chap 5 - Federal, legislative and judicial processes; the IRS; and taxpayer penalties Flashcards
A taxpayer filed his income tax return after the due date but neglected to file an extension form. The return indicated a tax liability of $50,000 and taxes withheld of $45,000. On what amount would the penalties for late filing and late payment be computed?
a. $50,000 b. $45,000 c. $0 d. $5,000
$5,000.
Choice “d” is correct. The penalty for failure to file a tax return by the due date is 5% per month or fraction of month (up to a maximum of 25%) on the amount of tax shown as due on the return. The penalty for failure to pay by the due date (1/2% per month) is also based on the amount due on the return.
An accuracy-related penalty applies to the portion of tax underpayment attributable to:
I. Negligence or a disregard of the tax rules or regulations.
II. Any substantial understatement of income tax.
a. I only.
b. II only.
c. Neither I nor II.
d. Both I and II.
Both I and II.
Choice “d” is correct. Accuracy-related penalties apply to the portion of tax underpayments attributable to negligence or disregard of tax rules and regulations as well as to any substantial understatement of income tax.
John S. Loppe has not been particularly careful in preparing his income tax returns and, as a result, has substantially understated his tax. The negligence penalty with respect to understatement of tax might thus be applicable to him. The negligence penalty with respect to understatement of tax:
a. Is computed as 25% of the understatement of tax.
b. Is imposed in conjunction with the penalty for substantial underpayment of tax and the penalty for a substantial valuation misstatement.
c. Defines “disregard” as any careless, reckless, or unintentional disregard of tax rules and regulations.
d. Is an accuracy-based penalty for negligence or for disregard of tax rules and regulations.
Is an accuracy-based penalty for negligence or for disregard of tax rules and regulations.
Choice “d” is correct. The negligence penalty with respect to understatement of tax is an accuracy-based penalty for negligence or for disregard of tax rules and regulations.
Choice “a” is incorrect. The negligence penalty with respect to understatement of tax is computed as 20%, not 25%, of the understatement of tax.
Choice “c” is incorrect. The negligence penalty with respect to understatement of tax defines “disregard” as any careless, reckless, or intentional, not unintentional, disregard of tax rules and regulations.
Choice “b” is incorrect. The negligence penalty with respect to understatement of tax is not imposed in conjunction with the penalty for substantial underpayment of tax and the penalty for a substantial valuation misstatement. If the negligence penalty with respect to understatement of tax is imposed, the other two penalties cannot also be imposed.
Chatham Corporation is a defendant in a lawsuit by the IRS. Which of the following statements is correct with respect to the various defenses that might be available to Chatham to avoid or reduce civil and criminal penalties that might otherwise be imposed on it?
a. The more-likely-than-not standard involves a position that has a more than 50% chance of succeeding.
b. The reasonable basis standard involves a position that is arguable but fairly unlikely to prevail in court. A numerical statement of this standard has at least a 10% chance of succeeding.
c. Reports issued by the U.S. Congress, IRS regulations, rules, and releases, and U.S. and foreign court case decisions constitute substantial authority for the substantial authority standard.
d. The substantial authority standard involves a position that has a less than 50% chance but more than a one-in-four chance of succeeding.
The more-likely-than-not standard involves a position that has a more than 50% chance of succeeding.
Choice “a” is correct. The more-likely-than-not standard involves a position that has a more than 50% chance of succeeding.
Choice “b” is incorrect. The reasonable basis standard involves a position that is arguable but fairly unlikely to prevail in court. A numerical statement of this standard has at least a 20% chance, not a 10% chance, of succeeding.
Choice “d” is incorrect. The substantial authority standard involves a position that has a more than one-in-three chance, not a one-in-four chance, but a less than 50% chance of succeeding.
Choice “c” is incorrect. Reports issued by the U.S. Congress, IRS regulations, rules, and releases, and U.S. court case decisions, but not foreign court case decisions, constitute substantial authority for the substantial authority standard.
John R. Fudge is an individual taxpayer in Cut and Shoot, Texas. He has been accused of understating the tax on one of his returns and is concerned about the possibility of imprisonment if he is convicted. The understatement has nothing to do with a tax shelter. Which of the following statements is correct for his situation?
a. If John’s understatement of tax is a substantial understatement, the penalty is double what it would have been for a simple understatement.
b. If John took a reasonable position on his tax return, he is subject to the penalty for understatement of tax but not to the penalty for substantial understatement of tax.
c. If John relied on the opinion of a reputable accountant or attorney who prepared his return and furnished all relevant information, in general, he would have a reasonable basis for the tax return position and could avoid the penalties for understatement of tax.
d. If there was a reasonable basis for a disclosed tax position on the tax return, and John acted in good faith, the penalty for understatement of tax would still apply if John actually did understate his tax.
If John relied on the opinion of a reputable accountant or attorney who prepared his return and furnished all relevant information, in general, he would have a reasonable basis for the tax return position and could avoid the penalties for understatement of tax.
Choice “c” is correct. If John relied on the opinion of a reputable accountant or attorney who prepared his return and furnished all relevant information, in general, he would have a reasonable basis for the tax return position and could avoid the penalties for understatement of tax.
Choice “b” is incorrect. If John took a reasonable position on his tax return, he is subject to the penalty for understatement of tax and not to the penalty for substantial understatement of tax (both would not be applied at the same time). The exact penalty that would apply would depend on the amount of the understatement of tax.
Choice “d” is incorrect. If there was a reasonable basis for a disclosed tax position on the tax return, and John acted in good faith, the penalty for understatement of tax would not apply if John actually did understate his tax. He would still be liable for the unpaid tax, and any interest, but he would not be liable for the penalty.
Choice “a” is incorrect. If John’s understatement of tax is a substantial understatement, the penalty is the same percentage as for a simple understatement.
Dewey Cheatam, Esq. is a leading candidate for the next open seat on the U.S. Supreme Court. He recently addressed the graduating class at The University of Texas Law School on the subject of the judicial process for tax issues. Which of the following statements in his address was correct?
a. The U.S. Court of Federal Claims follows the decisions of the Federal Court of Appeals and the geographical Courts of Appeals.
b. Judges for the U.S. Tax Court hear cases at various locations in the country as do justices for the U.S. Supreme Court.
c. U.S. District Court cases are heard before one judge, not a panel of judges.
d. When the U.S. Supreme Court denies a writ of certiorari, it confirms the lower court’s decision.
U.S. District Court cases are heard before one judge, not a panel of judges.
Choice “c” is correct. U.S. District Court cases are heard before one judge, not a panel of judges.
Choice “a” is incorrect. The U.S. Court of Federal Claims follows the decisions of the Federal Court of Appeals but not the geographical Courts of Appeals.
Choice “b” is incorrect. Judges for the U.S. Tax Court hear cases at various locations in the country, but the justices for the U.S. Supreme Court do not. The Supreme Court hears cases in Washington, DC with all nine justices present. The Supreme Court does not conduct jury trials.
Choice “d” is incorrect. When the U.S. Supreme Court denies a writ of certiorari, it does not confirm the lower court’s decision.
J. Dewey Taxem, running for the Senate for the sixth time from a large northeastern state, has just completed a major campaign speech relating to his proposed changes to the legislative process. Which of the following excerpts from his speech is correct?
a. If the President does not like some of the provisions of a specific tax bill approved by both the House and the Senate, he can veto those specific parts and sign the rest.
b. Most tax legislation originates in the Senate as riders to other non-tax legislation.
c. Unlike non-tax legislation, tax legislation must be enacted in exactly the same form in both the House and the Senate so that no conference committee is necessary.
d. A presidential veto can be overridden by a vote of two-thirds of both the House and the Senate.
A presidential veto can be overridden by a vote of two-thirds of both the House and the Senate.
Choice “d” is correct. A presidential veto (other than a pocket veto) can be overridden by a vote of two-thirds of both the House and the Senate.
Choice “b” is incorrect. Some tax legislation originates in the Senate as riders to other non-tax proposals. However, most tax legislation originates in the House of Representatives.
Choice “c” is incorrect. There is absolutely no requirement that tax legislation be enacted in exactly the same form in both the House and the Senate. A conference committee is most often required to reconcile the differences between the two bills.
Choice “a” is incorrect. The President cannot pick and choose the parts of tax legislation (or any other legislation) that he likes. At the current time, there is no line item veto.
Place the following events in the legislative process for a specific tax law in the proper logical order:
I. The legislation is vetoed by the President.
II. The legislation is voted on and approved by the full House.
III. The legislation originates in the House Ways and Means Committee.
IV. The President’s veto is overridden by two-thirds votes of the House and the Senate.
V. The legislation is voted on and approved by the full Senate.
VI. The legislation is considered by a Joint Conference Committee.
a. I, II, III, IV, V, VI.
b. III, II, V, VI, I, IV.
c. III, II, VI, V, IV, I.
d. III, II, VI, V, I, IV.
III, II, V, VI, I, IV.
Choice “b” is correct. Tax legislation is originated in the House Ways and Means Committee (III). It is then voted on and approved by the full House (II) and goes to the Senate and the Senate Finance Committee (the Senate Finance Committee is not included in the events to be sequenced). Upon approval by the Senate Finance Committee, it is voted on and approved by the full Senate (V). It is then considered by a Joint Conference Committee (VI). Finally, the legislation is vetoed by the President (I) and the veto is overridden by two-thirds votes of the House and the Senate (IV).
Choice “a” is incorrect. The first step in the legislative process would not be a veto by the President. There has to be something to veto.
Choice “d” is incorrect. Tax legislation is originated in the House Ways and Means Committee (III). It is then voted on and approved by the full House (II). However, the next step would not be the legislation being considered by a Joint Conference Committee (VI). The next step would be voting and approval by the full Senate (V).
Choice “c” is incorrect. In this question, the last step in the legislative process would not be a veto by the President. In this question, the veto is overridden (IV).
John Q. Dillinger is the outgoing Commissioner of the Internal Revenue Service. In his final public meeting with IRS employees, he addressed changes that he would like to see made in the IRS audit and appeals process. Which of the following statements that he made at this meeting is correct?
a. Office audits are normally performed at the national office of the IRS in Washington, DC.
b. Following an audit, if agreement is reached with the taxpayer, the taxpayer signs Form 870.
c. A revenue agent and the Appeals Division can both settle an unresolved tax issue based on the probability of winning the case in court.
d. Tax returns are checked for mathematical accuracy, but only if the returns indicate a refund.
Following an audit, if agreement is reached with the taxpayer, the taxpayer signs Form 870.
Choice “b” is correct. Following an audit, if agreement is reached with the taxpayer, the taxpayer signs Form 870 (Waiver of Restrictions on Assessment and Collection of Deficiency in Tax).
Choice “d” is incorrect. Upon submission, all returns are checked for mathematical accuracy and to ensure that required items such as Social Security numbers and signatures are not missing. This check is made regardless of whether or not the return indicates a refund.
Choice “a” is incorrect. Office audits are not normally performed at the national office of the IRS in Washington, DC. They are normally performed at local IRS offices.
Choice “c” is incorrect. The Appeals Division, but not a revenue agent, can settle an unresolved tax issue based on the probability of winning the case in court.
Which of the following are returns that are not normally selected for audit by the IRS’s Discriminant Inventory Function System (DIF) or by other means?
a. Cash businesses.
b. Individuals whose itemized deductions are in excess of norms established for income levels.
c. Individuals with gross incomes greater than $50,000.
d. Self-employed individuals with substantial business income and deductions.
Individuals with gross incomes greater than $50,000.
Choice “c” is correct. The DIF generally selects for audit returns of individuals with gross incomes greater than $100,000, not $50,000.
Choice “d” is incorrect. The DIF selects for audit returns of self-employed individuals with substantial business income and deductions.
Choice “a” is incorrect. The DIF selects for audit returns of cash businesses (because cash income is easier to conceal).
Choice “b” is incorrect. Returns of individuals whose itemized deductions are in excess of norms established for income levels are often selected for audit.
Which of the following statements is correct for the judicial process when a taxpayer and the Internal Revenue Service cannot reach agreement on a tax issue using the administrative appeals process?
a. The IRS bears the burden of proof in civil tax cases because the IRS can readily afford expensive lawyers and thus should be able to bear a greater burden.
b. The U.S. Tax Court is a specialized trial court that hears Federal tax and other Federal cases.
c. The U.S. Court of Federal Claims has jurisdiction over most claims for money damages against the United States.
d. The Supreme Court often hears tax cases because tax issues are extremely important to the economic health of the nation.
The U.S. Court of Federal Claims has jurisdiction over most claims for money damages against the United States.
Choice “c” is correct. The U.S. Court of Federal Claims has jurisdiction over most claims for money damages against the United States, one type of which is tax refunds.
Choice “d” is incorrect. The Supreme Court seldom hears tax cases, regardless of the importance of the tax issues to the economic health of the nation. That means that the Courts of Appeals often have the last word on tax issues.
Choice “b” is incorrect. The U.S. Tax Court is a specialized trial court, not an appellate court. It hears only Federal tax cases, not Federal tax and other Federal cases.
Choice “a” is incorrect. Unlike normal non-tax cases, the taxpayer most often bears the burden of proof in civil tax cases. In certain tax cases, the burden of proof shifts to the IRS, but this shift has nothing to do with which party can afford expensive lawyers.
Which Senate committee considers new tax legislation?
a. Finance. b. Rules and Administration. c. Appropriations. d. Budget.
Finance.
Choice “a” is correct. Most tax legislation begins in the House Ways and Means Committee of the U.S. House of Representatives. Tax legislation goes from the U.S. House of Representatives to the U.S. Senate Finance Committee.
Choices “d”, “c”, and “b” are incorrect per the above rule.
An IRS agent has just completed an examination of a corporation and issued a “no change” report. Which of the following statements about that situation is correct?
a. The IRS may not examine any other tax return of the corporation for a period of one year.
b. The IRS may not reopen the examination.
c. The taxpayer may not amend the tax return for that taxable year.
d. The IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation.
The IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation.
Choice “d” is correct. The IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation.
Choice “c” is incorrect. The taxpayer may timely amend the tax return for that taxable year.
Choice “b” is incorrect. The IRS generally may not reopen the examination except in cases involving fraud or other similar misrepresentation.
Choice “a” is incorrect. The IRS may examine any other tax return of the corporation for that same year.
Which of the following statements is correct with respect to penalties?
a. The taxpayer cannot avoid penalties under any circumstances.
b. The taxpayer can generally avoid penalties if he/she acted in good faith.
c. The taxpayer can generally avoid penalties if he/she acted in good faith and if there was a reasonable basis to support the tax return position.
d. The taxpayer can generally avoid penalties if he/she acted in good faith, if there was a reasonable basis to support the tax return position, and if the taxpayer did not have willful neglect.
The taxpayer can generally avoid penalties if he/she acted in good faith, if there was a reasonable basis to support the tax return position, and if the taxpayer did not have willful neglect.
Choice “d” is correct. The taxpayer can generally avoid penalties if he/she acted in good faith, if there was a reasonable basis to support the tax return position, and if the taxpayer did not have willful neglect.
Choice “b” is incorrect. The taxpayer cannot generally avoid penalties merely by acting in good faith. More is necessary.
Choice “c” is incorrect. The taxpayer cannot generally avoid penalties merely by acting in good faith and having a reasonable basis to support the tax return position. In addition, the taxpayer must not have had willful neglect.
Choice “a” is incorrect. The taxpayer can generally avoid penalties under certain circumstances.
Which of the following correctly lists the order, from earliest to latest, that U.S. legislative bodies consider new tax legislation?
a. House of Representatives, U.S. Senate, Joint Conference Committee.
b. Joint Conference Committee, House of Representatives, Senate Finance Committee.
c. House of Representatives, Joint Conference Committee, U.S. Senate.
d. U.S. Senate, Joint Conference Committee, House of Representatives.
House of Representatives, U.S. Senate, Joint Conference Committee.
Choice “a” is correct. The correct order for all new tax legislation is the House of Representatives, the Senate, the Joint Conference Committee to resolve differences (if necessary), and presidential action.
Choices “b”, “d”, and “c” are incorrect, per the above rule.
