Question 1

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 2

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

A prompt assessment is a request made by the taxpayer to the IRS to calculate their tax liability quickly. By making this request, the taxpayer is essentially volunteering for an audit of their tax return. This is because the IRS will closely examine the taxpayer's return in order to ensure that the tax liability is accurate.

Question 3

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 4

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 5

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

Accepted Answer

Neither the IRS nor the taxpayer can appeal a contrary judgment in the Small Cases Division of the Tax Court. This is because the decisions made in the Small Cases Division are final and cannot be appealed by either party.

Question 6

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 7

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

Question 8

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 9

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 a...

Question 10

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

Question 11

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

Accepted Answer

The statement that the accuracy-related penalty for negligence applies only to intentional tax understatements by the taxpayer is incorrect. The penalty applies to any understatement of tax that is due to the taxpayer's negligence or disregard of rules or regulations.

Question 12

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

Accepted Answer

It is generally recommended that an IRS audit be conducted at the office of the tax advisor rather than at the client's premises. This is because the tax advisor is likely to have better access to the necessary tax records and documentation, and can more effectively communicate with the auditor on behalf of the client. Additionally, conducting the audit at the advisor's office can help protect the client's confidential information and minimize disruptions to their business operations.

Question 13

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.

Question 14

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 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

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 painting...

Question 17

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 use an estimated property tax deduction that is significantly lower than the previous year's actual deduction without further inquiry or investigation. It could be considered a violation of the Statements on Standards for Tax Services.

Question 18

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 19

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 base the business supplies deduction on an estimate given by Henrietta. Gracie must have documentation or a reasonable basis for the deduction.

Question 20

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

Accepted Answer

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

Quiz 26: Tax Practice and Ethics