Ethics: Federal tax practice and procedures
UPDATED Exam Questions and
CORRECT Answers
Underpayments and penalties - CORRECT ANSWER - 20% penalty on the following
underpayments:
1. Underpayments attributable to negligence or disregard of rules or regulations
2. Substantial understatement of income tax. This amount is offset by amounts for which the tax
treatment is adequately disclosed and there is a reasonable basis (≥20% chance of being
sustained) for the tax treatment. Or there was substantial authority for claimed tax treatment.
3. Undisclosed position must be supported by substantial authority which requires a ≥40%
chance of being sustained.
Underpayments due to negligence - CORRECT ANSWER - "Negligence" is "any failure to
make a reasonable attempt to comply with" the rules.
1. Failure to keep adequate books and records.
2. Taxpayer conduct—Did the taxpayer make reasonable attempts to get it right?
3. Taxpayer positions—A taxpayer position that lacks a "reasonable basis" may be attributed to
negligence.
4. Disclosure of a position that is negligently taken is not a defense.
Underpayments due to disregard - CORRECT ANSWER - "Disregard" may be negligent,
reckless, or intentional.
Negligent and reckless disregard largely overlap with the "negligence" provision of the statute.
, Intentional disregard may be problematic but is not necessarily wrongful just because the
taxpayer takes a tax position that is ultimately found to be erroneous. A "good-faith" mistake of
law provides a defense.
1. Disclosure of a position on a Form 8275 or 8275-R may provide a defense to any penalty for
intentional disregard if the position has a reasonable basis and the taxpayer has kept adequate
books and records to properly substantiate necessary items.
Reasonable cause - CORRECT ANSWER - No penalty is imposed if (a) there was
"reasonable cause" for the underpayment and (b) the taxpayer acted with "good faith."
*Reasonable cause* - The exercise of ordinary care, *Judged objectively*
example: Reliance on tax adviser and/or
Reliance on advice of IRS employee.
Standards of belief - CORRECT ANSWER - Undisclosed position—"Substantial authority"
(≥40% chance of being sustained)
Disclosed position—"Reasonable basis" (≥20% chance of being sustained)
Tax shelter position—"More likely than not" (>50% chance)
Good Faith - CORRECT ANSWER - Definition—Honesty of purpose
*Judged subjectively*
Examples:
Reliance on erroneous W-2, with no red flags to indicate its inaccuracy.
Reliance on erroneous advice of tax adviser where:
UPDATED Exam Questions and
CORRECT Answers
Underpayments and penalties - CORRECT ANSWER - 20% penalty on the following
underpayments:
1. Underpayments attributable to negligence or disregard of rules or regulations
2. Substantial understatement of income tax. This amount is offset by amounts for which the tax
treatment is adequately disclosed and there is a reasonable basis (≥20% chance of being
sustained) for the tax treatment. Or there was substantial authority for claimed tax treatment.
3. Undisclosed position must be supported by substantial authority which requires a ≥40%
chance of being sustained.
Underpayments due to negligence - CORRECT ANSWER - "Negligence" is "any failure to
make a reasonable attempt to comply with" the rules.
1. Failure to keep adequate books and records.
2. Taxpayer conduct—Did the taxpayer make reasonable attempts to get it right?
3. Taxpayer positions—A taxpayer position that lacks a "reasonable basis" may be attributed to
negligence.
4. Disclosure of a position that is negligently taken is not a defense.
Underpayments due to disregard - CORRECT ANSWER - "Disregard" may be negligent,
reckless, or intentional.
Negligent and reckless disregard largely overlap with the "negligence" provision of the statute.
, Intentional disregard may be problematic but is not necessarily wrongful just because the
taxpayer takes a tax position that is ultimately found to be erroneous. A "good-faith" mistake of
law provides a defense.
1. Disclosure of a position on a Form 8275 or 8275-R may provide a defense to any penalty for
intentional disregard if the position has a reasonable basis and the taxpayer has kept adequate
books and records to properly substantiate necessary items.
Reasonable cause - CORRECT ANSWER - No penalty is imposed if (a) there was
"reasonable cause" for the underpayment and (b) the taxpayer acted with "good faith."
*Reasonable cause* - The exercise of ordinary care, *Judged objectively*
example: Reliance on tax adviser and/or
Reliance on advice of IRS employee.
Standards of belief - CORRECT ANSWER - Undisclosed position—"Substantial authority"
(≥40% chance of being sustained)
Disclosed position—"Reasonable basis" (≥20% chance of being sustained)
Tax shelter position—"More likely than not" (>50% chance)
Good Faith - CORRECT ANSWER - Definition—Honesty of purpose
*Judged subjectively*
Examples:
Reliance on erroneous W-2, with no red flags to indicate its inaccuracy.
Reliance on erroneous advice of tax adviser where:
