Risk Assessment Flashcards

Which defense under IRC Section 6664(c) can eliminate an accuracy-related penalty if the taxpayer acted properly?

Answer: Reasonable cause and good faith

IRC 6664(c) excuses accuracy-related penalties where the taxpayer shows reasonable cause and acted in good faith.

Which IRS form is used to disclose a return position so that a substantial understatement penalty can be avoided if the position has a reasonable basis?

Answer: Form 8275

Form 8275 (Disclosure Statement) adequately discloses a position, reducing penalty exposure when a reasonable basis exists.

A taxpayer participating in a reportable transaction must generally disclose it on which form?

Answer: Form 8886

Form 8886, Reportable Transaction Disclosure Statement, is attached to the return for each reportable transaction.

Under the Augusta Rule (IRC 280A(g)), which practice BEST reduces audit risk when a business rents a shareholder's home for meetings?

Answer: Documenting fair market rent with comparable local rates and meeting records

The rental income exclusion holds up best when rent is supported by comparable rates and evidence of actual business use, within the 14-day limit.

What is the primary audit risk when an S corporation shareholder-employee takes large distributions but little or no salary?

Answer: IRS reclassification of distributions as wages subject to employment taxes

The IRS can recharacterize distributions as reasonable compensation subject to FICA and related employment taxes.

Under IRC Section 183(d), an activity is presumed to be engaged in for profit if it shows a profit in at least how many of five consecutive years?

Answer: 3 of 5 years

The hobby loss presumption applies when an activity is profitable in 3 of 5 consecutive years (2 of 7 for horse activities).

A 'listed transaction' is best described as which of the following?

Answer: A transaction the same as or substantially similar to one the IRS has identified as a tax avoidance transaction

Listed transactions are those the IRS has specifically identified by notice or other guidance as tax avoidance transactions.