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Exam 17: Tax Practice and Ethics

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Question 1

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

A) True
B) False

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Question 2

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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.

A) True
B) False

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Question 3

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Gadsden, who is subject to a 40% marginal Federal 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:

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 by Whitehall. The return does not make any special disclosure that the deduction is being claimed. Whitehall paid Latrelle a fee of $8,000 for preparing the Form 1120. Latrelle will be assessed a preparer penalty of $4,000 for taking an unreasonable position on the Whitehall return.

The ____________________, a presidential appointee, is the "IRS's attorney."

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

Malik, Inc., a calendar year C corporation subject to a 35% marginal income tax rate, claimed a Form 1120 charitable contribution deduction of $30,000 for a sculpture that the IRS later valued at $10,000. The applicable overvaluation penalty is:

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

For each of the indicated tax penalties, indicate the appropriate taxpayer defense. A letter may be used more than once. Not all of the letters might be used. -Substantial understatement of a tax.

Chung's AGI last year was $180,000. Her Federal income tax came to $45,000, which she paid through a combination of withholding and estimated payments. This year, her AGI will be $250,000, with a projected tax liability of $60,000, all to be paid through estimates. Ignore the annualized income method. Compute Chung's quarterly estimated payment schedule for this year.

The AICPA's Statements on Standards for Tax Services provide principles-based guidelines as to how a tax professional should conduct business.

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.

The tax professional can reduce the chances that staff personnel will incur IRS preparer penalties by adopting a "tone at the top" that stresses integrity, diligence, and other elements of an ethical tax practice.

A negligence penalty can be waived if the taxpayer discloses a tax return position that is contrary to a judicial precedent and there is a ____________________ for the taxpayer's position.

IRS computers use document matching programs for both individuals and business taxpayers to keep the audit rate low.

Describe the potential outcomes to a party who provides information to the IRS under the informant or whistleblower program.

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

Because he undervalued property that he transferred by gift, Dan owes additional gift taxes of $4,000. The penalty for undervaluation does not apply in this situation, because the tax understatement was too small.

In a letter ruling, the IRS responds to a taxpayer request concerning the tax treatment of a proposed transaction.

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