CTP IRS Procedures, Audits & Controversy Resolution 3

Question 1

What is the failure-to-file penalty under IRC §6651(a)(1), and how is it calculated?

Accepted Answer

5% of unpaid tax per month, up to 25%

Answer

The failure-to-file penalty is 5% of the unpaid tax for each month or part of a month the return is late, capped at 25% of the unpaid tax under IRC §6651(a)(1).

Question 2

The accuracy-related penalty under IRC §6662 is generally imposed at what rate on the portion of underpayment attributable to negligence or substantial understatement?

Accepted Answer

20%

Answer

The accuracy-related penalty under IRC §6662 is 20% of the underpayment attributable to negligence, disregard of rules, or substantial understatement of income tax.

Question 3

What is the civil fraud penalty imposed under IRC §6663, and how does it differ from the accuracy-related penalty?

Accepted Answer

75% of the underpayment attributable to fraud; it requires proof of intentional wrongdoing

Answer

The civil fraud penalty is 75% of the underpayment due to fraud, and unlike the accuracy-related penalty, it requires the IRS to prove by clear and convincing evidence that the taxpayer acted with fraudulent intent.

Question 4

A taxpayer can avoid IRS penalties by demonstrating 'reasonable cause and good faith.' Which of the following is the BEST example of reasonable cause?

Accepted Answer

The taxpayer relied on erroneous advice from a competent tax professional who was given all relevant facts

Answer

Reasonable cause exists when a taxpayer exercises ordinary business care, such as relying in good faith on the advice of a qualified tax professional who was fully informed of the facts.

Question 5

What is the legal distinction between tax avoidance and tax evasion?

Accepted Answer

Tax avoidance is the legal use of tax laws to reduce liability; tax evasion is the illegal non-payment or underpayment of taxes through fraud or concealment

Answer

Tax avoidance involves legally reducing tax liability through legitimate planning, while tax evasion involves intentional illegal acts such as hiding income or falsifying records to reduce taxes owed.

(CTP) Certified Tax Professional Practice Test

(CTP) Certified Tax Professional Practice Test

CTP IRS Procedures, Audits & Controversy Resolution 3