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Exam 2: Tax Compliance, the Irs, and Tax Authorities

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Question 31

Multiple Choice

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A taxpayer can avoid a substantial understatement of tax penalty:

A) if the position is frivolous and disclosed on the tax return.
B) if the position has a realistic possibility of being sustained by the IRS or courts.
C) if there is substantial authority to support the position.
D) if the position has a reasonable basis and is not disclosed on the tax return.
E) None of the choices are correct.

F) B) and C)
G) A) and D)

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Question 32

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The IRS DIF system checks each tax return for mathematical mistakes and errors.

A) True
B) False

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Question 33

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Lavonda discovered that the U.S. Circuit Court of Appeals for the Federal Circuit has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case?

The Senate Ways and Means Committee is in charge of drafting tax bills in the U.S. Senate.

Corporations are required to file a tax return only if their taxable income is greater than:

The IRS has recently completed its audit of Lorene's corporation. As a tax novice, she has very little understanding regarding the audit process and what happens next. Describe the post-audit process for Lorene and identify her options.

A taxpayer can avoid a substantial understatement of tax penalty:

For the 2020 tax returns, indicate when the statute of limitations expires and why. a. Phoenix filed his tax return on February 28, 2021. b. Jill and Randy filed their tax return on August 16, 2021. c. Although required to file, Catherine chose not to file a tax return this year because she was expecting a tax refund and could not pull together all the information needed to file the return. d. Jerry filed his tax return on May 22, 2021, but has accidentally underreported his taxable income by 30 percent.

Raul was researching an issue and found two tax court decisions issued within six months of each other, one for a taxpayer residing in California and the other for a taxpayer residing in New York, whose rulings were inconsistent. Raul knows that the federal tax law does not differ by state and the issue was exactly the same in both cases. Raul is confused because he thought that a basic judicial doctrine was that a court is supposed to rule consistently. Name and describe this judicial doctrine that requires judicial consistency and discuss why the tax court may have intentionally ruled inconsistently in this example.

Which of the following is not considered a primary authority?

Lavonda discovered that the 5 ^th Circuit (where Lavonda resides) has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case?

For the following tax returns, identify which of the three audit types will most likely be utilized. a. The IRS selected Don's return for audit because of his high itemized deductions. The IRS would like documentation of these deductions. b. Large Public Corporation is a very large publicly traded corporation. It is involved in many complex transactions that have significant tax ramifications. c. George and Barbara operate a small business out of their home. The IRS has identified a couple of issues that may relate to their business. d. The IRS selected Bill and Hillary's tax return for review because of some of their investment sales. They would like a better understanding of the transactions and parties involved.

Which of the following audits is the least common, broadest in scope, and typically most complex?

Andy filed a fraudulent 2020 tax return on May 1, 2021. The statute of limitations for IRS assessment on Andy's 2020 tax return should end:

The tax return filing requirements for individual taxpayers only depend on the taxpayer's filing status.

Kim has decided to litigate a tax issue with the IRS. Describe the trial-level courts that Kim may use to litigate the case.

Houston has found conflicting authorities that address a research question for one of his clients. The majority of the authorities provide a favorable answer for his client. Nonetheless, there are several authorities that provide an unfavorable answer. Houston estimates that if the client takes the more favorable position on its tax return there is approximately a 60 percent chance that the position will be sustained upon audit or judicial proceeding. If the client takes this position on its tax return, will Houston be subject to penalty? Will the client potentially be subject to penalty?

In researching a tax issue, Eric finds that the U.S. Circuit Court of Appeals for the Federal Circuit previously has ruled in favor of his tax position, whereas the 11 ^th Circuit (Eric's circuit)previously has ruled against his tax position. If Eric is contemplating litigating his tax position with the IRS, he should prefer to have his case first tried by the U.S. Tax Court.

The "30-day" letter gives the taxpayer the opportunity to request an appeals conference or agree to a proposed IRS adjustment on the taxpayer's income tax return.

Leslie made a mathematical mistake in computing her tax liability. Which audit program will likely catch Leslie's mistake?