Exam 26: Tax Practice and Ethics

Ming (a calendar year taxpayer) donates a painting to a local art museum (a qualified charity).The painting cost Ming $2,000 ten years ago and, according to one of Ming's friends (an amateur artist), is worth $40,000.On his income tax return, Ming 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 Ming is subject to a 30% marginal Federal income tax rate, his penalty for overvaluation is:

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.

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?"

If the auditor comes to the taxpayer's office to review a tax return, the review is called a(n) ____________________ audit.

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

Circular 230 requires that a tax preparer be aware of changes in the tax law.Furthermore, office practices of the preparer must be up to industry standards.

Maria's AGI last year was $95,000.To avoid a penalty, her estimated tax payments and withholdings for this year must equal the lesser of ____________________ percent of last year's taxes or ____________________ percent of this year's taxes. or

The IRS pays interest on a refund to the taxpayer, unless the IRS's payment is made within ____________________ days of the date that a return is filed.

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

Certain individuals are more likely than others to have the Form 1040 audited by the IRS. List at least five factors that may increase above the national norms one's chances of audit.

Lola, a calendar year taxpayer subject to a 35% marginal gift tax rate, made a gift of a sculpture to Redd, valuing the property at $70,000.The IRS later valued the gift at $100,000.The applicable undervaluation penalty is:

Describe the potential outcomes to a party who provides information to the IRS under the informant or whistleblower program.

In the context of civil tax fraud, the burden of proof is on the IRS to show by a "preponderance of the evidence" that the taxpayer had a specific intent to evade a tax.

About ____________________% of all Forms 1040 are audited each year.The rate is about ____________________% if income exceeds $1 million. or

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

Circular 230 applies to all paid tax practitioners. This includes attorneys, CPAs, and enrolled agents, even though each of the groups has its own code of conduct.

Margaurite did not pay her Federal income tax on time.When she eventually filed the return, she reported a balance due.Compute Margaurite's failure to file penalty in each of the following cases.

The taxpayer can avoid a valuation penalty for overstating the value of the charitable contribution of an artwork by showing that the deduction claimed was based on a qualified ____________________.

Circular 230 allows a tax preparer to:

Michelle, a calendar year taxpayer subject to a 30% marginal income tax rate, claimed a Form 1040 charitable contribution deduction of $275,000 for a sculpture that the IRS later valued at $200,000.The applicable overvaluation penalty is: