Chapter 12: Tax Administration and Tax Planning Key
1. The IRS has ten regional offices.
2. The tax law is administered by the Federal Trade Commission.
3. Tax evasion involves the use of illegal methods to reduce or avoid income tax.
4. Taxpayers are required by law to maintain records to facilitate an IRS audit.
5. The IRS may issue a summons for a taxpayer’s bank account records.
6. An “office audit” is an audit in which the revenue agent visits the taxpayer’s office.
7. The Discriminant Function System is designed to identify tax returns that may contain errors.
8. As a result of an IRS audit a taxpayer may be required to pay additional taxes, but he or she is never paid a
refund.
9. If a taxpayer has too much income tax withheld from his salary during the tax year, the IRS will pay interest
on the excess amount.
10. Tax penalties are considered to be additional taxes and are not deductible by taxpayers.
11. The statute of limitations for a tax return generally is 3 years.
12. The tax law contains a penalty for filing a “frivolous” tax return.
13. The statute of limitations for the deduction of a worthless security is 5 years.
14. A “correspondence audit” by the IRS is conducted through the mail.
15. Tax practitioners can be assessed a penalty for promoting an abusive tax shelter.
16. Tax returns are processed at the IRS national office in Washington, D.C.
17. Tax returns selected for most audits are selected by the Discriminant Function System.
18. The IRS charges a fixed 10 percent interest rate on underpayments of taxes.
19. A commercial tax preparer must be an enrolled agent.
20. Interest paid on an underpayment of taxes (other than an underpayment of estimated taxes) is not subject to
21. A tax preparer may be subject to a penalty for failing to provide a copy of the taxpayer’s tax return to the
client.
22. The Taxpayer Bill of Rights is summarized in IRS Publication 1.
23. A taxpayer’s average tax rate is determined by dividing the total tax paid by the total income of the
taxpayer.
24. A taxpayer with an average tax rate of 20 percent who receives additional income of $20,000 will pay
additional taxes of $4,000.
25. Beginning in 2011, all paid tax return preparers must sign up with the IRS, pay a fee, and obtain a preparer
tax identification number.
26. Taxpayers who are unable to pay their taxes may enter into a payment plan with the IRS if the amount they
owe is within certain limits.
27. At which of the following IRS locations are tax returns processed?
28. Which of the following is not a type of IRS audit?
29. Which of the following is the most common type of audit for an individual taxpayer?
30. Which of the following statements best describes the process of tax planning?
31. A tax return with a large casualty loss would be most likely selected for audit through:
32. Which of the following is not a possible result of an audit by the IRS?
33. If a calendar year taxpayer’s 2011 individual income tax return is mailed on June 15, 2012, the statute of
limitations would normally run out on:
A. June 15, 2014
34. Which of the following types of audits was suspended due to protests from taxpayers and lawmakers?
A. Discriminant Function System selected audit
35. Which of the following will not affect the statute of limitations on a tax return?
36. Which of the following statements best describes the purpose of the Taxpayer Bill of Rights?
37. Which of the following taxpayers will benefit most in terms of dollars saved as a result of tax planning to
reduce taxes?
38. Patricia has taxable income of $40,000 on which she pays income tax of $6,194. If Patricia’s taxable income
increases by $2,000, she will pay an additional tax of $500. What is Patricia’s marginal tax rate?
39. If a taxpayer makes all of his income from his job and various investments, which office of the IRS would
likely investigate his return if it were audited?
40. Which of the following is false regarding the return audit process?
41. A failure to file will result in which of the following penalties?
42. Craig commits fraud on his tax return. It is found that he was $45,000 deficient in his tax because of the
fraud. What would his penalty be?
43. Mike deducts a bad debt on his 2011 tax return. How many years is the statute of limitations for the bad
debt deduction?
44. Which of the following is the best definition of tax planning?
45. Linda filed her individual income tax return on its due date, but failed to pay $1,000 in taxes that were due
with the return. Linda promptly paid the taxes upon receipt of a notice and demand for payment. If Linda pays
the taxes exactly 4 months late, calculate the amount of her failure–to-pay penalty.
46. The IRS determined that John underpaid his 2009 tax liability by $7,000 due to negligence. In 2011, John
pays $1,000 of interest related to the underpayment and the full amount of any penalties assessed by the IRS.
a.
Calculate the amount of the accuracy-related penalty that could be assessed by the IRS in this situation.
b.
What part of the deficiency, income taxes, interest and penalty, is deductible by John on his current tax return? Explain.
a.
penalty and the tax liability are also not deductible.
47. Kendall is considering the purchase of a home. He has saved $20,000 for a down payment on a home and
will finance the remainder of the purchase price with a home mortgage loan. Kendall currently rents an
apartment for $900 per month and does not anticipate an increase in his monthly income. He wants to make sure
that the monthly payment on his new home does not exceed $900, after-tax. Kendall has a marginal tax rate of
28 percent and an average tax rate of 22 percent. Assuming the monthly mortgage payment (before-tax) will be
equal to 1 percent of the initial mortgage balance and the entire amount of each monthly payment will be
deductible home mortgage interest, what is the maximum amount that Kendall can spend on a new home?
48. For each of the following situations, indicate the nature and amount of the penalty that could be imposed.
(The penalties include both tax practitioner penalties and taxpayer penalties.)
Description
of the Penalty
Penalty
Amount
a.
Kyle files his tax return on the original due date and pays
the entire balance of tax due of $5,000. He did not pay any
estimated tax during the year and had no withholding. His
prior year tax return showed a tax liability of $12,000.
_________________________
b.
Drew writes a check for $300 in payment of his income
taxes. Drew knows he does not have sufficient funds in his
account to cover the check.
_________________________
c.
Enrique has a $10,000 tax deficiency on his 2011 tax return
due to civil fraud.
_________________________
d.
Vladimir prepares a tax return for Oscar but does not keep a
copy of the tax return.
_________________________
e.
Priscilla, a self-employed accountant, prepares a tax return
for Billy. She signs the return but does not include her
preparer tax identification number on the tax return as
required.
_________________________
f.
Manny prepares a tax return for his client who requests that
Manny disregard a current tax law which would increase his
tax liability by $17,000. Manny agrees to do so since he
does not want to lose this important client.
_________________________
49. Answer the following:
a.
Geoffrey filed his tax return 2 months and 8 days late and had not requested an extension of time for filing. Geoffrey‘s return indicated that
he is to receive a $600 refund in taxes. Calculate the amount of Geoffrey’s penalty for failure to file his tax return on time, assuming the
failure to file was not fraudulent.
b.
John filed his individual income tax return 4 1/2 months after it was due. He had not requested an extension of time for filing. Along with
his return, John remitted a check for $1,000, which was the balance of the taxes he owed with his return. Disregarding interest, calculate
the total penalty that John will be required to pay, assuming the failure to file was not fraudulent (and that he is not subject to failure-to–
pay penalties).
a.
b.
50. Janet did not file her tax return or pay her taxes for 2010 until November of 2011. She paid the following
amounts to the IRS related to the late filing and payment of tax:
Interest
$ 500
Underpayment of estimated tax penalty
350
Failure-to-file and failure-to-pay penalties
1,700
What amount of the above items may be deducted on Janet’s 2011 individual income tax return? Explain.
51. Indicate in the blank space the date the statute of limitations would run out on each of the following
individual tax returns.
a.
A 2011 tax return filed on April 15, 2012 which omitted $20,000 of income. The total gross income shown on the tax return was $40,000
b.
A 2011 tax return filed April 15, 2012 which contained a large bad debt deduction
c.
A 1999 tax return that was never filed
d.
A 2011 tax return filed on April 15, 2012
e.
A fraudulent 2011 tax return filed April 15, 2012
b.
Bad check; $25.
c.
Fraud penalty; $7,500.
d.
Failure to keep a copy of the prepared return; $50.
e.
Failure to furnish preparer’s identifying number; $50.
Willful understatement penalty; $1,000 (less the $250 penalty for unrealistic positions, if assessed).
52. What is the difference between tax avoidance and tax evasion?
53. A taxpayer made estimated tax payments in excess of the tax due for the year, but failed to file a tax return.
Since the taxes were paid in full, would there be a penalty?