Deck 17: Tax Practice and Ethics

Question 1

A negligence penalty is 20% of the underpayment attributable to negligence.

Answer 1

True

Question 2

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 2011 is not filed until October 31, 2012, when the respective divorce attorneys forced them to cooperate. The Blancos should not be subject to any Federal late-filing penalties, because of the reasonable cause exception.

Answer 2

False

Question 3

Recently, the overall Federal income tax audit rate for individual returns has been about 3%.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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 7

The IRS targets high-income individuals for an audit rate that is about double that of the general populace.

Question 8

A letter ruling is issued by the IRS at no charge.

Question 9

One of the four operating divisions of the IRS deals exclusively with manufacturing and exporting businesses.

Question 10

Neither the taxpayer nor the government can appeal a decision of the Tax Court Small Cases Division.

Question 11

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

Question 12

When the IRS issues a notice of tax due, the taxpayer has 30 days to either pay the tax or file a petition with the Tax Court. This is conveyed in the "thirty-day letter."

Question 13

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

Question 14

When a tax issue is taken to court, the burden of proof is on the taxpayer to show that the items reported on the return are correct.

Question 15

The IRS employs almost 90,000 personnel, making it one of the largest Federal agencies.

Question 16

After a tax audit, the taxpayer receives the Revenue Agent's Report as part of the "90-day letter."

Question 17

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

Question 18

Babs filed an amended return in 2011, claiming a refund relative to her 2009 tax computation. When the IRS approves the amended return, it will pay Babs interest with respect to the overpayment.

Question 19

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

Question 20

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

Question 21

In the context of civil tax fraud, the burden of proof is on the IRS to show by a "preponderance of the evidence" that the taxpayer had a specific intent to evade a tax.

Question 22

The AICPA's Statements on Standards for Tax Services must be followed its members; they are more than merely advisory.

Question 23

Yang, a calendar year taxpayer, did not file a tax return for 2005 because she honestly believed that no additional tax was due. In 2011, Yang is audited by the IRS and the agent assesses a deficiency of $17,000 for tax year 2005. Yang need not pay this deficiency, since the statute of limitations expired on April 15, 2009.

Question 24

A VITA volunteer is exempted from the Code's tax preparer penalties.

Question 25

In a criminal fraud case, the burden is on the taxpayer to show that he or she was innocent "beyond the shadow of any reasonable doubt."

Question 26

Circular 230 requires that a tax preparer be aware of changes in the tax law. Furthermore, office practices of the preparer must be up to industry standards.

Question 27

Latrelle prepares the tax return for Whitehall Corporation. Latrelle 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. The return does not make any special disclosure that the deduction is being claimed. Whitehall paid Latrelle a fee of $3,000 for preparing the Form 1120. Latrelle will be assessed a preparer penalty of $1,000 for taking an unreasonable position on the Whitehall return.

Question 28

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

Question 29

A tax preparer cannot disclose to a mortgage banker the client's income level, or other information acquired by preparing the return, without the client's permission.

Question 30

Circular 230 prohibits a tax preparer from charging an unconscionable fee for his/her services.

Question 31

Because he undervalued property that he transferred by gift, Dan owes additional gift taxes of $8,000. The penalty for undervaluation does not apply in this situation, because the tax understatement was too small.

Question 32

A CPA and his/her client hold a privilege of confidentiality from the IRS, as to their discussions about completing a tax return.

Question 33

Jenny prepared Steve's income tax returns for no compensation for 2008 and 2009. Jenny is Steve's mother. In 2011, the IRS notifies Steve that it will audit his returns for 2007-2009. If Steve so desires, Jenny may represent him during the audit of all three returns.

Question 34

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

Question 35

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

Question 36

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 37

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 38

Circular 230 applies to all tax practitioners. This includes attorneys, CPAs, and enrolled agents, even though each of the groups has its own code of conduct.

Question 39

The Statements on Standards for Tax Services apply to members of the AICPA.

Question 40

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

Question 41

The Chief Counsel of the IRS is appointed by the:

A) Secretary of the Treasury Department.
B) U. S. Senate.
C) U. S. House of Representatives.
D) U. S. President.
E) American Bar Association President.

Question 42

Ming (a calendar year taxpayer) donates a painting to a local art museum (a qualified charity). The painting cost Ming $2,000 ten years ago and, according to one of Ming's friends (an amateur artist), is worth $40,000. On his income tax return, Ming 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 Ming is subject to a 30% marginal Federal income tax rate, his penalty for overvaluation is:

A) $5,000.
B) $2,000.
C) $1,000.
D) $0.
E) $10,000 (minimum penalty).

Question 43

When a "prompt assessment" of the tax liability is requested, the taxpayer essentially is volunteering for an IRS audit of the tax return.

Question 44

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 is imposed only on the part of the deficiency attributable to negligence.
C) The penalty applies only to intentional tax understatements by the taxpayer.
D) The penalty is waived if the taxpayer uses Form 8275 to disclose a return position that is reasonable though contrary to the IRS position.

Question 45

Maureen, a calendar year taxpayer subject to a 35% marginal tax rate, claimed a Form 1040 charitable contribution deduction of $250,000 for a sculpture that the IRS later valued at $200,000. The applicable overvaluation penalty is:

A) $17,500.
B) $14,000.
C) $3,500.
D) $0.

Question 46

Faye, a CPA, is preparing Judith's tax return. Before computing Judith's deduction for business supplies, Faye must examine Judith's records in support of the deducted amount.

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

Which of the following statements is incorrect as to the conduct of IRS income tax audits?

A) Only the Appeals Division of the IRS has the authority to settle tax disputes based on the hazards of litigation.
B) The IRS publishes the factors its computers use for audit selection purposes annually in the Commissioner's Report.
C) For a Form 1040 that is filed on April 11, 2012, if the taxpayer has not received an audit notification from the IRS by the end of 2012, the return may still be audited.
D) Most IRS examinations of Forms 1040 are conducted solely through the mail.

Question 49

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.

Question 50

In preparing a tax return, a CPA should verify "to the penny" every item of information submitted by a client.

Question 51

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

A) They are issued by the Secretary of the Treasury Department.
B) Some letter rulings are of such importance and general interest that they are later published (in anonymous form) as Revenue Rulings.
C) Letter rulings are private and can be seen only by the taxpayer who requested the ruling.
D) Letter rulings can benefit both taxpayers and the IRS.

Question 52

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

Question 53

Ron, a calendar year taxpayer subject to a 35% marginal tax rate, claimed a Form 1040 charitable contribution deduction of $250,000 for a sculpture that the IRS later valued at $150,000. The applicable overvaluation penalty is:

A) $0.
B) $7,000.
C) $10,000 (maximum penalty).
D) $14,000.

Question 54

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 the above statements are correct.
E) None of the above statements are correct.

Question 55

Which of the following statements is correct as to the conduct of IRS income tax audits?

A) Office audits are conducted at the office of the IRS.
B) The most common type of Federal income tax audit is the field audit.
C) An office audit typically is used for a business taxpayer.
D) A correspondence audit usually is concluded after a meeting with the taxpayer at the IRS auditor's office.

Question 56

Harold, a calendar year taxpayer subject to a 35% marginal tax rate, claimed a Form 1040 charitable contribution deduction of $20,000 for a sculpture that the IRS later valued at $10,000. The applicable overvaluation penalty is:

A) $10,000.
B) $7,000.
C) $3,500.
D) $0.

Question 57

Gloria, a calendar year taxpayer subject to a 35% marginal income tax rate, claimed a Form 1040 charitable contribution deduction of $800,000 for a sculpture that the IRS later valued at $100,000. The applicable overvaluation penalty is:

A) $245,000.
B) $98,000.
C) $49,000.
D) $10,000 (maximum penalty).

Question 58

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

Question 59

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 60

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) The rate of interest for assessments is one percentage point lower than the rate of interest for refunds.
D) The IRS adjusts the rate of interest quarterly.

Question 61

Freddie has been assessed a preparer penalty for willful and reckless conduct. When he completed Peggy's Federal income tax return (who is in the 35% tax bracket), Freddie purposely omitted $100,000 of cash receipts that should have been reported as gross income. Freddie charged Peggy $6,000 to prepare the return. What is Freddie's preparer penalty?

A) $0, because Peggy incurred her own understatement penalty for the return.
B) $3,000.
C) $5,000.
D) $17,500.

Question 62

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:

A) $27,000.
B) $13,500.
C) $10,000 (maximum penalty).
D) $0.

Question 63

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

A) An individual must make estimated payments if his or her balance due for the Federal income tax for the year will exceed $1,000.
B) The due dates of the payments for a calendar-year C corporation are March, June, September, and December 15.
C) A C corporation must make estimated payments if its Federal income tax liability for the year will exceed $250.
D) A trust is not required to make estimated payments.

Question 64

The Statements on Standards for Tax Services are issued by the:

A) IRS.
B) AICPA.
C) ABA.
D) SEC.

Question 65

Vera is audited by the IRS for several tax years. Her returns were prepared by the following parties. Which of the following statements is correct?

A) Sally may represent Vera for tax year 1. Such representation may extend through the Appeals Division of the IRS.
B) Wesley may represent Vera for all tax years under audit.
C) Alex can only represent Vera for tax year 3.
D) Vera may represent herself for all tax years involved.

Question 66

Jake, an individual calendar year taxpayer, incurred the following transactions. 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 $207,500.
D) The six-year rule does not apply here.

Question 67

A tax preparer is in violation of Circular 230 if he or she:

A) Files a tax return that includes a math error.
B) Charges a fee to prepare an original Form 1120 equal to one-third of the taxpayer's refund due.
C) Fails to inform the IRS of an error on the client's prior-year return.
D) All of the above are Circular 230 violations.

Question 68

Mickey, a calendar year taxpayer, was not required to file a 2010 Federal income tax return. During 2011, his AGI is $120,000 and his tax liability is $20,000. To avoid a penalty for tax underpayments for 2011, Mickey must make aggregate estimated tax payments of at least:

A) $0.
B) $1,000 (minimum amount).
C) $18,000.
D) $20,000.

Question 69

Mickey, a calendar year taxpayer, filed a return correctly showing no Federal income tax liability for 2010. During 2011, his AGI is $120,000 and his tax liability is $20,000. To avoid a penalty for 2011, Mickey must make aggregate estimated tax payments of at least:

A) $0.
B) $1,000 (minimum amount).
C) $18,000.
D) $20,000.

Question 70

Concerning the penalty for civil tax fraud:

A) Fraudulent behavior is more than mere negligence on the part of the taxpayer.
B) The burden of proof to establish the penalty is on the government.
C) The penalty is 100% of the underpayment.
D) Fraud is defined in Code §§ 6663(b) and (f).

Question 71

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) Operate the "Tax Nerd's Blog" on the Internet.
C) Charge a $5,000 fee to prepare a Form 1040EZ.
D) Avoid signing a tax return that is likely to be audited.

Question 72

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:

A) $0.
B) $22,500.
C) $25,000 (maximum penalty).
D) $45,000.

Question 73

Megan prepared for compensation a Federal income tax return for Joan. Joan's return included an aggressive interpretation of the rules concerning overnight business travel. Megan is not liable for a preparer penalty for taking an unreasonable tax return position if:

A) The tax reduction attributable to the disputed deduction did not exceed $5,000.
B) There was a reasonable basis for Joan's interpretation of the travel deduction rules.
C) There was substantial authority for Joan's interpretation of the travel deduction rules.
D) The IRS found that the travel deduction was frivolous, but Joan disclosed the position in an attachment to the return.

Question 74

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:

A) $7,200.
B) $3,600.
C) $1,000 (minimum penalty).
D) $0.

Question 75

Roger prepared for compensation a Federal income tax return for Mona. Mona's return included an aggressive interpretation of the rules concerning overnight business travel. Roger is not liable for a preparer penalty for taking an unreasonable tax return position if:

A) The tax reduction attributable to the disputed deduction did not exceed $5,000.
B) Mona is assessed her own penalty for an understatement of tax due to disregard of IRS rules.
C) There was a reasonable basis for Mona's interpretation of the travel deduction rules, and Mona disclosed the position in an attachment to the return.
D) The IRS found that the travel deduction was frivolous, but Mona disclosed the position in an attachment to the return.

Question 76

The rules of Circular 230 need not be followed by which of the following paid tax preparers?

A) A CPA.
B) A Wal-Mart cashier who e-files 15 tax returns for her paying clients per filing season.
C) An enrolled agent.
D) All of the above are subject to the Circular 230 rules.

Question 77

Which of the following is subject to tax return preparer penalties?

A) Lizzie, the firm's administrative assistant, makes copies of returns and assembles the mailings that the client must make to the taxing agencies.
B) Meredith is the director of Federal taxes for a C corporation.
C) Sammy is a volunteer who prepares returns at the retirement home under the IRS Tax Counseling for the Elderly program.
D) Abbie prepares her mother's tax returns for $50 a year. A CPA, Abbie would charge a client $750 for completing a similar return.

Question 78

The privilege of confidentiality applies to a CPA tax preparer concerning the client's information relative to:

A) Financial accounting tax accrual workpapers.
B) A tax research memo used to determine an amount reported on the tax return.
C) Building a defense against a penalty assessed for the use of a tax shelter.
D) Building a defense against a charge brought by the SEC.

Question 79

The special tax penalty imposed on appraisers:

A) Is waived if the taxpayer also was charged with his/her own valuation penalty.
B) Applies if the appraiser knew that the appraisal would be used in preparing a Federal income tax return.
C) Equals 10% of the appraised value of the property, with a $5,000 minimum penalty.
D) Can be as much as 200% of the appraisal fee that was charged.

Question 80

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