CHAPTER 26 TAX PRACTICE AND ETHICS

1. Which statement is correctas to the conduct of IRS income tax audits?

a. Office audits are conducted at the office of the IRS.

b. An office audit involves a line­by­line review of the taxpayer’s return.

c. The most common type of Federal income tax audit is the field audit.

d. A correspondence audit usually is concluded after a meeting with the taxpayer at the IRS auditor’s office.

2. With respect to the Small Cases Division of the Tax Court,

a. The taxpayer (but not the IRS) can appeal a contrary judgment.

b. The IRS (but not the taxpayer) can appeal a contrary judgment.

c. Either the IRS or the taxpayer can appeal a contrary judgment.

d. Neither the IRS nor the taxpayer can appeal a contrary judgment.

3. Which of the following statements correctly reflects the rules governing interest to be paid on an individual’s

Federal tax deficiency or claim for refund?

a. The IRS has full discretion in determining the rate that will apply.

b. The simple interest method for calculating interest is used.

c. IRS interest compounds daily.

d. Congress sets the IRS interest rate twice each year.

4. Which of the following statements does notreflect the rules governing the accuracy-related penalty for negligence?

a. The penalty rate is 20%.

b. The penalty applies whenever the taxpayer takes a return position that is contrary to a court decision.

c. The penalty applies when the taxpayer does not keep records adequate to compute the tax correctly.

d. The penalty is waived if the taxpayer uses Form 8275 to disclose a return position that is reasonable though contrary to the IRS position.

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

a. The taxpayer has substantial authority for the treatment taken on the tax return.

b. The relevant facts affecting the treatment are adequately disclosed in the return or on Form 8275.

c. The IRS failed to meet its burden of proof in showing the taxpayer’s error.

d. All of the above statements are correct.

6. 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:

a. $10,000 (minimum penalty).

b. b. $5,000.

c. $2,500.

d. $2,000.

e. $0.

7. Malik, Inc., a calendar year C corporation subject to a 35% marginal income tax rate, claimed a Form 1120 charitable contribution deduction of $30,000 for a sculpture that the IRS later valued at $10,000. The applicable overvaluation penalty is:

a. $0.

b. $7,000.

c. $10,000 (minimum penalty).

d. $20,000.

8. Michelle, a calendar year taxpayer subject to a 25% marginal Federal 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:

a. $0.

b. $3,750.

c. $7,500.

d. $18,750.

9. Lisa, a calendar year taxpayer subject to a 33% marginal Federal income tax rate, claimed a Form 1040 charitable contribution deduction of $250,000 for a sculpture that the IRS later valued at $160,000. The applicable overvaluation penalty is:

a. $0.

b. $6,000.

c. $10,000 (maximum penalty).

d. $12,000.

10.Georgio, a calendar year taxpayer subject to a 33% 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:

a. $10,000 (maximum penalty). b. $12,000.

c. $24,000.

d. $60,000.

11.Lola, a calendar year taxpayer subject to a 40% marginal Federal 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:

a. $0.

b. $1,000 (minimum penalty).

c. $2,400.

d. $12,000.

12.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:

a. $0.

b. $20,000.

c. $25,000 (maximum penalty).

d. $40,000.

13.Juanita, who is subject to a 40% marginal Federal gift tax rate, made a gift of a sculpture to Bianca, valuing the property at $150,000. The IRS later valued the gift at $300,000. The applicable undervaluation penalty is:

a. $24,000.

b. $12,000.

c. $10,000 (maximum penalty).

d. $0.

14.The tax penalty imposed on appraisers:

a. Can be as much as 200% of the appraisal fee that was charged.

b. Is waived if the taxpayer also was charged with his/her own valuation penalty.

c. Equals 25% of the appraised value of the property, with a $10,000 minimum penalty.

d. Applies if the appraiser knew that the appraisal would be used in preparing a Federal income tax return.

15.Concerning the penalty for civil tax fraud:

a. The burden of proof is on the taxpayer to establish that no fraud was committed.

b. Fraudulent behavior is more than mere negligence on the part of the taxpayer.

c. The penalty is 100% of the underpayment.

d. Fraud is defined in Code §§ 6663(b) and (f).