Risk Assessment & Mitigation Flashcards

Which type of IRS notice proposes additional tax based on information return mismatches and gives the taxpayer 30 days to respond before a statutory notice of deficiency is issued?

Answer: CP2000 underreporter notice

A CP2000 notice is an automated underreporter notice proposing changes based on information return mismatches, granting 30 days to agree or dispute before a formal deficiency is issued.

A client's C corporation pays the sole shareholder-employee a salary far below fair market value for services rendered. What tax risk does this create for the corporation?

Answer: Constructive dividend reclassification of the underpaid salary amount

When a shareholder-employee is paid below market compensation, the IRS may treat the economic benefit as a constructive dividend, which is not deductible by the corporation and is taxable to the shareholder.

Under IRC §7701(o), what penalty applies to an undisclosed transaction that is disregarded for lacking economic substance?

Answer: 40% strict-liability penalty

IRC §7701(o) codifies the economic substance doctrine; undisclosed transactions lacking economic substance are subject to a 40% strict liability penalty under §6662A.

A taxpayer files a return reporting a net operating loss carryback to a prior year. Which post-TCJA risk factor should the CTC evaluate most carefully?

Answer: Whether an election to forgo the carryback was required to be filed timely

Under TCJA, NOLs generally must be carried forward; a taxpayer must affirmatively elect to forgo carryback for any applicable exceptions, and missing that election can create unexpected tax consequences in prior open years.

What is the primary tax risk when an acquirer issues mostly cash rather than stock as consideration in a reorganization structured as tax-free?

Answer: The transaction may fail the continuity of interest requirement, making it fully taxable

Tax-free reorganization treatment under IRC §368 requires continuity of interest, meaning a significant portion of consideration must be acquirer stock; excessive cash consideration can cause the entire transaction to be taxable.

A client claims large charitable contribution deductions. Which documentation failure poses the greatest legal risk for contributions of $250 or more?

Answer: Failure to obtain a contemporaneous written acknowledgment from the donee organization

IRC §170(f)(8) requires a contemporaneous written acknowledgment from the charity for donations of $250 or more; without it, the deduction is denied regardless of other evidence.

A taxpayer receives boot in a §1031 like-kind exchange. What tax consequence must the CTC assess?

Answer: Gain is recognized to the extent of boot received, creating a partial taxable event

In a §1031 exchange, realized gain is recognized to the extent of boot received (cash or non-like-kind property), while any remaining realized gain above the boot amount is deferred.