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

Question 1

Which of the following statements is correct?

A. A warrant is a legal claim against a taxpayer’s property used as a security for the tax debt.
B. A lien is a legal seizure of a taxpayer’s property to satisfy a tax debt.
C. A lien is a legal claim against a taxpayer’s property used as a security for the tax debt.
D. None of the answer choices are correct.

Answer 1

C. A lien is a legal claim against a taxpayer’s property used as a security for the tax debt.

• A lien is a legal claim to a taxpayer’s current and future property, such as a house or car, and rights to property, such as wages and bank accounts. The lien comes into existence if a taxpayer fails to pay the tax amount due after receiving the first bill.
• A legal seizure of a taxpayer’s property to satisfy a tax debt is a levy. Levies are different from liens; a lien is a claim used as security for the tax debt, while a levy takes the property to satisfy the tax debt.

Question 2

What does a Notice of Federal Tax Lien mean to a taxpayer’s creditors?

A. The IRS has a claim against all of the taxpayer’s currently owned property.
B. The IRS has a claim against all of the taxpayer’s owned property, including property acquired by the taxpayer after the lien was filed.
C. The IRS is in the process of seizing all of the taxpayer’s currently owned property.
D. The IRS is in the process of seizing all of the taxpayer’s currently owned property and will seize any property acquired by the taxpayer until the tax liability is paid in full.

Answer 2

B. The IRS has a claim against all of the taxpayer’s owned property, including property acquired by the taxpayer after the lien was filed.

• Publication 594, page 5, provides that the IRS files a Notice of Federal Tax Lien in the public records to establish the priority of their claim versus the claims of other creditors. The Notice of Federal Tax Lien is filed with local or state authorities, such as county recorder of deeds of the Secretary of State offices.
• If a Notice of Federal Tax Lien is filed against the taxpayer, it may be reported by consumer credit reporting agencies. This can have a negative effect on the taxpayer’s credit rating and make it difficult for them to receive credit (such as a loan or credit card). Employers, landlords, and others may also use this information and not favorably view the fact that a Notice of Federal Tax Lien has been filed against the taxpayer.
• The lien attaches to all of the taxpayer’s current and future property (such as a house or car) and to all of the taxpayer’s rights to property (such as the accounts receivable of the taxpayer’s business). The lien automatically comes into existence if the taxpayer does not pay their amount due after receiving their first bill.

Question 3

For court proceedings resulting from examinations started after July 1998:

A. The IRS has the burden of proof for any factual issue.
B. Taxpayers are no longer required to maintain records to substantiate items claimed on tax returns.
C. The IRS has the burden of proof for any factual issue if the taxpayer has introduced credible evidence relating to the issue.
D. The taxpayer has the burden of proof for any factual issue.

Answer 3

C. The IRS has the burden of proof for any factual issue if the taxpayer has introduced credible evidence relating to the issue.

• Publication 556, page 9, provides information on burden of proof. For court proceedings resulting from examinations started after July 22, 1998, the IRS has the burden of proof for any factual issue if the taxpayer has INTRODUCED CREDIBLE EVIDENCE relating to the issue. The taxpayer, however, also must have:
  
  • Complied with all substantiation requirements of the Internal Revenue Code,
  • Maintained all records required by the Internal Revenue Code,
  • Cooperated with all reasonable requests by the IRS for information regarding the preparation and related tax treatment of any item reported on the taxpayer’s tax return, and
  • Had a net worth of $7 million or less and not more than 500 employees at the time the taxpayer’s tax liability is contested in any court proceeding if the taxpayer’s tax return is for a corporation, partnership, or trust.

Question 4

Dave operates a retail business as a sole proprietorship with stores in several locations in the Toledo, Ohio, area. The books and records for all of the stores are maintained at the main store near his residence. Dave’s tax returns have always been prepared by his longtime accountant in Toledo. Dave has been notified that his 2021 Form 1040 has been selected for an examination. Dave’s brother-in-law in Detroit, Michigan, a district away, has just passed the enrolled agent’s examination and Dave’s wife would like him to handle the examination. Which of the following statements is most likely correct?

A. The Internal Revenue Service will likely approve a transfer to the Detroit office.
B. The Internal Revenue Service will likely approve a transfer to the Detroit office if the taxpayer transfers his books up to Detroit.
C. The Internal Revenue Service will likely require the examination to take place in Toledo.
D. The Internal Revenue Service will likely approve a transfer to the Detroit office, provided a properly executed Form 2848 is submitted with the request.

Answer 4

C. The Internal Revenue Service will likely require the examination to take place in Toledo.

• Publication 556, page 4, provides a reason for transferring a case to another district. Generally, a taxpayer’s return is examined in the IRS district where the taxpayer lives. But if his or her return can be examined more quickly and conveniently in another district, such as where the taxpayer’s books and records are located, then the taxpayer can ask to have the case transferred to that district.
• Form 2848 is a power of attorney for another person to represent the taxpayer. If properly executed, it will allow Dave’s brother-in-law to represent him. (Publication 556, page 9).
• Some examinations are handled entirely by mail. Examinations not handled by mail can take place in the taxpayer’s home, the taxpayer’s place of business, an Internal Revenue office, or the office of the taxpayer’s authorized representative. If the time, place, or method is not convenient for the taxpayer, the examiner will try to work out something more suitable. However, the IRS makes the final determination of when, where, and how the examination will take place. (Publication 556, page 3).
• In this case, there is no reason for transferring the examination to another district. Hence, the Internal Revenue Service will likely require the examination to take place in Toledo, where Dave operates his business.

Question 5

Which of the following conditions is the best response to when the Internal Revenue Service may abate (reduce) the amount of interest you owe?

A. The Internal Revenue Service does not have the authority to abate the interest owed by a taxpayer.
B. The interest is due to an unreasonable error by an Internal Revenue Service officer in performing a ministerial or managerial act.
C. The interest is due to an unreasonable delay by an Internal Revenue Service employee in performing a ministerial or managerial act.
D. The interest is due to an unreasonable error or delay by an Internal Revenue Service officer or employee in performing a ministerial or managerial act.

Answer 5

D. The interest is due to an unreasonable error or delay by an Internal Revenue Service officer or employee in performing a ministerial or managerial act.

• Publication 556, page 7, provides that the IRS may abate (reduce) the amount of interest owed by the taxpayer if the interest is due to an unreasonable error or delay by an IRS officer or employee in performing a ministerial or managerial act. Only the amount of interest on income, estate, gift, generation-skipping, and certain excise taxes can be reduced.
  
  • A ministerial act is a procedure or mechanical act, not involving the exercise of judgment or discretion, during the processing of a case after all prerequisites have taken place. A decision concerning the proper application of federal tax law (or other federal or state law) is not a ministerial act.
  • A managerial act is an administrative act during the processing of a case that involves the loss of records or the exercise of judgment or discretion concerning the management of personnel. A decision concerning the proper application of federal tax law (or other federal or state law) is not a managerial act.
• The amount of interest will not be reduced if the taxpayer or anyone related to the taxpayer contributed significantly to the error or delay. Also, the interest will be reduced only if the error or delay happened after the IRS contacted the taxpayer in writing about the deficiency or payment on which the interest is based. An audit notification letter is such a contact.
• The IRS cannot reduce the amount of interest due to a general administrative decision, such as a decision on how to organize the processing of tax returns.
• Hence, the IRS may abate the amount of interest a taxpayer owes when the interest is due to an unreasonable error or delay by either an IRS officer or employee in performing a ministerial or managerial act.

Question 6

Lorie owed the IRS $150,000. Lorie owned a money market account with a major stock brokerage firm that had a value of $200,000. Which of the following statements is correct concerning the IRS?

A. The IRS can force the brokerage firm to pay $150,000 from the account by levying the account.
B. The IRS can force the brokerage firm to pay $150,000 from the account by serving a notice of lien on it.
C. The maximum amount that the IRS can levy is one-half of Lorie’s money market account.
D. The IRS cannot take any action against Lorie’s assets.

Answer 6

A. The IRS can force the brokerage firm to pay $150,000 from the account by levying the account.

• Publication 594, pages 5 and 6, states a levy (not a lien) is a legal seizure of the taxpayer’s property to satisfy a tax debt. Moreover, the IRS is able to levy the total tax liability from a person’s assets; it is not limited to one-half. Hence, the IRS can force the brokerage firm to pay $150,000 from the account by levying the account.
• In addition, you should realize that liens are different from levies. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.

Question 7

In some cases, a spouse will be relieved of the tax, interest, and penalties on a joint return. Which of the following types of relief is not relief from a joint tax return?

A. Innocent spouse relief.
B. Separation of liability relief.
C. Equitable relief.
D. Injured spouse relief.

Answer 7

D. Injured spouse relief.

• Publication 971, pages 1 and 2, states, in part, that many married taxpayers choose to file a joint tax return because of certain benefits this filing status allows. Both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the joint return even if they later divorce. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns.
• One spouse may be held responsible for all the tax due even if all the income was earned by the other spouse. In some cases, a spouse (or former spouse) will be relieved of the tax, interest, and penalties on a joint tax return. Three types of relief are available: innocent spouse relief, relief by separation of liability, and equitable relief.
• A taxpayer may also seek relief under the injured spouse rules if the taxpayer’s share of the overpayment shown on the taxpayer’s joint return was, or is expected to be, applied against the taxpayer’s spouse’s past-due federal debts, state taxes, state unemployment compensation debts, child or spousal support payments, or a federal nontax debt, such as a student loan. If the taxpayer is an injured spouse, they may be entitled to receive a refund of their share of the overpayment.
• In this problem, injured spouse relief is not a type of relief from a joint tax return, because it deals with an overpayment, not relief from taxes owed, penalty, and interest.

Question 8

If a taxpayer and the IRS fail to settle a non-docketed examination controversy in the IRS Independent Office of Appeals, the next event to occur is:

A. Issues of a notice of deficiency.
B. Issuance of notice and demand for payment.
C. Referral of the case to the Taxpayer Advocate Service.
D. Return of the case to the assigned Revenue Agent for further review.

Answer 8

A. Issues of a notice of deficiency.

• According to IRS Publication 556, pages 5-7, if a taxpayer and the IRS cannot reach a settlement on a non-docketed examination controversy in the IRS Independent Office of Appeals, the next step is the issuance of a notice of deficiency. This notice, often referred to as a “90-day letter,” formally states the IRS’s determination that additional tax is owed and gives the taxpayer 90 days to either pay the amount due or file a petition with the U.S. Tax Court to contest the deficiency.
• The issuance of notice and demand for payment occurs after the deficiency has been assessed and if no petition is filed. The referral to the Taxpayer Advocate Service is not a typical procedural step in this context. The return of the case to the assigned Revenue Agent for further review does not happen after the appeals process if an agreement is not reached.
• Therefore, the correct answer is the issuance of a notice of deficiency.

Question 9

When dealing with IRS employees, you have certain rights. Which of the following most accurately reflects those rights?

A. A right of appeal is available for most collection actions.
B. A right of representation is only available in audit matters; it is not available for collection matters.
C. A case may not be transferred to a different IRS office, even if your authorized representative is located in an area different from your residence.
D. If you disagree with the IRS employee who handles your case, you must first have the employee’s permission before requesting a meeting with the manager.

Answer 9

A. A right of appeal is available for most collection actions.

• Publication 594, page 4, highlights how to appeal an IRS decision. A taxpayer has the right to appeal most collection actions to the IRS Office of Appeals (Appeals). Appeals is separate from and independent of the IRS Collection office that initiates collections actions. Appeals ensures and protects its independence by adhering to a strict policy prohibiting certain communications with the IRS Collection office or other IRS offices, such as discussions regarding the strength or weakness of your case. When an IRS office is to be engaged in discussions, the taxpayer will be invited to participate in the conference or provided any written document to give the taxpayer an opportunity to comment.
• The main options for appeals are either Collection Due Process or the Collection Appeals Program. The purpose of a Collection Due Process hearing is to have Appeals review collection actions that were taken or have been proposed. After Appeals has made their determination and the taxpayer does not agree, the taxpayer can go to court to appeal the determination.
• Under the Collection Appeals Program (CAP), if a taxpayer disagrees with an IRS employee’s decision regarding any levy, seizure, or Notice of Federal Tax Lien filing and wants to appeal it, the taxpayer can ask the IRS employee’s manager to review their case. If the taxpayer disagrees with the manager’s decision, the taxpayer may continue with the Collection Appeals Program as outlined in Publication 1660. Instances in which a taxpayer can pursue the Collection Appeals Program include, but are not limited to, the following:
  
  • Before or after the IRS files a Notice of Federal Tax Lien
  • Before or after the IRS seizes (“levies”) the taxpayer’s property
  • After the IRS rejects, terminates, or proposes to terminate a taxpayer’s Installment Agreement (A conference with the manager is recommended, but not required.)
• In this problem, the most accurate statement that reflects a person’s rights when dealing with an IRS employee is the right to appeal most IRS collection actions.

Question 10

If you do not agree with the Internal Revenue Service examination conclusion, you may take your case to the U.S. Tax Court for the following:

A. State income tax examination.
B. Federal income tax examination.
C. Federal estate tax examination.
D. Both federal income tax examination and federal estate tax examination.

Answer 10

D. Both federal income tax examination and federal estate tax examination.

• As provided on page 12 of Publication 556, the taxpayer can go to the U.S. Tax Court if a disagreement with the IRS is over whether a taxpayer owes additional income tax, estate tax, gift tax, certain excise taxes, or penalties related to these proposed liabilities.
• Tax controversies such as those involving some employment tax issues or manufacturers’ excise taxes cannot be heard by the Tax Court. Rather, these disputes are heard by the U.S. District Court.
• Therefore, a dispute involving the state may not be resolved in the U.S. Tax Court; the taxpayer must seek relief from the state’s court system.

Question 11

What action may a taxpayer take if he does not agree with the proposed changes from an examination?

A. The taxpayer must go directly to Appeals within 15 days.
B. The taxpayer can request an immediate meeting with the examiner’s supervisor to explain the taxpayer’s position.
C. The taxpayer must go directly to Tax Court within 90 days.
D. The taxpayer has no appeals after an examination.

Answer 11

B. The taxpayer can request an immediate meeting with the examiner’s supervisor to explain the taxpayer’s position.

• Publication 556, page 4, states in part that if a taxpayer does not agree with the proposed changes during an examination, the examiner will explain the appeal rights to the taxpayer. If the examination takes place in an IRS office, the taxpayer can request an immediate meeting with the examiner’s supervisor to explain the taxpayer’s position. If an agreement is reached, the case will be closed.
• If an agreement cannot be reached with the supervisor or if the examination takes place outside the IRS office, the examiner will write up the taxpayer’s case, explaining the taxpayer’s position and the IRS’s position. The examiner will forward the write-up for processing.
• As a result, the taxpayer does not need to go directly to an appeal if they do not agree. The taxpayer can request an immediate meeting with the examiner’s supervisor to explain the taxpayer’s position.

Question 12

For the IRS to grant a guaranteed installment agreement, a taxpayer must have not failed to file any income tax returns or pay any tax shown on such returns during any of the preceding:

A. 3 taxable years.
B. 5 taxable years.
C. 6 taxable years.
D. 10 taxable years.

Answer 12

B. 5 taxable years.

• The IRS must agree to an installment payment plan for an individual’s tax debt under the following conditions:

1. The tax debt, excluding interest and penalties, is $10,000 or less.
2. Over the past 5 years, the taxpayer (and spouse, if it’s a joint return):
   a. Filed all required tax returns.
   b. Paid all taxes due.
   c. Did not have an installment agreement.
3. The IRS confirms that the taxpayer cannot pay the debt in full immediately and requires the taxpayer to provide necessary financial information.
4. The plan must ensure the tax debt is fully paid within 3 years.
5. The taxpayer must agree to follow all tax laws while the installment plan is active.

Question 13

What action can a taxpayer take who has been audited for the same items in either of 2 preceding years, had no change proposed on his or her tax liability, and receives notice that his or her return has been selected for examination?

A. He can disregard the notice under the repeat examination rule.
B. He must submit to the examination.
C. He may contact the Internal Revenue Service and request that the examination be discontinued under the repeat examination rule.
D. He must submit to the examination because the repeat examination rule pertains to the 3 preceding years.

Answer 13

C. He may contact the Internal Revenue Service and request that the examination be discontinued under the repeat examination rule.

• Publication 556, page 4, provides insight into the issue of repeat examinations. In particular, the IRS tries to avoid repeat examinations of the same items, but sometimes this happens. If a taxpayer’s tax return was examined for the same items in either of the 2 previous years and no change was proposed to the taxpayer’s tax liability, the taxpayer should contact the IRS as soon as possible to see if the examination should be discontinued.

Question 14

The examination of Greta’s tax return for 2022 resulted in adjustments creating a tax liability in the amount of $30,000. Greta does not believe she owes anything. A Notice of Proposed Income Tax Deficiency is issued to Greta, who wants to appeal the Revenue Agent’s adjustments to the IRS Office of Appeals. Greta must file a written protest letter no later than which of the following periods?

A. 10 days.
B. 30 days.
C. 90 days.
D. None of the answer choices are correct.

Answer 14

B. 30 days.

• Publication 556, pages 4 and 5, addresses the issues associated with the IRS examination. If the taxpayer does not agree with the proposed changes, the examiner will explain the appeal rights. If the examination takes place in an IRS office, the taxpayer can request an immediate meeting with the examiner’s supervisor to explain his or her position. If an agreement is reached, the case will be closed.
• If the taxpayer cannot reach an agreement with the supervisor at this meeting, or if the examination took place outside of an IRS office, the examiner will write up the case explaining the taxpayer’s position and the IRS’s position. The examiner will forward the case for processing.
• Most cases that are not docketed in any court qualify for fast-track mediation. Mediation can take place as early as a conference that the taxpayer requests with the examiner’s supervisor. The process involves an Appeals Officer who has been trained in mediation.
• Within a few weeks after the closing conference with the examiner and/or supervisor, the taxpayer will receive a package that contains a letter (known as a 30-day letter) notifying the taxpayer of his or her right to appeal the proposed changes within 30 days.

Question 15

What action may a taxpayer take when the taxpayer and the IRS do not reach agreement on proposed audit changes?

A. The taxpayer may request the case be handled under the small tax case procedures if the tax liability is less than $100,000.
B. The taxpayer may take the case directly to the Tax Court.
C. The taxpayer must seek settlement by an Appeals Office before going to the Tax Court.
D. The IRS decision is final and cannot be appealed.

Answer 15

B. The taxpayer may take the case directly to the Tax Court.

• Publication 556, page 8, states, in part, that if a taxpayer does not agree with any or all of the IRS findings, the taxpayer may request a meeting or a telephone conference with the supervisor of the person who issued the findings. If the taxpayer still disagrees, the taxpayer may (must not) appeal the case to the Appeals Office of the IRS.
• If the taxpayer decides to do nothing and the case involves an examination of the taxpayer’s income, estate, gift, and certain excise taxes or penalties, the taxpayer will receive a formal Notice of Deficiency. The Notice of Deficiency allows the taxpayer to go to the Tax Court and tells the taxpayer the procedure to follow.
• If the taxpayer does not go to the Tax Court, the IRS will send the taxpayer a bill for the amount due.
• If the taxpayer and Appeals do not agree on some or all of the issues after the Appeals conference, or if the taxpayer skipped the Appeals system, the taxpayer may take the case to the U.S. Tax Court (money owed), the U.S. Court of Federal Claims (sue for a refund), or the taxpayer’s U.S. District Court (sue for refund) after satisfying certain procedural and jurisdictional requirements (Publication 556, page 12).
• In addition, 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 simple alternative to solve the taxpayer’s case (Publication 556, page 12). 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 by either party.
• Since the taxpayer is not required but is strongly encouraged, the correct response here is the taxpayer may take the case directly to the Tax Court.

Question 16

How many days after a Collection Due Process hearing with the Office of Appeals to discuss an Internal Revenue Service levy or lien does a taxpayer have to seek review of the determination?

A. The taxpayer does not have the right to bring suit after this hearing.
B. The taxpayer has 30 days from the date of the determination.
C. The taxpayer has 90 days from the date of the determination.
D. The taxpayer has 180 days from the date of the determination.

Answer 16

B. The taxpayer has 30 days from the date of the determination.

• According to Publication 594, page 5, at the conclusion of a taxpayer’s Collection Due Process hearing (also referred to as a CDP hearing), the IRS Office of Appeals will issue a determination. That determination either will support the continued existence of the filed federal tax lien or will determine the lien should be released, or withdrawn. If the taxpayer disagrees with the determination, the taxpayer will have 30 days after the date of the determination to seek review of the determination in the U.S. Tax Court or appeal under the Collection Appeals Program.
• See Publication 1660, Collection Appeal Rights, for more information.

Question 17

If you do not agree with the Internal Revenue Service examination conclusion, you may take your case to which of the following?

A. U.S. Tax Court.
B. U.S. Court of Federal Claims.
C. U.S. District Court.
D. All of the answer choices are correct.

Answer 17

D. All of the answer choices are correct.

• Publication 556, page 12, discusses the issue presented in this problem. Specifically, if the taxpayer and Appeals do not agree on some or all of the issues after the taxpayer’s Appeals conference, or if the taxpayer skipped the IRS’s Appeals system, the taxpayer may take his or her case to the U.S. Tax Court, the U.S. Court of Federal Claims, or the taxpayer’s U.S. District Court, after satisfying certain procedural and jurisdictional requirements. These courts are independent judicial bodies and have no connection with the IRS.
• If a taxpayer’s disagreement with the IRS is over whether he or she owes additional income tax, estate tax, gift tax, certain excise taxes, or penalties related to these proposed liabilities, the taxpayer can go to the U.S. Tax Court. (Other types of tax controversies, such as those involving some employment tax issues or manufacturers’ excise taxes, cannot be heard by the Tax Court.)
• Thus, a taxpayer can take his or her case to any of the three courts listed.

Question 18

What remedies does a taxpayer have if the IRS prematurely seizes property?

A. They may file a claim with the IRS to recover economic damages.
B. They may sue for damages against the federal government.
C. They may sue for damages against the IRS employees.
D. They have no recourse.

Answer 18

A. They may file a claim with the IRS to recover economic damages.

• If the IRS intentionally or negligently does not follow Internal Revenue law while collecting a taxpayer’s taxes, or the IRS wrongfully seized the property of the wrong taxpayer, a taxpayer may be entitled to recover economic damages. Some limitations may apply.
• The taxpayer must file an administrative claim with the Advisory Group Manager for the taxpayer’s area. The taxpayer must mail their written claim to the attention of the Advisory Group Manager at the address listed in Publication 4235, Collection Advisory Group Numbers and Addresses.
• If the claim is denied, the taxpayer may sue the federal government, but not IRS employees, for economic damages.

Question 19

Which of the following statements is correct if a taxpayer agrees to changes made during an examination and he signs an agreement, but does not pay the taxes due?

A. If the taxpayer pays when he or she signs the agreement, the interest is generally waived from the due date of the return to the date of the payment.
B. If the taxpayer does not pay the additional tax when he or she signs the agreement, the taxpayer will receive a bill that includes interest and an additional penalty.
C. If the taxpayer pays the amount due within 21 calendar days of the billing date and the amount is less than $100,000, the taxpayer will not have to pay more interest or penalties.
D. None of the answer choices are correct.

Answer 19

C. If the taxpayer pays the amount due within 21 calendar days of the billing date and the amount is less than $100,000, the taxpayer will not have to pay more interest or penalties.

• Publication 556, page 2, provides that a taxpayer’s return may be examined for a variety of reasons, and the examination may take place in any one of several ways. After the examination, if any changes to a taxpayer’s tax are proposed, either the taxpayer can agree with those changes and pay any additional tax owed, or the taxpayer can disagree with the changes and appeal the decision.
• Publication 556, page 4, provides the general provision if the taxpayer agrees with the proposed changes. Specifically:
  
  • If a taxpayer agrees with the proposed changes after the examination, the taxpayer can sign an agreement form and pay any additional tax he or she may owe. A taxpayer must pay interest on any additional tax and the interest is generally figured (not waived) from the due date of the return to the date of the payment.
  • If the taxpayer does not pay the additional tax when he or she signs the agreement, the taxpayer will receive a bill that includes interest (not an additional penalty).
  • If the taxpayer pays the amount due within 10 business days of the billing date, the taxpayer will not have to pay more interest or penalties. This period is extended to 21 calendar days if the amount due is less than $100,000.
  • If the taxpayer is due a refund, the taxpayer will receive it sooner if they sign the agreement form. Moreover, the taxpayer will be paid interest on the refund amount.
• Given the information above, if the taxpayer pays the amount due within 21 calendar days of the billing date and the amount is less than $100,000, the taxpayer will not have to pay more interest or penalties.

Question 20

The Installment Agreement is one of the acceptable methods of paying off a tax debt to the U.S. Treasury. Financial information on a “Collection Information Statement” may be required as a condition of the Installment Agreement. Generally, an Installment Agreement cannot be turned down without this statement if the dollar amount is:

A. $20,000 or less if it is a joint return.
B. $25,000 or more.
C. At least $15,000 for the current year, but less than $20,000 for all years.
D. $10,000 or less.

Answer 20

D. $10,000 or less.

• Publication 594, page 3, provides that if a taxpayer cannot pay all the taxes owed at the current time, the taxpayer can contact the IRS to explain their situation and request more time to pay their debt. Prior to approving a taxpayer’s request to delay collection until they are able to pay, the IRS may request the taxpayer to fill out Collection Information Statements (Form 433-F, Form 433-A, and Form 433-B) to help them compare the taxpayer’s monthly income with expenses to determine the amount that a taxpayer can pay.
• Another method of paying off a tax debt to the U.S. Treasury is the Installment Agreement (Publication 594, page 2). Form 9465 is used to request a monthly installment plan if you are an individual who owes income tax. However, the instructions for Form 9465 provide that the request for an Installment Agreement cannot be turned down if the amount owed is not more than $10,000 in tax and the following criteria are satisfied:
  
  • The taxpayer, and spouse, if applicable, have timely filed all income tax returns and paid any income tax due during the past 5 tax years and have not entered into an Installment Agreement for payment of income taxes.
  • The taxpayer agrees to pay the full amount owed within 3 years and to comply with the tax laws while the agreement is in effect.
  • The IRS determines that the taxpayer is financially unable to pay the liability owed in full when it is due.
• In this case and if the taxpayer meets the other criteria as given above, the IRS cannot turn down the installment plan request if the amount owed is $10,000 or less.

Question 21

Brittany’s 2020 return was selected for an examination. Information was requested to support claimed business expenses. Brittany failed to provide the Internal Revenue Service with any of the requested information because she felt the examination was an unwarranted invasion of her privacy. The Internal Revenue Service issued a Notice of Deficiency and Brittany filed a petition with the Tax Court. Which of the following statements is correct since the examination was started in 2022?

A. The IRS will have the burden of proof in the Tax Court proceedings because the taxpayer claimed the examination was an unwarranted invasion of her privacy.
B. The IRS will have the burden of proof in the Tax Court proceedings because business expenses are a protected area.
C. Brittany will have the burden of proof in the Tax Court proceedings because she failed to provide the IRS with credible evidence relating to the issue.
D. The taxpayer always has the burden of proof in the Tax Court proceedings.

Answer 21

C. Brittany will have the burden of proof in the Tax Court proceedings because she failed to provide the IRS with credible evidence relating to the issue.

• Publication 556, page 9, provides information on burden of proof. For court proceedings resulting from examinations started after July 22, 1998, the IRS has the burden of proof for any factual issue if the taxpayer has introduced credible evidence relating to the issue. The taxpayer, however, also must have:
  
  • Complied with all substantiation requirements of the Internal Revenue Code,
  • Maintained all records required by the Internal Revenue Code,
  • Cooperated with all reasonable requests by the IRS for information regarding the preparation and related tax treatment of any item reported on the taxpayer’s tax return, and
  • Had a net worth of $7 million or less and not more than 500 employees at the time the taxpayer’s tax liability is contested in any court proceeding if the taxpayer’s tax return is for a corporation, partnership, or trust.
• Since Brittany has failed to provide the Internal Revenue Service with any of the requested information, the burden of proof remains with her.

Question 22

Which of the following is correct concerning a taxpayer’s request to have the tax return examination moved to another IRS area?

A. A taxpayer’s return is examined only in the IRS district where the taxpayer lives.
B. A taxpayer’s return may be moved if the taxpayer’s books and records are located in the other area.
C. A taxpayer’s return may be moved if the taxpayer does not want anyone to know that he is being examined.
D. A taxpayer’s return may be moved by simply filing Form TRAN within 10 days of the notice.

Answer 22

B. A taxpayer’s return may be moved if the taxpayer’s books and records are located in the other area.

• Publication 556, page 4, provides a reason for transferring a case to another district. Generally, a taxpayer’s return is examined in the IRS district where the taxpayer lives. But if his or her return can be examined more quickly and conveniently in another district, such as where the taxpayer’s books and records are located, then the taxpayer can ask to have the case transferred to that area.
• Hence, the taxpayer’s return may be moved if the taxpayer’s books and records are located in the other area.

Question 23

An Enrolled Agent’s (EA’s) client is an individual taxpayer who is requesting assistance with a proposed penalty. All of the following are methods of addressing the penalty, EXCEPT:

A. Prior to a penalty being assessed in an examination, it may be appealed via deficiency procedures.
B. Prior to assessment, the EA can request binding arbitration to reconsider the penalty.
C. After the penalty has been assessed, a written request for abatement can be submitted.
D. After the penalty has been assessed and paid, the EA can prepare a claim for refund.

Answer 23

B. Prior to assessment, the EA can request binding arbitration to reconsider the penalty.

• Section 20.1.1.4 of the Internal Revenue Manual (11-21-2017) provides that various administrative and legislative remedies are provided for taxpayers who disagree with the IRS’s determination that they are liable for a particular penalty. Generally, when a taxpayer disagrees with our determination regarding a penalty, he or she has the right to an administrative appeal.
• Taxpayers have the right to challenge the assertion or assessment of a penalty, and generally may do so at any stage in the penalty process. Taxpayers may request the following:
  
  • A review of the penalty prior to assessment (e.g., deficiency procedures),
  • A penalty abatement after it is assessed, and either before or after it is paid (post-assessment review), or
  • An abatement and refund after payment (claim for refund).
• Taxpayers may indicate their disagreement with the IRS either verbally or in writing, or if the penalty has already been paid, by filing a claim for refund or credit.
• If agreement cannot be reached at the area field office or the campus, the taxpayer may request a conference with the employee’s immediate manager, or (in most cases) the taxpayer may request that the case be forwarded to Appeals. Taxpayers should provide a written request for consideration by Appeals.
• Given the information above, the EA can appeal via the deficiency procedures (but not request binding arbitration) to reconsider the penalty before the assessment.

Question 24

Ruth’s 2020 and 2021 returns were examined for investment expenses. Both examinations resulted in no change to the return as filed. Ruth was notified that her 2022 return was selected for examination for investment expenses. Which of the following statements is the best advice to give Ruth?

A. Since Ruth has two prior no change audits on the same item, upon notifying the Internal Revenue Service, the examination should be discontinued.
B. Since Ruth has two prior no change audits, upon notifying the Internal Revenue Service, the examination should be discontinued.
C. Since Ruth’s prior reviews were on the same item, the current examination should continue.
D. Ruth can disregard the notice.

Answer 24

A. Since Ruth has two prior no change audits on the same item, upon notifying the Internal Revenue Service, the examination should be discontinued.

• Publication 556, page 4, provides insight to the issue of repeat examinations. In particular, the IRS tries to avoid repeat examinations of the same items, but sometimes this happens. If a taxpayer’s tax return was examined for the same items in either of the 2 previous years and no change was proposed to the taxpayer’s tax liability, the taxpayer should contact the IRS as soon as possible to see if the examination should be discontinued.
• In this case, Ruth should notify the Internal Revenue Service that she has had two no change audits on the same item to see if the examination should be discontinued, since this would be the 3rd year.

Question 25

An enrolled agent’s written communications with a client may be privileged if they concern:

A. A criminal tax investigation.
B. Preparing the client’s tax return.
C. Representing the client in an IRS examination.
D. Encouraging the client to participate in a tax shelter.

Answer 25

C. Representing the client in an IRS examination.

• Under Internal Revenue Code Section 7525, the confidentiality privilege between a taxpayer and a federally authorized tax practitioner, such as an enrolled agent, applies to written communications concerning tax advice. This privilege is similar to the attorney-client privilege and applies to communications made in the context of noncriminal tax matters before the IRS, such as during an examination. However, it does not apply to communications regarding criminal tax investigations, the preparation of tax returns, or advice related to tax shelters. Therefore, written communications between an enrolled agent and a client may be privileged if they pertain to representing the client in an IRS examination.
• The correct answer is representing the client in an IRS examination.

Question 26

After the issuance of a Statutory Notice of Deficiency, failure to timely file a petition with the Tax Court will result in which of the following?

A. The Internal Revenue Service will issue a 30-day letter.
B. The Internal Revenue Service will assess the tax it says the taxpayer owes.
C. The Internal Revenue Service will issue a 90-day letter.
D. You will be required to post a deposit before being allowed to request an extension for time to file a petition.

Answer 26

B. The Internal Revenue Service will assess the tax it says the taxpayer owes.

• Publication 556, page 4, provides that if a taxpayer disagrees with the IRS over its assessment of additional taxes owed, the taxpayer may request a meeting or telephone conference with the supervisor of the person who issued the findings. If the taxpayer still disagrees, the taxpayer can appeal the IRS’s decision with the Appeals Office of the IRS. The Appeals Office is separate from—and independent of—the IRS office taking the action the taxpayer disagrees with.
• If the taxpayer and the Appeals Office do not agree on some or all of the issues after the taxpayer’s Appeals conference, or if the taxpayer skipped the Appeals system, the taxpayer may take his or her case to the U.S. Tax Court, the U.S. Court of Federal Claims, or the taxpayer’s U.S. District Court.
• A taxpayer starts this process after the IRS issues a formal letter (known as a Notice of Deficiency) stating the amounts that the IRS believes the taxpayer owes. The taxpayer has 90 days from the mailing date of the Notice of Deficiency to file a petition with the Tax Court (or 150 days if the notice is addressed outside the United States). Failure to file timely results in the IRS assessing the tax that it says the taxpayer owes.

Question 27

Which of the following is true with respect to an Offer in Compromise?

A. The taxpayer may be allowed to pay less than the full amount owed.
B. Collection actions, such as levy, may be delayed.
C. A rejected offer may be appealed.
D. All of the answer choices are correct.

Answer 27

D. All of the answer choices are correct.

• The Internal Revenue Service (IRS) may accept an Offer in Compromise (OIC) to settle unpaid tax accounts for less than the full amount of the balance due. The IRS may accept an OIC if:
  
  • The IRS agrees that the taxpayer’s tax debt may not be accurate,
  • The taxpayer has insufficient assets and income to pay the amount due, or
  • Because of the taxpayer’s exceptional circumstances, paying the amount due would cause an economic hardship or would be unjust.
• The OIC program is an option for those taxpayers who are unable to pay their tax account in a lump sum or through an Installment Agreement and have exhausted their search for other payment arrangements.
• As provided on page 3 of the Form 656-B Booklet, there is a $205 application fee for submitting Form 656. However, there is an exception to the application fee. If the taxpayer is an individual or a sole proprietor, or a disregarded single-member LLC taxed as a sole proprietor AND the taxpayer’s household gross income meets the Low-Income Certification guidelines, the taxpayer will not be required to send the application fee. See page 2 of Form 656 to see the qualifications for satisfying the Low-Income Certification.
• Moreover, a taxpayer may be eligible to receive a refund of the application fee if the IRS:

1. Accepts the offer to promote effective tax administration, or
2. Accepts the offer based on doubts as to collectability and determines that collecting an amount greater than the amount offered would create an economic hardship.

• To be considered for an Offer in Compromise, all returns that are due must be filed and, if applicable, be current with all Federal Tax Deposits. Collection actions, such as a levy, may be delayed.
• Additionally, Publication 594, page 3, provides that if an Offer in Compromise is rejected, it may be appealed (see Publication 1660).
• Thus, all the responses given in this problem are correct with respect to an Offer in Compromise.

Question 28

A taxpayer received a notice from the IRS saying a prior year’s tax return had been examined, creating a tax assessment of $2,560. The taxpayer disagrees with the amount of tax assessed. In which of the following situations can a taxpayer not request an audit reconsideration?

A. The taxpayer moved and never received the examination notice.
B. The taxpayer neither appeared for the examination nor sent information to the IRS.
C. There is new documentation for the examination.
D. The taxpayer already paid the full amount owed.

Answer 28

D. The taxpayer already paid the full amount owed.

• Publication 3598, page 2 provides the following reasons that a taxpayer may request audit reconsideration. The four reasons are:
  
  • Did not appear for the taxpayer’s audit
  • Moved and did not receive correspondence from the IRS
  • Have additional information to present that the taxpayer did not provide during their original audit
  • Disagree with the assessment from the audit
• A taxpayer cannot request an audit reconsideration if they already paid the full amount owed.

Question 29

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. Both I and II.
D. Neither I nor II.

Answer 29

C. Both I and II.

• An accuracy-related penalty applies to the portion of tax underpayment attributable to either negligence or a disregard of the tax rules or regulations and any substantial understatement of income tax.
• Note: A 20% “accuracy-related” civil penalty applies to the portion of an understatement of tax on a tax return that is due (absent reasonable cause) to:
  
  • Negligence or a disregard of rules or regulations,
  • Substantial understatement of income tax,
  • Substantial valuation misstatement,
  • Substantial overstatements of pension liabilities, or
  • Substantial estate or gift tax valuation understatement.

Question 30

Julie, who lives in Washington, D.C., operated a business without books and records. Her business income and expenses were reported on Schedule C. Julie’s tax return for 2020 was examined and substantial adjustments were proposed. Julie disagreed with the adjustments and wants to take her case directly to Tax Court. A Statutory Notice of Deficiency was issued to Julie by the IRS Area Director. Julie can file a petition for a small tax case before the U.S. Tax Court during which of the following periods beginning from the date of the issuance of the notice?

A. 30 days.
B. 90 days.
C. 150 days.
D. None of the answer choices are correct.

Answer 30

B. 90 days.

• The Statutory Notice of Deficiency is referred to as the Notice of Deficiency, and it is also known as the 90-day letter because this is the time that the taxpayer has to file a petition with the Tax Court.
• Publication 556, page 5, provides that a taxpayer generally has 30 days from the date of the 30-day letter to tell the IRS whether he or she will accept or appeal the proposed changes.
• If the taxpayer does not respond to the 30-day letter, or if the taxpayer later does not reach an agreement with an Appeals Officer, the IRS will send a 90-day letter, which is also known as a Notice of Deficiency. The taxpayer will have 90 days (150 days if it is addressed to a person outside the United States) from the date of this notice to file a petition with the Tax Court.

Question 31

If your tax return was examined for the same items in either of the 2 previous years and no change was proposed to your tax liability:

A. You may ignore the examination notice.
B. You should call the Taxpayer Advocate Office and file a complaint.
C. You should call the IRS as soon as possible to see if the examination should be discontinued.
D. You should write a letter to the Service Center and complain that the Revenue Agents are harassing you.

Answer 31

C. You should call the IRS as soon as possible to see if the examination should be discontinued.

• Publication 556, page 4, provides insight to the issue of repeat examinations. If a taxpayer’s tax return was examined for the same items in either of the 2 previous years and no change was proposed to the taxpayer’s tax liability, the taxpayer should contact the IRS as soon as possible to see if the examination should be discontinued.

Question 32

Which fee arrangement described below is permissible for an Electronic Return Originator (ERO)?

A. Fees based on AGI from the tax return.
B. Fees based on percentage of refund.
C. Fees based on taxable income from the tax return.
D. None of the answer choices are correct.

Answer 32

D. None of the answer choices are correct.

• Circular 230, Section 10.27, provides that a practitioner (which would include an Authorized IRS e-file Provider) may not base their fees on a percentage of the refund amount or compute their fees using any figure from tax returns. In addition, separate fees may not be charged for direct deposits.
• Therefore, none of the responses are correct.

Question 33

The Internal Revenue Service may accept an Offer in Compromise to settle unpaid tax accounts for less than the full amount due. A Collection Information Statement (financial statement) is not required with the offer when the reason for the offer is:

A. Doubt as to liability.
B. Doubt as to collectability.
C. To promote effective tax administration.
D. Economic hardship.

Answer 33

A. Doubt as to liability.

• Form 656-B (Booklet), Offer in Compromise, page 1, provides the general rules for making an Offer in Compromise (OIC). An Offer in Compromise (offer) is an agreement between the taxpayer and the IRS that settles a tax debt for less than the full amount owed. The offer program provides eligible taxpayers with a path toward paying off their tax debt and getting a “fresh start.” The ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS. To be considered, generally the taxpayer must make an appropriate offer based on what the IRS considers the taxpayer’s true ability to pay.
• Submitting an application does not ensure that the IRS will accept the taxpayer’s offer. It begins a process of evaluation and verification by the IRS, taking into consideration any special circumstances that might affect the taxpayer’s ability to pay.
• The IRS may legally compromise a tax liability for one of the following reasons: doubt as to liability, doubt as to collectability, or to promote effective tax administration (Tax Topic 204).
• A taxpayer may submit an Offer in Compromise by completing Form 656, which is included in the Form 656 Booklet (Form 656-B). If, however, the taxpayer is basing his or her offer on doubt as to collectability or promotion of effective tax administration, the taxpayer must also submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. The reason for filing Form 656 is given in Section 3 of the form as a checkbox for either doubt as to collectability or effective tax administration.
• Publication 594, page 3, refers to these three reasons as:

1. “We agree that your tax debt may not be accurate”,
2. “You have insufficient assets and income to pay the amount due”, or
3. “Because of your exceptional circumstances, paying the amount due would cause an economic hardship or would be unjust.”

• If a taxpayer has a legitimate doubt that they owe part or all of the tax debt, they will need to complete a Form 656-L, Offer in Compromise (Doubt as to Liability). If the taxpayer does not dispute the amount of the tax debt, they should not file a Form 656-L.
• The Form 656-B Booklet, page 3, explains there are two types of OIC payment terms that the IRS and the taxpayer may agree to:

1. Lump-sum cash requires 20% of the total offer amount to be paid with the offer and the remaining balance paid within five or fewer installments within 5 or fewer months from the date of notice of acceptance.
2. Periodic payment requires the first payment with the offer and the remaining balance paid within 6 to 24 months, in accordance with the taxpayer’s proposed offer terms.

• In this case, the Collection Information Statement is not necessary if the taxpayer is filing an offer on the grounds there is a doubt as to the liability.

Question 34

A lien is a legal claim to property as security or payment for a tax debt. Select the best answer regarding the filing of a Notice of Federal Tax Lien:

A. It may be filed simultaneously with the first bill for taxes due.
B. It may be filed when a tax deficiency resulting from an audit is agreed to.
C. It may not be filed when an Installment Agreement is in effect and payments are being made.
D. It may be filed after the taxpayer does not pay their first bill for taxes due.

Answer 34

D. It may be filed after the taxpayer does not pay their first bill for taxes due.

• Publication 594, page 5, provides that the IRS may file a Notice of Federal Tax Lien in the public records, which means that a taxpayer’s creditors are publicly notified that the Service has a claim against all of the taxpayer’s property, including property acquired by the taxpayer after the lien was filed.
• In general, liens give the IRS a legal claim to a taxpayer’s property as security for payment of an existing tax debt. The federal tax lien automatically comes into existence when the taxpayer does not pay the amount due after receiving their first bill.
• In this problem, the best answer regarding the filing of a Notice of Federal Tax Lien is that it may be filed after the taxpayer does not pay their first bill for taxes due.

Question 35

The Notice of Deficiency is also known as:

A. A 30-day letter because the taxpayer generally has 30 days from the date of the letter to file a petition with the Tax Court.
B. A 90-day letter because the taxpayer generally has 90 days from the date of the letter to file a petition with the Tax Court.
C. An Information Document Request (IDR) because the taxpayer is asked for information to support his or her position regarding his or her liability for tax.
D. A notice and demand because the taxpayer is put on notice that the tax liability is due and owing.

Answer 35

B. A 90-day letter because the taxpayer generally has 90 days from the date of the letter to file a petition with the Tax Court.

• Publication 556, page 5, provides that a taxpayer generally has 30 days from the date of the 30-day letter to tell the IRS whether he or she will accept or appeal the proposed changes.
• If the taxpayer does not respond to the 30-day letter, or if the taxpayer later does not reach an agreement with an Appeals Officer, the IRS will send a 90-day letter, which is also known as a Notice of Deficiency. The taxpayer will have 90 days (150 days if it is addressed to a person outside the United States) from the date of this notice to file a petition with the Tax Court.

NOTE: The Statutory Notice of Deficiency is also referred to as the Notice of Deficiency and as the 90-day letter because this is the time that the taxpayer has to file a petition with the Tax Court.