CTRS Tax Law and Regulations 3 — Questions and Answers
Question 1: An Offer in Compromise based on 'Effective Tax Administration' (ETA) is most appropriate when:
- The taxpayer can pay the full liability but doing so would create economic hardship (Correct answer)
- The taxpayer disputes the underlying tax liability
- The IRS made an error in computing the tax owed
- The taxpayer has no assets and no income
Correct answer: The taxpayer can pay the full liability but doing so would create economic hardship
ETA offers are appropriate when a taxpayer can technically pay in full but collection would create economic hardship or be inequitable given exceptional circumstances.
Question 2: What is the primary purpose of IRS Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals)?
- To request penalty abatement
- To document a taxpayer's financial condition for collection decisions (Correct answer)
- To report foreign bank accounts
- To elect installment sale treatment
Correct answer: To document a taxpayer's financial condition for collection decisions
Form 433-A collects detailed financial information about a taxpayer's income, expenses, assets, and liabilities so the IRS can determine the appropriate collection resolution.
Question 3: Under IRC Section 7122, the IRS may reject an Offer in Compromise and return the offer fee under which circumstance?
- The offered amount is less than the Reasonable Collection Potential (RCP)
- The taxpayer is in an open bankruptcy proceeding (Correct answer)
- The taxpayer has unfiled tax returns
- The offer was submitted without Form 656
Correct answer: The taxpayer is in an open bankruptcy proceeding
An open bankruptcy proceeding is a statutory bar that results in the return of the offer and fee, because the bankruptcy court controls the taxpayer's assets during that time.
Question 4: The Trust Fund Recovery Penalty (TFRP) under IRC Section 6672 can be assessed against which individuals?
- Only the corporation's CEO
- Any responsible person who willfully failed to collect or pay over trust fund taxes (Correct answer)
- Only the company's accountant
- Only shareholders with more than 50% ownership
Correct answer: Any responsible person who willfully failed to collect or pay over trust fund taxes
The TFRP applies to any 'responsible person' — determined by authority, not title — who willfully failed to collect, account for, or pay over withheld employment taxes.
Question 5: What is the Collection Due Process (CDP) hearing primarily designed to allow taxpayers to do?
- Dispute the underlying tax liability in all cases
- Challenge IRS collection actions and propose collection alternatives before a levy takes effect (Correct answer)
- Request a refund of taxes already paid
- Appeal tax audit findings to the Tax Court
Correct answer: Challenge IRS collection actions and propose collection alternatives before a levy takes effect
A CDP hearing under IRC Sections 6320 and 6330 gives taxpayers the right to challenge proposed levies or filed liens and propose alternatives such as installment agreements or OICs.
Question 6: Under IRC Section 6404, the IRS is required to abate interest that accrued due solely to an IRS error or delay in certain circumstances. What is the minimum period of IRS inaction that typically triggers this abatement?
- 30 days
- 60 days (Correct answer)
- 1 year
- 3 years
Correct answer: 60 days
IRC Section 6404(e) allows interest abatement when an IRS error or delay of at least 60 days caused unreasonable interest to accrue on a deficiency.
Question 7: Which IRS notice formally informs a taxpayer that the IRS intends to file a federal tax lien and provides CDP rights under IRC Section 6320?
- CP14
- CP2000
- Letter 3172 (Correct answer)
- Letter 1058
Correct answer: Letter 3172
Letter 3172 (Notice of Federal Tax Lien Filing and Your Right to a Hearing) is the notice that triggers the taxpayer's right to a CDP hearing regarding a filed lien.
CTRS Tax Law and Regulations 3
An Offer in Compromise based on 'Effective Tax Administration' (ETA) is most appropriate when: