CTRS Tax Problem Resolution Strategies 3 — Questions and Answers
Question 1: A self-employed taxpayer failed to file returns for 5 years due to severe depression. Which IRS program or provision should the tax resolution specialist explore to address the non-filing and potential penalties?
- Voluntary Disclosure Program
- First-Time Abatement combined with Reasonable Cause abatement (Correct answer)
- Offer in Compromise Doubt as to Liability
- Audit Reconsideration
Correct answer: First-Time Abatement combined with Reasonable Cause abatement
First-Time Abatement can eliminate penalties for one year, while Reasonable Cause based on mental illness can address the remaining years' failure-to-file and failure-to-pay penalties.
Question 2: Under the Trust Fund Recovery Penalty (TFRP), the IRS can assess 100% of unpaid payroll taxes against which individuals?
- Only the CEO and CFO of the company
- Any person who was responsible for collecting and paying over taxes and willfully failed to do so (Correct answer)
- Only employees who directly handled payroll
- The business owner only, regardless of their role
Correct answer: Any person who was responsible for collecting and paying over taxes and willfully failed to do so
The TFRP applies to any 'responsible person' who willfully failed to collect, account for, or pay over trust fund taxes, which can include officers, directors, employees, or others with authority.
Question 3: A taxpayer received a Notice of Deficiency (90-day letter). They disagree with the IRS findings but missed the 90-day deadline to petition Tax Court. What is their primary remaining option to dispute the liability without paying first?
- File an amended return
- Request an Audit Reconsideration (Correct answer)
- Appeal to the IRS Office of Appeals
- Request a Collection Due Process hearing
Correct answer: Request an Audit Reconsideration
Audit Reconsideration allows taxpayers who disagree with an assessment but missed the Tax Court deadline to submit new information for the IRS to review the assessment.
Question 4: The IRS is about to levy a taxpayer's wages. The taxpayer requests a Collection Due Process (CDP) hearing. What is the primary effect of filing a timely CDP request?
- It eliminates accrued interest on the balance
- It suspends the IRS's ability to levy while the hearing is pending (Correct answer)
- It automatically results in Currently Not Collectible status
- It requires the IRS to accept an Installment Agreement
Correct answer: It suspends the IRS's ability to levy while the hearing is pending
A timely CDP request suspends levy action during the CDP hearing and any subsequent Tax Court review, protecting the taxpayer from collection while the case is being reviewed.
Question 5: Which type of Offer in Compromise is appropriate when a taxpayer believes the tax assessed was incorrect or does not legally owe the amount?
- Doubt as to Collectibility
- Doubt as to Liability (Correct answer)
- Effective Tax Administration
- Collateral Agreement
Correct answer: Doubt as to Liability
Doubt as to Liability OICs are appropriate when there is a genuine dispute about whether the assessed tax is legally correct, such as when new evidence surfaces.
Question 6: A taxpayer owes $30,000 in taxes and has been on a currently-not-collectible (CNC) status for 3 years. The statute of limitations on collection is 10 years. What key risk must the tax resolution specialist monitor?
- The CNC status converts to an Installment Agreement after 3 years
- Interest and penalties continue to accrue during CNC status, increasing the total liability (Correct answer)
- The IRS can revoke CNC status only during open collection windows
- The taxpayer loses the right to appeal if CNC status exceeds 5 years
Correct answer: Interest and penalties continue to accrue during CNC status, increasing the total liability
During CNC status, interest and penalties continue to accrue on the unpaid balance, which can significantly increase the total liability even though active collection is suspended.
Question 7: A partnership owes employment taxes and the general partner wants to resolve the liability. The IRS issues a TFRP against the general partner personally. What is the relationship between the partnership's tax debt and the TFRP assessment?
- The TFRP replaces the partnership liability entirely
- Both the partnership and the responsible person are liable, but the total collected cannot exceed the original trust fund taxes (Correct answer)
- The responsible person's TFRP liability is limited to their ownership percentage
- Paying the TFRP automatically releases the partnership from the remaining liability
Correct answer: Both the partnership and the responsible person are liable, but the total collected cannot exceed the original trust fund taxes
The TFRP creates a separate but concurrent liability; however, the IRS cannot collect more than the total trust fund taxes owed, so payments by either party reduce both liabilities.
CTRS Tax Problem Resolution Strategies 3
A self-employed taxpayer failed to file returns for 5 years due to severe depression.
Which IRS program or provision should the tax resolution specialist explore to address the non-filing and potential penalties?