Chapter c15

Prentice Hall's Federal Taxation 2016: Corporations, 29e (Pope)Chapter C15: Administrative Procedures

LO1: Role of the Internal Revenue Service

1) The Internal Revenue Service is part of theA) Congress.B) Treasury Department.C) Federal Bureau of Investigation.D) U.S. Customs Department.Answer: BPage Ref.: C:15-2Objective: 1

2) Explain how the Internal Revenue Service is organized to be efficient and client-oriented.Answer: The IRS is organized functionally into four divisions: (1) Wage and Investment, (2) Small Business, (3) Middle Market/Large Corporate, and (4) Tax Exempt. Each division is headed by a divisional director.

The Wage and Investment Division is responsible for individual taxpayers who report only wage and investment income. Most of these taxpayers file Forms 1040, 1040A, or 1040EZ. The Small Business Division is responsible for sole proprietors, individuals with supplemental income, and small corporations and partnerships. Most of these taxpayers file Forms 1065 and 1120S or Schedules C, E, and F. The Middle Market/Large Corporate Division is responsible for corporations with assets of $5 million or more. Most of these taxpayers file Form 1120. The tax Exempt Division is responsible for tax-exempt organizations, employee plans, and state and local governments. Most of these entities file forms relating to tax exempt status.

The shift to a functional mode of organization reflects Congress's desire to render the IRS more efficient and client-oriented. Through this mode of organization, tax administrators can focus on their areas of technical expertise, and taxpayers can deal with the same technical experts wherever they reside.Page Ref.: C:15-2Objective: 1

LO2: Audits of Tax Returns

1) The majority of the individual tax returns that are audited are selected under the DIF program.Answer: FALSEPage Ref.: C:15-3Objective: 2

2) The IRS will issue a 90-day letter (a Statutory Notice of Deficiency) if the taxpayer does not file a protest letter within 30 days of the date of the 30-day letter.Answer: TRUEPage Ref.: C:15-7Objective: 2

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3) The 90-day letter (Statutory Notice of Deficiency) gives the taxpayer 90 days to file a petition with the Tax Court or to pay the disputed tax.Answer: TRUEPage Ref.: C:15-7Objective: 2

4) If the taxpayer has credible evidence, the IRS bears the burden of proof in a tax dispute.Answer: TRUEPage Ref.: C:15-8Objective: 2

5) The program specifically designed to identify returns with a high potential for a deficiency assessment is theA) TCMP.B) DIF program.C) instant audit program.D) 1040 program.Answer: BPage Ref.: C:15-3Objective: 2

6) Identify which of the following statements is false.A) The majority of the individual tax returns that are audited are selected under the DIF program.B) The TCMP audit program has been temporarily suspended by the IRS and replaced in part by lifestyle audits.C) The IRS is authorized to pay a reward to individuals who provide information resulting in increased collections.D) All of the above are false.Answer: APage Ref.: C:15-4Objective: 2

7) Identify which of the following statements is true.A) If a taxpayer has been audited in at least one of the two previous years on the same item and the earlier audit did not result in any additional tax owed, the taxpayer may qualify for the special audit relief rule.B) A taxpayer can request and always receive an exemption from an audit by the IRS if his return was audited in at least one of the two previous years and the previous audit did not result in any change to his tax liability.C) The signing of Form 870 allows the taxpayer to wait for 30 interest-free days after the billing date to pay the tax.D) All of the above are true.Answer: APage Ref.: C:15-5Objective: 2


8) Identify which of the following statements is false.A) A Technical Advice Memorandum may be requested by an IRS auditor if the transaction in question involves an especially complex tax issue.B) If the taxpayer being audited does not concur with the proposed assessment, the Service is required to send the taxpayer a 30-day letter detailing the proposed changes and the available appeals process.C) During the audit process, if the taxpayer concurs with the assessment of tax by the IRS and signs Form 870 (Waiver of Restrictions on Assessment and Collection of Deficiency in Tax), then the taxpayer is precluded from filing a refund suit.D) Interest on a deficiency accrues from the due date of the return through the payment date.Answer: CPage Ref.: C:15-6Objective: 2

9) Identify which of the following statements is false.A) Appeals officers usually have the operating authority to settle disputes with taxpayers based on the "hazards of litigation."B) When an appeals officer is dealing with an "appeals coordinated issue," he has the authority to settle with the taxpayer based on the "hazards of litigation."C) A Technical Advice Memorandum may be requested by an IRS auditor if the transaction in question involves an especially complex tax issue.D) If the taxpayer and the appeals officer fail to reach agreement, the IRS issues a 90-day letter.Answer: BPage Ref.: C:15-7Objective: 2

10) The IRS provides advice concerning an issue that arises during an audit by issuingA) a revenue ruling.B) an audit memorandum.C) a technical advice memorandum.D) a private letter ruling.Answer: CPage Ref.: C:15-6Objective: 2

11) In order to appeal to the Appeals Division, a taxpayer must submit a protest letter to the IRSA) if an office audit is involved.B) as a response to receiving a 30-day letter.C) in a field audit involving a assessment of taxes, interest, and penalties in excess of $25,000.D) if a TCMP audit is involved.Answer: CPage Ref.: C:15-6Objective: 2


12) A taxpayer will receive a 30-day letterA) to notify him that the return was selected for audit.B) after a response to the 90-day letter with a protest.C) only if the taxpayer does not sign Form 870.D) only if the taxpayer is more than 30 days late in filing the tax return.Answer: CPage Ref.: C:15-6Objective: 2

13) How long does a taxpayer have to file a petition with the U.S. Tax Court following the date of the Statutory Notice of Deficiency?A) 90 daysB) three monthsC) 180 daysD) 30 daysAnswer: APage Ref.: C:15-7Objective: 2

14) The court in which the taxpayer does not have to pay the tax and then litigate for a refund is theA) U.S. Court of Federal Claims.B) Federal district court.C) Tax Court.D) all of the aboveAnswer: CPage Ref.: C:15-7Objective: 2

15) Identify which of the following statements is true.A) Form 870-AD is used if the taxpayer and IRS representative agree to a lesser tax liability than that originally proposed by the Service.B) Signing of Form 870-AD by the taxpayer does not generally preclude the subsequent filing of a refund claim.C) The IRS will issue a 90-day letter (a Statutory Notice of Deficiency) if the taxpayer does not file a protest letter within 10 days of the date of the 30-day letter.D) All of the above are false.Answer: APage Ref.: C:15-6Objective: 2


16) Identify which of the following statements is true.A) The 90-day letter offers the taxpayer the choice of paying the tax assessed or filing a petition refuting the tax assessment with the Tax Court.B) A taxpayer can choose to initiate tax litigation in a U.S. district court, the Tax Court, or a Court of Appeals.C) The IRS cannot raise a new tax issue after issuance of the Statutory Notice of Deficiency (90-day letter).D) All of the above are false.Answer: APage Ref.: C:15-7Objective: 2

17) Identify which of the following statements is false.A) In general, the taxpayer has the burden of proof in Tax Court cases. However, the IRS has the burden of proof for issues raised after the issuance of the 90-day letter.B) A taxpayer may want to avoid using the Tax Court to litigate an issue because decisions from this court cannot be appealed.C) The Tax Court can be used to litigate a tax issue without first paying the tax assessment.D) In order to litigate in the Tax Court, a petition must be filed within 90 days of the issuance of a notice of deficiency.Answer: BPage Ref.: C:15-8Objective: 2

18) Identify which of the following statements is false.A) If the phrase "Entered under Rule 155" appears at the end of the Tax Court's opinion, the litigating parties must jointly determine the additional tax due.B) A taxpayer does not have to pay the tax assessment before filing suit in a U.S. district court or the U.S. Court of Federal Claims.C) Either the taxpayer or the government can appeal the decision of a court of original jurisdiction to the next higher court with the potential for a final ruling from the U.S. Supreme Court if a writ of certiorari is granted.D) All of the above are false.Answer: BPage Ref.: C:15-8Objective: 2

19) Identify which of the following statements is false.A) So-called private letter rulings are made public after confidential information is eliminated.B) A letter ruling is a written statement issued to a taxpayer by the IRS that interprets and applies the tax laws to that taxpayer's specific set of facts.C) Only the taxpayer can appeal the decision of a court of original jurisdiction to the next higher court.D) If the Supreme Court decides to hear a case, it grants certiorari.Answer: CPage Ref.: C:15-8Objective: 2


20) Explain the four conditions that must be met in civil cases for the burden of proving any factual issue relevant to the determination of taxpayer liability to rest with the IRS.Answer: The taxpayer must introduce "credible evidence," evidence of a quality sufficient to serve as the basis of a court decision. The taxpayer must comply with the recordkeeping and substantiation requirements of the IRC, including the proper documentation of meal and entertainment expenses, charitable contributions, and foreign controlled businesses. Also, the taxpayer must cooperate with the reasonable requests of the IRS for witnesses, information, documents, meetings, and interviews. Finally, the taxpayer must be either a legal person with a net worth not exceeding $7 million or a natural person.Page Ref.: C:15-8Objective: 2

LO3: Requests for Rulings

1) A letter ruling is a written determination that interprets and applies the tax laws to the taxpayer's specific set of facts.Answer: TRUEPage Ref.: C:15-9Objective: 3

2) Which one of the following statements about letter rulings is false?A) If a taxpayer requests and pays for a ruling, the IRS must respond to his request by issuing a ruling.B) A ruling is a response to a taxpayer's specific set of facts.C) Rulings become public information.D) The IRS issues revenue procedures periodically, which prescribe the information that must be supplied with a ruling request.Answer: APage Ref.: C:15-9Objective: 3

3) Which of the following items can be omitted from a taxpayer's request for a ruling?A) names, addresses, and taxpayer identification numbers of all interested partiesB) a detailed explanation of the transactionC) the particular conclusion desired by the taxpayerD) the location of the IRS district office that has examination jurisdictionAnswer: CPage Ref.: C:15-9Objective: 3

4) The IRS will issue a rulingA) on prospective transactions only.B) only if regulations have been issued on the subject.C) on a completed transaction for which a return has been filed.D) to clarify the tax treatment of a transaction.Answer: DPage Ref.: C:15-10Objective: 3


5) Identify which of the following statements is false.A) The IRS issues annually a revenue procedure that prescribes how a letter ruling should be requested and the information to be contained in the ruling request.B) The request for a ruling may contain a suggested conclusion (or answer) that the taxpayer proposes that the IRS adopt in the described situation.C) As a practical consideration, taxpayers always find it preferable to obtain an advance ruling on questionable tax situations.D) Third parties may not cite private letter rulings as authority for the tax consequences of their transactions.Answer: CPage Ref.: C:15-10Objective: 3

LO4: Due Dates

1) The "automatic" extension period for filing an individual return is seven months.Answer: FALSEPage Ref.: C:15-11Objective: 4

2) Identify which of the following statements is false.A) The IRS will not issue a ruling on the topic of whether compensation is reasonable.B) Tax returns for all taxpayers must be filed on or before the fifteenth day of the fourth month following the year-end.C) A corporation must file a tax return even if it has no gross income.D) Extensions of time for filing tax returns may be obtained.Answer: BPage Ref.: C:15-11Objective: 4

3) Identify which of the following statements is true.A) A partnership is not required to file a return if the partnership has no income for the year.B) The "automatic" extension period for filing an individual return is five months.C) Individuals and corporations may obtain six-month extensions for paying taxes and filing their returns for the taxable year by filing the appropriate extension requests.D) All of the above are false.Answer: CPage Ref.: C:15-11Objective: 4

4) An automatic extension of time from the regular filing date for an individual tax return may be received, without giving the IRS a reason, forA) 2 months.B) 3 months.C) 4 months.D) 6 months.Answer: DPage Ref.: C:15-11Objective: 4

5) If a return's due date is extended, a taxpayerA) also extends the period in which to pay taxes without interest.B) still should pay the tax by the original return due date.C) has 30 days following the original due date to pay estimated taxes without penalty.D) has 30 days following the original due date to pay estimated taxes without interest.Answer: B


Page Ref.: C:15-11Objective: 4

6) In which of the situations below will a taxpayer not be assessed interest on the tax remitted?A) An extension is obtained and the tax is paid within the extension period.B) A timely return is filed but the taxpayer must delay payment of the taxes.C) The return is audited and additional tax is owed.D) None of the above situations.Answer: DPage Ref.: C:15-12Objective: 4

7) Identify which of the following statements is false.A) Interest is imposed on any tax not paid by the due date of the return (determined without regard to extensions).B) Interest is charged on underpayments, or paid on overpayments, at a rate of three percentage points higher than the federal short-term rate.C) Interest on underpayments is calculated using daily compounding and covers a time period from the original due date of the return until the date of payment.D) Any tax not paid by the due date for the return is subject to an interest charge.Answer: BPage Ref.: C:15-12Objective: 4

8) Explain one of the two exceptions to imposing interest from the original due date of the tax return until the date the tax deficiency is paid.Answer: If the IRS fails to send an individual taxpayer a notice within 18 months after the original due date or the date on which a return is timely filed, whichever is later, the accrual of interest (and penalties) will be suspended. The suspension period begins on the day after the 18-month period and ends 21 days after the IRS sends the requisite notice. Beginning in 2004, the notice must be sent within one year after the aforementioned dates.

If the IRS does not issue a notice and demands payment within 30 days after the taxpayer signs Form 870, Waiver of Statutory Notice, no interest can be charged for the period between the end of the 30-day period and the date the IRS issues its notice and demand.Page Ref.: C:15-12 and C:15-13Objective: 4


LO5: Failure-to-File and Failure-to-Pay Penalties

1) The maximum failure to file penalty is a total of 25% of the underpayment.Answer: TRUEPage Ref.: C:15-14Objective: 5

2) A taxpayer who fails to file and fails to pay taxes is subject to a combined 5% monthly penalty on the underpayment.Answer: TRUEPage Ref.: C:15-14Objective: 5

3) Identify which of the following statements is false.A) In addition to interest, taxpayers may be subject to penalties for failure to file on time and failure to pay taxes by the due date for the return.B) The failure-to-file penalty is levied against taxpayers who do not file a return by its due date at a rate of 5% per month (or fraction of a month) with a maximum additional penalty of 25%.C) The failure-to-pay penalty is imposed at a rate of 5% per month (or fraction of a month) with a maximum penalty of 25%.D) A different interest rate is charged to corporate and noncorporate taxpayers.Answer: CPage Ref.: C:15-16Objective: 5

4) A calendar-year individual taxpayer files last year's income tax return on October 17 of the current year. No extension was requested, and there is not a reasonable cause for the late filing. The return shows a balance due of $1,500 of tax. The late filing penalty isA) $0.B) $75.C) $375.D) $450.Answer: CExplanation: The penalty is 5% per month (or fraction thereof) with a maximum of 25%. In this case, the maximum applies. 0.25 × $1,500 = $375Page Ref.: C:15-14Objective: 5

5) A calendar-year individual taxpayer files last year's income tax return on July 1 of the current year. No extension was requested, and there is not a reasonable cause for the late filing. The return shows a balance due of $800 of tax. The late filing penalty isA) $0.B) $40.C) $80.D) $120.Answer: DExplanation: The penalty is 5% per month (or fraction thereof). 0.05 × 3 months × $800 = $120.Page Ref.: C:15-14Objective: 5

6) Gerald requests an extension for filing his last year's individual income tax return. His tax liability is $10,000, of which $8,000 was withheld, leaving a balance due of $2,000 when he files on August 1 of the current year. His penalty for failure to pay the tax on time isA) $0.


B) $40.C) $300.D) $400.Answer: BExplanation: 0.005 × 4 months × $2,000 = $40Page Ref.: C:15-16Objective: 5

7) If Brad files his last year's individual tax return on July 5 of the current year after having requested an extension, what is the amount of his failure-to-pay penalty if his total tax is $10,000 and he paid $9,500 through timely withholding and $500 with the return?A) $0B) $6C) $60D) none of the aboveAnswer: AExplanation: His balance due is $500, which is not more than 10% of his total tax of $10,000. There is no penalty.Page Ref.: C:15-16Objective: 5

8) On August 13 of the following year, Joy files her current calendar-year tax return and pays the amount due without having requested an extension. The tax shown on her return is $25,000. Her current-year withholding tax is $15,000. Joy pays no estimated taxes and does not claim any tax credits on her current- year return. Calculate the penalties that the IRS is likely to assess. Ignore the penalty for underpayment of estimated taxes. Assume she did not commit fraud.Answer: Failure-to-pay penalty —

0.005 × ($25,000 - $15,000) × 4 months $ 200Failure-to-file penalty —

0.05 × ($25,000 - $15,000) × 4 months $2,000Minus: failure-to-pay penalty ( 200) 1,800Total penalties $2,000Page Ref.: C:15-16Objective: 5

9) Pete has reported a tax liability of $3,500 on his 2012 tax return. His 2013 withholding was $3,800. He did not file his 2013 return until June 12, 2014. What penalties does Pete owe?Answer: Pete owes no penalty for failure-to-file or failure-to-pay because the amount withheld exceeds the tax liability owed.Page Ref.: C:15-14Objective: 5


10) Lucy files her current-year individual income tax return on August 5 of the following year, without having requested an extension. Her total tax is $10,000. Lucy pays $7,500 in a timely manner and the $2,500 balance when she files the return. Lucy did not engage in fraud and has no reasonable cause for late filing and late payment. Compute Lucy's penalties.Answer: Failure-to-pay penalty: $2,500 × 0.005 × 4 months $ 50Failure-to-file penalty: $2,500 × 0.05 × 4 months 500Less: Reduction for failure-to-pay penalty for same period ( 500)Total penalties $ 50Page Ref.: C:15-16Objective: 5

11) On July 25 of the following year, Joy files her current calendar-year tax return without having requested an extension. On October 8, she pays the amount due. The tax shown on her return is $25,000. Her current-year withholding tax is $20,000. Joy pays no estimated taxes and does not claim any tax credits on her current year return. Calculate the penalties that the IRS is likely to assess. Ignore the penalty for underpayment of estimated taxes. Assume she did not commit fraud.Answer: Failure-to-pay penalty —

0.005 × ($25,000 - $20,000) × 6 months $ 150Failure-to-file penalty —

0.05 × ($25,000 - $20,000) × 4 months$1,000Minus: failure-to-pay penalty for 4 months ( 100) 900Total penalties $1,050Page Ref.: C:15-16Objective: 5

12) Billy, a calendar-year taxpayer, files his current year individual tax return on August 17 of the following year without having requested an extension. His return reports an amount due of $5,000. Billy pays this amount on November 23 of the following year. What are Billy's penalties for his failure to file and his failure to pay his tax on time? Assume Billy did not commit fraud.Answer: Failure-to-pay penalty —

0.005 × $5,000 × 8 months $ 200Failure-to-file penalty —

0.05 × $5,000 × 5 months $1,250Minus: failure-to-pay penalty for same time

period — 0.005 × $5,000 × 5 months ( 125) 1,125Total penalties $1,325Page Ref.: C:15-16Objective: 5


LO6: Estimated Taxes

1) Identify which of the following statements is true.A) The failure-to-pay penalty is waived if the additional tax due with the filing of the extended return does not exceed 15% of the tax owed for the year.B) If both the failure-to-file and the failure-to-pay penalties are owed, the taxpayer will incur a maximum addition to tax of 5.5% per month.C) Individuals having substantial income from sources not subject to regular withholding generally should make quarterly estimated tax payments to the IRS.D) All of the above are false.Answer: CPage Ref.: C:15-17 through C:15-20Objective: 6

2) Your client wants to avoid any penalty for underpayment of estimated taxes by making timely deposits. Determine the amount of the minimum quarterly estimated tax payments required to avoid the penalty. Assume your client's adjusted gross income last year was $140,000.

Last year's tax liability $40,000This year's estimated total tax 44,000Taxes to be withheld for this year 9,000

A) $7,650B) $7,750C) $8,750D) $11,000Answer: AExplanation: Use the lesser of 90% of this year's tax or 100% of last year's tax.

$44,000 Estimated current year tax liability × 0.90 Times: m payment requirement$39,600 Required payment ( 9,000) Minus: withholding$30,600 Amount to be paid via estimated tax payments × 0.25 $ 7,650 Quarterly required estimated tax payment

This amount is less than 25% of last year's tax liability ($40,000) minus the amount withheld ($9,000) or $7,750.Page Ref.: C:15-17 through C:15-20Objective: 6


3) A taxpayer can automatically escape the penalty for underpayment of taxes byA) owing less than $1,000 in taxes over and above the taxes withheld from wages.B) owing taxes in the previous year.C) having a casualty loss.D) none of the aboveAnswer: APage Ref.: C:15-19Objective: 6

4) On August 13 of the following year, Joy files her current calendar-year tax return and pays the amount due without having requested an extension. The tax shown on her return is $25,000. Her current-year withholding tax is $15,000. Joy pays no estimated taxes and does not claim any tax credits on her current- year return. Will Joy owe interest, and if so, on what amount and for how many days?Answer: Joy owes interest on $5,000 from April 16 of the current year through August 13 of the following year, or for 120 days.Page Ref.: C:15-19Objective: 6

5) On July 25 of the following year, Joy files her current calendar- year tax return. She had requested extensions as required. On October 8, she pays the amount due. The tax shown on her return is $22,000. Her current-year withholding tax is $21,000. Joy pays no estimated taxes and does not claim any tax credits on her current-year return. Calculate the penalties that the IRS is likely to assess. Ignore the penalty for underpayment of estimated taxes. Assume she did not commit fraud.Answer: If Joy requests an extension, the failure-to-file penalty will not apply because she files the return before the August 15 extended due date. The failure-to-pay penalty is not imposed because the additional tax due with the filing of the return ($1,000) does not exceed $2,200 or 10% of the $22,000 tax owed for the year (Reg. Sec. 301.6651-1(c)(3)).Page Ref.: C:15-16Objective: 6

6) On July 25 of the following year, Joy files her current calendar-year tax return without having requested an extension. On October 8, she pays the amount due. The tax shown on her return is $25,000. Her current-year withholding tax is $20,000. Joy pays no estimated taxes and does not claim any tax credits on her current-year return. Assume she did not commit fraud. Will Joy owe interest, and if so, on what amount and for how many days?Answer: Joy owes interest on $5,000 from April 16 of the current year through October 8 of the following year, or for 176 days.Page Ref.: C:15-16Objective: 6


7) The taxes shown on Kate's tax returns for 2012 and 2013 were $6,000 and $9,000, respectively. Kate's withholding tax for 2009 was $7,000 and she paid no estimated taxes. Kate filed her 2013 return on April 3, 2014, but she did not have sufficient funds to pay the balance due. She pays the $2,000 balance due on June 19, 2014. Kate's AGI for 2013 did not exceed $150,000. Calculate the penalties Kate owes on her 2013 tax return.Answer: Kate's 2013 AGI did not exceed $150,000. Therefore, she does not owe the penalty for underpaying estimated tax in 2013 because she paid an amount equal to her 2012 tax liability. She does not owe the failure-to-file penalty because she filed a timely return. She owes the failure-to-pay penalty for 15 months. The penalty is $150 (0.005 × $2,000 × 15).Page Ref.: C:15-16Objective: 6

8) Paul's tax liability for last year was $30,000. Paul projects that his tax for this year will be $40,000. Paul is self-employed and, thus, will have no withholding. His AGI for last year did not exceed $150,000. How much estimated tax should Paul pay for this year to avoid the penalty for underpayment of estimated taxes?Answer: Because Paul's AGI for last year does not exceed $150,000, he should pay in $30,000 (100% of the prior-year liability), at a minimum, to avoid the penalty.Page Ref.: C:15-17 through C:15-20Objective: 6

9) Jeff's tax liability for last year was $30,000. Jeff projects that his tax for this year will be only $25,000. Jeff is self-employed and, thus, will have no withholding. His AGI for last year did not exceed $150,000. How much estimated tax, at a minimum, should Jeff pay for this year to avoid the penalty for underpayment of estimated taxes? How would your answer change if his income exceeded last year's due to a large capital gain at the end of the year?Answer: Jeff's AGI for last year does not exceed $150,000. Therefore, he should pay in $22,500 (0.90 × $25,000) because this amount is less than his last year's tax liability. A problem arises, however, because the large gain causes his actual tax for this year to exceed $25,000. If he pays in only $22,500, he will owe a penalty for underpayment of estimated taxes.Page Ref.: C:15-17 through C:15-20Objective: 6

LO7: Other More Severe Penalties

1) A taxpayer's return is audited and additional taxes are assessed. The IRS also asserts that a negligence penalty should be assessed. The taxpayer concurs with the additional $15,000 tax liability; $7,000 of this amount is attributable to negligence. What is the amount of the penalty for negligence?A) $700B) $1,400C) $5,600D) $1,750Answer: BExplanation: 0.20 × $7,000 = $1,400Page Ref.: C:15-20; Example C:15-20Objective: 7


2) A substantial understatement of tax liability involves which of the following?A) understatement of tax exceeding the greater of 10% of tax required to be shown on the return or $5,000 for individualsB) underpayment of tax exceeding the greater of 15% of the tax required to be shown on the return or $5,000 for individualsC) underpayment of tax exceeding the lesser of 25% of the tax required to be shown on the return or $5,000 for individualsD) $10,000 or more difference between the amount shown on the return and the correct amount dueAnswer: APage Ref.: C:15-21Objective: 7

3) Which of the following is not a reason for relief from the substantial understatement penalty?A) disclosure of the relevant facts pertaining to the questionable tax return positionB) substantial authority for the tax return positionC) reliance on a tax return preparerD) reasonable cause and a good faith effort to comply with the tax lawAnswer: CPage Ref.: C:15-21Objective: 7

4) What is the requirement for a substantial understatement of tax for individuals?A) The understatement exceeds 10% of the tax required to be shown on the return.B) The understatement exceeds $5,000.C) The understatement exceeds the lesser of 10% of the tax required to be shown on the return or $5,000.D) The understatement exceeds the greater of 10% of the tax required to be shown on the return or $5,000.Answer: DPage Ref.: C:15-21Objective: 7

5) Identify which of the following statements is true.A) An individual taxpayer may be subject to a penalty for underpayment of estimated taxes if his balance of tax due when he files is $500.B) A penalty for substantial understatement will potentially be assessed on an individual if the underpayment of tax exceeds the greater of 15% of the tax shown on the return or $5,000.C) Substantial authority exists for a position that is supported by a decision rendered by the Court of Appeals for the taxpayer's own circuit.D) All of the above are true.Answer: CPage Ref.: C:15-22Objective: 7


6) Identify which of the following statements is false.A) If fraud is asserted in a tax transaction, the burden of proof falls on the IRS.B) The civil fraud penalty consists of 75% of the tax underpayment attributable to fraud plus 25% of the interest payable on the portion of the underpayment resulting from the fraud.C) The government must prove its case "beyond a reasonable doubt" in order for the court or jury to convict a taxpayer of criminal fraud.D) The fraud penalty can be imposed with respect to income, gift, and estate tax returns.Answer: BPage Ref.: C:15-23Objective: 7

7) Linda's individual tax return for the current year is subject to an IRS audit. The IRS assesses a $10,000 deficiency, $4,000 of which is due to Linda's negligence. What is Linda's negligence penalty?Answer: The negligence penalty is $800 (0.20 × $4,000), the portion of the deficiency attributable to negligence.Page Ref.: C:15-20; Example C:15-20Objective: 7

8) The IRS audits Kiara's current-year individual return and determines that, among other errors, she negligently did not report dividend income of $10,000. The deficiency with respect to the dividends is $2,800. The IRS argues for an additional $12,000 deficiency for various other errors that do not involve negligence. What is Kiara's negligence penalty for the $14,800 in deficiencies?Answer: The negligence penalty is $560 (0.20 × $2,800).Page Ref.: C:15-20; Example C:15-20Objective: 7

9) Pablo, a bachelor, owes $80,000 of additional taxes, all due to fraud. What is the amount of the civil fraud penalty? What criminal fraud penalty might be imposed under Sec. 7201?Answer: a) The civil fraud penalty is $60,000 (0.75 × $80,000).b) Under Sec. 7201, the fine could be as high as $100,000. In addition, Luis could receive a prison sentence of as long as five years.Page Ref.: C:15-21Objective: 7

10) How does a taxpayer determine if "substantial authority" exists for a tax treatment the taxpayer desires to adopt?Answer: A taxpayer should initially look to primary sources for support for the position on a tax issue. Specifically, the taxpayer should consult Code sections, Treasury regulations, revenue rulings, revenue procedures, determination letters, and judicial opinions to assess the existence of substantial authority. The weight of authorities supporting a position should be "substantial" in relation to authorities going the other way. There can be substantial authority for more than one position.Page Ref.: C:15-22Objective: 7


11) What is the difference between the burden of proof for civil and criminal fraud?Answer: The burden of proof is:

Clear and convincing evidence — civil fraudBeyond a reasonable doubt — criminal fraudPage Ref.: C:15-21Objective: 7

12) The IRS audited the tax returns of Dan Jackson, a gifted painter. It contended that, between 2003 and 2005, Jackson received $500,000 for his paintings, but reported only $75,000. Jackson attributed the shortfall to his receipt of cash at art fairs and street fairs. He allegedly concealed the cash payments in separate bank accounts unbeknownst to his CPA. What tax compliance issues regarding the alleged underreporting are pertinent to the CPA?Answer: Dan Jackson, his agent, and CPA (tax return preparer) face a number of issues, which include:

• Did an understatement of income occur as a result of misreporting the income received from the art fairs and street shows?• Are the tax years in question still open years under the statute of limitations?• What is the amount of the additional taxes owed (if any) on the underreporting of income?• What is the amount of the interest and penalties owed on the understatement of the tax liability?• What is the amount of the civil and criminal penalties that Dan Jackson faces?• What tax-return-preparer, civil, and criminal penalties can be imposed by the IRS on the taxpayer's agent and/or CPA for the underreporting of Dan Jackson's tax liability?• What sanctions might the AICPA and/or the appropriate State Board of Accountancy impose on the tax return preparer?

The facts and circumstances of the situation will determine the penalties levied on Dan Jackson and his CPA. At a minimum, a penalty will be imposed for failure to pay taxes. Because Jackson filed his tax return, no failure-to-file penalty will be imposed. In addition, interest may apply to the failure to make the appropriate estimated tax payments. A 20% negligence penalty also may be imposed on Jackson if the IRS can show that the underpayment was due to negligence or disregard of the rules and regulations. Also, a 20% substantial understatement penalty may be imposed under Sec. 6662(d). As an alternative, the IRS may go for imposition of the civil and criminal fraud penalty. This would depend on the taxpayer's intent.

The statute of limitations may be extended from three to six years if more than 25% of Jackson's gross income was omitted from the tax return. (Whether this penalty applies is not ascertainable from the public press information regarding the fairs.) No statute of limitations would apply if fraud could be proven. Criminal penalties under Secs. 7201, 7203, or 7206 can lead to up to five years in prison. Various provisions potentially apply against the tax return preparer. We do not have enough information to know which civil or criminal penalties, if any, may apply. If the CPA actively participated in the fraudulent activity, he or she may lose the ability to practice as a CPA, or may lose the ability to practice before the IRS. If the CPA had no knowledge of the fair activities, it is unlikely that the CPA would lose his or her license to practice.Page Ref.: C:15-20 through C:15-23 and C:15-31 through C:15-33Objective: 7


13) You are preparing the tax return for Agre Corporation, which has sales of $50 million. Agre made a $2 million expenditure for which the appropriate tax treatment, deductible or capitalizable, is a gray area. The corporation's Chief Financial Officer wants you to deduct the expenditure. What tax compliance issues should you consider in deciding whether to deduct the expenditure?Answer: • Will you as the tax return preparer have sufficient support, according to IRC Sec. 6694 and the AICPA's SRTP, to deduct the expenditure?• Will the client have substantial authority for a deduction?• If not, will the client have a reasonable basis for deducting the expenditure?• Should you present a disclosure as part of the tax return about the expenditure if you deduct it?

Background comments: the information presented is not complete enough for the students to conclude definitively whether the reasonable basis and substantial authority standards are met. The problem was designed, however, as an issue recognition problem, not a question for which there is a definitive answer.

According to Sec. 6694 and the AICPA's Statements on Standards in Tax Services, you (the preparer) should believe that sufficient authority exists to meet the realistic possibility of being sustained test. Treasury Regulations quantify this test as being approximately a one-in-three likelihood of being sustained. If you do not believe that sufficient authority exists for meeting this test, you may adopt a pro-taxpayer position, so long as you make a disclosure, and the position is not frivolous.

The substantial authority standard is less stringent than the more-likely-than-not (>50%) test. It means, according to Treasury Regulations, that the authorities supporting a position are substantial in relation to authorities going the other way. It is possible for substantial authority to be present for more than one position. Treasury Regulations explain that reasonable basis refers to a position that is arguable but unlikely to be upheld in court. Provided a disclosure is made and sufficient support exists to meet the reasonable basis standard, the client will not owe the substantial understatement penalty (of Sec. 6662) in the event the IRS audits its return and it agrees to delete the $1 million deduction. Without such a disclosure, the IRS might levy the 20% substantial underpayment penalty. Furthermore, the IRS might levy a $250 preparer penalty against you if you do not include a disclosure with the return.Page Ref.: C:15-20 through C:15-23 and C:15-31 through C:15-33Objective: 7


14) Latka Novatny gave you the following information to use in the preparation of his current year's tax return:

Salary $120,000Dividends 20,000Itemized deductions 35,000

In addition, he received $40,000 from a relative for whom he had worked previously. You have researched whether the $40,000 should be classified as a gift or compensation and are confident that substantial authority exists for classifying it as a gift. What tax compliance issues should you consider in deciding whether to report or exclude the $40,000?Answer: • Will Latka be liable for a penalty if the $40,000 is excluded from his gross income?• What statute of limitations will apply?

If you are correct in believing that substantial authority exists for excluding the $40,000, Latka should not be subjected to any penalties, even if his return is audited and he agrees to include the $40,000 in his income.

Unless a disclosure concerning the $40,000 is attached to Latka's return, the statute of limitations will be six years (from the date he files his return, or from the due date for the return if later) instead of the regular three years. The reason is that he will have omitted from this gross income more than 25% of the $140,000 of gross income reported on his return (25% × $140,000 = $35,000). Perhaps Latka would like to make a disclosure to have a shorter statute of limitations. This might be the case, for example, if some of the deductions he claimed fall into the gray area.Page Ref.: C:15-20 through C:15-23 and C:15-31 through C:15-33Objective: 7

15) Richard recently won a popular television reality show and its one million dollar prize. However, he omitted the prize money from his tax return for the year. What penalties can the IRS assess?Answer: • Criminal or civil fraud• Negligence or substantial understatement of tax (if no fraud penalty levied)• Failure to pay• Underpayment of estimated taxes (depending on the amount of prior-year taxes)

The IRS will also charge interest on the underpayment.Page Ref.: C:15-20 through C:15-24Objective: 7


LO8: Statute of Limitations

1) The statute of limitations, which stipulates the time frame within which either the government or the taxpayer may request a redetermination of tax due, usually expires 6 years after the date on which the return is filed.Answer: FALSEPage Ref.: C:15-24Objective: 8

2) The statute of limitations is unlimited for a tax return that is never filed.Answer: TRUEPage Ref.: C:15-26Objective: 8

3) A six-year statute of limitation rule applies if the taxpayerA) understates taxable income by 25%.B) understates AGI by 25%.C) understates gross income by 25%.D) none of the aboveAnswer: CPage Ref.: C:15-24Objective: 8

4) On April 15, 2010, a married couple filed their joint 2009 tax return showing gross income of $120,000. Their return was prepared by a professional tax preparer who mistakenly omitted $45,000 of income, which the preparer in good faith considered to be nontaxable. No information with regard to this omitted income was disclosed on the return or attached statements. By what date must the IRS assert a notice of deficiency before the statute of limitations expires?A) April 15, 2015B) December 31, 2011C) April 15, 2009D) December 31, 2009Answer: APage Ref.: C:15-24Objective: 8

5) Identify which of the following statements is true.A) The statute of limitations, which stipulates the time frame within which either the government or the taxpayer may request a redetermination of tax due, usually expires six years after the date on which the return is filed.B) The statute of limitations limits the time during which a taxpayer may claim a refund of an overpayment of tax.C) If a taxpayer omits from gross income an amount in excess of 25% of the gross income shown on his return, the statute of limitations is five years.D) All of the above are true.Answer: BPage Ref.: C:15-24Objective: 8

6) Terry files his return on March 31. The return shows taxes of $6,000, and Terry pays this entire amount when he files his return. By what time must he file a claim of refund?A) the later of two years from the return filing or three years from the date the tax is paidB) the later of three years from the return due date or two years from the date the tax is paidC) two years from the payment of tax date, if the IRS mails a notice of deficiency in the third year following the due date of the return


D) four years from the payment of tax date, if the IRS mails a notice of deficiencyAnswer: BPage Ref.: C:15-24Objective: 8

7) Steve files his return on April 1 and pays the entire amount of tax for the year at that time, $5,000. He is audited and pays the deficiency of $1,500 two years later. The maximum amount Steve may file a claim for refund for eighteen months later isA) $6,500.B) $5,000.C) $1,500.D) some other amount.Answer: CPage Ref.: C:15-27Objective: 8

8) Kelly, a calendar-year taxpayer, files her 2008 individual return on March 30, 2013, and pays the amount due at the same time. Later, she discovers some deductions that she should have claimed on the return. By what date must she file a claim for refund?Answer: She would file by three years from the due date of the return; that is, by April 15, 2012.Page Ref.: C:15-24Objective: 8

L09: Liability for Tax

1) Identify which of the following statements is true.A) If a taxpayer fails to file a return, the statute of limitations is extended to 10 years.B) If a couple files a joint return but only one spouse had income, only the spouse with income is responsible for paying any tax due.C) Joint and several liability means that each spouse is potentially liable for the full amount of tax due.D) All of the above are false.Answer: CPage Ref.: C:15-27Objective: 9

2) The innocent spouse relief provision from tax liability covers all of the following exceptA) improper deductions.B) improper credits.C) improper basis.D) All are understatements subject to minimum thresholds.Answer: DPage Ref.: C:15-28Objective: 9

3) All of the following requirements must be met in order to establish innocent spouse relief except which of the following?A) The return contains an understatement of tax attributable to the erroneous item(s) of an individual filing it. B) The request for innocent spouse relief is made no later than one year after the IRS begins its collection efforts.C) The requesting individual establishes that he or she neither knew nor had reason to know of any or all of the understatement.D) Based on all the facts and circumstances, holding the other individual for the deficiency would be inequitable.Answer: B


Page Ref.: C:15-28Objective: 9

4) Kristina and Victor filed a joint return for the current year. They are in the 31% marginal tax bracket. Victor did not know that Kristina failed to report a prize valued at $16,000 that she won. She used the money to buy Victor a motorcycle. Does Victor meet the tests for relief under the innocent spouse provisions?Answer: Probably not. Although (1) Victor and Kristina filed a joint return, (2) the return contained an understatement of tax attributable to Kristina's erroneous item, and (3) Victor can establish that he did not actually know of the understatement, he nevertheless had reason to know. He had reason to know because he benefited directly from Kristina's prize. The receipt of this benefit should have alerted him to the requirement to report it as taxable income.Page Ref.: C:15-28Objective: 9

5) For innocent spouse relief to apply, five conditions must be met. Explain them.Answer: Five conditions must be met:1) A joint return is filed. 2) The return contains an understatement of tax attributable to the erroneous item(s) of an individual filing it. 3) The other individual establishes that he or she neither knew nor had reason to know of the understatement. 4) Based on all the facts and circumstances, holding the other individual liable for the deficiency would be inequitable. 5) The other individual elects innocent spouse relief no later than two years after the IRS begins its collection efforts.Page Ref.: C:15-27Objective: 9


6) Jayne and Jon jointly file a tax return this year. Jayne fraudulently reports two expenses on Schedule C: $2,000 and $2,500. The IRS audits the return, assesses a $1,050 deficiency, and begins collection efforts two years after the timely filing by Jayne and Jon. What must Jon do to be relieved of the $1,050 tax liability?Answer: Jon must meet all five conditions to elect innocent spouse relief. (1) The election must be made no later than two years after the IRS begins its collection efforts. (2) Jon must establish that he neither knew nor had reason to know of the understatement. (3) Holding Jon liable for the deficiency would be inequitable. (4) A joint return was filed. (5) And, the return contained an understatement of tax attributable to an erroneous item of an individual filing it.Page Ref.: C:15-28Objective: 9

7) Christie and Billy jointly file this year. Billy intentionally omits $5,000 in gambling winnings. Christie fraudulently deducts $1,000 in business expenses. The IRS audits the return, assesses a $2,500 deficiency and begins collection efforts two years after the timely filing of the return. Christie and Billy divorced one year before the deficiency was assessed. Can Christie receive any tax relief from the full $2,500 deficiency?Answer: Yes, under the proportional liability election, which is part of the innocent spouse provisions, Christie meets all four of the conditions at the time of her election: divorced, not residing with the other filer at any time during the 12-month period preceding the election, no actual knowledge of the gambling winnings, and electing proportional liability within two years after the IRS begins its collection efforts. Christie will remain liable only for that portion of the deficiency attributable to her separate taxable items.Page Ref.: C:15-28Objective: 9

L10: Tax Practice Issues

1) Treasury Department Circular 230 regulates the practice of attorneys, CPAs, enrolled agents, and enrolled actuaries before the IRS.Answer: TRUEPage Ref.: C:15-31Objective: 10

2) Anyone who prepares a tax return is subject to the provisions of Circular 230.Answer: FALSEPage Ref.: C:15-31Objective: 10

3) Tax return preparers can be penalized for the following activities exceptA) failure to sign a return.B) failure to give a copy of the return to the taxpayer.C) failure to maintain IRS continuing education requirements.D) failure to provide the preparer's identification number on the return.Answer: CPage Ref.: C:15-29Objective: 10


4) What is the penalty for a tax return preparer who willfully attempts to understate taxes, or intentionally disregards the tax rules and regulations?A) $50B) $250C) $5,000D) 20% of the understatementAnswer: CPage Ref.: C:15-31Objective: 10

5) What is the penalty for a tax return preparer who lacks substantial authority to take a return position?A) $50B) $250C) $1,000D) 20% of the understatementAnswer: CPage Ref.: C:15-31Objective: 10

6) What is the IRS guideline for determining whether a tax return position has substantial authority?A) A person knowledgeable in the tax law concludes that the position has a something less than 50% likelihood of being supported.B) A person knowledgeable in the tax law concludes that the position has at least a 50% likelihood of being supported.C) A person knowledgeable in the tax law concludes that the position has at least a two-thirds likelihood of being supported.D) A person knowledgeable in the tax law concludes that the position has at least a 75% likelihood of being supported.Answer: APage Ref.: C:15-29 through C:15-31Objective: 10

7) Identify which of the following statements is true.A) The "innocent spouse provision," if applicable, relieves both spouses from an assessment of tax caused by a spouse's understating income or gain and/or overstating deductions, losses, or credits.B) The IRS is precluded from assessing any residual tax liability against transferees and fiduciaries because the initial filers are responsible for meeting the tax payments in a timely fashion.C) Treasury Department Circular 230 regulates the practice of attorneys, CPAs, enrolled agents, and enrolled actuaries before the IRS.D) All of the above are false.Answer: CPage Ref.: C:15-31Objective: 10


8) According to Circular 230, what should a CPA do upon discovery of an error in a client's prior-year return?A) Notify the IRS of the error.B) Inform the client of the error and its tax consequences.C) File an amended return for the client.D) Do nothing.Answer: BPage Ref.: C:15-32Objective: 10

9) Which of the following statements regarding Circular 230 is false?A) Circular 230 applies to all tax return preparers.B) Circular 230 defines practice before the IRS.C) Circular 230 provides guidance as to the level of authority necessary for a CPA to take a tax return position.D) Circular 230 applies to CPAs, enrolled agents, enrolled actuaries, and attorneys.Answer: APage Ref.: C:15-31Objective: 10

10) The "Statement on Practice in the Field of Federal Income Taxation" includes all of the following areas of mutual competence exceptA) preparing federal income tax returns.B) determining the tax effect of proposed transactions.C) representing clients in criminal investigations.D) representing taxpayers before the U.S. Tax Court.Answer: CPage Ref.: C:15-36Objective: 10

11) Which of the following activities is protected by accountant-client privilege?A) written communications between a CPA and a corporation regarding a tax shelterB) communications related to tax return preparationC) communications related to criminal tax evasionD) advice given regarding tax issues in a divorceAnswer: DPage Ref.: C:15-36Objective: 10

12) Which, if any, of the following could result in penalties against an income tax return preparer?I. Knowing or reckless disclosure or use of tax information obtained in preparing a return.II. A willful attempt to understate any client's tax liability on a return or claim for a refund.A) I onlyB) II onlyC) neither I nor IID) both I and IIAnswer: DPage Ref.: C:15-29Objective: 10

13) One of your corporate clients comes to you asking for advice regarding a proposed merger with XYZ Company. You (a) issue an opinion concerning the FMV of XYZ, (b) prepare pro forma financials for the merged entity to be, (c) draft shareholder resolutions for your client approving the proposed merger, (d) file a shareholder proxy statement with the U.S. Securities and Exchange Commission, and (e) advise your client's board of directors concerning the advantages of a Type A versus a Type B reorganization. Which of


these activities, if any, constitutes the unauthorized practice of law?Answer: Activities (c) and (d) constitute the unauthorized practice of law because they involve the drafting and filing of legal documents. Activities (a) and (b) fall within the traditional domain of accountants. Activity (e) may properly be conducted by either an accountant or a lawyer.Page Ref.: C:15-35 and C:15-36Objective: 10

14) One of your corporate clients has recently filed for bankruptcy. In the course of the proceedings, you (a) prepare a plan of reorganization that alters the rights of preferred stockholders, (b) notify the company's creditors of an impending bulk transfer of the company's assets, (c) review IRS secured claims against these assets, (d) restructure the company's debt by reducing its principal amount and extending its maturity, and (e) advise the bankruptcy court as to how this restructuring will impact the company's NOLs. Which of these activities, if any, constitutes the unauthorized practice of law?Answer: Activities (a), (b), and (c) constitute the unauthorized practice of law because they potentially involve a determination or modification of the rights of the company's stockholders or creditors. Activity (d) falls within the traditional domain of accountants. Activity (e) may properly be conducted by either an accountant or a lawyer.Page Ref.: C:15-35 and C:15-36Objective: 10

15) Which of the following communications between an accountant and client are privileged?a) During the preparation of her 2008 tax return, Tammy informs her accountant that she contributed $25,000 to a qualified charitable organization.b) After filing his tax return, a client mentions to his accountant that he forgot to report a $7,000 prize that he won playing bingo. He asks how he should correct the error.c) A client tells his accountant that he will no longer pay alimony to his ex-wife.Answer: Only communication (b) is privileged because it is made for the purpose of obtaining professional tax advice. Communication (a) is not privileged because it is made for tax preparation purposes only. Communication (c) is not privileged because it does not involve a tax matter.Page Ref.: C:15-36Objective: 10


16) Which of the following communications between an accountant and client are not privileged?a) An accountant orally communicates to his client that he should set up a foreign subsidiary to shift taxable income to a lower tax jurisdiction.b) An accountant privately submits to the client a plan for shifting taxable income to a lower tax jurisdiction.c) During a meeting in which a client is asking for advice relating to criminal fraud, the client tells his accountant that he lied to the IRS.Answer: Communications (b) and (c) are not privileged, the former because it involves a written communication relating to a tax shelter (i.e., any plan or arrangement, a significant purpose of which is tax avoidance), the latter because it is discoverable in a criminal proceeding. Although communication (a) relates to a tax shelter, it was not made in writing.Page Ref.: C:15-36Objective: 10

17) How does the IRS regulate the activities of compensated tax return preparers? In particular, list six acts that will cause a compensated tax return preparer to incur a penalty.Answer: Regulation of tax return preparers occurs through Code Secs. 6694, 6695, 6696, 6700, 6701, 7602, and Treasury Department Circular 230. These provisions are a representative listing of the practice requirements placed on preparers and, among others, include penalties for:• failure to furnish the taxpayers with a copy of the return.• failure to sign a return.• failure to furnish one's identification number.• failure to keep a copy of a return or maintain a list of taxpayers for whom returns were filed.• failure to disclose the names of employees who prepare returns.• endorsement of a tax refund check of a taxpayer.• understatement of tax because of taking a position without a realistic possibility of it being sustained.• willful attempt to understate taxes and reckless or intentional disregard of rules or regulations.

Treasury Department Circular 230 regulates the practice of attorneys, CPAs, enrolled agents, and enrolled actuaries before the IRS. Individuals who do not comply with the rules and regulations of Circular 230 can be barred from practicing before the IRS.Page Ref.: C:15-29Objective: 10


18) Explain accountant-client privilege. What are the similarities and differences between it and attorney-client privilege?Answer: According to judicial doctrine, certain communications between an attorney and a client are "privileged" ( i.e., nondiscoverable in the course of litigation). In l998, Congress extended this privilege to similar communications between a federally authorized tax practitioner and a client. A federally authorized tax advisor includes a certified public accountant.

The accountant-client privilege is similar to the attorney-client privilege in two respects. First, it encompasses communications for the purpose of obtaining or giving professional advice. Second, it excludes communications for the sole purpose of preparing a tax return. The accountant-client privilege is dissimilar in three respects. First, it is limited only to tax advice. Second, it may be asserted only in a noncriminal tax proceeding before a federal court or the IRS. Third, it excludes written communications regarding a tax shelter between an accountant and a corporation. A tax shelter is any plan or arrangement, a significant purpose of which is tax avoidance or evasion.

The creation of an accountant-client privilege reflects Congress's belief that the selection of a tax advisor should not hinge on the question of privilege. It ensures that all tax advice is accorded the same protection regardless of the tax advisor's professional status.Page Ref.: C:15-36Objective: 10


Chapter c15

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Transcript of Chapter c15