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Exam 17: Tax Practice and Ethics

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Question 71

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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.

E) All of the above
F) A) and D)

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Question 72

Multiple Choice

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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) A) and B)
F) All of the above

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Question 73

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Recently, the overall Federal income tax audit rate for the Form 1040 has been about 1%.

Specific factors that are used in selecting tax returns for audit, and the weights for such factors, are not released to the public. Summarize the public information about tax audit selection; how might a tax return's chances of audit increase above national norms?

The IRS is organized according to the industry classification of the taxpayer. One of the operating divisions of the IRS deals exclusively with manufacturing and exporting businesses.

If the taxpayer comes to the office of the IRS for the audit of a tax return, the review is called a(n) ____________________ audit.

The IRS processes about ____________________ million individual tax returns every year, about ____________________ percent of which are filed electronically.

Clarita underpaid her taxes by $50,000. Of this amount, $35,000 was due to negligence on her part, as her record-keeping system is highly inadequate. Determine the amount of any negligence penalty.

A letter ruling should be requested when the taxpayer wants to know the IRS interpretation of how the tax law will be applied to a ____________________ (proposed, completed) transaction.

Match each of the following tax penalties with the type of tax penalty as specified by the Code. A letter can be used more than once. The correct solution may include more than one letter. -Substantial understatement of tax liability. A)Taxpayer penalty B)Tax preparer penalty C)Appraiser's penalty

Compute the overvaluation penalty for each of the following independent cases involving the taxpayer's reporting of the fair market value of charitable contribution property. In each case, assume a marginal Federal income tax rate of 35%. $\begin{array}{llrr}&\text {Taxpayer}&\text {Corrected IRS Value}&\text {Reported Vabue}\\\text { a. } & \text { Individual } & \$ 10,000 & \$ 20,000 \\\text { b. } & \text { C corporation } & 10,000 & 30,000 \\\text { c. } & \text {S corporation } & 10,000 & 30,000 \\\text { d. } & \text {Individual } & 100,000 & 175,000 \\\text { e. } & \text {Individual } & 100,000 & 250,000 \\\text { f. } & \text { C corporation } & 100,000 & 500,000\end{array}$

The tax penalty imposed on appraisers:

Match each of the following tax penalties with the type of tax penalty as specified by the Code. A letter can be used more than once. The correct solution may include more than one letter. -Undervaluation of a reported item.

After the completion of an audit, the taxpayer has 90 days to petition the ____________________ Court to modify the proposed tax due.

The IRS targets high-income individuals for an audit rate that is much higher than that of the general populace.

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

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

Match each of the following tax penalties with the type of tax penalty as specified by the Code. A letter can be used more than once. The correct solution may include more than one letter. -Failure to deposit withholding tax.

Faye, a CPA, is preparing Judith's tax return. Last year, Judith's return included dividend income from the P&G Company. This year, Judith reports no such income. Faye should inquire as to whether Judith sold the P&G stock during the year.

Match each of the following tax penalties with the type of tax penalty as specified by the Code. A letter can be used more than once. The correct solution may include more than one letter. -Aiding in preparing an improper tax return.