Risk Assessment & Mitigation Flashcards

A taxpayer files a return claiming a large refund based on overstated withholding credits. What IRS compliance risk does this most directly trigger?

Answer: Examination or delay under the Questionable Refund Program

The IRS Questionable Refund Program flags returns with suspicious refund claims for additional scrutiny, delaying the refund pending verification of the credits claimed.

A client's tax return is selected for correspondence audit. What mitigation strategy should the CTC recommend first?

Answer: Respond only to the specific items raised in the audit notice with targeted documentation

In a correspondence audit, expanding beyond the specific items raised can invite broader scrutiny; the best practice is to respond precisely and only to the items the IRS identified.

Under IRC §469 passive activity loss rules, which scenario creates the greatest risk of disallowed losses?

Answer: A limited partner who receives only a guaranteed payment for services and no other income from the entity

A limited partner who receives only guaranteed payments is generally treated as a passive investor; losses from the partnership are passive and can only offset passive income, not wages or portfolio income.

A trust instrument gives the grantor broad discretion to distribute trust income or principal back to themselves. What tax risk does this retained power create?

Answer: The trust may be classified as a grantor trust, causing all income to be taxed to the grantor

Under IRC §§671–679, retained powers or interests (including broad discretionary distribution powers held by the grantor) can trigger grantor trust status, attributing all income to the grantor.

A multinational client allocates income to a low-tax foreign subsidiary through related-party transactions. Under U.S. transfer pricing rules, what is the primary penalty mitigation tool?

Answer: Preparing contemporaneous transfer pricing documentation under IRC §6662(e)

IRC §6662(e) penalties for transfer pricing misstatements are avoided if the taxpayer has contemporaneous documentation establishing that intercompany pricing meets the arm's-length standard.

A client uses a syndicated conservation easement donation to generate large charitable deductions. Which risk factor most directly indicates the transaction may be a listed transaction?

Answer: The deduction claimed exceeds 2.5 times the amount invested in the property

The IRS identified syndicated conservation easements where the deduction exceeds 2.5 times the investment as listed transactions in Notice 2017-10, requiring mandatory disclosure and carrying heightened penalty risk.

A client failed to file returns for three consecutive years due to non-willful oversight. Which IRS program offers the greatest penalty reduction for coming into compliance?

Answer: Streamlined Filing Compliance Procedures with a 5% offshore penalty or no penalty for domestic filers

The IRS Streamlined Filing Compliance Procedures allow non-willful noncompliant taxpayers to file delinquent returns with significantly reduced penalties, providing a structured path to compliance.