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Exam 2: Tax Compliance, the Irs, and Tax Authorities

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Question 31

Multiple Choice

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Which of the following is not a common method that the IRS uses to select returns for audit?

A) DIF system
B) Tax Select system
C) Information matching
D) Document perfection
E) None of the choices are correct.

F) B) and C)
G) A) and B)

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Question 32

True/False

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A taxpayer can avoid an underpayment penalty if there is substantial authority that supports her tax return position.

A) True
B) False

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Question 33

Multiple Choice

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Which of the following is not a source of a tax practitioner's professional responsibilities?

Houston has found conflicting authorities that address a research question for one of his clients. The majority of the authorities provide a favorable answer for his client. Nonetheless, there are several authorities that provide an unfavorable answer. Houston estimates that if the client takes the more favorable position on its tax return there is approximately a 60 percent chance that the position will be sustained upon audit or judicial proceeding. If the client takes this position on its tax return, will Houston be subject to penalty? Will the client potentially be subject to penalty?

Nolene suspects that one of her new clients may be intentionally underreporting his taxable income. What are the potential ramifications to her client for this behavior? What are the consequences to Nolene if she assists the client in underreporting income? Any advice for Nolene?

Which of the following audits is the least common, broadest in scope, and typically most complex?

Which of the following audits is the most common and typically less comprehensive?

Caitlin is a tax manager for an accounting firm, and Duff is a first-year staff accountant. Describe the differences in the manner in which Caitlin and Duff may identify research issues and in general how one may identify research questions.

Secondary authorities are official sources of the tax law with a lesser "weight" than primary authorities.

Lavonda discovered that the U.S. Circuit Court of Appeals for the Federal Circuit has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case?

Chris and Chuck were recently debating whether the Internal Revenue Code is "logical." Chris offers that she has briefly reviewed the Code and could hardly understand its organizational structure, if there is one. Please describe the basic organization of the Code and how understanding its organization may be especially beneficial to the tax researcher.

According to Statements on Standards for Tax Services No. 1, a tax practitioner can recommend a tax return position:

Office examinations are the most common type of IRS audit.

Which of the following is not a common tool used in conducting tax research?

Mel recently received a 30-day letter from the IRS. Although his tax return being audited has several potential large issues (potential tax consequences of $70,000 − $80,000), the IRS agent auditing his return only identified one item that will require a modest adjustment of $10,000. Mel feels strongly that the $10,000 adjustment would not hold up in court and was surprised that the IRS agent did not identify some of the other potential larger issues. What are Mel's choices with respect to the 30-day letter and what factors should influence his decisions?

The three basic types of IRS examinations are computer exams, office exams, and business exams.

Raul was researching an issue and found two tax court decisions issued within six months of each other, one for a taxpayer residing in California and the other for a taxpayer residing in New York, whose rulings were inconsistent. Raul knows that the federal tax law does not differ by state and the issue was exactly the same in both cases. Raul is confused because he thought that a basic judicial doctrine was that a court is supposed to rule consistently. Name and describe this judicial doctrine that requires judicial consistency and discuss why the tax court may have intentionally ruled inconsistently in this example.

If Lindley requests an extension to file her individual tax return in a timely manner, the latest she could pay her tax due without penalty is:

Generally, code sections are arranged (grouped together) :

The statute of limitations for IRS assessment generally ends four years after the date a tax return is filed.