Question 1

A six-year statute of limitation rule applies if the taxpayer
A)understates taxable income by 25%.
B)understates AGI by 25%.
C)understates gross income by 25%.
D)none of the above

Accepted Answer

According to the IRS, if a taxpayer understates their gross income by 25% or more, the statute of limitations for the IRS to assess additional tax is extended from three years to six years. This means that the IRS has six years from the time a return is filed to assess additional tax if gross income is understated by 25% or more.

Question 2

What is the requirement for a substantial understatement of tax for individuals?
A)The understatement exceeds 10% of the tax required to be shown on the return.
B)The understatement exceeds $5,000.
C)The understatement exceeds the lesser of 10% of the tax required to be shown on the return or $5,000.
D)The understatement exceeds the greater of 10% of the tax required to be shown on the return or $5,000.

Accepted Answer

A substantial understatement of tax for individuals occurs when the understatement exceeds the greater of 10% of the tax required to be shown on the return or $5,000.

Question 3

The IRS audited the tax returns of Dan Jackson, a gifted painter. The IRS contends for several years, Jackson received $500,000 for his paintings, but reported non cash payments of $75,000. Jackson attributed the shortfall to his receipt of cash at art fairs and street fairs. He allegedly concealed the cash payments in separate bank accounts unbeknownst to his CPA. What tax compliance issues regarding the alleged underreporting are pertinent to the CPA?

Accepted Answer

The answer of The IRS audited the tax returns of...

Question 4

The statute of limitations is unlimited for a tax return that is never filed.

Accepted Answer

For tax returns that are never filed, the IRS can technically pursue taxes owed indefinitely because the statute of limitations for assessing and collecting taxes does not begin until a return is filed.

Question 5

Identify which of the following statements is true.
A)An individual taxpayer may be subject to a penalty for underpayment of estimated taxes if his balance of tax due when he files is $500.
B)A penalty for substantial understatement will potentially be assessed on an individual if the underpayment of tax exceeds the greater of 15% of the tax shown on the return or $5,000.
C)Substantial authority exists for a position that is supported by a decision rendered by the Court of Appeals for the taxpayer's own circuit.
D)All of the above are true.

Accepted Answer

Substantial authority for a tax position can indeed be established by a decision from the Court of Appeals for the taxpayer's circuit, reflecting the importance of circuit court rulings in tax law interpretation.

Question 6

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.

Accepted Answer

The general statute of limitations for federal tax returns is 3 years from the date the return was filed or the due date of the return, whichever is later.

Question 7

You are preparing the tax return for Agre Corporation, which has sales of $50 million. Agre made a $2 million expenditure for which the appropriate tax treatment, deductible or capitalizable, is a gray area. The corporation's Chief Financial Officer wants you to deduct the expenditure. What tax compliance issues should you consider in deciding whether to deduct the expenditure?

Accepted Answer

The answer of You are preparing the tax return for...

Question 8

What is the difference between the burden of proof for civil and criminal fraud?

Accepted Answer

The answer of What is the difference between the burden...

Question 9

Steve files his return on April 1 and pays the entire amount of tax for the year at that time, $5,000. He is audited and pays the deficiency of $1,500 two years later. The maximum amount Steve may file a claim for refund for eighteen months later is
A)$6,500.
B)$5,000.
C)$1,500.
D)some other amount.

Accepted Answer

According to the statute of limitations, a taxpayer has two years from the date of payment to file a claim for refund. In this case, Steve paid the deficiency of $1,500 two years after filing his return and paying the full tax amount. Therefore, the maximum amount Steve may file a claim for refund for eighteen months later (which is within the statute of limitations) is $1,500.

Question 10

Identify which of the following statements is false.
A)If fraud is asserted in a tax transaction, the burden of proof falls on the IRS.
B)The civil fraud penalty consists of 75% of the tax underpayment attributable to fraud plus 25% of the interest payable on the portion of the underpayment resulting from the fraud.
C)The government must prove its case "beyond a reasonable doubt" in order for the court or jury to convict a taxpayer of criminal fraud.
D)The fraud penalty can be imposed with respect to income, gift, and estate tax returns.

Accepted Answer

The civil fraud penalty is generally 75% of the underpayment of tax attributable to fraud. There is no additional 25% penalty on the interest payable on the underpayment.

Question 11

Linda's individual tax return for the current year is subject to an IRS audit. The IRS assesses a $10,000 deficiency, $4,000 of which is due to Linda's negligence. What is Linda's negligence penalty?

Accepted Answer

The answer of Linda's individual tax return for the current...

Question 12

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)The statute of limitations limits the time during which a taxpayer may claim a refund of an overpayment of tax.
C)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.
D)All of the above are true.

Accepted Answer

The statute of limitations indeed limits the time during which a taxpayer may claim a refund of an overpayment of tax, typically within three years from the time the return was filed or two years from the time the tax was paid, whichever is later. Choices A and C contain inaccuracies regarding the duration of the statute of limitations for tax redeterminations and the specific conditions under which it can be extended.

Question 13

Richard recently won a popular television reality show and its one million dollar prize. However, he omitted the prize money from his tax return for the year. What penalties can the IRS assess?

Accepted Answer

The answer of Richard recently won a popular television reality...

Question 14

How does a taxpayer determine if "substantial authority" exists for a tax treatment the taxpayer desires to adopt?

Accepted Answer

The answer of How does a taxpayer determine if "substantial...

Question 15

Terry files his return on March 31. The return shows taxes of $6,000, and Terry pays this entire amount when he files his return. By what time must he file a claim of refund?
A)the later of two years from the return filing or three years from the date the tax is paid
B)the later of three years from the return due date or two years from the date the tax is paid
C)two years from the payment of tax date, if the IRS mails a notice of deficiency in the third year following the due date of the return
D)four years from the payment of tax date, if the IRS mails a notice of deficiency

Accepted Answer

Terry has paid the entire amount of taxes owed when he filed his return. Therefore, he has two options for claiming a refund: (1) the later of three years from the return due date or (2) two years from the date the tax is paid. Option (1) does not apply since Terry filed his return on March 31, so the return due date was April 15 of that year, which was less than three years ago. Option (2) is applicable since Terry paid the taxes when he filed his return, which was less than two years ago. Therefore, Terry must file a claim of refund by the later of three years from the return due date or two years from the date the tax is paid, which is the answer in choice (B).

Question 16

Identify which of the following statements is true.
A)If a taxpayer fails to file a return, the statute of limitations is extended to 10 years.
B)If a couple files a joint return but only one spouse had income, only the spouse with income is responsible for paying any tax due.
C)Joint and several liability means that each spouse is potentially liable for the full amount of tax due.
D)All of the above are false.

Accepted Answer

Joint and several liability means that each spouse is potentially liable for the full amount of tax due. The other statements are false. The statute of limitations is only extended to 6 years if a taxpayer fails to file a return, and both spouses are responsible for any tax due on a joint return, regardless of which spouse had income.

Question 17

Pablo, a bachelor, owes $80,000 of additional taxes, all due to fraud. What is the amount of the civil fraud penalty? What criminal fraud penalty might be imposed under Sec. 7201?

Accepted Answer

The answer of Pablo, a bachelor, owes $80,000 of additional...

Question 18

On April 15, 2018, a married couple filed their joint 2017 tax return showing gross income of $120,000. Their return was prepared by a professional tax preparer who mistakenly omitted $45,000 of income, which the preparer in good faith considered to be nontaxable. No information with regard to this omitted income was disclosed on the return or attached statements. By what date must the IRS assert a notice of deficiency before the statute of limitations expires?
A)April 15, 2024
B)December 31, 2018
C)April 15, 2021
D)December 31, 2024

Accepted Answer

The IRS typically has three years from the date a tax return is filed to audit the return and assert a notice of deficiency. However, if a taxpayer omits more than 25% of their gross income on their tax return, the statute of limitations is extended to six years. In this case, the couple omitted $45,000 out of $120,000, which is more than 25% of their gross income. Therefore, the IRS has until April 15, 2024, to assert a notice of deficiency, which is six years from the original filing deadline of April 15, 2018.

Question 19

Latka Novatny gave you the following information to use in the preparation of his current year's tax return:  In addition, he received $40,000 from a relative for whom he had worked previously. You have researched whether the $40,000 should be classified as a gift or compensation and are confident that substantial authority exists for classifying it as a gift. What tax compliance issues should you consider in deciding whether to report or exclude the $40,000?

Accepted Answer

The answer of Latka Novatny gave you the following information...

Question 20

The IRS audits Kiara's current-year individual return and determines that, among other errors, she negligently did not report dividend income of $10,000. The deficiency with respect to the dividends is $2,800. The IRS argues for an additional $12,000 deficiency for various other errors that do not involve negligence. What is Kiara's negligence penalty for the $14,800 in deficiencies?

Accepted Answer

The answer of The IRS audits Kiara's current-year individual return...

Quiz 15: Administrative Procedures

A six-year statute of limitation rule applies if the taxpayer

What is the requirement for a substantial understatement of tax for individuals?

The statute of limitations is unlimited for a tax return that is never filed.

Identify which of the following statements is true.

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.

What is the difference between the burden of proof for civil and criminal fraud?

Steve files his return on April 1 and pays the entire amount of tax for the year at that time, $5,000. He is audited and pays the deficiency of $1,500 two years later. The maximum amount Steve may file a claim for refund for eighteen months later is

Identify which of the following statements is false.

Linda's individual tax return for the current year is subject to an IRS audit. The IRS assesses a $10,000 deficiency, $4,000 of which is due to Linda's negligence. What is Linda's negligence penalty?

Identify which of the following statements is true.

Richard recently won a popular television reality show and its one million dollar prize. However, he omitted the prize money from his tax return for the year. What penalties can the IRS assess?

How does a taxpayer determine if "substantial authority" exists for a tax treatment the taxpayer desires to adopt?

Terry files his return on March 31. The return shows taxes of $6,000, and Terry pays this entire amount when he files his return. By what time must he file a claim of refund?

Identify which of the following statements is true.

Pablo, a bachelor, owes $80,000 of additional taxes, all due to fraud. What is the amount of the civil fraud penalty? What criminal fraud penalty might be imposed under Sec. 7201?