Question 1

Which of the following statements,if any,do not reflect the rules governing the accuracy-related penalty for negligence?

Accepted Answer

Statement C is incorrect as the accuracy-related penalty for negligence can be imposed on unintentional tax understatements by the taxpayer as well.

Question 2

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.

Question 3

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:

Accepted Answer

The answer of Max (a calendar year taxpayer)donates a painting...

Question 4

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

Accepted Answer

The answer of Most practitioners encourage their clients to attend...

Question 5

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 6

A taxpayer should conduct a cost-benefit analysis before taking a tax dispute to court.

Accepted Answer

Conducting a cost-benefit analysis helps the taxpayer carefully consider the potential costs and benefits associated with taking a tax dispute to court, including legal fees, time, and potential outcomes. This analysis can help the taxpayer make an informed decision about whether the dispute warrants the expense and effort of pursuing a court case.

Question 7

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 estimate provided by the taxpayer for computing itemized deductions since it can result in inaccurate and misleading information on the tax return. The CPA should verify the actual property tax amount paid by Ned before including it in the itemized deductions.

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

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:

Accepted Answer

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

Question 10

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 11

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:

Accepted Answer

The overvaluation penalty is 40% of the underpayment of tax attributable to the overvaluation, subject to a maximum penalty of 20% if the overvaluation is less than 200% of the actual value. In this case, Gloria claimed a deduction of $800,000 but the actual value was only $100,000, resulting in an overvaluation of 700%. The underpayment of tax attributable to the overvaluation is $245,000 ($700,000 x 35%), and the 40% penalty on this amount is $98,000. Since the overvaluation is more than 400%, the penalty is not subject to the maximum penalty of 20%. Therefore, the applicable penalty is $98,000.

Question 12

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:

Accepted Answer

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

Question 13

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

Accepted Answer

This statement is incorrect. While it is true that letter rulings are private, they may be disclosed to the public if the taxpayer provides a written consent to the disclosure. Additionally, the IRS may choose to publish certain letter rulings with the taxpayer's identity removed, as Revenue Rulings.

Question 14

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

Accepted Answer

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

Question 15

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 exercise due diligence and accuracy in preparing a client's tax return, it is not necessary to verify every item of information submitted by the client to the penny. The CPA should use professional judgment and make reasonable inquiries to ensure the accuracy and completeness of the return.

Question 16

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

Accepted Answer

The answer of With respect to the audit process,which of...

Question 17

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.

Accepted Answer

Faye, as a CPA, is required to accurately prepare Judith's tax return and cannot intentionally avoid reporting necessary information that may impact Judith's tax liability. This could result in penalties or legal consequences for both Faye and Judith.

Question 18

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:

Accepted Answer

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

Question 19

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

Accepted Answer

The most common type of Federal income tax audit is the correspondence audit, which is conducted by mail. Office audits, on the other hand, are conducted at the IRS office, and are typically used for business taxpayers or taxpayers with more complex returns. A correspondence audit can be concluded without a meeting with the auditor in person, as communication is done through mail or phone.

Question 20

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 a rough estimate for Henrietta's business expenses on the Form 1040. She must have accurate and verifiable records to support any deductions claimed. Simply using a "close enough" estimate is not sufficient and could lead to potential audit issues.

Quiz 17: Tax Practice and Ethics