Part 3 - Representation, Practices & Procedures - Unit 2 - Questions

Question 1

Judith wants to revoke a power of attorney that she previously executed and does not want to name a new representative. In order to do this, what is Judith’s most appropriate action?

A. Judith must call the Internal Revenue Service toll-free number, verify that she is Judith, and inform them she wants to revoke the current power of attorney that is on file.
B. Judith must send a letter to her nearest Internal Revenue Service Center informing them that she wants to revoke the current power of attorney that is on file.
C. Judith must send a copy of the previously executed power of attorney to the Internal Revenue Service with the word “REVOKE” written across the top of the power of attorney with the original current signature and date under the annotation.
D. Judith must send a new power of attorney to the Internal Revenue Service office(s) where the prior power was originally filed and name herself as the representative.

Answer 1

C. Judith must send a copy of the previously executed power of attorney to the Internal Revenue Service with the word “REVOKE” written across the top of the power of attorney with the original current signature and date under the annotation.

• Publication 947, page 10, provides the general rules for revoking an existing power of attorney. If a taxpayer wants to revoke a previously executed power of attorney and does not want to name a new representative, or if a representative wants to withdraw from representation, send a copy of the previously executed power of attorney to the IRS and follow the procedures below.
• The copy of the power of attorney must have a current signature of the taxpayer if the taxpayer is revoking or a current signature of the representative if the representative is withdrawing. If the taxpayer is revoking the power of attorney, write “REVOKE” across the top of the first page with the taxpayer’s current signature and date below this annotation on Form 2848. If the representative is withdrawing the power of attorney, write “WITHDRAW” across the top of the first page with the representative’s current signature and date below this annotation on Form 2848.
• If a taxpayer or a representative does not have a copy of the power of attorney he or she wants to revoke or withdraw, send a statement to the IRS. The statement of revocation or withdrawal must indicate that the authority of the power of attorney is revoked or withdrawn, must list the tax matters and periods, and must be signed and dated by the taxpayer or representative as applicable. If the taxpayer is revoking, list the name and address of each recognized representative whose authority is revoked. If the representative is withdrawing, list the name, TIN (taxpayer identification number), and address (if known) of the taxpayer.

Question 2

What must a taxpayer do to appoint a representative to act on a taxpayer’s behalf before the Internal Revenue Service?

A. A certified letter is filed only if the taxpayer wants to name a person(s) to represent them and that person is recognized to practice before the Internal Revenue Service.
B. Form 2848 is filed only if the taxpayer wants to name a person(s) to represent them and that person is recognized to practice before the Internal Revenue Service.
C. Form 2848 is filed only if the taxpayer wants to name a person(s) to represent them and that person is not recognized to practice before the Internal Revenue Service.
D. A certified letter is filed only if the taxpayer wants to name a person(s) to represent them and that person is not recognized to practice before the Internal Revenue Service.

Answer 2

B. Form 2848 is filed only if the taxpayer wants to name a person(s) to represent them and that person is recognized to practice before the Internal Revenue Service.

• Publication 947, pages 7 and 8, states a taxpayer must submit a power of attorney when the taxpayer wants to authorize an individual to receive confidential tax information and represent the taxpayer before the IRS. A power of attorney is most often required when a taxpayer wants to authorize another individual to perform at least one of the following acts on behalf of the taxpayer:
  
  • Represent the taxpayer at a meeting with the IRS.
  • Prepare and file a written response to the IRS.
• Form 2848 is used to appoint a representative to act on behalf of the taxpayer before the IRS. The taxpayer can file this form only if the taxpayer wants to name a person(s) to represent the taxpayer and that person is recognized to practice before the IRS.

Question 3

During the course of examining Ollie’s income tax return, the Revenue Agent required information from third-party sources. Which of the following provisions does not apply to the Revenue Agent giving Ollie reasonable notice before contacting third parties?

A. Pending criminal investigation.
B. Providing notice might result in reprisal against the contact.
C. Ollie authorizes the contact.
D. All of the answer choices are correct.

Answer 3

D. All of the answer choices are correct.

• Publication 556 (page 3) provides, in part, that the IRS must give a taxpayer reasonable notice before contacting other persons about a taxpayer’s tax matters. In examining or collecting a taxpayer’s tax liability, the IRS may contact third parties such as the taxpayer’s neighbors, banks, employers, or employees.
• The IRS must also give a taxpayer notice of specific contacts by providing the taxpayer with a record of persons contacted on both a periodic basis and upon the taxpayer’s request.
• As one might suspect, there are exceptions to the above policy. The provision does not apply:
  
  • To any pending criminal investigation,
  • When providing notice would jeopardize collection of any tax liability,
  • Where providing notice may result in reprisal against any person, or
  • When the taxpayer authorized the contact.
• Thus, all the statements that are given in this problem are exceptions for the Revenue Agent giving Ollie reasonable notice before contacting third parties.

Question 4

Which of the following statements about the Taxpayer Advocate Service (TAS) is correct?

A. The taxpayer pays a nominal charge for using this service.
B. Members of the TAS are not part of the IRS.
C. The TAS is available for both businesses and individuals.
D. None of the responses are correct.

Answer 4

C. The TAS is available for both businesses and individuals.

• As provided on page 1 of Publication 1546, the Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. TAS can help resolve problems that the taxpayer cannot resolve with the IRS, and their service is free.
• The law requires each TAS office to secure and maintain means of communication independent of other IRS offices. Each local office has a separate phone, fax, and mailing address. TAS has the discretion to not disclose a taxpayer’s information to the IRS. In general, however, to provide the taxpayer with assistance or relief, TAS will likely have to disclose the information to an IRS employee or employees. Publication 1546, page 6
• A taxpayer should try to resolve their problem with the IRS, but if they cannot resolve it, then they should seek TAS assistance. TAS can help if (Publication 1546, page 4):
  
  • The taxpayer’s problem with the IRS is causing financial difficulties for the taxpayer, the taxpayer’s family, or the taxpayer’s business.
  • The taxpayer faces (or the taxpayer’s business is facing) an immediate threat of adverse action.
  • The taxpayer has tried repeatedly to contact the IRS, but no one has responded, or the IRS has not responded by the date promised.
  • Processes, systems, or procedures within the IRS are not operating efficiently and causing delays in the IRS response to the issues.
• A taxpayer may contact the Taxpayer Advocate Service by:
  
  • Calling the phone number listed in the TAS brochure for the TAS office nearest the taxpayer,
  • Calling their toll-free line at 1-877-777-4778,
  • Filing Form 911, Request for Taxpayer Advocate Service Assistance (and Application for Taxpayer Assistance Order), with the TAS, or
  • Asking an IRS employee to complete Form 911 on the taxpayer’s behalf.
• To get a copy of Form 911 or learn more about the TAS, go to the Taxpayer Advocate Service page at www.irs.gov/advocate.

Question 5

Who is authorized to practice before the IRS if they hold power of attorney?

A. Any person considered an enrolled agent under Circular 230, who is not currently under suspension or disbarment from practice before the IRS who files a written declaration that he or she is currently qualified as an enrolled agent and is authorized to represent the particular party on whose behalf he or she acts.
B. Any attorney who is not currently under suspension or disbarment from practice before the IRS who files a written declaration that he or she is currently qualified as an attorney and is authorized to represent the particular party on whose behalf he or she acts.
C. Both statements are correct.
D. Neither statement is correct.

Answer 5

C. Both statements are correct.

• Publication 947 (pages 3 and 4) provides that any individual who is recognized to practice (a recognized representative) can practice before the IRS. A recognized representative includes an attorney, a certified public accountant, an enrolled agent (a person enrolled to practice before the IRS), an enrolled actuary, or the unenrolled return preparer who prepared the return and signed it as the preparer.
• However, the recognized representative must be designated as the taxpayer’s power of attorney and file a written declaration with the IRS stating that he or she is authorized and qualified to represent a particular taxpayer. Form 2848 can be used for this purpose.
• Pursuant to Circular 230, Section 10.3, an attorney, CPA, or enrolled agent is a recognized representative if he or she is not currently under suspension or disbarment from practice before the IRS. He or she may practice before the IRS by filing with the IRS a written declaration that he or she is currently qualified as an attorney, CPA, or an enrolled agent and is authorized to represent the party or parties on whose behalf he or she acts.

Question 6

The following statements are given to you as an enrolled agent:

1. The filing of Form 8821 will revoke any Form 2848 that is in effect.
2. The filing of Form 2848 will revoke any Form 8821 that is in effect.

A. Item 1 is correct.
B. Item 2 is correct.
C. Both items 1 and 2 are correct.
D. Both items 1 and 2 are incorrect.

Answer 6

D. Both items 1 and 2 are incorrect.

• Publication 947, page 10, states that a newly filed power of attorney (Form 2848) concerning the same matter will revoke a previously filed power of attorney.
• The new power of attorney, however, will not revoke the prior power of attorney if it specifically states it does not revoke such prior power of attorney and either of the following is attached to the new power of attorney:
  
  • A copy of the unrevoked prior power of attorney, or
  • A statement signed by the taxpayer listing the name and address of each representative authorized under the prior unrevoked power of attorney.
• Furthermore, the filing of Form 2848 will not revoke any Form 8821 that is in effect.
• The instructions for Form 8821, page 1, provide that Form 8821 authorizes any individual, corporation, firm, organization, or partnership the taxpayer designates to inspect and/or receive the taxpayer’s confidential information verbally or in writing for the type of tax and the years or periods the taxpayer lists on Form 8821. Form 8821 (not Form 2848) is also used to delete or revoke prior tax information authorizations. Likewise, Form 2848 (not Form 8821) is filed to authorize an individual to represent the taxpayer before the IRS. The appointee may not substitute another party as the taxpayer’s authorized designee. Therefore, both items are incorrect.

Question 7

Under what condition does Circular 230 permit an enrolled agent to cash a taxpayer’s refund check?

A. The amount of the check is less than the amount of the total fee outstanding on the date the check is cashed.
B. The amount of the check is less than $100.
C. The check is endorsed by the taxpayer.
D. Circular 230 prohibits an enrolled agent from cashing a taxpayer’s refund check.

Answer 7

D. Circular 230 prohibits an enrolled agent from cashing a taxpayer’s refund check.

• Publication 947, page 6, provides general information about the power of attorney. In particular, a power of attorney is a taxpayer’s written authorization for an individual to receive a taxpayer’s confidential tax information from the IRS and to perform certain actions on their behalf. If the authorization is not limited, the individual can generally perform all acts that the taxpayer can perform, except negotiating a check.
• Circular 230, Section 10.31, provides that a practitioner who prepares tax returns may not endorse or otherwise negotiate any check issued to a client by the government in respect of a federal tax liability.

Question 8

Which of the following statements is correct concerning a small tax case?

A. A small tax case is one that is $100,000 or less for any tax year or period.
B. A small tax case can be presented by the taxpayer to the Tax Court for a decision that is final and that cannot be appealed.
C. A small tax case decision can be appealed to the Tax Court.
D. A small tax case is one that is requested by the IRS and the taxpayer agrees to it.

Answer 8

B. A small tax case can be presented by the taxpayer to the Tax Court for a decision that is final and that cannot be appealed.

• Publication 556, page 12, provides information on the small tax case procedure. If the amount in a taxpayer’s case is $50,000 or less for any 1 tax year or period, the Tax Court has a simpler alternative to solve the taxpayer’s case. At the taxpayer’s request and if the Tax Court approves, the taxpayer’s case can be handled under the small tax case procedure. In this procedure, the taxpayer can present his or her case to the Tax Court for a decision that is final and that cannot be appealed.
• As a result of the above information, the only correct statement is the one that states a small tax case can be presented by the taxpayer to the Tax Court for a decision that is final and that cannot be appealed.

Question 9

How many years in the future can an authorization on a Form 2848 be recorded to the Centralized Authentication File (CAF)?

A. Current year +1.
B. Current year +2.
C. Current year +3.
D. Current year +4.

Answer 9

C. Current year +3.

• Pursuant to the Instructions for Form 2848, page 3, a taxpayer may list the current year/period and any tax years or periods that have already ended as of the date they sign the power of attorney. The taxpayer may also list future tax years or periods. However, the IRS will not record on the CAF system future tax years or periods listed that exceed 3 years from December 31 of the year that the IRS receives the power of attorney.
• The taxpayer must enter the description of the matter, the tax form number, and the future year(s) or period(s). If the matter relates to estate tax, enter the date of the decedent’s death instead of the year or period. If the matter relates to an employee plan, include the plan number in the description of the matter.

Question 10

Which of the following acts is not permitted for an enrolled agent who is authorized to act on behalf of the taxpayer that has properly filed a power of attorney?

A. Represent the taxpayer before any office of the IRS.
B. Sign a consent form to extend the statutory time period for assessment or collection of a tax.
C. Receive and endorse, or cash, a refund check drawn on the U.S. Treasury.
D. Sign a closing agreement.

Answer 10

C. Receive and endorse, or cash, a refund check drawn on the U.S. Treasury.

• Publication 947, page 7, provides the general information about the power of attorney. In particular, a power of attorney is a taxpayer’s written authorization for an individual to receive a taxpayer’s confidential tax information from the IRS and to perform certain actions on their behalf. If the authorization is not limited, the individual can generally perform all acts that the taxpayer can perform, except negotiating a check.
• An enrolled agent can usually perform the following acts under a power of attorney:
  
  • Represent the taxpayer before any office of the IRS
  • Sign an offer or a waiver of restriction on assessment or collection of a tax deficiency, or a waiver of notice of disallowance of claim for credit or refund
  • Sign a consent to extend the statutory time for assessment or collection of a tax
  • Sign a closing agreement
• Practitioners subject to Circular 230 may not endorse or otherwise negotiate (cash) any check (including directing or accepting payment by any means, electronic or otherwise, in an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated) issued to the taxpayer by the government in respect of a Federal tax liability. (Publication 947, page 6)
• Likewise, Circular 230, Section 10.31, provides that a practitioner who prepares tax returns may not endorse or otherwise negotiate any check issued to a client by the government in respect of a federal tax liability.
• Thus, a representative of the taxpayer is not authorized to endorse or cash a taxpayer’s check.

Question 11

Joe, a calendar year taxpayer, filed his federal income tax return, with a refund due, for tax year 2023 on April 1, 2024. The last day to timely file a claim for refund with respect to that return is:

A. April 1, 2026.
B. April 15, 2026.
C. April 1, 2027.
D. April 15, 2027.

Answer 11

D. April 15, 2027.

• Publication 556, page 13, states that, in general, a taxpayer must file a claim for a credit or refund within 3 years from the date the taxpayer filed the original return or 2 years from the date the tax was paid, whichever is later. If the taxpayer does not file a claim within this period, the taxpayer may no longer be entitled to a credit or a refund.
• Also, if the due date to file a return or a claim for a credit or refund is a Saturday, Sunday, or legal holiday, it is filed on the next business day. Returns that are filed before the due date are considered filed on the due date.
• Thus, Joe must file a claim for a refund by April 15, 2027, for his tax return that was filed on April 1, 2024, but was not due until April 15, 2024.

Question 12

Which of the following statements is not correct about bankruptcy proceedings?

A. The bankruptcy court does not have authority to determine the tax amount owed prior to bankruptcy.
B. They will always result in the discharge of all federal tax liabilities.
C. The filing of a bankruptcy petition automatically results in a stay of any Tax Court proceeding on determining a tax liability.
D. Property with an IRS lien for taxes owed that would be discharged by the bankruptcy proceedings may still be collectable by the IRS.

Answer 12

B. They will always result in the discharge of all federal tax liabilities.

• Publication 908, page 17, states, in part, that the bankruptcy court may enter an order discharging the debtor from personal liability for certain debts, including taxes. The order for discharge is a permanent order of the court prohibiting the creditors from acting against the debtor personally to collect the debt. However, secured creditors with valid pre-bankruptcy liens may enforce them to recover property secured by the lien.
• Not all debts are dischargeable. Many tax debts are excepted from the bankruptcy discharge. As a general rule, the following tax debts, including interest that is applicable to an individual that files under chapter 7, are not subject to discharge: taxes entitled to eighth priority, taxes for which no return was filed, taxes for which a return was filed late after 2 years before the bankruptcy petition was filed, taxes for which a fraudulent return was filed, and taxes that the taxpayer willfully attempted to evade or defeat. As a result, bankruptcy proceedings do not always result in the discharge of federal tax liabilities.

Question 13

You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support items shown on your return until the period of limitations for that return runs out. The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the Internal Revenue Service can assess additional tax. Which statement listed below is incorrect?

A. If no other provisions apply, the statute of limitations is 3 years after the return was filed.
B. If more than 25% of gross income has been omitted from the tax return, the statute of limitations is 6 years after the return was filed, unless the omitted amount was disclosed in the return or in a statement attached to the return, in a manner adequate to apprise the Internal Revenue Service of the nature and amount of the omission.
C. If a fraudulent return is filed, the statute of limitations is 7 years.
D. If a tax return is not filed at all, there is no statute of limitations.

Answer 13

C. If a fraudulent return is filed, the statute of limitations is 7 years.

• Publication 17, page 18, provides the following period of limitations. (Returns filed before the due date are treated as being filed on the due date.)
• A fraudulent return has no statute of limitations (not a 7-year statute of limitations).

Question 14

John Bitter wants his associate, Bill Sweet, to be informed about his business tax account. John wants to disclose only this information and grant no other authority. Which form should be filed to give Bill this authorization?

A. Form 8821, Tax Information Authorization, should not be used in this situation.
B. Form 2848, Power of Attorney, should be used in this situation.
C. Form 8821, Tax Information Authorization, should be used in this situation.
D. Form 8821, Tax Information Authorization, or Form 2848, Power of Attorney, should be used in this situation.

Answer 14

C. Form 8821, Tax Information Authorization, should be used in this situation.

• Publication 947, page 11, provides the general rules for when a power of attorney is not required. A taxpayer does not have to file a power of attorney to authorize the disclosure of tax return information. This is done using Form 8821, Tax Information Authorization.
• Form 8821 authorizes any individual, corporation, firm, organization, or partnership the taxpayer designates to inspect and/or receive confidential information verbally or in writing for the type of tax and the year or periods listed on Form 8821. Section 6103(c) limits disclosure and use of return information received pursuant to the taxpayer’s consent and holds the recipient subject to penalties for any unauthorized access, other use, or redisclosure without the taxpayer’s express permission or request.
• In contrast, Form 2848 authorizes a third-party to represent the taxpayer before the IRS. With the exception of unenrolled preparers whose rights representation rights are limited, federally authorized third-parties are granted authority under Form 2848 to inspect and/or receive confidential information and perform all acts (sign agreements, consents, waivers, etc.) that the taxpayer himself/herself would be able to perform with respect to the matters described on Form 2848.
• Hence, Form 8821 should be used to limit the associate’s authorization to only access information.

Question 15

The IRS does NOT need to give a taxpayer reasonable notice before contacting other persons except:

A. When providing notice would jeopardize collection of any tax liability.
B. Where providing notice may result in reprisal against any person.
C. When examining or collecting a taxpayer’s tax liability.
D. When the taxpayer authorized the contact.

Answer 15

C. When examining or collecting a taxpayer’s tax liability.

• Publication 556 (page 3) provides, in part, that the IRS must give a taxpayer reasonable notice before contacting other persons when examining or collecting a taxpayer’s tax liability. The IRS may contact third parties such as your neighbors, banks, employers, or employees during this investigation.
• The IRS also must give a taxpayer notice of specific contacts by providing the taxpayer with a record of persons contacted on both a periodic basis and upon the taxpayer’s request.
• As one might suspect, there are exceptions to the above policy. The provision does not apply to any pending criminal investigation, when providing notice would jeopardize collection of any tax liability, where providing notice may result in reprisal against any person, or when the taxpayer authorized the contact.
• Thus, the IRS does need to give a taxpayer reasonable notice before contacting other persons when they are examining or collecting a taxpayer’s tax liability.

Question 16

In the process of examining or collecting a taxpayer’s tax liability, the Internal Revenue Service may contact third parties. Which of the following statements is incorrect about the responsibility of the Internal Revenue Service to the taxpayer?

A. Reasonable notice must be given by the IRS before making any inquiries of third parties.
B. Notification must include the specific names of those the IRS intends to contact.
C. Reasonable notice is not necessary where it may result in reprisal against any person.
D. Reasonable notice is not necessary when it would jeopardize collection of any tax liability.

Answer 16

B. Notification must include the specific names of those the IRS intends to contact.

• Publication 556 (page 3) provides, in part, that the IRS must give a taxpayer reasonable notice before contacting other persons: “You must be given reasonable notice in advance that, in examining or collecting your tax liability, the IRS may contact third parties such as your neighbors, banks, employers, or employees.”
• The IRS must also give a taxpayer notice of specific contacts by providing the taxpayer with a record of persons contacted on both a periodic basis and upon the taxpayer’s request. The IRS is not required to give the specific names of those it intends to contact as part of its notification to contact third parties.
• As one might suspect, there are exceptions to the above policy. The provision does not apply to any pending criminal investigation, when providing notice would jeopardize collection of any tax liability, where providing notice may result in reprisal against any person, or when you authorized the contact.

Question 17

A claim for refund must be filed:

A. No later than 3 years after you filed your original return.
B. No later than 2 years from the date you paid the tax.
C. No later than 3 years after you filed your original return or no later than 2 years from the date you paid the tax, whichever is later.
D. 4 years after making estimated payments.

Answer 17

C. No later than 3 years after you filed your original return or no later than 2 years from the date you paid the tax, whichever is later.

• Publication 556, page 13, addresses the timing issue for filing a claim for refund. It states that, in general, a taxpayer must file a claim for a credit or refund within 3 years from the date the taxpayer filed the original return or 2 years from the date the tax was paid, whichever is later. If the taxpayer does not file a claim within this period, the taxpayer may no longer be entitled to a credit or a refund.
• If the due date to file a return or a claim for a credit or refund is a Saturday, Sunday, or legal holiday, it is filed on time if it is filed on the next business day. Returns filed by a taxpayer before the due date are considered filed on the due date. This is true even when the due date is a Saturday, Sunday, or legal holiday.

Question 18

Which of the following are not published in the Internal Revenue Bulletins?

A. Private letter rulings
B. Revenue rulings
C. Treasury decisions
D. Announcements

Answer 18

A. Private letter rulings

• As shown on pages i through iii of IRB 2020-53, an Internal Revenue Bulletin (IRB) contains actions on decisions, announcements, some court decisions, notices, proposed regulations, Treasury decisions, revenue rulings, and revenue procedures. Private letter rulings, however, are not published in the IRBs. They are available from some publishing companies and also in the IRS “Electronic Reading Room” webpage at www.irs.gov.
• A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc. is published in Internal Revenue Bulletins. IRB 2020-53 offers a full reference table for all announcements, notices, proposed regulations, revenue procedures and rulings, and treasury decisions on pages ii and iii. IRBs are available online from the IRS at www.irs.gov/irb. (Internal Revenue Bulletin 2020-53, pages ii–iii (Rev. 12/28/2020))

Question 19

Arnie is an enrolled agent who prepares income tax returns for his clients. Which of the following statements is not correct with respect to Arnie’s responsibilities on completing a client’s tax return?

A. Arnie must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete.
B. Arnie is required to audit, examine, or review books and records, business operations, or other evidence to verify independently information provided by the taxpayer.
C. Arnie may rely in good faith without verification upon a tax return that has been previously prepared by another tax return preparer and filed with the IRS.
D. All of the responses are correct.

Answer 19

B. Arnie is required to audit, examine, or review books and records, business operations, or other evidence to verify independently information provided by the taxpayer.

• For purposes of IRC Sections 6694(a) and (b), the tax return preparer generally may rely in good faith without verification upon information furnished by the taxpayer. Also, a tax return preparer may rely in good faith and without verification upon information and advice furnished by another advisor, another tax return preparer, or other party (including another advisor or tax return preparer at the tax return preparer’s firm).
• The tax return preparer is not required to audit, examine, or review books and records, business operations, documents, or other evidence to verify independently information provided by the taxpayer, advisor, other tax return preparer, or other party.

Question 20

In the process of examining or collecting a taxpayer’s tax liability, the Internal Revenue Service may contact third parties. Which of the following statements is incorrect?

A. The Internal Revenue Service must give the taxpayer reasonable notice before making any inquiries of third parties.
B. The Service is not required to give notice to a taxpayer of third-party contacts if they are pending criminal investigation.
C. The Service must give a taxpayer a record of persons contacted on both a periodic basis and upon the taxpayer’s request.
D. The Service must give the taxpayer a record of persons to be contacted before contacting any third party.

Answer 20

D. The Service must give the taxpayer a record of persons to be contacted before contacting any third party.

• Page 3 of Publication 556 provides, in part, that the IRS must give a taxpayer reasonable notice before contacting other persons. In examining or collecting a taxpayer’s tax liability, the IRS may contact third parties such as the taxpayer’s neighbors, banks, employers, or employees.
• The IRS must also give a taxpayer notice of specific contacts by providing the taxpayer with a record of persons contacted on both a periodic basis and upon the taxpayer’s request.
• As one might suspect, there are exceptions to the above policy. The provision does not apply:
  
  • To any pending criminal investigation,
  • When providing notice would jeopardize collection of any tax liability,
  • Where providing notice may result in reprisal against any person, or
  • When the taxpayer authorized the contact.
• Thus, the IRS must notify the taxpayer of specific contacts by providing the taxpayer with a record of persons contacted (not those to be contacted) on both a periodic basis and upon the taxpayer’s request.

Question 21

Bethany timely filed her 2019 Form 1040 tax return and paid the $2,000 tax as shown on the return at the time of filing. The return was subsequently examined, and Bethany signed an agreement form for the proposed changes on August 20, 2021. She paid the additional tax due of $5,000 on September 30, 2021. In 2023, Tiffany located missing records that she believes would make $3,000 of the additional assessment erroneous. Which of the following statements accurately states the date by which Bethany must file a claim for refund to get the $3,000 back?

A. August 20, 2022, 2 years from signing the agreement form.
B. April 15, 2022, 3 years from the due date of the original return.
C. September 30, 2023, 2 years from when the additional tax was paid.
D. No claim for refund can be filed since an examination agreement form was signed.

Answer 21

C. September 30, 2023, 2 years from when the additional tax was paid.

• Publication 556, page 13, states that, in general, a taxpayer must file a claim for a credit or refund within 3 years from the date the taxpayer filed the original return or 2 years from the date the tax was paid, whichever is later. If the taxpayer does not file a claim within this period, the taxpayer may no longer be entitled to a credit or a refund.
• In this case, Bethany must file a claim for refund by September 30, 2023, which is the later of the two dates (2 years from when the additional tax was paid).

Question 22

Generally, how long does the IRS have to collect outstanding federal taxes?

A. 10 years from the due date of the return.
B. 10 years from the date the return is filed.
C. 10 years from the date of the notice of deficiency.
D. 10 years from the date of assessment.

Answer 22

D. 10 years from the date of assessment.

• By law, the IRS has the authority to collect outstanding federal taxes for 10 years from the date of assessment. The 10-year collection period may be suspended under certain circumstances that are discussed in Publication 594 on pages 3 and 4.

Question 23

Karl had his 2021 income tax return examined resulting in adjustments. Karl has administratively appealed the adjustments. Some of them were sustained, resulting in an income tax deficiency in the amount of $45,000. He now wants to appeal his case to the U.S. Tax Court. He will handle the case himself since he cannot afford a lawyer. Which of the following statements is correct?

A. The IRS is entitled to invoke the Small Tax Case procedure.
B. If the Small Tax Case procedure is accepted by the Tax Court, Karl will be required to seek the services of an attorney.
C. Karl is entitled to invoke the Small Tax Case procedure.
D. Karl is entitled to invoke the Small Tax Case procedure, but if elected, he will be required to seek the services of an attorney.

Answer 23

C. Karl is entitled to invoke the Small Tax Case procedure.

• Publication 556, page 12, provides the criteria associated with qualifying as a small tax case. If the amount in the taxpayer’s case is $50,000 or less for any 1 tax year or period, the Tax Court has a simple alternative to solve the case. At the taxpayer’s request and if the Tax Court approves, the taxpayer’s case can be handled under the small tax case procedure.
• In the small tax case procedures, the taxpayer can present the taxpayer’s case to the Tax Court for a decision that is final, and that the taxpayer cannot appeal.
• Since Karl’s tax deficiency after administrative appeals is less than $50,000, he can petition for the small tax case procedures.

Question 24

Disputes involving which areas of taxation may not be resolved in a deficiency determination proceeding in U.S. Tax Court?

A. Income tax.
B. Gift tax.
C. Employment tax not involving IRS employment status determination.
D. Estate tax.

Answer 24

C. Employment tax not involving IRS employment status determination.

• If a disagreement with the IRS is over whether a taxpayer owes additional income tax, estate tax, gift tax, employment tax involving IRS employment status determinations, or certain excise taxes, the taxpayer can go to the U.S. Tax Court.
• Tax controversies such as those involving some employment tax issues or manufacturers’ excise taxes are heard by the District Court or the Court of Federal Claims; they cannot be heard by the Tax Court.
• Therefore, all of the above items would allow the disagreement with the Internal Revenue Service to be taken the U.S. Tax Court except for employment taxes.

Question 25

Wesley timely filed his tax year 2019 Form 1040 tax return on April 15, 2020, and paid the $2,000 tax as shown on the return at the time of filing. The return was subsequently examined, and Wesley signed an agreement form for the proposed changes on October 31, 2021. He paid the additional tax due of $10,000 on December 31, 2021. In 2023, Wesley located missing records, which he believes would make $5,000 of the additional assessment erroneous. Which of the following statements accurately states the date by which Wesley must file a claim for refund?

A. October 31, 2023, 2 years from signing the agreement form.
B. April 15, 2023, 3 years from the due date of the original return.
C. December 31, 2023, 2 years from when the additional tax was paid.
D. No claim for refund can be filed since an examination agreement form was signed.

Answer 25

C. December 31, 2023, 2 years from when the additional tax was paid.

• Publication 556, page 13, states that, in general, a taxpayer must file a claim for a credit or refund within 3 years from the date the taxpayer filed the original return or 2 years from the date the tax was paid, whichever is later. If the taxpayer does not file a claim within this period, the taxpayer may no longer be entitled to a credit or a refund.
• In this case, Wesley must file a claim for refund no later than December 31, 2023, which is the later of the two dates (2 years from when the additional tax was paid).

Question 26

Which of the following may contain a position of the IRS involving substantive guidance of the Internal Revenue Code or other provisions of tax law and is published in Internal Revenue Bulletins (IRBs)?

A. Notices and Announcements.
B. Notices only.
C. IRS news release.
D. Announcements only.

Answer 26

A. Notices and Announcements.

• Notices and Announcements are used generally when expeditious guidance is needed that may contain substantive guidance regarding a position of the IRS involving the tax laws or contain guidance to taxpayers of a procedural nature. They are published in the Internal Revenue Bulletins (IRBs). The Internal Revenue Manual, Part 32, Chapter 2, Section 2 “Summary of the Published Guidance Process” defines a notice as a public pronouncement by the Service that may contain guidance that involves substantive interpretations of the Internal Revenue Code or other provisions of the law. Notices may be used in circumstances in which a revenue ruling or revenue procedure would not be appropriate. Notices may be used to solicit public comments on issues under consideration, in connection with non-regulatory guidance, such as a revenue procedure.
• An announcement is a public pronouncement that has only immediate or short-term value. For example, an announcement can be used to summarize the law or regulations without making any substantive interpretation or to notify taxpayers of existence of an election or an approaching deadline for making an election.
• Since Notices and Announcements that contain substantive or procedural guidance are intended to be relied on by taxpayers, they are equivalent of revenue rulings and revenue procedures.
• The IRS’s Media Relations Office also puts out IRS news releases to provide relevant information to the general public about the tax treatment of items that are deducted, expensed, or included in gross income. News releases are generally sent to the news media and are not published in the IRBs.
• An Action on Decision (AOD) is a document issued by the Internal Revenue Service regarding whether the Service will follow an adverse tax decision. The response may be issued with respect to case decisions that were given by the Tax Court, District Court, Court of Federal Claims, or Circuit Courts of Appeals. AODs are published in the Internal Revenue Bulletins. (For an example, see IRB 2016-40, “Actions Relating to Decisions of the Tax Court,” with decisions concerning Giant Eagle, Inc. v. Commissioner.)

Question 27

Which of the following courts hears only tax cases and its rulings can be cited as precedent?

A. District Court.
B. U.S. Court of Federal Claims.
C. Tax Court.
D. Small Case Division.

Answer 27

C. Tax Court.

• The District Court hears federal cases pertaining to both tax and nontax issues. Unlike the Tax Court, a taxpayer may request a jury trial in the district court. District Court decisions can be cited as precedent by both the taxpayer and the IRS. The District Court follows the precedents set by the Supreme Court and the Circuit Court of Appeals for the circuit in which the taxpayer is a resident.
• The U.S. Court of Federal Claims is located in Washington, D.C. and is made up of 16 judges who hear money claims founded upon the Constitution, federal statutes, executive regulations, or contracts (express or implied) with the United States. Hence, this court hears both tax and nontax cases. Decisions by this court can be cited as precedent by both the taxpayer and the IRS. The Court of Federal Claims follows the precedents set by the Supreme Court and the Court of Appeals for the Federal Circuit. (For more information, see, for example, the “About Federal Courts” page of www.uscourts.gov.)
• The Tax Court rules on disputes between taxpayers and the IRS involving underpayment of federal income, gift taxes, and estate taxes. Like the U.S. Court of Federal Claims, the Tax Court is located in Washington, D.C. However, these judges hear only tax cases. Like interpretations that are issued by the Treasury, judicial decisions can be cited as precedent by both the taxpayer and the IRS.
• If the amount in the case is $50,000 or less for any 1 tax year or period, the small tax case procedure is available upon request if the Tax Court approves. There is no appeal to the decision rendered by this court for either the taxpayer or the IRS. Moreover, since the opinion is not published, it cannot be cited as precedent (IRC Section 7463).

Question 28

Which of the following statements is correct concerning which tax debts are not subject to discharge for an individual taxpayer in most bankruptcies, such as cases under Chapter 7, Chapter 11, Chapter 12, and Chapter 13?

A. Taxes for which no return was filed.
B. Taxes for which a fraudulent return was filed.
C. Taxes that the debtor willfully attempted to evade or defeat.
D. All of the answer choices are not subject to discharge for an individual taxpayer in most bankruptcies.

Answer 28

D. All of the answer choices are not subject to discharge for an individual taxpayer in most bankruptcies.

• As stated in Publication 908, page 17, a bankruptcy court may enter an order discharging the debtor from personal liability for certain debts, including taxes. Not all debts are dischargeable, however. Many tax debts are excepted from the bankruptcy discharge. For the bankruptcy cases under Chapter 7, Chapter 11, Chapter 12, and Chapter 13, the following taxes are not subject to discharge for all of these bankruptcies for individuals (see unsecured tax claims section, item 3):
  
  • Taxes for which no return was filed
  • Taxes for which a return was filed late after 2 years before the bankruptcy petition was filed
  • Taxes for which a fraudulent return was filed
  • Taxes that the debtor willfully attempted to evade or defeat
• As a result, all of the answer choices in this question are correct; they are not subject to discharge for an individual taxpayer in most bankruptcies.

Question 29

A taxpayer is provided a $300 per month mileage allowance for business travel from employer. Which of the following must be true for this to be a non-taxable item?

A. The taxpayer must return any excess reimbursement within 180 days after the expense was paid or incurred.
B. The taxpayer must adequately account for the expenses within 60 days after they were paid or incurred.
C. The taxpayer must receive the advance within 60 days of the time the taxpayer has the expense.
D. The taxpayer must adequately account for the expenses within 120 days after they were paid or incurred.

Answer 29

B. The taxpayer must adequately account for the expenses within 60 days after they were paid or incurred.

• Publication 463 provides that the tax treatment for reimbursements of employee business expenses. Reimbursements treated as paid under an accountable plan are not reported as pay. Reimbursements treated as paid under nonaccountable plan, are reported as pay (see Publication 15 for more information). As such, if the three rules of an accountable plan described below are met, the employer should not include any reimbursements in wages reported in Box 1 of Form W-2.
• Pursuant to Publication 463, page 29, an accountable plan for an employer’s reimbursement or allowance arrangement must include all of the following rules:
  
  • The expense must have a business connection, that is, the employee must have paid or incurred deductible expenses while performing services as an employee of their employer.
  • The employee must adequately account to the employer for the expenses within a reasonable period (within the tax year is not reasonable).
  • The employee must return (not keep) any excess reimbursement or allowance within a reasonable period.
• One of the rules for an accountable plan is that the employee must adequately account for their expenses to their employer. Adequate accounting includes a statement of expense, an account book, a diary, or a similar record in which each expense is entered at or near the time incurred, along with documentary evidence of travel, mileage, and other employee business expenses. A per diem or car allowance satisfies the adequate accounting requirement under certain conditions:
  
  • The employer reasonably limits payment of employee expenses to those that are ordinary and necessary in the conduct of the trade or business
  • The allowance is similar in form to and not more than the federal rate
  • The employee proves the time (dates) place, and business purpose of expenses to employer within a reasonable period of time
  • The employee is not related to the employer.
• The regular federal per diem rate is the highest amount that the federal government will pay its employees for lodging and meals and incidental expenses while they are traveling away from home in a particular area. The rates are different for different locations. Per diem rates are published at gsa.gov/per diem.
• In conclusion, to be non-taxable, the allowance has to be made under an accountable plan and the allowance must be within federal statutory limits for per diem allowances.

Question 30

Mike is an enrolled agent. For the past 5 years, the information that Anne provided Mike to prepare her return included a Schedule K-1 from a partnership showing significant income. However, Mike did not see a Schedule K-1 from the partnership among the information Anne provided to him this year. What does due diligence require Mike to do?

A. Without talking to Anne, Mike should estimate the amount that would be reported as income on the Schedule K-1 based on last year’s Schedule K-1 and include that amount on Anne’s return.
B. Call Anne’s financial advisor and ask him about Anne’s investments.
C. Nothing, because Mike is required to rely only on the information provided by his client, even if he has a reason to know the information is not accurate.
D. Ask Anne about the fact that she did not provide him with a Schedule K-1.

Answer 30

D. Ask Anne about the fact that she did not provide him with a Schedule K-1.

• Being an enrolled agent, Mike should be asking why Anne is not providing him with a copy of the Schedule K-1. Otherwise, he is not satisfying the diligence as to accuracy provision in Circular 230.
• To be more specific, Circular 230, Section 10.22, provides that a practitioner must exercise due diligence:
  
  • In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to IRS matters,
  • In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury, and
  • In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the IRS.
• Furthermore, a practitioner will be presumed to have exercised due diligence for purposes of this section if the practitioner relies on the work product of another person and the practitioner used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person.

Question 31

Generally, the statute of limitations for the collection of outstanding income tax liabilities is:

A. 3 years after the due date of the return.
B. 3 years after the tax is assessed.
C. 10 years after the tax is assessed.
D. 10 years from the last day of the tax period (calendar or fiscal) for which the return is filed.

Answer 31

C. 10 years after the tax is assessed.

• By law, the IRS has the authority to collect outstanding federal taxes for 10 years from the date the taxpayer’s tax was assessed.
• The 10-year collection period is suspended:
  
  • While the IRS and the Office of Appeals consider a request for an Installment Agreement or an Offer in Compromise,
  • From the date the taxpayer requests a Collection Due Process (CDP) hearing until Appeals issues a CDP Notice of Determination or, if the taxpayer seeks review in the Tax Court, until the Tax Court’s decision becomes final,
  • From the date the taxpayer requests innocent spouse relief until a final Notice of Determination is issued,
  • For tax periods included in a bankruptcy while the automatic stay is in effect, plus an additional 6 months, or
  • While the taxpayer is residing outside the United States, if the taxpayer is absent for a continuous period of at least 6 months.
• The amount of time the suspension is in effect will be added to the time remaining in the 10-year period. For example, if the 10-year period is suspended for 6 months, the time left in the period the IRS has to collect will increase by 6 months.

NOTE: Be aware that this question may be asked as follows: “Generally, the statute of limitations for the collection of income tax is:”

Question 32

To avoid tax return preparer penalties for a return’s understated tax liability due to an intentional disregard of the regulations, which of the following actions must a tax preparer take?

A. Audit the taxpayer’s corresponding business operations.
B. Review the accuracy of the taxpayer’s books and records.
C. Make reasonable inquiries to determine if the taxpayer’s information is incomplete.
D. Examine the taxpayer’s supporting documents.

Answer 32

C. Make reasonable inquiries to determine if the taxpayer’s information is incomplete.

• Tax return preparer penalties are covered in both Circular 230 and 26 CFR 1.6694-1(e). An audit or review is not required and examination of the taxpayer’s supporting documents is only sometimes required. Reasonable inquiries, however, are generally required.