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Exam 26: Tax Practice and Ethics

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Question 41

Multiple Choice

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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. -Negligence.

A) Taxpayer penalty
B) Tax preparer penalty
C) Appraiser's penalty

D) A) and B)
E) All of the above

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Question 42

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The taxpayer must pay a significant fee to have a letter ruling issued by the IRS.

A) True
B) False

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Question 43

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Some taxpayers must make quarterly estimated payments of their income tax. Describe the structure of these requirements. In your answer, include both corporate and non-corporate taxpayers.

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. $\begin{array}{llr}\text { Gross receipts } & & \$ 3,500,000 \\\text { Cost of sales } & & (1,000,000 \\\text { Gross profit } & & \$ 2,500,000 \\\text { Capital gain } & \$ 100,000\\\text { Capital loss}& \underline{(30,000)} & \underline{70,000}\\\text { Total income}&& \underline{\$2,570,000}\end{array}$

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

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."

Circular 230 allows a tax preparer to:

About % of all Forms 1040 are audited each year. The rate is about ____________________ % for large corporations.

The IRS is one of the largest Federal agencies, employing about people throughout the year.

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

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. -Willful and reckless conduct.

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

Evaluate this statement: the audited taxpayer has more freedom to "trade issues" with the IRS when the dispute progresses to an Appeals conference. Hint: What are the "hazards of litigation?"

Juanita, who is subject to a 40% marginal Federal gift tax rate, made a gift of a sculpture to Bianca, valuing the property at $150,000. The IRS later valued the gift at $300,000. The applicable undervaluation penalty is:

CPA Shearer is required by AICPA tax ethics rules to inform her client Martinez of significant changes in the Federal income tax laws.

Jake, an individual calendar year taxpayer, incurred the following transactions. $\begin{array}{lll} \text { Gross receipts } & & \$ 800,000 \\ \text { Less: Cost of sales } & & (300,000 ) \\\text { Net business income } & & \$ 500,000 \\\text { Capital gain } & \$ 30,000 & \\ \text { Capital loss } & (90,000) & (60,000) \\\text { Total income }&&\$440,000\end{array}$ Assuming that any error in timely reporting these amounts was inadvertent, how much omission from gross income Would be required before the six-year statute of limitations would apply?

After the completion of an audit, the taxpayer has 90 days to petition the Court to modify the proposed tax due.

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

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

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