Client Advisory & Consultation Flashcards

A client asks whether they should structure a new business as an S corporation or a partnership. Which factor most strongly favors the S corporation?

Answer: Self-employment tax savings on reasonable compensation

S corporation shareholder-employees can reduce self-employment tax by paying reasonable salary and taking remaining profits as distributions not subject to SE tax.

During a consultation, a client reveals they have unreported foreign bank accounts with balances exceeding $10,000. What is your primary advisory obligation?

Answer: Advise the client of FBAR filing requirements and potential penalties

The advisor must inform the client of their FBAR (FinCEN Form 114) obligations and the significant civil and criminal penalties for non-compliance.

A client received a CP2000 notice proposing additional tax. What is the most appropriate initial step in advising the client?

Answer: Review the notice against the client's records to determine accuracy

The first step is to verify whether the IRS's proposed changes are accurate by comparing the notice to the client's actual records and third-party information returns.

A high-net-worth client wants to gift appreciated stock to their adult child. Which advisory point is most critical?

Answer: The donor may owe gift tax if the gift exceeds the annual exclusion amount

Gifts exceeding the annual exclusion ($18,000 per donee in 2024) require filing Form 709, and gift tax may be owed if the donor's lifetime exemption is exhausted.

A client asks whether they can deduct a home office used partly for personal purposes. What is the correct advisement?

Answer: The space must be used regularly and exclusively for business to qualify

IRC §280A requires the home office space to be used both regularly and exclusively for business; any personal use disqualifies the deduction.

A client is considering selling their principal residence where they have lived for 18 months. How should you advise them regarding the Section 121 exclusion?

Answer: They qualify for a partial exclusion if the sale is due to a qualifying unforeseen circumstance

Taxpayers who fail the 2-year test due to a change in employment, health, or unforeseen circumstances may claim a pro-rata partial exclusion under IRC §121(c).

A client's C corporation has accumulated earnings of $350,000 with no documented business purpose. What risk should you communicate?

Answer: Accumulated Earnings Tax under IRC §531 on amounts beyond reasonable business needs

IRC §531 imposes a 20% accumulated earnings tax on C corporations that retain earnings beyond reasonable business needs without a documented justification.