CTC Risk Assessment & Mitigation 3 â Questions and Answers
Question 1: 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?
- CP2000 underreporter notice (Correct answer)
- Form 4549 Revenue Agent Report
- Letter 1058 Final Notice of Intent to Levy
- Form 886-A Explanation of Items
Correct 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.
Question 2: 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?
- Constructive dividend reclassification of the underpaid salary amount (Correct answer)
- Disallowance of the corporation's salary deduction entirely
- IRS reclassification of the underpayment as a loan from the corporation
- Automatic termination of the corporate charter
Correct 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.
Question 3: Under IRC §7701(o), what penalty applies to an undisclosed transaction that is disregarded for lacking economic substance?
- 20% accuracy-related penalty only
- 40% strict-liability penalty (Correct answer)
- Automatic criminal referral to the Department of Justice
- First-time abatement penalty waiver
Correct 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.
Question 4: 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?
- Whether the taxpayer had passive activity losses in the carryback year
- Whether an election to forgo the carryback was required to be filed timely (Correct answer)
- Whether the taxpayer's AGI exceeded $250,000 in the loss year
- Whether the taxpayer was subject to AMT in the loss year
Correct 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.
Question 5: What is the primary tax risk when an acquirer issues mostly cash rather than stock as consideration in a reorganization structured as tax-free?
- The transaction may fail the continuity of interest requirement, making it fully taxable (Correct answer)
- The target's NOLs will be permanently disallowed under §382
- The transaction triggers built-in gains tax immediately
- The acquirer loses the stepped-up basis in acquired assets
Correct 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.
Question 6: A client claims large charitable contribution deductions. Which documentation failure poses the greatest legal risk for contributions of $250 or more?
- Failure to attach receipts to the tax return
- Failure to obtain a contemporaneous written acknowledgment from the donee organization (Correct answer)
- Using the wrong line on Schedule A
- Contributing appreciated stock instead of cash
Correct 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.
Question 7: A taxpayer receives boot in a §1031 like-kind exchange. What tax consequence must the CTC assess?
- The entire realized gain is recognized regardless of the boot amount
- Gain is recognized to the extent of boot received, creating a partial taxable event (Correct answer)
- The exchange is disqualified entirely if any boot is received
- Boot received is treated as a return of basis and is not taxable
Correct 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.
CTC Risk Assessment & Mitigation 3
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?