Federal Tax Practice and Procedures
UPDATED ACTUAL Exam Questions and
CORRECT Answers
What % is Substantial authority to be sustained? - CORRECT ANSWER - 40% or More
What % for a Disclosed Reasonable Basis to be sustained? - CORRECT ANSWER - 20% or
More
Underpayment penalty punishes... - CORRECT ANSWER - - Underpayments due to
negligence or disregard of rules
- Any substantial understatement of income tax
Understatement amount is reduced by... - CORRECT ANSWER - - Substantial authority (40%
and higher)
- Disclosed Reasonable Basis (20% and higher)
Section 6664 Reasonable Cause relies on... - CORRECT ANSWER - - The exercise of
ordinary care
- Objective Judgement
- Reliance on Tax Adviser
- Reliance on the advice of IRS employee
Section 6664 Good Faith relies on - CORRECT ANSWER - - Honesty of purpose
- Judged subjectively
What does disclosure do? - CORRECT ANSWER - Helps avoid liability be demonstrating
that the taxpayer was Acting in Good Faith, and not trying to "pull a fast one."
,What does substantiation do? - CORRECT ANSWER - Helps avoid liability by establishing
ENTITLEMENT to a claimed position and also indicating good faith by a taxpayer who is trying
to get things right
What is Form -R? - CORRECT ANSWER - - It is the form that is filed when
disclosing a tax position.
- Lowers standard to "reasonable cause/good faith" being between 40%-20% chance.
Examples of when a position is not substantiated due to negligence which would lead to
penalties... - CORRECT ANSWER - - Failure to keep adequate books or records, or
- Failure to substantiate items that give rise to the understatement
What deductions are usually inquire for books and records? - CORRECT ANSWER - - Home
office deductions
- Vehicle Mileage
- Gifts to clients
- Food & Entertainment
Record retention requirements... - CORRECT ANSWER - - Retain all tax returns for the
previous 7 years
- All records that pertain to a return for 3 years
- Other records, no matter how old, that would be needed to support a tax position on a
subsequent return
What are the book and record requirements for Charitable contributions? - CORRECT
ANSWER - - Donations of 250 or more must have a receipt
- Donations of MORE than 5000 must be appraised
How must the business use of a vehicle be tracked? - CORRECT ANSWER - - With a timely-
kept log of miles driven for business use
, What is the late FILING penalty? - CORRECT ANSWER - - It is 5% of the taxes due per
month up to 25%
What is the late FILING penalty due to fraud? - CORRECT ANSWER - - it is 5% of the taxes
due per month up to 75%
What is the late PAYMENT penalty? - CORRECT ANSWER - - It is 0.5% of the taxes due
per month up to 25%
What is the understatement penalty? - CORRECT ANSWER - - It is penalty due to negligence
or disregard of rules or regulations
Examples of Understatement .. - CORRECT ANSWER - - Failing to include a W-2
- Filing at last minute and making many errors
What are the 2 Focuses when determining if the Understatement Penalty should be imposed? -
CORRECT ANSWER - - Taxpayer Conduct
- Taxpayer Positions
How to determine if an Understatement is SUBSTANTIAL? - CORRECT ANSWER - If the
understatement exceeds Greater of;
- 10% of the total tax due
- $5,000
For corporations, How to determine if an Understatement is SUBSTANTIAL? - CORRECT
ANSWER - If the understatement exceeds Lesser of;
- 10% of the tax (or, if greater, $10,000), or
- $10,000,000
UPDATED ACTUAL Exam Questions and
CORRECT Answers
What % is Substantial authority to be sustained? - CORRECT ANSWER - 40% or More
What % for a Disclosed Reasonable Basis to be sustained? - CORRECT ANSWER - 20% or
More
Underpayment penalty punishes... - CORRECT ANSWER - - Underpayments due to
negligence or disregard of rules
- Any substantial understatement of income tax
Understatement amount is reduced by... - CORRECT ANSWER - - Substantial authority (40%
and higher)
- Disclosed Reasonable Basis (20% and higher)
Section 6664 Reasonable Cause relies on... - CORRECT ANSWER - - The exercise of
ordinary care
- Objective Judgement
- Reliance on Tax Adviser
- Reliance on the advice of IRS employee
Section 6664 Good Faith relies on - CORRECT ANSWER - - Honesty of purpose
- Judged subjectively
What does disclosure do? - CORRECT ANSWER - Helps avoid liability be demonstrating
that the taxpayer was Acting in Good Faith, and not trying to "pull a fast one."
,What does substantiation do? - CORRECT ANSWER - Helps avoid liability by establishing
ENTITLEMENT to a claimed position and also indicating good faith by a taxpayer who is trying
to get things right
What is Form -R? - CORRECT ANSWER - - It is the form that is filed when
disclosing a tax position.
- Lowers standard to "reasonable cause/good faith" being between 40%-20% chance.
Examples of when a position is not substantiated due to negligence which would lead to
penalties... - CORRECT ANSWER - - Failure to keep adequate books or records, or
- Failure to substantiate items that give rise to the understatement
What deductions are usually inquire for books and records? - CORRECT ANSWER - - Home
office deductions
- Vehicle Mileage
- Gifts to clients
- Food & Entertainment
Record retention requirements... - CORRECT ANSWER - - Retain all tax returns for the
previous 7 years
- All records that pertain to a return for 3 years
- Other records, no matter how old, that would be needed to support a tax position on a
subsequent return
What are the book and record requirements for Charitable contributions? - CORRECT
ANSWER - - Donations of 250 or more must have a receipt
- Donations of MORE than 5000 must be appraised
How must the business use of a vehicle be tracked? - CORRECT ANSWER - - With a timely-
kept log of miles driven for business use
, What is the late FILING penalty? - CORRECT ANSWER - - It is 5% of the taxes due per
month up to 25%
What is the late FILING penalty due to fraud? - CORRECT ANSWER - - it is 5% of the taxes
due per month up to 75%
What is the late PAYMENT penalty? - CORRECT ANSWER - - It is 0.5% of the taxes due
per month up to 25%
What is the understatement penalty? - CORRECT ANSWER - - It is penalty due to negligence
or disregard of rules or regulations
Examples of Understatement .. - CORRECT ANSWER - - Failing to include a W-2
- Filing at last minute and making many errors
What are the 2 Focuses when determining if the Understatement Penalty should be imposed? -
CORRECT ANSWER - - Taxpayer Conduct
- Taxpayer Positions
How to determine if an Understatement is SUBSTANTIAL? - CORRECT ANSWER - If the
understatement exceeds Greater of;
- 10% of the total tax due
- $5,000
For corporations, How to determine if an Understatement is SUBSTANTIAL? - CORRECT
ANSWER - If the understatement exceeds Lesser of;
- 10% of the tax (or, if greater, $10,000), or
- $10,000,000
