deductible.

Question 60

The National Taxpayer Advocate reports to the:

A) Treasury Secretary.
B) IRS Commissioner.
C) IRS Director of Compliance Analytics.
D) IRS Director of Professional Responsibility.

Question 61

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) A taxpayer discovers an inadvertent overstatement of deductions equal to 30% of gross income.
D) A taxpayer inadvertently omits an amount of gross income equal to 30% of the gross income stated on the return.

Question 62

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 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

Young-Eagle files her 2018 Form 1040 on July 1, 2019. The Federal tax statute of limitations for this return expires on:

A) April 15, 2022.
B) July 1, 2022.
C) July 1, 2026.
D) Never for a late-filed return.

Question 65

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 66

Georgio, a calendar year taxpayer subject to a 32% 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) $-0-
B) $10,000 (maximu penalty)
C) $11,520
D) $23,040
E) $60,000

Question 67

The tax law requires that all paid tax preparers:

A) Have a current Preparer Tax Identification Number (PTIN).
B) Hold a bachelor's degree.
C) Hold a bachelor's degree in business or economics.
D) Complete at least 20 hours or continuing education courses every year.

Question 68

Mickey, a calendar year taxpayer, was not required to file a Federal income tax return last year because his AGI was very low. 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 69

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 70

AICPA SSTS #1 requires that a client's tax return position:

A) Have a realistic possibility of being sustained if challenged by the Treasury or in the courts.
B) Be supported by substantial authority.
C) Agree with all pertinent IRS interpretations of the tax law.
D) Follow all interpretations of the tax law that were reflected on the immediately prior tax year's return.

Question 71

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.

Question 72

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 73

Jake, an individual calendar year taxpayer, incurred the following transactions. $\begin{array} { l } \text {Gross receipts }&&\$800,000\\ \text { Less: Cost of sales}&&(300,000)\\ \text {Net business income }&&\$500,000\\ \text {Capital gain }&\$30,000\\ \text {Capital loss }&(90,000)&(60,000)\\ \text {Total income }&&\$440,000\\\end{array}$
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 $200,000.
D) More than $207,500.
E) The six-year rule does not apply here.

Question 74

Lisa, a calendar year taxpayer subject to a 32% 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) $5,760.
C) $10,000 (maximum penalty).
D) $11,520.

Question 75

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 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 or her own valuation penalty.
C) Equals 25% of the appraised value of the property with a $10,000 minimum penalty.
D) Applies only if the appraiser knew that the appraisal would be used in preparing a Federal income tax return.

Question 77

Young-Eagle files her 2018 Form 1040 on March 1, 2019. The Federal tax statute of limitations for this return expires on:

A) March 1, 2022.
B) April 15, 2022.
C) April 15, 2025.
D) April 15, 2026.

Question 78

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 79

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 these are Circular 230 violations.

Question 80

Michelle, a calendar year taxpayer subject to a 24% 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) $3,600.
C) $7,200.
D) $18,000.