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レグ 1 Ethics and Business Law > I-2 Federal Tax Practice and Procedures > Flashcards

I-2 Federal Tax Practice and Procedures Flashcards

1
Q

What penalty does IRS impose for understatement?

A

20% penalty based on the understated amount

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2
Q

What are 2 types of understatement?

A
  1. Disclosed AND there is a reasonable basis (20% chance of being sustained).
  2. There is a reasonable basis (40% chance of being sustained).
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3
Q

What are definition and 3 reasonable cause defense? Definition and one for Good faith defense?

A

Reasonable cause definition: The exercise of ordinary care.

  1. Judged objectively.
  2. Reliance on tax advisor.
  3. Reliance on advice of IRS employee

Good faith definition: Honesty of purpose.
Judged subjectively.

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4
Q

Where should disclosure be made?

A

Form 8275 or 8275-R

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5
Q

What are 2 types of cause of accuracy related penalties?

A

Failure to keep adequate books or records.

Failure to substantiate items that gave rise to the understatement.

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6
Q

Does the law require a specific type of records to keep?

A

No.

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7
Q

What are examples of deductions that are questioned?

A

Home office deductions, vehicle mileage, gifts to clients, food and entertainment.

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8
Q

What are 3 types of records that should be retained?

A
  1. All tax returns for the previous 7 years.
  2. All records that pertain to a return for the previous 3 yrs.
  3. Others, regardless of ages, that support subsequent tax positions.
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9
Q

What are substantiative requirement for charitable donations?

A

Donations more than or equal to $250 must be documented with a receipt.
More than $5,000 generally requires a qualified appraisal.

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10
Q

What are substantiative requirement for business use of an automobile?

A

Tax payer must track the miles driven for business use in a timely-kept log.

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11
Q

What is penalty for late filing or failure to file? When failure to file is fraudulent? For late payment of tax (return filed)? When both return and payment was late?

A

5% of the next tax due per month (up to 25% of unpaid taxes).

15% per month (up to 75% of unpaid tax).

0.5% of the next tax due per month (up to 25%) Plus interest.

Not 5.5%, but capped at 5%.

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12
Q

What are 2 IRS focus on understatement penalty due to carelessness or negligence?

A

Taxpayer conduct.

Taxpayer position.

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13
Q

What is substantial understatement for individuals?

A

Understatement exceeds greater of;

10% of the tax or $5,000.

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14
Q

What is substantial understatement for corporations?

A

Understatement exceeds lesser of:

10% of the tax (or, if greater, $10,000) or $10,000,000.

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15
Q

What is a way to avoiding substantial claim?

A

Substantial authority - weight of authority supporting the claimed position is more than the weight of authority opposing it.
AND
more than 40% chance of being sustained.

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16
Q

What is the penalty for Civil Fraud? Can reasonable cause and good faith defense be used?

A

75% penalty.

No.

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17
Q

Criminal tax culpability: what are examples of tax evasion?

A

Failure to file a return, falsifying income, falsifying deductions.

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18
Q

Tax evasion: what are 3 things must government prove and how much?

A
  1. An affirmative act, an attempt to evade tax.
  2. Willfulness.
  3. Existence of a tax deficiency.
    Beyond reasonable doubt.
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19
Q

What are 3 primary sources of authority (law itself)?

A
  1. Legislative authority (Congress).
  2. Administrative authority (Administrative - president’s cabinet).
  3. Judicial authority (Courts).
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20
Q

What is the secondary authority?

A

Anything other than primary authority.

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21
Q

Which source must a CPA use in decision making?

A

From primary sources.

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22
Q

Which source does IRC belong to?

A

Primary source - codification of the tax laws promulgated by Congress.

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23
Q

What are sources of legislative authority? Who has the last say?

A

Constitution, IRC, Committee reports (provide insights).

Congress.

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24
Q

What is the most significant type of Administrative source?

What are 2 categories in it?

A

Treasury regulations.

  1. Legislative (highest authority), interpretative, procedural regulations.
  2. Proposed (no effect in law), temporary (by IRS, for 3 yrs), final.
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25
Q

What are other Administrative sources?

A
  • Revenue Rulings (specific facts).
  • Private Letter Rulings (at request of taxpayer for actions that have not made - good only for requested party).
  • Revenue procedures.
  • Technical advice memoranda.
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26
Q

What are 3 courts of original jurisdiction?

A

Tax court, District court, Claims court (national court).

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27
Q

What are appeals court for 3 courts? What is the court after those?

A

Tax/District court - Circuit Court of Appeals (11 Circuits and DC Circuit).
Claims court - Court of Appeals (Federal Circuit)

Supreme Court.

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28
Q

Which court is the only one tax payers can go to without first paying the tax deficiency?

A

Tax court.

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29
Q

Which court is the only one Jury trial is available?

A

District Court.

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30
Q

What are 2 characteristics of Small Cases Division of Tax Court?

A

$50,000 or less.

No appeal.

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31
Q

What is the highest source of tax legislative authority? Next highest?

A

US Constitution.

IRC.

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32
Q

What has almost as much weighting of authority as IRC?

A

Legislative regulations.

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33
Q

What is the highest tax Administrative authority? Next?

A

Regulations.

Revenue Rulings.

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34
Q

What are the factors influence the weighting of a judicial decision?

A

Level of court, legal residence of taxpayer, whether IRS has acquiesced (disagree, but will honor the other decision) to the decision, the date of the decision, whether later decisions have concurred with opinion.

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35
Q

What are 7 steps of research?

A
  1. Identify all relevant facts.
  2. Clearly state problem to be solved.
  3. Locate applicable tax authority.
  4. Evaluate the relevance of the authorities.
  5. Determine alternative solutions.
  6. Determine the most appropriate solution.
  7. Communicate results.
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36
Q

What are 5 steps of communicating research?

A
  1. Document all relevant facts.
  2. Clearly describe the issue investigated.
  3. Report conclusions.
  4. Summarize rationale and authorities that support conclusions.
  5. Summarize key authorities used.
37
Q

IRS audit: How is IRS audit target determined?

A

Matching program.

Score from formula from Discriminant Function System (DIF).

38
Q

IRS audit: Who can taxpayer select as his representation?

A

a CPA, attorney, enrolled agent.

39
Q

IRS audit: What are typical classified types of returns?

A

Individual, corporation, partnership, fiduciary, etc.

40
Q

IRS audit: What power does IRS have?

A

To summon records and witness to testify.

41
Q

IRS audit: what does IRS use to report its findings?

A

Income Tax Examination Changes Report.

42
Q

IRS audit: What are 2 types of questions IRS may have?

A

Questions of fact or law.

43
Q

IRS audit: What source does IRS use to take its position?

A

Administrative sources fo the tax law.

44
Q

IRS audit: how long can the negotiation between IRS and taxpayer go on?

A

Until the issue is resolved.

45
Q

IRS audit: Can taxpayer pursue tax relief in Tax Court after agreeing with the proposal in Revenue Agent’s Report?

A

No.

46
Q

IRS audit: What must taxpayer do before he can pursue refund through District Court or Claims Court?

A

Pay the deficiency

47
Q

IRS audit: What will IRS do if agreement is not reached? What does IRS encourage taxpayer to do?

A

Send copy of the Revenue Agent’s Report and a 30-day letter.

To agree to RAR or request an appellate conference.

48
Q

IRS audit: Is taxpayer required to respond to 30-day letter?

A

No

49
Q

IRS audit: What happens when taxpayer doesn’t respond to a 30-day letter or does not reach agreement in the appeal’s process?

A

Send a 90-day letter with a statutory notice of deficiency.

50
Q

IRS audit: What must a taxpayer do to appeal with a 30-day letter?

A

Filed a written protest with the request for an appellate conference.

51
Q

IRS audit: What must a written protest explain?

A

The taxpayer’s position for issues and provide support.

52
Q

IRS audit: Is IRS required to grant an appeal?

A

No.

53
Q

IRS audit: Can IRS raise new issues besides what Revenue Agent’s Letter states during appeal?

A

No.

54
Q

IRS audit: Which form will be signed if the case is settled? Can the case be reopened by IRS?

A

Form 870-AD.

Yes, if there is a sig mathematical error or fraud.

55
Q

IRS audit: What does “no change” issuance by IRS mean? Can IRS reopen the case?

A

Taxpayer’s appeal was successful.

No unless fraud exists.

56
Q

IRS audit: What’s the sig of a 90-day letter? Which date is used?

A

This is the time that the taxpayer has to file a petition with the Tax Court.
The date on the statutory notice of deficiency.

57
Q

IRS audit: Can IRS enforce its assessment after a petition is filed with the Tax Court by taxpayer?

A

No until the decision is finalized.

58
Q

IRS audit: Can taxpayer make an offer to settle the deficiency with lesser amount?

A

Yes. but IRS is not required to accept it.

59
Q

IRS audit: Is taxpayer required to accept IRS’s request to extend the statute of limitations period? What will generally happen?

A

No.

If refused, IRS will generally assess a tax deficiency.

60
Q

IRS audit: what are 2 cases privileged communication between taxpayer and CPA does not apply?

A

Criminal tax matters or corporate tax shelters.

61
Q

Must taxpayer always sign the return? In the case of e-file?

What must a tax preparer do?

A

Yes.
Use an electronic signature.
Sign the return and provide a Personal Identification Number (PIN).

62
Q

A tax return is signed under what? What’s the consequence of signing a false return?

A

Penalty of perjury.

Being subject to civil and/or criminal penalties.

63
Q

What’s the penalty for tax preparer for failing to sign the return or providing PIN?

A

$50 penalty for each failure (up to $25,000 in a calendar year).

64
Q

What is “registration requirement”?

A

Anyone who prepares tax returns for compensation has to be registered with IRS and pay a registration fee.

65
Q

Which form must be completed if an individual is to represent a taxpayer before IRS or obtain info from IRS?

A

A power of attorney (Form 2848, Power of Attorney and Declaration of Representative).

66
Q

What are other professional stds a CPA is subject to besides Circular 230?

A

AICPA’s Code of Professional Conduct, AICPA’s Statements on Standards for Tax Services.

67
Q

What is Form 1139? Form 1045?

A

Used by a corporation to file for a tentative adjustment or refund when an overpayment of taxes for a prior year results from the carryback of a current year’s net operating loss or net capital loss.
Used by an individual for similar purpose.

68
Q

What is Form 1040X?

A

Amended U.S. Individual Income Tax Return, should be used to claim a refund of erroneously paid income taxes`

69
Q

What is Form 843?

A

used to file a refund claim for taxes other than income taxes.

70
Q

What is the form to submit std tax return? Due date? Can taxpayer ask for an extension?

A

Form 1040. April 15 unless the day falls on a weekend.

Yes, automatic extension to Oct 15 with IRS approval.

71
Q

Pmt Requirement - Individual: When must taxpayer pay estimated pmts? Self-employed individual?

A

If the amount of tax owed is at least $1,000 after subtracting withholdings and credits.
On Apr 15, June, Sept, Jan.
More than $400 net earnings.

72
Q

Pmt Requirement - Individual: What are 2 ways that there is no underpayment penalty?

A

*If the total tax pmts are at least equal to the lower of: 90% of the current yr’s tax / 100% of the prior yr’s tax.
If the adjusted income exceeds $150,000 and taxpayer chooses to base off the prior year, 110% of prior year tax.
*Annualized income exception: Compute actual income for each quarter and compute estimated tax pmt based on the income computation.

73
Q

Pmt Requirement - Individual: What is underpayment penalty?

A

Applicable interest rate (IRS) x underpayment until the earlier of Apr 15 or the time the tax is paid.

74
Q

Pmt Requirement - corporation: When must taxpayer pay estimated pmts?

A

Apr 15, June, Sept, Dec.

If the amount of tax owed is at least $500 after withholdings and credits.

75
Q

Pmt Requirement - corporation: What are 2 ways that there is no underpayment penalty?

A

*If the tax pmts are at least equal to the lower of 100% of the current yr’s tax / 100% of the prior yr’s tax.
*Annualized income exception.
A corporation with $1 million or more of taxable income in any of 3 preceding tax yrs can use the preceding yr’s tax exception only for its first installment.

76
Q

When is the preceding yr exception method not allowed for all taxpayers?

A

When there was no tax liability in the preceding yr.

77
Q

Annualization exception: How to compute amount due with an installment?

A

Tax due till the point minus the amount required to be paid for previous installments.

78
Q

Can different exceptions for underpayment penalty be used for different installment or the same one?

A

Ok to use different ones.

79
Q

What should taxpayer do if the installment under the annualized income method is less than the required installment under the regular method?

A

Any reduction in a required installment is captured by increasing the amount of the next required installment.

80
Q

What is the penalty for accuracy-related penalty: underpayments due to negligence, disregard of rules, substantial understatement, or substantial valuation overstatement?

A

20%.

81
Q

What is Form 1120X?

A

Used by corporation to amend return.

82
Q

Does tax preparer’s penalties only apply to returns?

A

No, all federal tax related items such as preparers for estate, gifts, employment, excise, exemption.

83
Q

Preparer penalty: What does “not frivolous” mean? “Reasonable basis”? “Substantial authority”? “More likely than not”?

A

F: not patently improper.
R: at least one authority that has not been over ruled.
S: more than a reasonable basis (>40%).
M: more likely than not (>50%).

84
Q

Preparer penalty: When is the position unreasonable? Preparer penalty? Exception?

A

When there is not substantial authority for it.
Equal to greater of $1,000 or 50% of the income derived by the preparer for preparing the return.

If the position is disclosed and there is a reasonable basis for it. It only applies to reportable transactions and tax shelters with more likely than not chance of being sustained.

85
Q

Preparer penalty: when the understated tax liability is due to an unreasonable position and the preparer willfully attempts to understate the tax liability or recklessly or intentionally disregards rules?

A

Greater of $5,000 or 75% of the income earned by preparing the return or claim.

86
Q

Preparer penalties: Others?

A

Not signing the returns done for compensation.
Not providing a copy of the return for the taxpayer.
Not keeping a list of returns filed.
Endorsing or negotiating a refund check.
Disclosing confidencial info.

87
Q

What must a CPA do when realizing error in the return after filed? If the client doesn’t take corrective action and ask you to prepare the next return, what should you do?

A

Notify the client immediately, but not IRS (prohibited).

Consider withdrawing.

88
Q

What is UTP?

A

Uncertain tax position.
When a corporation has at least $10 million of assets and uncertain tax positions and it or related party has issued audited FS.

89
Q

What is disclosure requirement for UTP?

A

Including a concise description of each UTP ranked by the current year’s relative magnitude based on the FS reserve.

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