R6 Flashcards
Unrelated business income of
exempt organizations?
An unrelated business does not include any activity in which all the work is performed by the organization by unpaid volunteers.
A taxpayer filed his income tax return after the due date but neglected to file an extension form. The return indicated a tax liability of $50,000 and taxes withheld of $45,000. On what amount would the penalties for late filing and late payment be
computed?
5000
The penalty for failure to file a tax return by the due date is 5% per
month or fraction of month (up to a maximum of 25%) on the amount of tax shown as
due on the return.
The penalty for failure to pay by the due date (1/2% per month) is also based on the amount due on the return.
An IRS agent has sent a 30-day letter reflecting a proposed adjustment to increase a client’s taxable income in three prior years.
The CPA and the client have reviewed the
proposed changes and agree with the proposed adjustment.
What would be the CPA’s
most appropriate recommendation to the client?
An individual taxpayer rejected the IRS examiner’s findings in an audit of the taxpayer’s tax return. What will the IRS do in response to the taxpayer’s rejection?
Accept the proposed IRS changes and pay any deficiency
- If the taxpayer agrees with the conclusions reached by the IRS agent in an audit, the taxpayer will sign Form 870 and pay any additional tax assessed (plus interest and penalties)
IRS will issue the taxpayer a 30-day letter
(preliminary notice) notifying the taxpayer of the right to appeal. The taxpayer has 30 days to request an administrative appeals conference with the IRS Office of Appeals.
PRIVATE LETTER RULING
When a taxpayer needs guidance with a specific tax issue related to a proposed transaction, the taxpayer can ask the IRS for:
PRIVATE LETTER RULING
- A private letter ruling (PLR) is the IRS’s interpretation of the federal tax law as it applies to a specific taxpayer situation.
- A PLR is issued by the IRS in response to a taxpayer’s request for guidance as to the federal tax consequences of a proposed transaction.
- It is binding for that specific taxpayer and transaction, but may not be relied on as precedent by other taxpayers or the IRS.
penalties usually imposed against an accountant who, in the course of performing professional services, breaches contract duties owed to a client?
Money Damages
The disclosure of a tax return position will reduce or eliminate an accuracy-related penalty on the taxpayer in which of the following circumstances?
- A penalty of 20 percent of the understatement is assessed for a substantial understatement of tax.
- This penalty can be avoided if the taxpayer has a
reasonable basis for taking the position, the taxpayer has disclosed the position on the tax return, and the position does not pertain to a tax shelter
The position does not concern a tax shelter and has a reasonable basis
SIMPLE TRUST
- Cannot make distributions to charitable organizations.
- May not distribute principal
AFTER MARITAL - INTERSPOUSAL TRANSFERS
Transfers between husband and wife (interspousal transfers) are not subject to taxation for gift
tax or income tax purposes.
Chatham Corporation is a defendant in a lawsuit by the IRS. Which of the following statements is correct with respect to the various defenses that might be available to Chatham to avoid or reduce civil and criminal penalties that might otherwise be
imposed on it?
The more-likely-than-not ( MORE THAN 50% )
standard involves a position that has a more than 50 percent chance of succeeding.
In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?
IRC - INTERNAL REVENUE CODE
COMPLEX TRUSTS
Brown transfers property to a trust. A local bank was named trustee. Brown retained no powers over the trust. The trust instrument provides that current income and $6,000 of principal must be distributed annually to the beneficiary. What type of trust was
created?
- A complex trust may distribute principal, so this is the type of trust that was created.
- A simple trust may not distribute principal, and the facts tell us
that $6,000 of principal must be distributed annually to the beneficiary. Therefore, a simple trust could not have been created. - A revocable trust was not created because Brown retained no powers over the trust and, thus, no right to revoke it.
- A grantor trust could not have been created, as it requires that
a person transfer property to a trust and retain certain powers over the trust (or treat the trust as being owned by the transferor for income tax purposes).
In this case, Brown
does transfer property, but Brown retained no powers over the trust.
Future Interest Gift
An individual taxpayer makes the following gifts during the year:
* a residence to his married son;
* a life estate in a trust to his older daughter; and
* a remainder interest in the trust for his younger daughter.
* In addition, the taxpayer makes a cash contribution to a qualified charity.
Which of the gifts qualifies for neither a deduction nor an exclusion in determining the taxpayer’s gift tax for the year?
The remainder interest in a trust given to the taxpayer’s younger daughter is a future interest because it will be distributed to her at some future date.
A future interest gift does not qualify for either a deduction or the annual exclusion from
gift tax.
Circular 230
According to Treasury Department Circular 230, a CPA is not allowed to charge a client a contingency fee for services provided in connection with which of the following types of refund claims filed with the IRS for the client?
A CPA prepared a tax return for a client who will receive a refund check. The client is traveling abroad and asked the CPA to pick up the check at the client’s home address. Under Treasury Circular 230, any of the following actions, if taken by the CPA relating to
the refund check, would be a violation of the rules of practice before the Internal Revenue Service, except:
- Circular 230 provides that practitioners are prohibited from charging an unconscionable fee and are only allowed to charge a contingent fee in
certain circumstances.
One situation in which a contingent fee is allowed is for a claim solely for a refund of interest and/or penalties assessed by the IRS but not for a claim for any refund of income tax paid to the IRS.
Rules relating to prompt disposition of pending matters
**A practioner may not unreasonably delay the prompt disposition of matters pending before the IRS. **
Holding the check for safe keeping and awaiting the client’s return.
MEDICAL EXPENSES
MEDICAL EXPENSES
Medical expenses paid directly to the health care provider qualify for an unlimited deduction, even if paid for unrelated persons.
Annual Gift exclusion
The $17,000 annual exclusion per donee (2023) applies to all gifts other than future interests.
