Solutions for Questions and Problems – Chapter 7 257

CHAPTER 12

TAX ADMINISTRATION AND TAX PLANNING Group 1 - Multiple Choice Questions

1. E (Section 12.1) 11. B ($6,430 – $6,680)/($41,000 – $40,000) 2. A (Section 12.2) (Section 12.7) 3. E (Section 12.3) 12. D ($2,000 – (30% x $1,800)) 4. A (Section 12.4) (Section 12.7) 5. D (Section 12.4) 13. D (Section 12.7) 6. A (Section 12.2) 14. C (Section 12.5) 7. B (Section 12.5) 15. E (Section 12.5) 8. E (Section 12.5) 16. D (Section 12.5) 9. A (Section 12.6) 17. D (Section 12.7) 10. D ($11,430 – $8,930)/ 18. D (Section 12.7) ($60,000 – $50,000) 19. D (Section 12.7) (Section 12.7) 20. D (Section 12.7) 21. B (Section 12.7)

Group 2 -Problems

1. a. $7.00 = $700 x .5% x 2 months. b. Failure to pay penalty (.5% x $750 x 5 months) $ 18.75

Failure to file penalty (5% x $750 x 5 months) $187.50 Less the failure to pay penalty –18.75 Net failure to file penalty 168.75 Total penalties $187.50 c. $0. If the taxpayer is entitled to a refund, there is no penalty. (Section 12.3)

2. True. (Section 12.1) True. (Section 12.1) False. Most individual returns are processed at one of the IRS service centers. (Section 12.1) False. Taxpayers should contact the district offices for tax information. (Section 12.1) False. The IRS may issue a summons for a taxpayer’s records which are in the possession of third

parties, such as CPAs. (Section 12.1) False. Taxpayer audits are usually conducted at the office of the taxpayer or at the IRS office.

(Section 12.2)

3. $0. None of the amounts are deductible since (1) the interest is considered consumer interest which is 100 percent disallowed, (2) federal income taxes are not deductible and (3) fines and penalties are not allowed as deductions. (Section 12.3)

4. a. Negligence penalty (20% x $4,000) $800 b. Fraud penalty (75% x $4,000) $3,000 (Section 12.3)

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258 Chapter 12 – Tax Administration and Tax Planning

5. False. In a field audit, the IRS agent reviews a taxpayer’s books and records at the taxpayer’s place of business or at the office of the taxpayer’s accountant. (Section 12.2)

False. A low DIF score decreases the possibility that a return will be selected for audit. (Section 12.2) False. The IRS pays interest on overpayments of taxes, except for overpayments of current year taxes.

(Section 12.3) True. (Section 12.3) True. (Section 12.5) False. The fraud penalty is only applied when a tax return has been filed. (Section 12.3)

6. a. Filing a frivolous tax return; $500 b. Bad check; $18.00 = $900 x 2%. c. Accuracy-related penalty, substantial understatement; $2,000 = $10,000 x 20%. (Section 12.3)

7. a. Indefinitely. b. May 19, 2012 c. April 15, 2012 d. April 15, 2015 (Section 12.4)

8. True. (Section 12.3) False. The statute of limitations is normally 3 years from the date the tax return was filed or the date it

was due, whichever is later. (Section 12.4) True. (Section 12.4) False. Enrolled agents are tax practitioners who have passed an exam. They are allowed to represent

taxpayers in proceedings before the IRS. (Section 12.5) False. Only enrolled agents, CPAs, and attorneys may represent their clients in IRS proceedings.

(Section 12.5) False. The IRS must schedule audits at a reasonable time and place. (Section 12.7)

9. a. $1,000 or more (the greater of $1,000 or 50 percent of the income derived by the tax preparer for an undisclosed unrealistic position). b. $50. c. $1,000, for each separate return or document, etc. d. $500. (Section 12.5)

10. True. (Section 12.7) True. (Section 12.7) False. The marginal tax rate represents the rate of tax that will be applied to the “next” dollar

of income. (Section 12.7) True. (Section 12.7) True. (Section 12.7) True. (Section 12.7) True. (Section 12.7) True. (Section 12.7)

11. Information about the commissioner of the IRS will change from time to time, so it is not reproduced here. The purpose of this problem is to familiarize the students with some of the nontechnical information available from the IRS Internet site.

12. Information in the Tax Pro News will change regularly so it is not reproduced here; it would not be current by the time students are assigned this problem.