Question 1

An individual who claims a deduction for qualified business income under § 199A

Accepted Answer

The deduction for qualified business income under § 199A is a complex calculation, and the IRS has stated that it will be scrutinizing returns that claim this deduction more closely. As a result, individuals who claim this deduction are more likely to have a penalty imposed for an error on the return than someone who does not claim this deduction.

Question 2

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:

Accepted Answer

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

Question 3

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:

Accepted Answer

The answer of Juanita, who is subject to a 40%...

Question 4

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

Accepted Answer

The accuracy-related penalty for negligence is not applied simply because the taxpayer takes a return position that is contrary to a court decision. The penalty is applied when the taxpayer fails to exercise reasonable care in preparing a tax return or in determining the tax liability, which results in an underpayment of tax.

Question 5

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:

Accepted Answer

Mickey is required to pay estimated taxes if the amount due is $1,000 or more after subtracting withholding and refundable tax credits. He has not made any estimated tax payments for the year and his tax liability is $10,000. To avoid a penalty for underpayment of estimated tax, he must either pay 100% of the previous year's tax liability (which was $0 for him) or pay 90% of the current year's tax liability, which is $9,000 (90% of $10,000). Therefore, Mickey must make aggregate estimated tax payments of at least $9,000 to avoid a penalty for underpayment of estimated tax.

Question 6

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

The answer of Which of the following statements correctly reflects...

Question 7

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:

Accepted Answer

Since Minnie had a zero Federal income tax liability in the previous year, she is not required to make any estimated tax payments for the current year to avoid a penalty, regardless of her current year's income or tax liability.

Question 8

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

Accepted Answer

The answer of Concerning a taxpayer's requirement to make quarterly...

Question 9

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:

Accepted Answer

The applicable overvaluation penalty is 40% of the underpayment of tax resulting from the overvaluation, subject to a maximum penalty of 20% of the amount overvalued. In this case, the underpayment of tax resulting from the overvaluation is $120,000 x 32% = $38,400. The applicable penalty is 40% x $38,400 = $15,360, which exceeds the maximum penalty of $60,000. Therefore, the maximum penalty of $60,000 applies, which is 20% of the amount overvalued ($300,000 - $120,000 = $180,000). The answer is thus C, $23,040.

Question 10

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

Accepted Answer

The penalty for substantial understatement of tax liability does not apply if the taxpayer has substantial authority for the treatment taken on the tax return, the relevant facts affecting the treatment are adequately disclosed in the return or on Form 8275, or the IRS failed to meet its burden of proof in showing the taxpayer's error.

Question 11

On July 1, Hernandez files a refund claim with the IRS, and the IRS agrees with his computations. The IRS can avoid paying any interest to Hernandez if:

Accepted Answer

The IRS can avoid paying interest if they issue the refund within 45 days of the claim being filed. Since Hernandez filed on July 1, paying by August 10 is within this 45-day window.

Question 12

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:

Accepted Answer

The answer of Gadsden, who is subject to a 40%...

Question 13

James can state "the tax law confused me" to avoid a tax penalty for:

Accepted Answer

The answer of James can state "the tax law confused...

Question 14

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:

Accepted Answer

The overvaluation penalty does not apply because the difference between the claimed value ($30,000) and the IRS-determined value ($10,000) does not exceed 200% of the correct amount, nor does the penalty amount meet the $5,000 threshold for corporations.

Question 15

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 24% marginal Federal income tax rate, his penalty for overvaluation is:

Accepted Answer

Juarez's deduction was based on an overvaluation of the painting. However, the penalty for overvaluation applies only if the claimed value is 150% or more of the correct value. Juarez claimed $40,000, which is not 150% of the true value of $30,000. Therefore, no penalty applies.

Question 16

The tax penalty imposed on appraisers:

Accepted Answer

The tax penalty imposed on appraisers applies if the appraiser knew that the appraisal would be used in preparing a Federal income tax return. The penalty is not as high as mentioned in option A or C. Option B is incorrect as the penalty is not waived even if the taxpayer is charged with their own valuation penalty. Therefore, option D is the correct answer.

Question 17

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:

Accepted Answer

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

Question 18

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:

Accepted Answer

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

Question 19

Concerning the penalty for civil tax fraud:

Accepted Answer

Civil tax fraud requires more than mere negligence on the part of the taxpayer. It involves intentional and deliberate actions to evade taxes. The penalty for civil tax fraud can be up to 75% of the underpayment. The burden of proof in such cases is on the IRS to establish that fraud was committed. Fraud is defined in Code § 6663.

Question 20

An individual might be incarcerated upon a conviction for:

Accepted Answer

Committing criminal tax fraud is a serious offense that can result in incarceration. Using an improper appraisal or having a tax refund claim denied by the Tax Court would not typically result in incarceration. Failure to pay withholdings from employees for one pay period would likely result in fines and penalties, but not incarceration.

Quiz 26: Tax Practice and Ethics