Exam 18: The Tax Compliance Process

Mr. and Mrs. Lester failed to report a $40,540 capital gain on their 2019 Form 1040. The gross income reported on the return was $169,404, and the return was filed on January 20, 2020. What is the last date on which the IRS can assess additional tax for 2019?

A taxpayer who is disputing a deficiency of $50,000 or less may request an informal hearing by the Small Tax Case Division of the Tax Court.

Only attorneys, enrolled agents, and CPAs may prepare tax returns for compensation.

Both individual and corporate taxpayers must pay any balance due of their tax by the extended due date of the tax return for the year.

Every year, the IRS selects a certain number of Form 1040s for audit. What is the approximate average audit coverage rate (percentage of individual returns filed selected for audit)?

Mr. Bennett is a professional tax return preparer. Three years ago, he prepared Form 1120 for Philly Inc. His fee for the preparation was $15,000. Upon audit of the return, the IRS disallowed a $100,000 deduction, which increased the corporation's tax by $35,000. Compute Mr. Bennett's preparer penalty if the IRS concludes that:Mr. Bennett had no reasonable legal basis for claiming the deduction and was not acting in good faith by doing so.Mr. Bennett intentionally disregarded the tax law by claiming the deduction in a willful attempt to understate Philly's tax.How would your answers to a. and b. change if Mr. Bennett's preparation fee was only $6,000?

A professional tax return preparer must attach his or her signature and identifying number to each return prepared.

For no particularly good reason, Ms. Totter failed to file her current year Form 1040 by the due date. Which of the following statements is false?

The revenue agent who audited Mr. and Mrs. Vento's Form 1040 assessed a $49,200 tax deficiency. The Ventos strongly disagree with the result of the audit. What is their first step in contesting the result?

A special agent is assigned to a tax investigation to determine if the government has enough evidence to indict the taxpayer for criminal fraud.

Which of the following statements about the U.S. Tax Court is false?

Taxpayers should keep all supporting documentation (credit card statements, etc.) for a tax return for at least three years after the return is filed.

Which of the following statements about the outcome of an IRS audit is false?

Which of the following is not a legal obligation of an income tax return preparer?

Taxpayers who cannot complete their tax return by the filing date can request an extension of time to pay any tax due for the year.

Which type of audit is handled by a revenue agent?

Linney Corporation, which uses a June 30 fiscal year end for tax purposes, requested an automatic six-month extension of time to file its return for FYE June 30, 2020. It filed the return on February 8, 2021. The revenue agent who examined the return suspects that Linney may have substantially underreported income for the year. Which of the following is false?

If a taxpayer fails to pay a deficiency after receiving notice of the deficiency, the IRS can garnish the taxpayer's salary or wage to settle the liability.

Mr. and Mrs. Nestor were assessed a $51,240 income tax deficiency. Which of the following statements is false?

A taxpayer who wants a jury trial must pay the tax deficiency and then sue the government for a refund in U.S. District Court.