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Exam 26: Tax Practice and Ethics

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Question 61

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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. a.Ignorance of the tax law b.Reasonable basis c.Reasonable cause d.Complexity of the tax law e.Substantial authority f.Disclosure on return -Failure to pay a tax that is due.

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Question 62

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The general statute of limitations regarding Federal tax returns extends for ____________________ years.It is ____________________ years if a substantial understatement of income is found,and ____________________ years with respect to worthless securities.

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3,6,7
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Question 63

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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.

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?

Mikel prepared for compensation a Federal income tax return for Mona.Mona's return included an aggressive interpretation of the rules concerning the home office deduction.Mikel is not liable for a preparer penalty for taking an unreasonable tax return position if:

Circular 230 requires that a tax preparer provide training for the tax staff as to the latest changes in the tax law.

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. a.Taxpayer penalty b.Tax preparer penalty c.Appraiser's penalty -Misstatement of withholding allowances.

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.

The Four Square Services Corporation estimates that its 2015 taxable income will be $1,000,000.Thus,it is subject to a flat 34% income tax rate and incurs a $340,000 liability.For each of the following independent cases,compute Four Square's minimum quarterly estimated tax payments that will avoid an underpayment penalty. a.For 2014,taxable income was ($200,000),resulting in a zero income tax liability.Four Square carried back all of this loss to prior years. b.For 2014,taxable income was $800,000,and tax liability was $272,000. c.For 2013,taxable income was $2 million,and tax liability was $680,000.For 2014,taxable income was $100,000,and tax liability was $22,250.

Keepert uses "two sets of books." She only reports one-half of her cash sales on the records that she uses to complete her Federal income tax return.The statute of limitations for Keepert's return is six years.

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:

Currently,the IRS charges a ____________________% interest rate on taxes that the taxpayer underpays.

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. a.Taxpayer penalty b.Tax preparer penalty c.Appraiser's penalty -Negligence.

Ling has hired CPA Gracie to complete this year's Form 1040.Ling uses online accounting software to keep the books for her interior design sole proprietorship.Ling tells Gracie that a $5,000 amount for business supplies is "close enough" to report for this year's deduction.Gracie can use this estimate in completing the Form 1040.

A privilege of ____________________ exists between a tax preparer and the client as to tax advice rendered.

Circular 230 allows a tax preparer to:

Fiona,a VITA volunteer for her college's tax clinic,is not a tax preparer as defined by the Code.Thus,Fiona is exempted from the Code's tax preparer penalties.

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.

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

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."