Exam 18: The Tax Compliance Process

Which type of audit takes place at the taxpayer's place of business?

Mrs Hepp completed her 2017 Form 1040 on April 13, 2018. The return showed a $923 balance due. Mrs Hepp needs more time to double check all her computations. What can Mrs Hepp do to give herself more time?

Mr Bennett is a professional tax return preparer. Three years ago, he prepared the 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: a. Mr Bennett had no reasonable legal basis for claiming the deduction and was not acting in good faith by doing so. b. Mr Bennett intentionally disregarded the tax law by claiming the deduction in a willful attempt to understate Philly's tax. c. How would your answers to a. and b. change if Mr Bennett's preparation fee was only $6,000?

The IRS selects returns to audit that have the highest probability of generating additional revenue.

The IRS assessed Ms. Tinlock a $3,050 income tax deficiency. Which of the following steps can the IRS not take to collect the deficiency?

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.

Individuals are allowed to deduct interest paid on an income tax deficiency as a miscellaneous itemized deduction.

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

The harshest administrative penalty that the IRS can impose is the civil fraud penalty.

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.

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?

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?

Mr and Mrs Clyde were married for 21 years before Mrs Clyde divorced her husband in 2017. This year, the IRS determined that the Clydes underpaid their 2016 tax by $19,650. In which case would Mrs Clyde be relieved of liability for the underpayment under the innocent spouse rule? 

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

Mr and Mrs Pitt filed a joint tax return last year. The couple divorced this year. The IRS audited their last year's return and determined that the Pitts had underpaid their tax by $38,200. Which of the following statements is true?

Who of the following cannot represent a taxpayer during an interview with the IRS?

Which of the following statements about the tax deficiency appeals process is false?

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

Which of the following should increase the likelihood that Mr Clarke's Form 1040 will be selected for audit by the IRS?

During the audit of Mr and Mrs Luce's income tax return, the revenue agent concluded that the couple had claimed a $26,300 deduction that was not allowed by law. The improper deduction reduced the couple's tax by $9,205. The Luces' total tax deficiency was $13,890. a. Compute the penalty that the IRS agent can impose if he concludes that the improper deduction was attributable to negligence. b. Compute the penalty that the IRS agent can impose if he concludes that the improper deduction was attributable to fraud.