Risk Assessment & Mitigation Flashcards

Which penalty provision applies when a tax return preparer takes an unreasonable undisclosed position that results in an understatement of the taxpayer's liability?

Answer: IRC §6694 preparer penalty with a more-likely-than-not standard for undisclosed positions

IRC §6694 imposes penalties on preparers who take undisclosed positions without meeting the more-likely-than-not standard; disclosed positions require only reasonable basis.

A U.S. person has signature authority over a foreign financial account that reached a maximum balance of $15,000 during the year. What is their FBAR filing obligation?

Answer: FinCEN Form 114 must be filed because the balance exceeded the $10,000 threshold

The FBAR (FinCEN Form 114) filing threshold is $10,000 in aggregate across all foreign financial accounts at any point during the calendar year; a $15,000 balance triggers the requirement.

When a partnership agreement allocates losses disproportionately to one partner, what is the primary tax risk that must be evaluated?

Answer: Whether the allocation has substantial economic effect under the §704(b) regulations

Under IRC §704(b), partnership special allocations must have substantial economic effect to be respected; allocations lacking economic effect are reallocated according to the partners' interests in the partnership.

A tax practitioner uses technically legal but highly aggressive positions whose outcomes clearly contradict congressional intent. Under Circular 230, this approach may violate which standard?

Answer: The best practices standard requiring practitioners to act with integrity under §10.33

Circular 230 §10.33 best practices require practitioners to act fairly and with integrity; positions designed to exploit technical loopholes while contravening legislative intent can implicate this standard.

A single-member LLC taxed as a disregarded entity fails to maintain separate finances from the owner. What is the primary risk this creates?

Answer: State courts may pierce the liability shield, exposing personal assets to business creditors

While commingling does not affect federal disregarded entity status, state courts may pierce the liability shield if the owner does not treat the LLC as a separate legal entity.

A client sold a rental property and identified replacement property 60 days after the relinquished sale closed. What is the tax consequence in a §1031 exchange?

Answer: The exchange fails because replacement property must be identified within 45 days of sale

IRC §1031 requires replacement property to be identified in writing within 45 days of the relinquished property's sale; missing this deadline disqualifies the entire exchange and all gain is immediately recognized.

Which risk management practice best protects a CTC when advising a client on a novel transaction with no clear precedent in the tax code or regulations?

Answer: Obtaining a formal tax opinion letter documenting the legal analysis and basis for the position taken

A formal opinion letter documents the legal reasoning, establishes a good-faith basis for the position, and can support a reasonable cause defense against penalties if the position is later challenged.