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Exam 26: Tax Practice and Ethics

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Question 61

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Harold, a calendar year taxpayer subject to a 35% marginal income tax rate, claimed a Form 1040 charitable contribution deduction of $20,000 for a sculpture that the IRS later valued at $10,000.The applicable overvaluation penalty is:

A) $10,000.
B) $7,000.
C) $3,500.
D) $0.

E) A) and B)
F) None of the above

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Question 62

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Quon filed an amended return, claiming a $100,000 refund. The IRS disallowed the refund, and it can assess a penalty if there was no reasonable basis of support for the refund claim, in the amount of ____________________% of the disallowed amount. or

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Question 63

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

The tax ____________________ workpapers are not privileged communications that can be kept confidential from an IRS subpoena.

Does the tax preparer enjoy an "attorney-client privilege" of confidentiality with his or her clients?

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

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

Circular 230 requires that the tax practitioner use the "best practices" of the tax profession in carrying out a tax engagement. Specify what some of these best practices entail.

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

Ron, a calendar year taxpayer subject to a 35% marginal income tax rate, claimed a Form 1040 charitable contribution deduction of $250,000 for a sculpture that the IRS later valued at $150,000.The applicable overvaluation penalty is:

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

An IRS letter ruling might determine that an employee's compensation is unreasonable in amount.

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

Under Circular 230, tax preparer Winston cannot disclose to a mortgage banker the income level of her client Pickett, or other information acquired by preparing the return, without Pickett's permission.

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

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. This includes attorneys, CPAs, and enrolled agents, even though each of the groups has its own code of conduct.

When a tax issue is taken to court, the burden of proof is on the taxpayer to show that the items reported on the return are correct.

Maria and Miguel Blanco are in the midst of negotiating a divorce. Because both parties are unwilling to share any current financial information, their joint Form 1040 for 2012 is not filed until October 31, 2013, when the respective divorce attorneys forced them to cooperate. The Blancos should not be subject to any Federal late-filing penalties, because of the reasonable cause exception.

Quon filed his Federal income tax return on time, but he did not remit the full balance due.Compute Quon's failure to pay penalty in each of the following cases.The IRS has not yet issued a deficiency notice.