Deck 26: Tax Practice and Ethics

Question 1

A "field audit" takes place at the headquarters of the corporate taxpayer.

Answer 1

True

Question 2

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

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

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

Question 5

The IRS is one of the largest of all Federal agencies.

Question 6

As a result of undervaluing property transferred by gift,Dan owes additional gift taxes of $3,000.The penalty for undervaluation does not apply in this situation,because the tax understatement was too small.

Question 7

The tax professional can render valuable services to the client in consultation over the strategy and tactics of dealing with a Federal tax audit.

Question 8

Only the government can appeal a decision of the Tax Court Small Cases Division.

Question 9

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

Question 10

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 11

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 2010 is not filed until October 31,2011,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.

Question 12

The IRS responds to a taxpayer request concerning the tax treatment of a proposed transaction in a Tax Interpretation.

Question 13

No overvaluation penalty is incurred by an individual until the misstatement would cause a tax underpayment of at least $10,000.

Question 14

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

Question 15

IRS letter rulings seldom are revised or revoked.

Question 16

The IRS uses document matching programs to keep the audit rate low.

Question 17

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 substantiated.

Question 18

Babs filed an amended return in 2010,claiming a refund relative to her 2008 tax computation.When the IRS approves the amended return,it will pay Babs interest with respect to the overpayment.

Question 19

After a tax audit,the taxpayer receives the Revenue Agent's Report and a "30-day letter."

Question 20

A letter ruling can be used to establish the level of reasonable employee compensation.

Question 21

Under Circular 230,a return must be signed as a preparer,even if it was completed for no charge as a favor to a friend or relative.

Question 22

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 23

Jenny prepared Steve's income tax returns for no compensation for 2007 and 2008.Jenny is Steve's cousin.In 2010,the IRS notifies Steve that it will audit his returns for 2006-2008.If Steve so desires,Jenny may represent him during the audit of all three returns.

Question 24

A CPA cannot take a tax return position for a client that is contrary to current IRS interpretations of the law.

Question 25

The AICPA's Statements on Standards for Tax Services are advisory,not mandatory,on its members.

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

Faye,a CPA,is preparing Judith's tax return.One item on the return requires a Yes or No answer.Faye can avoid checking either box if the effect is to increase Judith's tax liability.

Question 28

Circular 230 applies to all tax practitioners other than attorneys,CPAs,and enrolled agents,who are exempt because this group have their own codes of conduct.

Question 29

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

Question 30

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 31

Debbie,a calendar year taxpayer,did not file a tax return for 2004 because she honestly believed that no additional tax was due.In 2010,Debbie is audited by the IRS and the agent assesses a deficiency of $7,000 for tax year 2004.Debbie need not pay this deficiency,since the statute of limitations expired on April 15,2008.

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

In the context of civil 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 37

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 38

If a taxpayer understates her cash sales by 30% of the adjusted gross income on the return,the statute of limitations on assessments is increased to six years.

Question 39

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

Question 40

Circular 230 prohibits a tax preparer from charging a contingent fee for preparing an original Form 1040.

Question 41

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)For noncorporate taxpayers,the rate of interest for assessments is the same as the rate of interest for refunds.
D)The IRS semiannually adjusts the rate of interest.

Question 42

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 43

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

A)In certain situations,the IRS will not issue a ruling.
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 benefit both taxpayers and the IRS.
D)Letter rulings are private and are not open to public inspection.

Question 44

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

Question 45

Which of the following statements,if any,do 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 46

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

A)Office audits are conducted at the office of the taxpayer.
B)The most common type of Federal income tax audit is the correspondence 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 47

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:

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

Question 48

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:

A)$10,000 (maximum penalty).
B)$24,500.
C)$49,000.
D)$122,500.

Question 49

The special tax penalty imposed on appraisers:

A)Applies if the appraiser knew that the appraisal would be used in preparing a Federal income tax return.
B)Does not apply if the appraiser did not know that the appraisal would be used in preparing a Federal income tax return.
C)Equals 10% of the appraised value of the property.
D)Can be as much as 200% of the appraisal fee that was charged.

Question 50

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 51

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:

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

Question 52

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 53

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 54

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:

A)$0.
B)$560.
C)$2,800.
D)$3,500.

Question 55

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 56

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:

A)$0.
B)$1,200.
C)$2,400.
D)$5,000 (maximum penalty).
E)$6,000.

Question 57

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

A)Only the Appeals Division of the IRS has the authority to settle tax disputes based on the hazards of litigation.
B)The IRS does not publish the factors it uses for audit selection purposes annually in the Commissioner's Report.
C)For a Form 1040 that is filed on April 11,2011,if the taxpayer has not received an audit notification from the IRS by the end of 2011,the return may still be audited.
D)If the taxpayer makes a math error on the Form 1040,an office audit automatically is triggered.

Question 58

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 59

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 60

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 61

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 62

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 discovers an inadvertent overstatement of deductions equal to 5% of gross income.
D)Taxpayer inadvertently omits an amount of gross income in excess of 25% of the gross income stated on the return.

Question 63

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

Question 64

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

A)Files a tax return that includes a math error.
B)Does not sign the tax return that is prepared as a favor for a relative.
C)Charges a fee to prepare an original Form 1120 equal to one-third of the taxpayer's refund due.
D)Fails to inform the IRS of an error on the client's prior-year return.
E)All of the above are Circular 230 violations.

Question 65

The IRS is one of the largest Federal agencies,employing at least ____________________ people throughout the year.

Question 66

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 67

According to the IRS,the annual "Tax Gap" totals about $______________________ billion.

Question 68

Anthony,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)The six-year rule cannot apply here.
B)More than $115,000.
C)More than $137,500.
D)More than $212,500.

Question 69

Concerning the penalty for civil fraud applicable to taxpayers:

A)Fraud is defined in Code §§ 6663(b)and (f).
B)The burden of proof to establish the penalty is on the government.
C)The penalty is 100% of the underpayment.
D)The penalty is applied before any other accuracy-related penalty.

Question 70

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

Question 71

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

A)An estate is not required to make estimated payments.
B)A trust must make estimated payments if its Federal income tax liability for the year will exceed $500.
C)A C corporation must make estimated payments if its Federal income tax liability for the year will exceed $250.
D)An individual must make estimated payments if his or her balance due for the Federal income tax for the year will exceed $1,000.

Question 72

Mickey,a calendar year taxpayer,filed a return correctly showing no Federal income tax liability for 2009.During 2010,his AGI is $120,000 and his tax liability is $20,000.To avoid a penalty for 2010,Mickey must make aggregate estimated tax payments of at least:

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

Question 73

About ____________________% of all Forms 1040 are audited each year.The rate is about ____________________% if income exceeds $100,000.
or

Question 74

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 75

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 76

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)Charge a $5,000 fee to prepare a Form 1040EZ.
C)Advertise tax preparation services on the Internet.
D)Avoid signing a tax return that is likely to be audited.

Question 77

The IRS processes about ____________________ million individual tax returns every year.

Question 78

The rules of Circular 230 need not be followed by:

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

Question 79

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

A)IRS.
B)Sarbanes-Oxley Commission.
C)AICPA.
D)SEC.

Question 80

Mickey,a calendar year taxpayer,was not required to file a 2009 Federal income tax return.During 2010,his AGI is $120,000 and his tax liability is $20,000.To avoid a penalty for tax underpayments for 2010,Mickey must make aggregate estimated tax payments of at least:

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