Question 1

The IRS who audited Mr. Kodak's 2013 Form 1040 assessed an $87,400 deficiency. If the agent believes that the entire deficiency was caused by Mr. Kodak's willful attempt to cheat the government, compute the resulting civil fraud penalty.

Accepted Answer

The civil fraud penalty for willfully attempting to cheat the government is equal to 75% of the underpayment due to fraud. Therefore, 75% of the $87,400 deficiency is $65,550.

Question 2

Mr. Braco is an enrolled agent who prepares tax returns for a living. In preparing Mr. and Mrs. Colter's Form 1040, Mr. Braco claimed a deduction based on an unreasonable legal position. Mr. Braco's compensation for the return was $3,800. What is the consequence to Mr. Braco if the IRS disallows the deduction?

Accepted Answer

The IRS can impose a penalty on tax preparers who claim deductions or credits on a tax return that have no reasonable basis. The penalty is typically 50% of the income derived (or to be derived) by the tax preparer from the preparation of the return. In this case, since Mr. Braco's compensation was $3,800, half of that amount is $1,900, which aligns with option B.

Question 3

F&D Inc. ceased operations and dissolved under state law in 2014. Mrs. Herron, a 20% shareholder, received a $490,300 liquidating distribution from F&D. This year, the IRS determined that F&D underpaid its 2013 and 2014 income tax by $967,100. How much of this deficiency can the IRS assess against Mrs. Herron?

Accepted Answer

The answer of F&D Inc. ceased operations and dissolved under...

Question 4

Mr. and Mrs. Pitt filed a joint tax return in 2013. The couple divorced in 2014. The IRS audited their 2013 return and determined that the Pitts had underpaid their tax by $38,200. Which of the following statements is true?

Accepted Answer

When a couple files a joint tax return, both parties are jointly and severally liable for the entire tax liability, including any deficiencies. This means the IRS can pursue either spouse for the full amount, regardless of their marital status at the time of the audit.

Question 5

Which of the following statements about criminal tax fraud is false?

Accepted Answer

The answer of Which of the following statements about criminal...

Question 6

Mr. and Mrs. Clyde were married for 21 years before Mrs. Clyde divorced her husband in 2013. This year, the IRS determined that the Clydes underpaid their 2013 tax by $19,650. In which case would Mrs. Clyde be relieved of liability for the underpayment under the innocent spouse rule?

Accepted Answer

The innocent spouse rule requires that the spouse seeking relief did not know and had no reason to know of the understatement of tax. None of the options provided meet the criteria for innocent spouse relief.

Question 7

The revenue agent who audited Mr. and Mrs. Wilke's 2013 Form 1040 assessed a $40,200 deficiency and concluded that $13,900 of the deficiency resulted from Mr. Wilke's deliberate disregard of the tax rules concerning business entertainment expense. The remaining deficiency resulted from various errors caused by confusing instructions on the tax forms. Compute the negligence penalty that the agent can impose.

Accepted Answer

The negligence penalty is 20% of the portion of the underpayment of tax resulting from negligence. Negligence means failure to make a reasonable attempt to comply with the tax laws. In this case, the portion of the deficiency resulting from negligence is $26,300 ($40,200 - $13,900). Therefore, the negligence penalty is $5,260 ($26,300 x 20%). However, the negligence penalty cannot exceed the portion of the deficiency resulting from negligence, which is $13,900. Therefore, the negligence penalty is $2,780 ($13,900 x 20%).

Question 8

Which of the following statements about the U.S. Tax Court is false?

Accepted Answer

Individuals cannot request a jury trial in the Tax Court. Tax Court cases are decided solely by a judge.

Question 9

The IRS assessed Ms. Tinlock a $3,050 income tax deficiency. Which of the following steps can the IRS not take to collect the deficiency?

Accepted Answer

The IRS cannot assess a tax deficiency against anyone who is not liable for the tax owed. Ms. Tinlock's children, who are over 21 years old, would not be liable for her income tax deficiency, so the IRS cannot assess the deficiency against them. The IRS can take steps A and B to collect the deficiency.

Question 10

Which of the following statements about tax fraud is true?

Accepted Answer

The answer of Which of the following statements about tax...

Question 11

Which of the following statements about a tax deficiency is true?

Accepted Answer

Statement A is true. The government will charge interest on any unpaid tax balance from the due date of the return until the date of payment, regardless of the reason for the deficiency. Statement B is false, as interest on a tax deficiency is not a deductible itemized deduction. Statement C is also false, as interest on a tax deficiency is not a deductible business expense.

Question 12

Mrs. Lui decided to contest a negligence penalty in federal court. Which of the following statements is true?

Accepted Answer

In civil cases, such as a negligence penalty contest, the burden of proof typically lies with the plaintiff (in this case, the government) to establish the defendant's (Mrs. Lui's) negligence. The standard of proof is usually a preponderance of the evidence, meaning the government must show that it is more likely than not that Mrs. Lui was negligent.

Question 13

Which of the following statements about the tax deficiency appeals process is false?

Accepted Answer

Not all litigation of tax cases must begin in the U.S. Tax Court. Taxpayers have the option to file a petition for redetermination with the IRS Office of Appeals, which can allow for a settlement or resolution prior to litigation in Tax Court.

Question 14

Which of the following statements about the tax litigation process is false?

Accepted Answer

If the government loses a tax case at the trial level, it can appeal the case to a U.S. Circuit Court of Appeals, not directly to the U.S. Supreme Court. However, if a Circuit Court of Appeals issues a decision that conflicts with a decision issued by another Circuit Court of Appeals, the Supreme Court may hear the case to resolve the conflict. Additionally, a decision in a tax case by the Supreme Court is not necessarily final as it is possible for Congress to change the underlying tax law or for the Court to overrule its own prior decision in a future case.

Question 15

Mr. and Mrs. Nestor were assessed a $51,240 income tax deficiency. Which of the following statements is false?

Accepted Answer

Statement A is false. The IRS can force the Nestors to sell their assets to raise the cash if they do not have it on hand to pay the deficiency. The IRS has the authority to levy property and assets to collect unpaid taxes.

Question 16

The revenue agent who audited Mr. Silver's 2013 Form 1040 concluded that Mr. Silver deliberately disregarded the tax rules about charitable contributions. Consequently, the agent disallowed $19,320 of Mr. Silver's contribution deduction. Mr. Silver also miscalculated his AMT in spite of his good faith effort to make the difficult calculation. Because of these two errors, the agent assessed a tax deficiency for 2013. Which of the following statements is false?

Accepted Answer

The answer of The revenue agent who audited Mr. Silver's...

Question 17

The revenue agent who audited Mr. and Mrs. Vento's Form 1040 assessed a $49,200 tax deficiency. The Ventos strongly disagree with the result of the audit. What is their first step in contesting the result?

Accepted Answer

The first step in contesting the result of an audit is to appeal the result to the regional Appeals Office of the IRS. This process allows taxpayers to dispute the findings before taking further legal action.

Question 18

Mr. Boyd is a bookkeeper for a local auto repair company. Several years ago, he began to prepare federal income tax returns for his friends and relatives and has developed this sideline into a profitable business. Which of the following statements is true?

Accepted Answer

According to the IRS, an income tax return preparer is anyone who prepares or assists in preparing federal tax returns for compensation. Since Mr. Boyd prepares returns for compensation, he is considered an income tax return preparer subject to federal penalties. In addition, under the IRS's current rules, all paid preparers must sign the returns they prepare and provide their PTIN (preparer tax identification number). Therefore, statement C is also true.

Question 19

Which of the following is not a legal obligation of an income tax return preparer?

Accepted Answer

Endorsing clients' refund checks is not a legal obligation of an income tax return preparer. However, it is important to note that a preparer who is also authorized to receive their clients' refunds may be required to endorse the check in order for the client to access their funds.

Question 20

Which of the following statements about taxpayer negligence is false?

Accepted Answer

The statement "A taxpayer who relies on the advice of a tax professional has a guaranteed defense against the negligence penalty" is false. While relying on the advice of a tax professional can provide some level of protection against the negligence penalty, it is not a guaranteed defense. The taxpayer must show that they provided the tax professional with accurate information and that the professional was competent and qualified to provide the advice given. If the advice was based on incorrect information or if the professional was not qualified, the taxpayer may still be subject to the negligence penalty.

Quiz 18: The Tax Compliance Process