Wassim Zhani Chapter 18 Tax Practice and Procedure.pdf

1. Tax Practice and Procedure
Solutions to Tax Research Problems
TA X RE S E A R C H PR O B L E M S
18-64 The IRS is likely to prevail. Section 6501(c)(1) states that the tax may be assessed at any time on a false or
fraudulent return. (In other words, the statute of limitations never expires.) In E. Badaracco, Sr. (SupCt
84-1 USTC {9150, 104 SCt 756), the U.S. Supreme Court held that the filing of a non-fraudulent amended
return does not start the running of the three-year statute of limitations, since the original return filed was
fraudulent. Consequently, an unlimited time for assessment applies.
18-65 N should be penalized for failure to file. N gave information that was later determined to be incorrect to
her accountant, and his reply was based on that incorrect information. Section 6651(a)(1) states that a
penalty for failure shall be imposed, “unless it is shown that such failure is due to reasonable cause and not
due to willful neglect.” In R. L. Stovall (CA-11, 85-2 USTC {9450, 762 F.2d 891), the taxpayer was unable
to avoid the failure to file penalty by claiming that he relied on his accountant. Since the taxpayer was
unable to prove that he provided his accountant with all relevant information, the reliance on the
accountant was not “reasonable.”
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18-1

3. Tax Practice and Procedure
Test Bank
True or False
1. An example of involuntary taxpayer compliance is found in a sales tax system.
2. The Secretary of the Treasury has delegated the rule-making authority to the Commissioner of the
IRS, subject to the Secretary’s approval.
3. Only a small percentage of tax returns are scanned for mathematical errors as well as exclusions,
deductions, and credits.
4. Exceeding a “normal” range for itemized deductions at various income levels may trigger an audit by
the IRS.
5. Generally, an audit must be performed within three years of the due date of the tax return.
6. A taxpayer who agrees with a revenue agent’s proposed audit adjustment and signs Form 870 waives
the right to pursue the appeals process within the IRS and the courts.
7. The IRS allows a taxpayer an appellate conference as a matter of right.
8. If a taxpayer recognizes that she is liable for $1,500 of a $3,000 adjustment made by the IRS after an
audit, it is probably wise to agree with the adjustment and pay the entire amount, even though she is
convinced that she is not liable for the entire $3,000.
9. The general period of limitations for tax assessment is three years from the due date of the return or
the date the return is filed, whichever is later.
10. Taxpayer D filed his 2011 tax return on April 1, 2012. Absent fraud or a substantial omission from
gross income, the statute of limitations will expire on April 1, 2015.
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18-3

4. 11. Taxpayer T, a taxicab operator, filed his 2011 tax return on April 15, 2012. If T inadvertently omitted
$1,800 (average gross income for one month) from the return, the statute of limitations is extended to
April 15, 2018.
12. There is no statute of limitations barring assessment of additional taxes if the taxpayer either
deliberately filed a fraudulent return or failed to file a return for the year.
13. The filing of an amended return within 90 days of the expiration of the original statute of limitations
period will automatically extend the limitations period for 180 days from the date the amended return
is filed.
14. A refund claim must be filed within the later of three years from the filing (or due date) of the return,
or three years from the actual payment of the tax.
15. The minimum penalty for failure to file a tax return is the lesser of $135 or 100 percent of the net tax
due if the return is more than 60 days late.
16. A taxpayer that has received an extension of time to file his or her tax return will not be subject to the
failure-to-pay penalty for the extension period.
17. The failure-to-file penalty is reduced by the failure-to-pay penalty for any month that both penalties
apply.
18. A taxpayer can only be represented by an attorney, a CPA, or an enrolled agent during an IRS
examination of his or her return.
19. A tax return preparer who understates the liability of the taxpayer due to reckless or intentional
disregard of the rules or regulations will be subject to a flat $500 penalty.
20. A tax return preparer that endorses or otherwise negotiates an income tax refund check issued to the
taxpayer will be subject to a $500 penalty.
Multiple Choice
21. While the IRS will not publicize the precise factors that determine whether a return will or will not be
audited, one can deduce that all of the following may be prime targets except
a. Self-employed persons, especially those in typically high-income businesses
b. Individuals with high gross income
c. Taking a deduction that may be easily abused (business use of an automobile, for example)
d. Activity in sensitive areas, such as salaried government employees, social security recipients, and
graduate students on fellowships
e. All of the above
22. On the receipt of a refund check for overpayment of taxes, a taxpayer may assume
a. His or her return is not likely to be audited.
b. His or her return is likely to be audited.
c. His or her return definitely will be audited.
d. His or her return definitely will not be audited.
e. Nothing
18-4 Chapter 18 Tax Practice and Procedure

5. 23. It is always expected that an individual taxpayer facing an audit at the local IRS office must appear in
person except when
a. A certified public accountant goes instead.
b. An individual enrolled to practice before the IRS appears instead.
c. An attorney goes in his or her place.
d. Any qualified individual appears with a written power of attorney (Form 2848) executed by the
taxpayer.
e. All of the above are valid exceptions.
24. An IRS agent may not do which of the following?
a. Summon the taxpayer’s records.
b. Require the taxpayer to accompany the representative without first issuing an administrative
summons.
c. Both of the above may be done by an IRS agent.
d. Neither of the above may be done by an IRS agent.
25. Of the issues raised by an IRS audit, generally the most troublesome are
a. Questions of law
b. Questions of fact
c. Mixed questions of law and fact
d. Questions relating to Revenue Rulings
26. If a taxpayer wants a conference with the IRS Appeals Division, a written protest for appeal must be
filed with the request for an appellate conference. The protest is required in all cases except which one
of the following?
a. The deficiency was assessed in an office audit.
b. The deficiency is no greater than $2,500 for each tax period audited.
c. The deficiency is greater than $5,000 for each tax period audited.
d. The deficiency was assessed in a field audit.
e. Either a. or b.
27. Signing a Form 870-AD (Offer of Waiver of Restrictions on Assessment and Collection of Deficiency)
does all but which one of the following?
a. Settle the case.
b. The case will not be reopened (except if fraud, misrepresentation of fact, or serious mathematical
error is found).
c. Does not stop the running of interest until the offer is accepted by the IRS.
d. All of the above statements are true.
e. None of the above statements are true.
28. Which one of the following statements regarding the statutory notice of deficiency (90-day letter) is false?
a. Issuance of the 90-day letter suspends the running of the statute of limitations.
b. The 90-day letter is automatically issued to taxpayers who do not respond to the 30-day letter.
c. The 90-day letter does not suspend the running of interest on the deficiency.
d. The 90-day letter cannot be issued to a taxpayer until after the Appeals Division has reviewed the
agent’s proposed adjustments with the taxpayer.
e. A taxpayer cannot petition the Tax Court for relief until the 90-day letter has been issued.
29. An offer of compromise may be appropriate except
a. When substantial taxes are due
b. When the taxpayer can pay the entire deficiency in a short period of time
c. When there is doubt that the entire amount is collectible
d. All of the above
e. None of the above
Test Bank 18-5

6. 30. In terms of procedure, before a taxpayer may file a claim for a tax refund in a federal district court or
a federal claims court he or she must
a. Hire a tax lawyer.
b. Exhaust the IRS’s administrative remedies.
c. Avoid an IRS Appeals Conference.
d. Settle with the local IRS office.
31. Under normal circumstances, the statute of limitations for tax assessment for a return filed for 2011
on February 3, 2012, is
a. February 3, 2014
b. February 3, 2015
c. February 3, 2016
d. April 15, 2014
e. April 15, 2015
32. What is the date of the statute of limitations if the taxpayer files a Form 1040X on March 15, 2013
after having filed his 2011 Form 1040 on February 3, 2012?
a. March 15, 2014
b. March 15, 2015
c. March 15, 2016
d. April 15, 2014
e. April 15, 2015
33. What is the statute of limitations in the event that the taxpayer has filed a false or fraudulent return
with the intent to evade taxes?
a. Three years from the date the return is actually filed or the return is due, whichever is later
b. Answer A, plus a 60-day extension
c. Answer A, plus a 90-day extension
d. Answer A, plus a one-year extension
e. There is no statute of limitations in this case.
34. After an assessment has been made which of the following applies?
a. The IRS must begin proceedings to collect the tax within 10 years of the assessment.
b. The IRS must either levy against a taxpayer’s property or initiate court proceedings to recover the
tax assessed.
c. The limitations period may be extended by written agreement between the taxpayer and the IRS.
d. All of the above
e. Either a. or b.
35. Which of the following statements regarding refund claims is true (assuming that the taxpayer does
not wish to file suit in the Tax Court)?
a. If no tax return is filed, a refund claim must be filed within two years of the date the tax was paid.
b. A refund claim must be filed within three years from the date the tax return to which it relates
was filed, or if later, within two years of the actual payment of the tax.
c. If a return is filed and tax is paid, the amount of the refund may not exceed the tax paid within
the three-year period.
d. If a refund is claimed after three years from the date the return is filed (or was due), but within
two years of the payment of the tax, the refund amount may not exceed the amount paid during
the last two years.
e. All of the above statements are true.
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7. 36. One way to revive a civil charge against a taxpayer after the statute of limitations has run out on the
alleged wrong is to
a. File a statutory notice of deficiency (i.e., a 90-day letter).
b. Appeal to the appropriate U.S. district court.
c. Both a. and b.
d. There is no way to revive the claim.
37. A father reports his 15-year-old daughter’s income on his 2011 return. The daughter’s income was
$5,000. Which of the following describes what could happen if the daughter is audited in 2015?
a. Nothing can happen because the statute of limitations will have run out.
b. The father may claim a refund for the tax paid on his daughter’s income.
c. The daughter files her 2011 return late and pays tax on the $5,000 plus penalty and interest.
d. Both b. and c.
38. The total penalty for failure to file may not exceed a certain percentage of the net tax due. That
amount is
a. 10 percent compounded
b. 15 percent
c. 20 percent
d. 25 percent
e. 20 percent compounded
39. T, a calendar year taxpayer, determined that his net tax due for 2011 was $800. Unfortunately, T had
no money to pay the tax, so he postponed filing and paying the amount due until November 1, 2012.
T did not ask for an extension of time to file his return. T’s failure-to-file penalty will be
a. $100
b. $180
c. $196
d. $200
e. $220
40. When a taxpayer fails to pay the tax owed at the time it is due, a penalty is imposed; the penalty is
normally one-half of one percent of the net tax due for each month the tax is not paid. In what
situation may the penalty be increased to one percent per month?
a. If the taxpayer moves out of the country
b. If the IRS notifies the taxpayer of its intent to levy on the taxpayer’s assets
c. If the taxpayer is found guilty on a drug charge
d. If the IRS perceives that the taxpayer’s nonpayment is intentional fraud
e. Any one of the above situations
41. When a taxpayer shows that failure to file a tax return or to pay a tax is due to reasonable cause, no
penalty is assessed. While the concept of reasonable cause is not clearly defined by the IRS, it is
probable that the IRS and the courts would not allow which one of the following situations?
a. Serious illness of the taxpayer
b. Death of the taxpayer
c. Natural disaster
d. Reliance on an accountant to file the return
e. Unavoidable destruction of the taxpayer’s records
Test Bank 18-7

8. 42. In 2010 B’s A.G.I. was $36,000, and her gross tax liability was $6,000. In 2011 her A.G.I. is $45,000,
and her gross tax liability before prepayments is $8,000. What is the lowest required installment that B
can make and avoid a penalty? (Ignore the annualized income installment.)
a. $2,000
b. $1,800
c. $1,500
d. $1,350
43. In 2011 Q’s A.G.I. was $153,000, and his gross tax liability was $40,000. In 2012 his A.G.I. is
$160,000, and his gross tax liability before prepayments is $45,000. What is the lowest required
installment that Q can make and avoid a penalty? (Ignore the annualized income installment.)
a. $11,250
b. $11,000
c. $10,125
d. $10,000
44. Z, a calendar year self-employed individual, had a $1,600 tax liability for 2011. Because Z had so
many itemized deductions and exemptions, this tax liability was due solely to the self-employment tax.
Z’s 2011 tax liability, including $3,000 of self-employment taxes, totaled $4,000. Z’s 2011 A.G.I. was
$22,000. In order to avoid a penalty for her 2011 tax year, Z must have made quarterly estimated tax
payments of at least
a. $200
b. $400
c. $750
d. $1,000
e. $1,600
45. An accuracy-related penalty is imposed for underpayment of taxes due to the taxpayer’s negligence,
according to §6662. T files his 2011 return on April 15, 2012, and two years later the IRS assesses an
additional $6,000 of tax attributable to failure to report income. Not counting the interest on both the
additional tax and the penalty, how much negligence penalty will T have to pay?
a. $300
b. $600
c. $900
d. $1,200
e. $1,500
46. Taxpayer M defrauded the U.S. Government by understating her tax by $12,000 in 2011. If the IRS is
able to prove civil fraud in this case, M may have to pay a penalty of
a. $600
b. $1,000
c. $6,000
d. $9,000
e. $12,000
47. A difference between finding a taxpayer accountable under a civil fraud count and under a criminal
fraud count is that
a. Civil fraud must be shown by a preponderance of the evidence, while a criminal fraud must be
proven beyond a reasonable doubt.
b. The civil penalty is a percentage of the underpayment, while the criminal penalty is assessed
according to the severity of the fraud.
c. The civil penalty is reserved for tax avoidance of relatively minor amounts, while the criminal
penalties are reserved for the tax avoidance of greater amounts.
d. Both a. and b.
e. Choices a., b. and c.
18-8 Chapter 18 Tax Practice and Procedure

9. 48. The potentially least severe penalty is imposed for which one of the following criminal tax offenses?
a. Willful attempt to evade or defeat any tax
b. Willful failure to collect or truthfully account for and pay over any tax
c. Willful failure to pay a tax or an estimated tax, to make a required return, to keep required
records or to supply required information
d. Willfully furnishing an employee with a false statement regarding tax withholdings on wages
e. Making a declaration under penalty of perjury not believed by the maker to be true, preparing or
assisting in preparation of fraudulent returns or other documents, or concealing goods or property
in respect of any tax
49. A person who submits a frivolous return (e.g., one with 50 dependents) may face a civil penalty of
a. $500
b. $1,000
c. $2,000
d. $2,500
e. $5,000
50. A taxpayer may request that an overpayment (refund) of taxes be credited to a subsequent tax period
liability instead of taking payment by check. If this is done,
a. The interest runs from the date of the overpayment to the due date of the amount against which
the credit is taken.
b. No interest is accrued.
c. The interest runs from the date of the overpayment but at substantially lower than the Federal
short-term rate.
d. The interest is put into a special reserve account that the taxpayer can withdraw at any time.
e. None of the above
51. The standard of conduct for professionals who practice before the IRS includes all but which one of
the following?
a. No practitioner may unreasonably delay the deposition of any matter before the IRS.
b. No practitioner may engage in the practice of using a form of public communication (e.g.,
advertising) that contains a false or fraudulent statement of claim.
c. No practitioner may engage in direct or indirect, uninvited solicitation of employment regarding
tax matters. (This does not include mailings to the general public.)
d. A practitioner must advise a client of any noncompliance or omission he or she knows of with
respect to any return or document that the client is required to file.
e. All of the above
52. To practice as a preparer of tax returns, a person must have appropriate
a. Educational background
b. Competence
c. Experience
d. All of the above
e. None of the above
53. Which one of the following statements relating to return preparer’s penalties is incorrect?
a. $1,000 penalty for willful understatement of tax liability, or for understatement of tax liability due
to reckless or intentional disregard of the rules and regulations
b. $50 penalty for failure to furnish a copy of the tax return to the taxpayer
c. $50 penalty for failure to sign a tax return if prepared for compensation
d. $50 penalty for failure to retain a copy or record of a return prepared for compensation
Test Bank 18-9

10. 54. According to the AICPA Statements on Standards for Tax Services, a CPA should do all of the
following except
a. The CPA should only recommend to a client that a position be taken or prepare a return with a
position that can be sustained administratively or judicially.
b. The CPA should not rely on a third party in preparing a return.
c. A CPA may recommend a tax return position that differs from the way an item was previously
treated in an IRS examination, IRS appeal, or a court decision for that taxpayer, unless that
taxpayer is bound to a specific treatment for the item in the later year.
d. All of the above
e. None of the above
18-10 Chapter 18 Tax Practice and Procedure

11. Tax Practice and Procedure
Solutions to Test Bank
True or False
1. True. The sales tax is collected by the merchant at the time of the transaction. (See p. 18-2.)
2. True. Because Congress has delegated its rule-making authority, it is the duty of the IRS to ensure
compliance with the tax laws. (See p. 18-2.)
3. False. All returns are scanned for these items but only a small number of returns actually get selected for
audit. (See p. 18-3.)
4. True. Exceeding “normal” ranges is one of the most common reasons for audits. (See p. 18-3.)
5. True. According to § 6501 and Reg. § 301.6501, the statute of limitations is three years. Note, however, there
is no statute of limitations for a fraudulent return. (See pp. 18-4 and 18-5.)
6. False. By signing Form 870, the taxpayer waives the right to pursue the appeals process with the IRS and
also waives the right to petition the Tax Court for relief. However, the taxpayer is not prohibited from paying
the deficiency and suing for a refund in a U.S. District Court or the U.S. Claims Court. (See p. 18-7.)
7. False. In fact, the IRS does not allow the taxpayer a conference as a matter of right. Instead, it offers the
process as a privilege for a taxpayer who wishes to dispose of a case at an administrative level. Those making
frivolous appeals or pursuing claims based on extra-legal, moral, or political reasons may not be granted an
appellate conference. (See p. 18-8.)
8. False. If the taxpayer believes she is only liable for $1,500, she should probably appeal the adjustment. The
Appeals Division is eager to settle cases, especially relatively small ones, to reserve the courts for the more
important cases. It is possible that the taxpayer will be able to reduce the $3,000 adjustment to a figure closer
to the $1,500 she concedes. Of course, the taxpayer must consider the costs of presenting her case before
deciding to appeal. (See pp. 18-7 through 18-12.)
9. True. The statute of limitations generally runs for three years from the due date of the return or the date the
return was filed, whichever is later. [See p. 18-19 and § 6501(a).]
18
18-11

12. 10. False. The statute of limitations will not begin to run until April 15, 2012 because the return was filed before
the due date. The statute of limitations will expire April 15, 2015. [See Example 8 and p. 18-18 and § 6501(a).]
11. False. The statute of limitations is extended to six years only if there is a substantial omission of income; that
is, if the taxpayer omits (for any reason) income in excess of 25 percent of the gross income reported on the
return. One month’s average gross income is less than the 25 percent omission required to extend the statute.
[See p. 18-18, § 6501(f), and Reg. § 301.6501(f)-1.]
12. True. Assessment of taxes may be made or a court action begun at any time if the taxpayer intentionally files
a fraudulent return or fails to file a return. [See p. 18-18, § 6501(c), and Reg. § 301.6501(c)-1.]
13. False. If an amended return is filed and the normal assessment period would expire in less than 60 days, the
limitations period is extended for 60 days from the date of filing the amended return. (See Example 12 and
p. 18-19.)
14. False. A refund claim may be filed within the later of three years from the filing (or due date) of the return or
within two years from the actual payment of the tax. (See Examples 15 and 16 and pp. 18-20 and 18-21.)
15. True. The purpose of the minimum failure-to-file penalty is to encourage taxpayers owing small amounts of
tax to file a tax return. (See Examples 19 and 20 and p. 18-23.)
16. False. Only the failure-to-file penalty can be avoided if the taxpayer files a proper extension (i.e., a timely
filed extension request accompanied by 100% of the estimated tax due) and the return is filed within the
extended period. (See p. 18-23.)
17. True. This offset is allowed to mitigate the harsh effect of the double penalty. [See Example 21, 18-24, and
§ 6651(c)(1).]
18. False. Under certain circumstances, individuals other than attorneys, CPAs, or enrolled agents may represent
a taxpayer before the IRS. For example, a mentally competent person always may represent her- or himself.
(See p. 18-39.)
19. False. The penalty for understatement of a client’s tax liability due to reckless or intentional disregard of the
rules or regulations is the greater of $5,000 per return or 50 percent of the preparer's income from the return
or claim. [See p. 18-39 and § 6694(b).]
20. True. In order to market their services, some tax return preparers offer clients an “instant” refund by making
the taxpayer a loan for the amount of a claimed tax refund. The penalty of $500 per occurrence is to
discourage a devious tax return preparer from preparing a refund claim for a lower amount, having the
taxpayer sign the return and receive the instant refund, and then correcting the claim to the higher amount
and cashing the refund claim check. [See p. 18-39, § 6695(f).]
Multiple Choice
21. d. Certain sensitive areas are included in this category but those listed in this answer are not necessarily subject to
an audit. Other sensitive areas include oil and gas, equipment leasing, and real estate ventures. (See p. 18-3.)
22. e. Nothing can be assumed, even if a taxpayer receives a refund for overpayment of taxes. This is absolutely
no indication whether the IRS will audit the particular return. The selection of returns is done through the
use of the Discriminant Function System that scores returns, identifying those that have the greatest
likelihood for containing significant error. (See p. 18-3.)
23. d. Any qualified person may represent the taxpayer. The IRS requires that the representative act under a
written power of attorney (Form 2848). (See p. 18-5.)
24. b. The IRS may not require the taxpayer to accompany the representative unless an administrative summons
is issued to the taxpayer. However, the IRS may notify the taxpayer directly if it is believed that the
representative is causing unreasonable delay. (See p. 18-5.)
18-12 Chapter 18 Tax Practice and Procedure

13. 25. c. Mixed questions of law and fact are usually the most difficult to resolve because the applicable law must
be interpreted to fit ambiguous factual areas, or areas that the pertinent law might not have been intended
to reach. (See p. 18-6.)
26. e. The written protest is required in all cases except where the deficiency is no greater than $2,500 for each
tax period audited or the deficiency was assessed in an office audit. (See p. 18-7.)
27. d. All of the statements are true. Unlike Form 870, Form 870-AD does not stop the running of interest until
the offer is accepted by the IRS. Similarly, acceptance of 870-AD by the IRS means the case will not be
reopened, while 870 does not preclude further audits. (See p. 18-12.)
28. d. The 90-day letter may be issued at various times. If the taxpayer does not request an appeal, the Appeals
Division will not be involved in the audit process. (See p. 18-12.)
29. b. An offer in compromise is not appropriate if the taxpayer is able to pay the entire tax liability in a
reasonably short period of time. (See p. 18-15.)
30. b. A cardinal rule of administrative law is that all of an agency’s (like the IRS) procedures for getting a
remedy must be gone through (i.e., exhaust) before a court will consider the case. For purposes of judicial
economy, the appropriate federal agency is charged with working up a complete factual record and
making an expert judgment based on that record. Only after the taxpayer has gone through this process
may he or she take the case to a court. (See p. 18-16.)
31. e. The general period of limitations for tax assessment is three years after the date the return is filed or the
date the return is due, whichever is later, according to §6501(a). Therefore, it would be three years after
April 15, 2012 or April 15, 2015. (See p. 18-18.)
32. e. An amended return does not change the length of the limitations period. Thus, the statute of limitations is
unchanged and expires April 15, 2015, three years from the date the return is due (April 15, 2012) or the date
the original return was actually filed. (See pp. 18-18 through 18-19.)
33. e. There is no statute of limitations for a fraudulent return. (See p. 18-18.)
34. d. All of the statements apply. After an assessment has been made in a proper and timely manner, principles
of the American justice system require timely collection of assessments. If the collection cannot be made
in a timely fashion, the government can lose its right to the collection. (See p. 18-20.)
35. e. All of the statements are true, assuming that the taxpayer does not wish to file suit in Tax Court. A
nonfiler who goes to Tax Court may obtain a refund of the amounts paid within the three years prior to
the notice of deficiency. (See Examples 15 and 16 and pp. 18-20 through 18-21.)
36. d. Once the statute of limitations has run, the taxpayer has an absolute defense against the charge and will
not be held accountable. There are some offenses for which no limitations period exists (e.g., willful
attempt to evade taxes). (See p. 18-17.) Also, there are certain mitigation provisions that side-step
limitations period under certain circumstances in civil contexts. (See p. 18-21.)
37. d. The “mitigation provisions” (§§ 1311 through 1314) may be used to avoid the applicable statutes of limitation
when they have expired. The situation in this question would fall under these provisions. (See p. 18-21.)
38. d. The penalty for failure to file may not exceed 25 percent of the net tax due. (See p. 18-23.)
39. b. T’s 2011 return was due on April 15, 2012. It was actually filed on November 1, 2012, six and one-half
months late. The failure-to-file penalty is five percent per month (or any part of a month). When the
failure-to-pay penalty also applies, the failure-to-file penalty is reduced to four and one-half percent per
month (or any part of a month). The maximum failure-to-file penalty would have been 25 percent, if it
had not been reduced to 22.5% by the failure-to-pay penalty. Thus, T’s failure-to-file penalty will be $180
($800 net tax due 22.5%). [See Example 21 and pp. 18-23 through 18-24 and § 6651(a).]
Solutions to Test Bank 18-13

14. 40. b. The additional one-half of one percent (total penalty of one percent) is applied if the IRS notifies the
taxpayer of its intent to levy on the taxpayer’s assets or gives notice and demand for payment because the
collection of the tax is in jeopardy. (See p. 18-23.)
41. d. Reliance on an accountant to file a return is generally not considered to be a justifiable reason for a
taxpayer’s failure to file a return. (See p. 18-25.)
42. c. The required installment payment B might pay is the lowest of 25%:
a. 90% of the tax shown on this year’s return before any prepayments ¼ 90% $7,200; $7,200 .25 ¼
$1,800,
b. 100% of the tax shown on the return of the individual for the preceding taxable year ¼ $6,000 .25 ¼
$1,500,
a. The annualized income installment. (We ignore this for this problem.)
Thus $1,500 is the lowest amount. (See pp. 18-25 through 18-27.)
43. c. Q’s 2011 A.G.I. was more than $150,000, so Q may not base his required installment on 100% of the 2011
(prior year) tax. Q’s 2011 required installment is the lesser of 25 percent of 90 percent of the tax shown
on this year’s return before payments, [$10,125 ($45,000 90% ¼ $40,500; $40,500 25% ¼ $10,125)] or
25 percent of 110 percent of the prior year’s tax [$11,000 ($40,000 110% ¼ $44,000; $44,000 25% ¼
$11,000)]. (See pp. 18-25 and 18-26.)
44. b. To avoid a penalty for underpayment of estimated taxes, Z must make quarterly payments of $400
($1,600 prior year’s tax 25%). (See Examples 22 and 23, pp. 18-25 and 18-26, and § 6654.)
45. d. The accuracy-related penalty for negligence is 20 percent of the tax underpayment attributable to negligence.
The $1,200 amount is determined by multiplying $6,000 by 20 percent. (See p. 18-28.)
46. d. A penalty equal to 75 percent of the underpayment attributable to fraud is imposed where fraud on the
part of the taxpayer is found. Therefore, 75 percent of $12,000 is $9,000. (See p. 18-30.)
47. d. The primary conceptual difference between civil fraud and criminal fraud is that criminal fraud is an attempt
to willfully evade or defeat the tax. (See pp. 18-30 and 18-31, § 6653(b), and §§ 7201 through 7216.)
48. d. Willfully furnishing an employee with a false statement regarding tax withholdings on wages may result in
up to a $1,000 fine or one year imprisonment, or both, according to § 7204. Obviously, it is crucial for
anyone dealing in tax matters to keep all tax records accurate and to report all tax-related items in an
ethical manner. (See Exhibit 18.5 on p. 18-31.)
49. a. A $500 civil penalty may be imposed on any taxpayer who files a return with insufficient data to
determine the correctness of the tax liability. Imposition of this penalty does not preclude the levy of any
other penalty that otherwise applies. (See p. 18-32.)
50. a. The interest runs from the date of the overpayment to the due date of the amount against which the credit
is taken. (See pp. 18-35 through 18-36.)
51. e. All of these items, in addition to others, must be followed by practitioners. (See pp. 18-39 through 18-44.)
52. b. Beginning in 2012, tax return prepareres normally must pass a competency test to become a registered tax
return preparer. (See p. 18-37.)
53. a. The penalty for a preparer’s willful attempts to understate the taxpayer’s liability or when a preparer
understates the taxpayer’s liability by reckless or intentional disregard of the rules or regulations is the
greater of $5,000 or 50% of the preparer’s income from the return. [See p. 18-38 and § 6694(b).]
54. b. The CPA ordinarily may rely on information provided by the client or a third party; in addition, the CPA
is not required to examine or review documents or other evidence supporting client information in order
to sign the return. (See pp. 18-42 through 18-44.)
18-14 Chapter 18 Tax Practice and Procedure