Tax Exam 1 UPDATED QUESTIONS AND
CORRECT ANSWERS
What are the three primary sources of tax law? - CORRECT ANSWER The three
primary sources of tax law are statutory sources, administrative sources, and judicial sources.
What is the legal basis for today's income tax? - CORRECT ANSWER The 16th
Amendment, adopted on February 25, 1913, gives Congress the power to lay and collect
taxes. The Revenue Act of 1913 actually imposed the first income tax.
What are the statutory sources of tax law? - CORRECT ANSWER The Internal
Revenue Code is the only statutory source of tax law. The IRC has been codified three times:
1939, 1954, and 1986.
What are the administrative sources of tax law? - CORRECT ANSWER The
administrative sources of tax law are Treasury regulations, rulings from the IRS,
determination letters from the IRS, and revenue procedures from the IRS.
Compare and contrast proposed regulations, temporary regulations, and final regulations. -
CORRECT ANSWER Proposed regulations are regulations that have been drafted by
the Treasury, but have not been formally adopted in compliance with the provisions of the
Administrative Procedures Act. Temporary regulations are issued by the Treasury when
taxpayers need guidance quickly. Temporary regulations have the same preceden- tial
authority as final regulations. Final regulations are regulations that have been formally
adopted in compli- ance with the Administrative Procedures Act. Final regulations are
binding on both the Treasury and taxpayers.
What is the difference between a procedural regulation and an interpretive regulation? -
CORRECT ANSWER A procedural regulation does not deal with substantive tax
issues, but provides housekeeping instructions for how the Treasury and the IRS will conduct
their affairs. Interpretive regulations provide official interpretations and explanations of the
Internal Revenue Code.
Discuss the two types of rulings issued by the IRS. - CORRECT ANSWER Revenue
rulings are based on a set of facts that are common to many taxpayers. Private letter rulings,
, on the other hand, are requested by an individual taxpayer and are binding only on the
requesting taxpayer with regard to that particular situation.
When can a determination letter be issued? - CORRECT ANSWER If a taxpayer has
already engaged in a transaction, the taxpayer can request a determination letter from the dis-
trict director of the IRS if he or she would like to know how to report the transaction for tax
purposes. The district director will issue a determination letter only if the issue is clearly
covered by statute, Treasury decision or regulation, or a ruling or opinion of a Court decision
published in the Internal Revenue Bulletin.
What is the general statute of limitations before which the IRS may examine a tax return? -
CORRECT ANSWER The IRS generally has three years from the date a tax return is
filed to examine the return.
Under what circumstances is the statute of limitations extended? - CORRECT
ANSWER If there is a substantial understatement of income on the tax return, the
statute of limitations is extended to six years. If a taxpayer commits fraud when filing his or
her return, there is no statute of limitations.
What are the penalties for noncompliance? - CORRECT ANSWER If a taxpayer fails
to file her income tax return on time, the failure to file penalty is 5% of the unpaid tax bal-
ance for each month the return is late up to a maximum failure to file penalty of 25%. If a tax
return is filed more than 60 days late, the minimum failure to file penalty is the lower of $135
or the amount of tax due. If the failure to file the tax return is due to fraud, the failure to file
penalty is increased to 15% per month, up to a maximum penalty of 75% of the tax due. If a
taxpayer fails to pay the tax due on the due date, a failure to pay penalty of 0.5% per month is
imposed on the balance that remains unpaid, up to a maximum penalty of 25%. Furthermore,
an accuracy-related penalty is imposed on taxpayers who file incorrect returns under cer- tain
circumstances. The penalty imposed is generally 20% of the underpayment amount, but can
be increased to 30% when certain transactions are involved.
What are the two forms of dispute resolution with the IRS? - CORRECT
ANSWER Dispute resolution with the IRS takes two forms. The first is an internal
appeals process that permits taxpayers to request a second review of their cases from the IRS
Appeals Office, which is separate from the IRS examina- tion division. The second dispute
resolution process involves the use of the courts.
CORRECT ANSWERS
What are the three primary sources of tax law? - CORRECT ANSWER The three
primary sources of tax law are statutory sources, administrative sources, and judicial sources.
What is the legal basis for today's income tax? - CORRECT ANSWER The 16th
Amendment, adopted on February 25, 1913, gives Congress the power to lay and collect
taxes. The Revenue Act of 1913 actually imposed the first income tax.
What are the statutory sources of tax law? - CORRECT ANSWER The Internal
Revenue Code is the only statutory source of tax law. The IRC has been codified three times:
1939, 1954, and 1986.
What are the administrative sources of tax law? - CORRECT ANSWER The
administrative sources of tax law are Treasury regulations, rulings from the IRS,
determination letters from the IRS, and revenue procedures from the IRS.
Compare and contrast proposed regulations, temporary regulations, and final regulations. -
CORRECT ANSWER Proposed regulations are regulations that have been drafted by
the Treasury, but have not been formally adopted in compliance with the provisions of the
Administrative Procedures Act. Temporary regulations are issued by the Treasury when
taxpayers need guidance quickly. Temporary regulations have the same preceden- tial
authority as final regulations. Final regulations are regulations that have been formally
adopted in compli- ance with the Administrative Procedures Act. Final regulations are
binding on both the Treasury and taxpayers.
What is the difference between a procedural regulation and an interpretive regulation? -
CORRECT ANSWER A procedural regulation does not deal with substantive tax
issues, but provides housekeeping instructions for how the Treasury and the IRS will conduct
their affairs. Interpretive regulations provide official interpretations and explanations of the
Internal Revenue Code.
Discuss the two types of rulings issued by the IRS. - CORRECT ANSWER Revenue
rulings are based on a set of facts that are common to many taxpayers. Private letter rulings,
, on the other hand, are requested by an individual taxpayer and are binding only on the
requesting taxpayer with regard to that particular situation.
When can a determination letter be issued? - CORRECT ANSWER If a taxpayer has
already engaged in a transaction, the taxpayer can request a determination letter from the dis-
trict director of the IRS if he or she would like to know how to report the transaction for tax
purposes. The district director will issue a determination letter only if the issue is clearly
covered by statute, Treasury decision or regulation, or a ruling or opinion of a Court decision
published in the Internal Revenue Bulletin.
What is the general statute of limitations before which the IRS may examine a tax return? -
CORRECT ANSWER The IRS generally has three years from the date a tax return is
filed to examine the return.
Under what circumstances is the statute of limitations extended? - CORRECT
ANSWER If there is a substantial understatement of income on the tax return, the
statute of limitations is extended to six years. If a taxpayer commits fraud when filing his or
her return, there is no statute of limitations.
What are the penalties for noncompliance? - CORRECT ANSWER If a taxpayer fails
to file her income tax return on time, the failure to file penalty is 5% of the unpaid tax bal-
ance for each month the return is late up to a maximum failure to file penalty of 25%. If a tax
return is filed more than 60 days late, the minimum failure to file penalty is the lower of $135
or the amount of tax due. If the failure to file the tax return is due to fraud, the failure to file
penalty is increased to 15% per month, up to a maximum penalty of 75% of the tax due. If a
taxpayer fails to pay the tax due on the due date, a failure to pay penalty of 0.5% per month is
imposed on the balance that remains unpaid, up to a maximum penalty of 25%. Furthermore,
an accuracy-related penalty is imposed on taxpayers who file incorrect returns under cer- tain
circumstances. The penalty imposed is generally 20% of the underpayment amount, but can
be increased to 30% when certain transactions are involved.
What are the two forms of dispute resolution with the IRS? - CORRECT
ANSWER Dispute resolution with the IRS takes two forms. The first is an internal
appeals process that permits taxpayers to request a second review of their cases from the IRS
Appeals Office, which is separate from the IRS examina- tion division. The second dispute
resolution process involves the use of the courts.
