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Exam 17: Tax Practice and Ethics

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Question 51

Multiple Choice

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Lola, a calendar year taxpayer subject to a 40% marginal Federal gift tax rate, made a gift of a sculpture to Redd, valuing the property at $70,000. The IRS later valued the gift at $100,000. The applicable undervaluation penalty is:

A) $0.
B) $1,000 (minimum penalty) .
C) $2,400.
D) $12,000.

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

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Question 52

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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) A) and C)
F) B) and C)

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Question 53

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Linwell underpaid his taxes by $250,000. Portions of the underpayment were attributable to negligence ($210,000) and to civil fraud ($40,000). Compute the total penalties incurred.

A negligence penalty is assessed when the taxpayer is found to have not made a reasonable attempt to comply with the tax law.

CPA Norma and her client Colin hold a privilege of confidentiality from the IRS, as to their tax planning discussions about completing Colin's tax returns. The IRS cannot successfully subpoena records concerning these discussions.

A CPA, an attorney, and a(n) ____________________ can represent taxpayers before the IRS in an Appeals conference.

As part of a tax return engagement for XYZ Partnership, Enrolled Agent Wang can draft an amendment to the XYZ partnership agreement.

The tax ____________________ workpapers prepared as part of an independent financial audit are not privileged communications that can be kept confidential from an IRS subpoena.

Loren Ltd., a calendar year taxpayer, had the following transactions, all of which were properly reported on a timely filed return. Presuming the absence of fraud, how much of an omission from gross income must occur for Loren before the six-year statute of limitations applies? Show your computations.

Jaime's negligence penalty will be waived, under the reasonable cause exception. He told the court, "My taxes were wrong because I couldn't understand the tax law."

Lisa, a calendar year taxpayer subject to a 33% marginal Federal income tax rate, claimed a Form 1040 charitable contribution deduction of $250,000 for a sculpture that the IRS later valued at $160,000. The applicable overvaluation penalty is:

A(n) ___________________ member is required to follow the Statements of Standards for Tax Services in conducting a tax practice.

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. -Negligence in filing a return.

In preparing a tax return, a CPA should verify "to the penny" every item of information submitted by a client about its deduction for repairs and maintenance.

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. -Filing an improper refund claim.

Freddie has been assessed a preparer penalty for willful and reckless conduct. When he completed Peggy's Federal income tax return (she is in the 33% tax bracket) , Freddie 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?

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?

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

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

In a criminal fraud case, the burden is on the taxpayer to show that he or she was innocent "beyond the shadow of any reasonable doubt."