Chapter 8 - Ethics and Responsibilities

Question 1

What are the corporate exceptions for an underpayment penalty?

Answer 1

Won’t get a penalty if:

• Small balance: Underpayment less than $500
• Annualized income: Estimated tax payments cover the tax on the income to date
• Seasonal method: Estimated tax payments cover the tax on income to date assuming income follows the same pattern it has for the last 3 years
• Previous year: Payments equal at least 100% of the prior year tax liability

Question 2

What are the individual exceptions for an underpayment penalty?

Answer 2

Won’t get a penalty if:

• Balance due on tax return is less than $1,000
• Prior year liability: Withholdings and estimated tax payments are at least 100% of prior year tax liability. If AGI is over $150,000, it must be 110%.
• Annualized income method: Cumulative payments for each quarter cover the tax on income to date
• Current tax liability: Payments cover at least 90% of the current tax liability

Question 3

What are the penalties for late filing and late payment?

Answer 3

For late filing, 5% penalty a month up to a total of 25% of unpaid tax

For late payment, 0.5% each month after the due date up to 25% of unpaid tax

If both apply max penalty is 5% a month

Question 4

When is an individual NOT required to file a return?

Answer 4

If their gross income does NOT exceed the sum of:

• The basic standard deduction based on filing status
• The additional standard deductions based on age (>= 65)

Question 5

How much self-employment tax can an individual have before they have to file a return?

Answer 5

Can have up to $400 in net earnings before they have to file

Question 6

What letters does the IRS send to people who have their tax returns audited?

Answer 6

30 day letter – Letter than gives the taxpayer 30 days to accept or appeal proposed changes

Notice of deficiency (90 day letter) – Letter than allows the taxpayer 90 days to file a petition with the Tax court

Question 7

What is the definition of a tax preparer?

Answer 7

Anyone who prepares for compensation or employs others to prepare all or a substantial portion of any tax return

Question 8

What are some obligations the tax preparer has?

Answer 8

To sign the preparer’s declaration and provide their preparer tax identification number (PTIN)

Return must be timely filed and copy of completed return provided to taxpayer

Retain documentation of taxpayer name and ID number or return for three years

Must be reasonable inquiries about information on return

Question 9

What are examples of reportable transactions that must be disclosed on a tax return?

Answer 9

Registered tax shelters

Special arrangements that change reportable income by more than $10 million

Question 10

What are the probabilities of sucess and the significance of each level?

Answer 10

Question 11

When can a practitioner charge a contingent fee?

Answer 11

• For an admin examination or a challenge to an original return, an amended return, or a claim for refund
• Services related to a claim for credit for refund in connection with interest or penalties charged
• Services related to a judicial proceeding under the IRC