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Exam 17: Tax Practice and Ethics

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Question 51

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When a tax issue is taken to court, the burden of proof is on the IRS to show that its audit adjustments are correct.

A) True
B) False

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Question 52

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An individual is not subject to an underpayment penalty until more than $__________ is due and unpaid through estimated taxes.

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Question 53

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The Treasury issues private letter rulings and other determinations, usually in response to a taxpayer request. What is the purpose of the rulings program? Answer from both the point of view of the taxpayer and the government.

In the case of bad debts and worthless securities, the statute of limitations on claims for refund is three years.

The IRS employs about 75,000 personnel, making it one of the largest Federal agencies.

Maria did not pay her Federal income tax on time. When she eventually filed the return, she reported a balance due. Compute Maria's failure to file penalty in each of the following cases. Disregard any failure to pay penalty. a. Three months late, $500 additional tax due. b. Four months late, $2,000 additional tax due. c. Ten months late, $10,000 additional tax due. d. Four months late due to fraud by Maria, $10,000 additional tax due. e. Fifteen months late due to fraud by Maria, $10,000 additional tax due.

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.

Circular 230 applies to all paid tax practitioners. But attorneys, CPAs, and enrolled agents are exempt from the Circular 230 rules, because each of the groups has its own code of professional conduct.

An IRS office audit takes place at the headquarters office of the corporate taxpayer.

Freddie has been assessed a preparer penalty for willful and reckless conduct. When he completed Peggy's Federal income tax return, he purposely omitted $100,000 of cash receipts that should have been reported as gross income. Freddie charged Peggy $4,000 to prepare the return. What is Freddie's preparer penalty?

The accuracy-related penalties typically relate to_______ on the part of the taxpayer or other understatements of tax.

A taxpayer penalty may be waived if there is shown to be reasonable cause for the misstatement on the tax return. The courts have applied this standard strictly. List three or more assertions for a waiver of a taxpayer penalty that courts have found not to constitute reasonable cause. Example: Ignorance of the tax law.

To whom do the AICPA's Statements on Standards for Tax Services apply? Are they binding or merely advisory?

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

In connection with the taxpayer penalty for substantial understatement of tax liability, what defenses if any) are available?

Latrelle, who prepares the tax return for Whitehall Corporation 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.

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

Megan prepared a Federal income tax return for Joan for compensation. 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:

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

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.