Question 1

The tax professional can reduce the chances that staff personnel will incur IRS preparer penalties by adopting a
"tone at the top" that stresses integrity, diligence, and other elements of an ethical tax practice.

Accepted Answer

Adopting a "tone at the top" that emphasizes integrity, diligence, and ethical practices in tax preparation can influence the behavior of staff personnel, encouraging them to adhere to high standards and thus reducing the likelihood of incurring IRS preparer penalties.

Question 2

Last year, Ned's property tax deduction on his residence was $22,500. Although he lives in the same house, he tells his CPA that this year's taxes will be only $7,500. The CPA can use this estimate in computing Ned's itemized deductions under the Statements of Standards for Tax Services.

Accepted Answer

The CPA should verify the significant decrease in property tax deduction as it deviates substantially from the previous year, ensuring accuracy and compliance with tax laws and standards.

Question 3

An individual might be incarcerated upon a conviction for:

Accepted Answer

Committing criminal tax fraud is a serious offense that can lead to incarceration.

Question 4

Juarez (a calendar year taxpayer) donates a painting to a local art museum (a qualified charity). The painting cost Juarez $2,000 10 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 24% marginal Federal income tax rate, his penalty for overvaluation is:

Accepted Answer

Juarez's penalty for overvaluation would be $0 because the penalty for overvaluation of charitable contributions applies only when the overstatement exceeds 200% of the actual value. In this case, Juarez claimed the painting was worth $40,000, but it was actually valued at $30,000, which does not exceed the 200% threshold for triggering a penalty.

Question 5

Which statement is correct as to the conduct of IRS income tax audits?

Accepted Answer

Office audits are conducted at the office of the IRS, where the taxpayer is asked to bring documentation to support specific items on their tax return.

Question 6

Which of the following statements does not reflect the rules governing the accuracy-related penalty for negligence?

Accepted Answer

The accuracy-related penalty for negligence does not automatically apply whenever the taxpayer takes a return position contrary to a court decision. The penalty is more broadly based on negligence or disregard of rules or regulations, and there are provisions for reasonable basis and disclosure that can affect whether the penalty applies.

Question 7

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

Accepted Answer

Decisions made by the Small Cases Division of the Tax Court are final and cannot be appealed by either the IRS or the taxpayer. This is designed to provide a quicker, less formal resolution process for smaller tax disputes.

Question 8

Faye, a CPA, is preparing Judith's tax return. Last year, Judith's return included dividend income from the P&G Company. This year, Judith reports no such income. Faye should inquire as to whether Judith sold the P&G stock during the year.

Accepted Answer

Faye should inquire about the absence of dividend income to ensure the accuracy of the tax return, as the change could indicate a sale of the stock or another significant change in Judith's financial situation.

Question 9

Which statement is incorrect as to the conduct of IRS income tax audits?

Accepted Answer

The IRS does not publish the specific factors its computers use for audit selection purposes annually in the Commissioner's Report or elsewhere, as this information is considered sensitive and is kept confidential to prevent manipulation of returns to avoid audits.

Question 10

Ling has hired CPA Gracie to complete this year's Form 1040. Ling uses online accounting software to keep the books for her interior design sole proprietorship. Ling tells Gracie that a $5,000 amount for business supplies is "close enough" to report for this year's deduction. Gracie can use this estimate in completing the Form 1040.

Accepted Answer

Gracie, as a CPA, is required to ensure that all information on tax forms is accurate and verifiable. Estimations like "close enough" do not meet the standards of due diligence required for tax reporting.

Question 11

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?

Accepted Answer

IRS interest compounds daily, which means that interest is calculated on the amount owed each day, including previously accrued interest.

Question 12

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

Accepted Answer

The penalty for substantial understatement of tax liability does not apply if the taxpayer has substantial authority for the treatment taken on the tax return, the relevant facts affecting the treatment are adequately disclosed in the return or on Form 8275, or the IRS fails to meet its burden of proof in showing the taxpayer's error.

Question 13

In preparing a tax return, a CPA should verify to the penny every item of information submitted by a client about its deduction for repairs and maintenance.

Accepted Answer

A CPA is expected to exercise due diligence and apply professional judgment in preparing a tax return, but they are not required to independently verify every detail to the penny. They generally rely on the information provided by the client, unless it appears incorrect, incomplete, or inconsistent.

Question 14

It typically is advisable that an IRS audit be conducted at the office of the tax adviser, not of the client.

Accepted Answer

Having an IRS audit conducted at the office of the tax adviser rather than at the client's premises allows for better control over the process, minimizes the risk of spontaneous document requests, and ensures that the tax professional can manage the flow of information more effectively.

Question 15

The Commissioner of the IRS is appointed by the:

Accepted Answer

The Commissioner of the IRS is appointed by the U.S. President, reflecting the position's high level of responsibility within the federal government's executive branch.

Question 16

This official does not report directly to the IRS Commissioner.

Accepted Answer

The Treasury Secretary does not report directly to the IRS Commissioner; instead, the IRS Commissioner reports to the Treasury Secretary.

Question 17

Malik, Inc., a calendar year C corporation subject to a 21% 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:

Accepted Answer

The overvaluation penalty does not apply because the difference between the claimed value ($30,000) and the IRS-determined value ($10,000) does not exceed 200% of the correct amount, nor does the penalty amount meet the $5,000 threshold for corporations.

Question 18

CPA Shearer is required by AICPA tax ethics rules to inform her client Martinez of significant changes in the
Federal income tax laws.

Accepted Answer

The answer of CPA Shearer is required by AICPA tax...

Question 19

CPA Liam discovers that last year's Form 1120 for his client PollCo claimed a $100,000 advertising deduction for a gift to candidates of the Green Party. AICPA tax ethics rules require that an amended return immediately be filed because political expenditures are not deductible.

Accepted Answer

AICPA tax ethics rules require that the CPA advise the client of the error and the consequences, but the decision to file an amended return rests with the client, not the CPA.

Question 20

The National Taxpayer Advocate reports to the:

Accepted Answer

The National Taxpayer Advocate reports directly to the Commissioner of the Internal Revenue Service (IRS), providing an independent organization within the IRS that helps taxpayers resolve problems and recommends changes to prevent future problems.

Quiz 26: Tax Practice and Ethics

The tax professional can reduce the chances that staff personnel will incur IRS preparer penalties by adopting a "tone at the top" that stresses integrity, diligence, and other elements of an ethical tax practice.