Exam 26: Tax Practice and Ethics

Circular 230 applies to all paid tax practitioners.But attorneys,CPAs,and enrolled agents are exempt from the Circular 230 rules,because each of the groups has its own code of professional conduct.

A letter ruling should be requested when the taxpayer wants to know the IRS interpretation of how the tax law will be applied to a ____________________ (proposed,completed) transaction.

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

A taxpayer penalty may be waived if there is shown to be reasonable cause for the misstatement on the tax return.The courts have applied this standard strictly.List three or more assertions for a waiver of a taxpayer penalty that courts have found not to constitute reasonable cause.Example: Ignorance of the tax law.

Compute the undervaluation penalty for each of the following independent cases involving the executor's reporting of the value of a closely held business in the decedent's gross estate.In each case,assume a marginal Federal estate tax rate of 40%. Reported Value Corrected IRS Value a.$10,000 $ 20,000 b.60,000 100,000 c.80,000 150,000 d.50,000 300,000

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 might be used. a.Ignorance of the tax law b.Reasonable basis c.Reasonable cause d.Complexity of the tax law e.Substantial authority f.Disclosure on return -Filing an improper refund claim.

Freddie has been assessed a preparer penalty for willful and reckless conduct.When he completed Peggy's Federal income tax return (she is in the 33% tax bracket),Freddie purposely omitted $100,000 of cash receipts that should have been reported as gross income.Freddie charged Peggy $4,000 to prepare the return.What is Freddie's preparer penalty?

LaCharles made a charitable contribution of property that he valued at $80,000.He deducted this amount as an itemized deduction on his tax return.The IRS can show that the actual value of the property is $50,000.LaCharles is in the 33% Federal income tax bracket.Determine LaCharles's amount due for both tax and any penalty.

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. a.Taxpayer penalty b.Tax preparer penalty c.Appraiser's penalty -Failure to sign the return.

Cheng filed an amended return this year,claiming a refund relative to her tax computation on a prior-year's return.When the IRS approves the amended return and issues the refund,it also pays Cheng interest with respect to the overpayment.

A tax preparer is in violation of Circular 230 if he or she:

For purposes of tax penalties,a VITA volunteer is not classified as a tax return ____________________.

Troy Center Ltd.withheld from its employees' paychecks $200,000 in Federal income and Social Security taxes for the Monday,June 30 payroll.It then spent the $200,000 on equipment upgrades,missing altogether the August 2 due date for the tax remittances.How much does Troy now owe the government in taxes and penalties? Ignore interest accruals,and assume that the Treasury can prove that Troy's redirecting of the tax withholdings was willful.

Latrelle prepares the tax return for Whitehall Corporation.Latrelle includes a $5,000 deduction on the return.This type of deduction previously has been disallowed by the Tax Court,although there is a 15% chance that the holding will be reversed on an appeal by Whitehall.The return does not make any special disclosure that the deduction is being claimed.Whitehall paid Latrelle a fee of $8,000 for preparing the Form 1120.Latrelle will be assessed a preparer penalty of $4,000 for taking an unreasonable position on the Whitehall return.

Juarez (a calendar year taxpayer) donates a painting to a local art museum (a qualified charity).The painting cost Juarez $2,000 ten 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 25% marginal Federal income tax rate,his penalty for overvaluation is:

The usual three-year statute of limitations on additional tax assessments applies in the following situation(s).

During an audit,IRS personnel might request a(n) ____________________ from the IRS National Office,to clarify the application of tax law concerning a tax deduction.

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 taxpayer and the government points of view.

A taxpayer can take a dispute to the ____________________ Division of the Tax Court when the disputed amounts do not exceed $50,000.

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.