Exam 26: Tax Practice and Ethics

Georgio, a calendar year taxpayer subject to a 32% marginal Federal income tax rate, claimed a Form 1040 charitable contribution deduction of $300,000 for a sculpture that the IRS later valued at $120,000. The applicable overvaluation penalty is:

Clarita underpaid her taxes by $50,000. Of this amount, $35,000 was due to negligence on her part, because her record-keeping system is highly inadequate. Determine the amount of any negligence penalty.

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

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 need be used. -Undervaluation of a reported item.

The government can appeal a decision of the Tax Court Small Cases Division, but the taxpayer cannot.

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 need be used. -Preparer penalty for reckless conduct.

Recently, the overall Federal income tax audit rate for the Form 1040 has been under 1%.

A % penalty may result when the value of an asset contributed to a charity is reported at an amount that exceeds 150% of the correct valuation.

If the taxpayer comes to the office of the IRS for the audit of a tax return, the review is called a(n) ____________________ audit.

The taxpayer or a tax adviser may be subject to penalties if there is a misstatement of the valuation of an item reported on the tax return. Describe how these penalties work.

Gadsden, who is subject to a 40% marginal Federal gift tax rate, made a gift of a sculpture to Marvin, valuing the property at $150,000. The IRS later valued the gift at $400,000. The applicable undervaluation penalty is:

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. -Substantial understatement of a tax.

Juarez (a calendar year taxpayer) donates a painting to a local art museum (a qualified charity). The painting cost Juarez $2,000 10 years ago and, according to one of Juarez's friends (an amateur artist), now is worth $40,000. On his income tax return, Juarez deducts $40,000 as a Form 1040 charitable contribution. Upon later audit by the IRS, it is determined that the true value of the painting was $30,000. Assuming that Juarez is subject to a 24% marginal Federal income tax rate, his penalty for overvaluation is:

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

A negligence penalty can be waived if the taxpayer discloses a tax return position that is contrary to a judicial precedent and there is a for the taxpayer's position.

The tax penalty imposed on appraisers:

A tax professional needs to know how the IRS is structured and how it works to carry out its mission. Evaluate this statement.

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.

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

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.