CTC Risk Assessment & Mitigation 3

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?

Accepted Answer

CP2000 underreporter notice

Answer

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?

Accepted Answer

Constructive dividend reclassification of the underpaid salary amount

Answer

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?

Accepted Answer

40% strict-liability penalty

Answer

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?

Accepted Answer

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

Answer

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?

Accepted Answer

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

Answer

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.

(CTC) Chartered Tax Consultant Practice Test

(CTC) Chartered Tax Consultant Practice Test

CTC Risk Assessment & Mitigation 3