Question 1

The Chief Counsel of the IRS is appointed by the:

Accepted Answer

The Chief Counsel of the IRS is appointed by the U.S. President and confirmed by the Senate.

Question 2

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:

Accepted Answer

The answer of Ming (a calendar year taxpayer) donates a...

Question 3

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

Accepted Answer

When a prompt assessment is requested, the IRS will quickly review the tax return and may conduct an audit to ensure the accuracy of the return. Therefore, the taxpayer is essentially volunteering for an audit.

Question 4

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

Accepted Answer

This statement is incorrect because the accuracy-related penalty for negligence applies to both intentional and unintentional tax understatements caused by a taxpayer's failure to make a reasonable attempt to comply with the tax code. The penalty rate is 20%, and it is only imposed on the part of the deficiency attributable to negligence. Option D is correct because the penalty can be waived if the taxpayer discloses a reasonable return position using Form 8275.

Question 5

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:

Accepted Answer

The overvaluation penalty is 30% of the amount by which the claimed value exceeds the correct amount. In this case, the claimed value is $250,000 and the correct amount is $200,000, so the overvaluation is $50,000. The overvaluation penalty is therefore 30% of $50,000, or $15,000. However, the penalty is reduced by the amount of tax saved by the overvaluation. In this case, the taxpayer saved $35,000 in taxes by claiming the overvalued deduction. Therefore, the overvaluation penalty is $15,000 - $35,000 = $0.

Question 6

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.

Accepted Answer

The answer of Faye, a CPA, is preparing Judith's tax...

Question 7

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 8

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

Accepted Answer

The IRS does not publish the factors its computers use for audit selection purposes in the Commissioner's Report. These selection criteria are generally not disclosed to the public.

Question 9

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 given by Henrietta for business supplies. Gracie must confirm the actual amount with supporting documentation or by obtaining reasonable estimates based on actual data.

Question 10

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

Accepted Answer

While a CPA should ensure that the information provided by the client is accurate, they are not required to verify every item to the penny. The CPA can rely on reasonable estimates and assumptions, as long as they are not materially incorrect. However, the CPA should exercise professional judgment and take steps to ensure that the tax return is complete and accurate.

Question 11

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

Accepted Answer

The answer of Which statement appearing below does not correctly...

Question 12

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...

Question 13

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:

Accepted Answer

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

Question 14

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 15

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

Accepted Answer

The answer of Which of the following statements is correct...

Question 16

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:

Accepted Answer

The overvaluation penalty applies when the claimed value is 150% or more of the correct value. Here, $20,000 is exactly 200% of $10,000, so the penalty applies. However, the penalty is not calculated as a simple percentage of the overvaluation; it is based on the tax underpayment resulting from the overvaluation. Since the question does not provide enough information to calculate the tax underpayment, the penalty cannot be determined from the given options.

Question 17

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:

Accepted Answer

The applicable overvaluation penalty is 40% of the amount of the overvaluation (the difference between the claimed deduction and the IRS valuation). In this case, the overvaluation is $700,000 ($800,000 - $100,000), so the penalty is 40% of $700,000, which is $280,000. However, the maximum penalty is 20% of the underpayment of tax resulting from the overvaluation, or $56,000 ($280,000 x 20%). Since Gloria's marginal tax rate is 35%, the tax benefit from the overvaluation is $245,000 ($700,000 x 35%). Therefore, the penalty is limited to the tax benefit, which is $98,000 ($245,000 x 40%). Choice B is the correct answer.

Question 18

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

Accepted Answer

Conducting an IRS audit at the office of the tax advisor allows the auditor to review records and documents related to the client's tax return, without disclosing confidential information about the tax advisor's other clients. It also ensures that the tax advisor is readily available to provide any necessary information or clarification during the audit process.

Question 19

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 rely on the taxpayer's estimate of property taxes. The CPA should obtain documentation such as a property tax bill to accurately calculate the deduction. The Statements of Standards for Tax Services prohibit a CPA from relying solely on a client's estimate or oral representation.

Question 20

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 IRS adjusts the rate of interest quarterly, based on the federal short-term rate plus 3 percentage points.

Quiz 17: Tax Practice and Ethics