CHAPTER 26 TAX PRACTICE AND ETHICS

1. Concerning a taxpayer’s requirement to make quarterly estimated tax payments:

a. A C corporation must make estimated payments if its Federal income tax liability for the year will exceed $250.

b. The due dates of the payments for a calendar-year C corporation are March, June, September, and December 15.

c. A C corporation’s estimates must total at least 90% of the current­year tax, to avoid the penalty.

d. An individual must make estimated payments if his or her balance due for the Federal income tax for the year will exceed $1,000.

2. Mickey, a calendar year taxpayer, was not required to file a Federal income tax return last year because his AGI was negative due to business losses. For this tax year, his AGI is $120,000 and his tax liability is $10,000. To avoid a penalty for tax underpayments for the current year, Mickey must make aggregate estimated tax payments of at least:

a. $10,000.

b. $9,000.

c. $1,000 (minimum amount).

d. $0.

3. Minnie, a calendar year taxpayer, filed a return correctly showing a zero Federal income tax liability for last year, because her Form 1040 showed various deductions and credits. For this tax year, Minnie’s AGI is $120,000 and her tax liability is $20,000. To avoid a penalty for the current year, Minnie must make aggregate estimated tax payments of at least:

a. $20,000.

b. $18,000.

c. $1,000 (minimum amount).

d. $0.

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

a. No return at all is filed.

b. An investment in a marketable security is worthless.

c. Taxpayer discovers an inadvertent overstatement of deductions equal to 30% of gross income.

d. Taxpayer inadvertently omits an amount of gross income equal to 30% of the gross income stated on the return.

5. Jake, an individual calendar year taxpayer, incurred the following transactions.

Gross receipts		$800,000
Less: Cost of sales		(300,000)
Net business income		$500,000
Capital gain	$30,000
Capital loss	(90,000)	(60,000)
Total income		$440,000

Assuming that any error in timely reporting these amounts was inadvertent, how much omission from gross income

would be required before the six-year statute of limitations would apply?

a. More than $110,000.

b. More than $132,500.

c. More than $207,500.

d. The six-year rule does not apply here.

6. Vera is audited by the IRS for three tax years. Her returns were prepared by the following parties, to each of whom Vera paid a professional fee.

1 Sally (Vera’s niece, a dentist)

2 Wesley (an Enrolled Agent)

3 Alex (a CPA)

Vera wants help in appearing before the IRS Revenue Agent for the audit. Which of the following statements is correct?

a. Sally may represent Vera for all tax years involved.

b. Wesley may represent Vera, but only for tax year 2.

c. Alex can represent Vera, but only for tax year 3.

d. Vera may represent herself for all tax years involved.

7. A registered tax return preparer who is not also a CPA, attorney, or Enrolled Agent:

a. Can prepare returns and give tax advice.

b. Can represent the taxpayer before an IRS Appeals officer.

c. Must pass an annual qualifying exam concerning the tax law.

d. Is subject only to selected Circular 230 rules.

8. Circular 230 allows a tax preparer to:

a. Take a position on a tax return that is contrary to a decision of the U.S. Supreme Court.

b. Avoid signing a tax return that is likely to be audited.

c. Charge a $5,000 fee to prepare a Form 1040EZ.

d. Operate the “Tax Nerd’s Blog” on the Internet.

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

a. Files a tax return that includes a math error.

b. Fails to inform the IRS of an error on the client’s prior­year return.

c. Charges a fee to prepare an original Form 1120 equal to one­third of the taxpayer’s refund due.

d. All of the above are Circular 230 violations.

10.Which of the following is subject to tax return preparer penalties?

a. Meredith is the director of Federal taxes for a C corporation.

b. Sammy is a volunteer who prepares returns at the retirement home under the IRS Tax Counseling for the Elderly program.

c. Abbie prepares her mother’s tax returns for $50 a year. A CPA, Abbie would charge a client $750 for

completing a similar return.

d. Lizzie, the firm’s administrative assistant, makes copies of returns and assembles the mailings that the client

must make to the taxing agencies.

11.Megan prepared for compensation a Federal income tax return for Joan. Joan’s return included an aggressive interpretation of the rules concerning overnight business travel. Megan is not liable for a preparer penalty for taking an unreasonable tax return position if:

a. The tax reduction attributable to the disputed deduction did not exceed $5,000.

b. There was a reasonable basis for Joan’s interpretation of the travel deduction rules.

c. There was substantial authority for Joan’s interpretation of the travel deduction rules.

d. The IRS found that the travel deduction was frivolous, but Joan disclosed the position in an attachment to the return.

12.Mikel prepared for compensation a Federal income tax return for Mona. Mona’s return included an aggressive interpretation of the rules concerning the home office deduction. Mikel is not liable for a preparer penalty for taking an unreasonable tax return position if:

a. The tax reduction attributable to the disputed deduction did not exceed $5,000.

b. Mona is assessed her own penalty for an understatement of tax due to disregard of IRS rules.

c. The IRS found that the disputed deduction was frivolous, but Mona disclosed the position in an attachment to the return.

d. There was a reasonable basis for Mona’s interpretation of the home office deduction rules, and Mona

disclosed the position in an attachment to the return.

13.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?

a. $0, because Peggy incurred her own understatement penalty for the return. b. $2,000.

c. $4,000.

d. $5,000.

14.The privilege of confidentiality applies to a CPA tax preparer concerning the client’s information relative to:

a. Financial accounting tax accrual workpapers.

b. A tax research memo used to determine an amount reported on the tax return.

c. Building a defense against a penalty assessed for the use of a tax shelter.

d. Building a defense against a charge brought by the SEC.

.

15.The Statements on Standards for Tax Services are issued by the:

a. IRS.

b. AICPA.

c. ABA.

d. SEC.