CTC Risk Assessment & Mitigation 2

Question 1

A client operates a cash-intensive business with inconsistent recordkeeping. Which IRS audit technique does this most directly invite?

Accepted Answer

Bank deposit analysis to reconstruct unreported income

Answer

The IRS uses bank deposit analysis to reconstruct income when records are poor, making cash-intensive businesses with weak recordkeeping prime candidates for this technique.

Question 2

Which strategy best mitigates the risk of a client's S corporation losing its tax status due to an inadvertent invalid election?

Accepted Answer

Continuously monitoring shareholder eligibility requirements throughout the year

Answer

S corporation status is lost if ineligible shareholders (e.g., nonresident aliens or corporations) acquire shares, so continuous monitoring of shareholder eligibility is the primary mitigation control.

Question 3

A taxpayer claims a home office deduction for a room also used regularly for personal activities. What is the primary tax risk?

Accepted Answer

Disallowance of the deduction due to failure to meet the exclusive-use test

Answer

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

Question 4

When assessing tax risk for a client who received a large legal settlement, which classification determination is most critical?

Accepted Answer

Whether the proceeds are compensatory for physical injury or punitive damages

Answer

Under IRC §104, proceeds compensating for physical personal injury are excludable from gross income, while punitive damages are fully taxable regardless of the underlying claim.

Question 5

A tax practitioner discovers a material error on a prior-year return that resulted in underpayment. Under Circular 230, what is the practitioner's primary obligation?

Accepted Answer

Promptly advise the client of the error and its potential consequences

Answer

Circular 230 §10.21 requires practitioners to promptly advise clients of errors or omissions on prior returns and recommend corrective action, but it does not require the practitioner to notify the IRS directly.

(CTC) Chartered Tax Consultant Practice Test

(CTC) Chartered Tax Consultant Practice Test

CTC Risk Assessment & Mitigation 2