Question 1

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?

Accepted Answer

For noncorporate taxpayers, the interest rate for tax assessments is the same as the rate for refunds, as determined by the IRS.

Question 2

Henrietta has hired Gracie,a CPA,to complete this year's Form 1040.Henrietta uses software to keep the books for her business.She tells Gracie that a $5,000 amount for business supplies is "close enough" to constitute the deduction.Gracie can use this estimate in completing the Form 1040.

Accepted Answer

Gracie cannot use an estimate for business expense deductions. She must have actual records or receipts to support any deductions claimed on the Form 1040.

Question 3

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

Accepted Answer

Letter rulings are generally private and confidential, but they may be disclosed in certain situations, such as during litigation or if the taxpayer agrees to their disclosure. Therefore, they are not always protected from public inspection.

Question 4

Most practitioners encourage their clients to attend an IRS office audit.

Accepted Answer

Most practitioners advise against attending an IRS office audit without representation, as it can be beneficial to have a tax professional present to navigate the process and communicate effectively with the IRS.

Question 5

Which of the following statements,if any,do not reflect the rules governing the accuracy-related penalty for negligence?

Accepted Answer

The statement that the penalty applies only to intentional tax understatements by the taxpayer is incorrect. The accuracy-related penalty for negligence can also be imposed for careless mistakes or a lack of reasonable effort in preparation of the tax return, even if there was no intentional understatement of tax liability. The other statements are accurate.

Question 6

With respect to the audit process,which statement is correct?

Accepted Answer

According to the information provided, the statement that the most common type of Federal income tax audit is the correspondence audit is correct. The other statements are either incorrect or not supported by the information given.

Question 7

Maureen,a calendar year taxpayer subject to a 35% marginal tax rate,claimed a charitable contribution deduction of $250,000 for a sculpture that the IRS later valued at $200,000.The applicable overvaluation penalty is:

Accepted Answer

The answer of Maureen,a calendar year taxpayer subject to a...

Question 8

Ron,a calendar year taxpayer subject to a 35% marginal tax rate,claimed a charitable contribution deduction of $500,000 for a sculpture that the IRS later valued at $150,000.The applicable overvaluation penalty is:

Accepted Answer

The answer of Ron,a calendar year taxpayer subject to a...

Question 9

The special tax penalty imposed on appraisers:

Accepted Answer

The special tax penalty imposed on appraisers applies if the appraiser knew that the appraisal would be used in preparing a Federal income tax return. This penalty is intended to discourage appraisers from inflating property values to benefit taxpayers who may try to claim excessive tax deductions. The penalty is equal to the greater of $1,000 or 10% of the underpayment of tax resulting from the appraisal. It can also be as much as 200% of the appraisal fee that was charged. Therefore, option A is the correct choice. Option B is incorrect because the knowledge of whether an appraisal will be used in preparing a Federal income tax return is an important consideration for appraisers, and they are expected to exercise due diligence in determining the intended use of their appraisals. Option C is incorrect because the penalty is not a fixed percentage of the appraised value of the property, but rather a percentage of the underpayment of tax resulting from the appraisal. Option D is partially correct, but incomplete, as it is only one of the possible outcomes of the penalty and not the sole criteria for determining the amount of the penalty.

Question 10

Leroy,who is subject to a 45% marginal 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:

Accepted Answer

The answer of Leroy,who is subject to a 45% marginal...

Question 11

Gloria,a calendar year taxpayer subject to a 35% marginal income tax rate,claimed a charitable contribution deduction of $800,000 for a sculpture that the IRS later valued at $100,000.The applicable overvaluation penalty is:

Accepted Answer

The overvaluation penalty is 20% of the disallowed amount. The disallowed amount is $700,000 ($800,000 claimed - $100,000 IRS value). Therefore, the penalty is 20% of $700,000, which is $140,000. However, the maximum penalty is $98,000, which is 40% of the tax underpayment due to the overvaluation ($700,000 x 35% x 40%).

Question 12

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

Accepted Answer

Decisions made by the Small Cases Division of the Tax Court are final and cannot be appealed by either the IRS or the taxpayer. This is designed to provide a quicker, less formal resolution process for smaller tax disputes.

Question 13

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

Accepted Answer

The answer of The penalty for substantial understatement of tax...

Question 14

Harold,a calendar year taxpayer subject to a 35% marginal tax rate,claimed a charitable contribution deduction of $18,000 for a sculpture that the IRS later valued at $10,000.The applicable overvaluation penalty is:

Accepted Answer

The answer of Harold,a calendar year taxpayer subject to a...

Question 15

George,a calendar year taxpayer subject to a 45% marginal gift tax rate,made a gift of a sculpture to Redd,valuing the property at $100,000.The IRS later valued the gift at $140,000.The applicable undervaluation penalty is:

Accepted Answer

The answer of George,a calendar year taxpayer subject to a...

Question 16

Max (a calendar year taxpayer)donates a painting to a local art museum (a qualified charity).The painting cost Max $2,000 ten years ago and,according to one of Max's friends (an amateur artist),is worth $50,000.On his income tax return,Max deducts $50,000 as a charitable contribution.Upon later audit by the IRS,it is determined that the true value of the painting was $30,000.Assuming that Max is subject to a 30% marginal income tax rate,his penalty for overvaluation is:

Accepted Answer

The penalty for overvaluation is 20% of the underpayment of tax attributable to the overvaluation. The overvaluation is $20,000 ($50,000 claimed - $30,000 actual). The tax underpayment is $6,000 ($20,000 x 30%). The penalty is 20% of $6,000, which is $1,200.

Question 17

With respect to the audit process,which of the following statements is incorrect?

Accepted Answer

A math error on Form 1040 does not automatically trigger an office audit; instead, the IRS typically sends a notice to the taxpayer to correct the error.

Question 18

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.

Accepted Answer

The CPA cannot simply rely on Ned's estimate of his property taxes for the current year. The CPA must make reasonable efforts to verify the accuracy of the information provided by the client or obtain supporting documentation. Therefore, the CPA cannot use Ned's estimate without further verification.

Question 19

Juanita,who is subject to a 45% marginal 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:

Accepted Answer

The answer of Juanita,who is subject to a 45% marginal...

Question 20

When a practitioner discovers an error in a client's prior return,AICPA tax ethics rules require that an amended return immediately be filed.

Accepted Answer

The answer of When a practitioner discovers an error in...

Quiz 26: Tax Practice and Ethics