Student name:__________

TRUE/FALSE - Write 'T' if the statement is true and 'F'

if the statement is false.
1) Corporations are required to file a tax return annually
regardless of their taxable income.

⊚ true
⊚ false

2) The tax return filing requirements for individual

taxpayers only depend on the taxpayer's filing status.

⊚ true
⊚ false

3) If a taxpayer is due a refund, she does not have to file

a tax return.

⊚ true
⊚ false

4) If April 15 th falls on a Saturday, the due date for (assuming it is not a

individual tax returns will be on Monday, April 17 th holiday).

⊚ true
⊚ false

5) If an individual taxpayer is unable to file a tax return nine-month extension to

by its original due date, the taxpayer can request an automatic file the return.

Version 1 1
 ⊚ true ⊚ false

6) An extension to file a tax return does not extend the

due date for tax payments.

⊚ true
⊚ false

7) The statute of limitations for IRS assessment generally

ends four years after the date a tax return is filed.

⊚ true
⊚ false

8) For fraudulent tax returns, the statute of limitations for

IRS assessment is 10 years.

⊚ true
⊚ false

9) The IRS DIF system checks each tax return for

mathematical mistakes and errors.

⊚ true
⊚ false

Version 1 2
10) Joel reported a high amount of charitable contributions
as a deduction on his individual tax return relative to
taxpayers with similar income levels. The information
matching program is the IRS program most likely to identify
Joel's tax return for audit.

⊚ true
⊚ false

11) Office examinations are the most common type of IRS

audit.

⊚ true
⊚ false

12) The three basic types of IRS examinations are

computer exams, office exams, and business exams.

⊚ true
⊚ false

13) The "30-day" letter gives the taxpayer the opportunity

to request an appeals conference or agree to a proposed IRS
adjustment on the taxpayer's income tax return.

⊚ true
⊚ false

Version 1 3
14) The "90-day" letter gives the taxpayer the opportunity
to pay a proposed IRS tax adjustment or file a petition in the
U.S. District Court to contest the adjustment and hear the
case.

⊚ true
⊚ false

15) If a taxpayer has little cash and a very technical tax

case about which she feels very strongly that the tax rules are
"on her side," she should prefer to have her case tried in the
U.S. Tax Court.

⊚ true
⊚ false

16) In researching a tax issue, Eric finds that the U.S.

Circuit Court of Appeals for the Federal Circuit previously
has ruled in favor of his tax position, whereas the 11 th Circuit
(Eric's circuit) previously has ruled against his tax position. If
Eric is contemplating litigating his tax position with the IRS,
he should prefer to have his case first tried by the U.S. Tax
Court.

⊚ true
⊚ false

17) If a taxpayer loses a case at the circuit court level, he

is granted an automatic appeal hearing with the Supreme
Court.

Version 1 4
 ⊚ true ⊚ false

18) Secondary authorities are official sources of the tax

law with a lesser "weight" than primary authorities.

⊚ true
⊚ false

19) Revenue rulings and revenue procedures are examples

of primary authorities.

⊚ true
⊚ false

20) The Internal Revenue Code and tax treaties are

examples of statutory authorities.

⊚ true
⊚ false

21) Because the U.S. District Court hears a broader set of

cases, decisions by the U.S. District Court may be considered
to have more authoritative weight than those by the U.S.
Court of Federal Claims.

⊚ true
⊚ false

Version 1 5
22) Temporary regulations have more authoritative weight
than revenue rulings.

⊚ true
⊚ false

23) Proposed and temporary regulations have the same

authoritative weight.

⊚ true
⊚ false

24) An acquiescence indicates that the IRS lost a court

case and that it has decided to follow the court's ruling in the
future.

⊚ true
⊚ false

25) The Internal Revenue Code of 1986 is the name of the

current income tax code of the United States of America.

⊚ true
⊚ false

26) As required by the Constitution, all tax bills are

supposed to originate in the House of Representatives.

Version 1 6
 ⊚ true ⊚ false

27) The Senate Ways and Means Committee is in charge

of drafting tax bills in the U.S. Senate.

⊚ true
⊚ false

28) Closed facts are especially conducive to tax planning.

⊚ true
⊚ false

29) Of the two basic types of tax services, beginning tax

researchers often prefer topical tax services.

⊚ true
⊚ false

30) In researching a question of fact, the researcher should

focus her efforts on identifying authorities with fact patterns
similar to her client's facts.

⊚ true
⊚ false

Version 1 7
31) Under the Statements on Standards for Tax Services, a
CPA may recommend a tax return position if the position is
frivolous and the position is not disclosed on the tax return.

⊚ true
⊚ false

32) In general, a CPA will satisfy his professional complies with the
responsibilities under the Statements on Standards for Tax standards imposed by the
Services when recommending a tax return position if he applicable tax authority.

⊚ true
⊚ false

33) Under the tax law, taxpayers may be subject to both

civil and criminal penalties for underpaying their tax liability
(e.g., due to fraud).

⊚ true
⊚ false

34) A taxpayer can avoid an underpayment penalty if there

is substantial authority that supports her tax return position.

⊚ true
⊚ false

Version 1 8
35) If the IRS assesses additional tax on a tax return upon
audit, a taxpayer may be subject to interest and penalties on
the underpayment.

⊚ true
⊚ false

MULTIPLE CHOICE - Choose the one alternative that whether a taxpayer is

best completes the statement or answers the question. required to file a tax
36) Which of the following is not a factor that determines return?

D) Taxpayer's
A) Filing status age
B) Taxpayer's gross income E) None of the
C) Taxpayer's employment choices are correct.

37) If Paula requests an extension to file her individual tax without a failure-to-file
return in a timely manner, the latest she could file her return penalty is:

D) November 15
A) September 15 th. th
.
B) October 15 th. E) None of the
C) August 15 th. choices are correct.

38) If Lindley requests an extension to file her individual

tax return in a timely manner, the latest she could pay her tax
due without penalty is:

C) August 15 th.
A) April 15 th. D) November 15
B) October 15 th. th
.

Version 1 9
 E) None of the choices are correct.

Version 1 10
39) Corporations are required to file a tax return only if
their taxable income is greater than:

E) None of the
A) $0. choices are correct.
B) $1,000. Corporations are always
C) $600. required to file a tax return.
D) $750.

th
40) Generally, if April 15 falls on a Saturday, individual
tax returns will be due on:

D) April 17 th.
th
A) April 14 . E) None of the
th
B) April 15 . choices are correct.
th
C) April 16 .

41) Dominic earned $1,500 this year, and his employer zero tax liability this year,
withheld $200 of federal income tax from his salary. he:
Assuming that Dominic is single, 30 years old, and will have

D) is not required
A) is required to file a tax return. to file a tax return and
B) is not required to file a tax return but should file a should not file a return.
return anyway. E) None of the
C) is required to file a tax return but should not file choices are correct.
because he owes no tax.

42) Greg earned $25,500 this year and had $1,500 of of $1,375 (and thus will
federal income taxes withheld from his salary. Assuming that receive a $125 refund), he:
Greg is single, 25 years old, and will have a total tax liability

because he owes no tax.

A) is required to file a tax return.
B) is not required to file a tax return but should file a
return anyway.
C) is required to file a tax return but should not file

Version 1 11
 D) is not required to file a tax return and should not
file a return.
E) None of the choices are correct.

Version 1 12
43) Bill filed his 2020 tax return on March 15 th, 2021.
The statute of limitations for IRS assessment on Bill's 2020
tax return should end:
th
D) April 15 ,
th
A) March 15 , 2023. 2024.
B) April 15 th, 2023. E) None of the
C) March 15 th, 2024. choices are correct.

44) Henry filed his 2020 tax return on May 15 th, 2021.
The statute of limitations for IRS assessment on Henry's 2020
tax return should end:
th
D) April 15 ,
th
A) May 15 , 2023. 2024.
B) April 15 th, 2023. E) None of the
C) May 15 th, 2024. choices are correct.

45) Allen filed his 2020 tax return on May 15 th, 2021,
and underreported his gross income by 30 percent. Assuming
Allen's underreporting is not due to fraud, the statute of
limitations for IRS assessment on Allen's 2020 tax return
should end:

th
D) April 15 ,
th
A) May 15 , 2023. 2024.
B) April 15 th, 2023. E) None of the
C) May 15 th, 2024. choices are correct.

46) Andy filed a

Version 1 13
fraudulent 2020 tax return on May 1, 2021. The statute of
limitations for IRS assessment on Andy's 2020 tax return
should end:
th
D) April 15 ,
st
A) May 1 , 2024. 2027.
B) April 15 th, 2024. E) None of the
C) May 1 st, 2027. choices are correct.

47) Martin has never filed a 2020 tax return despite limitations expire for
earning approximately $30,000 providing landscaping work Martin's 2020 tax return?
in the community. In what tax year, will the statute of

D) 2028
A) 2023 E) None of the
B) 2024 choices are correct.
C) 2027

48) Which of the following is not a common method that

the IRS uses to select returns for audit?

D) Document
A) DIF system perfection
B) Tax Select system E) None of the
C) Information matching choices are correct.

49) Leslie made a mathematical mistake in computing her

tax liability. Which audit program will likely catch Leslie's
mistake?

D) Information
A) DIF system
B) Mathematical correction
C) Document perfection

Version 1 14
matching

Version 1 15
50) Tyrone claimed a large amount of charitable audit program likely
contributions as a tax deduction relative to taxpayers with identified Tyrone's tax
similar levels of income. If Tyrone's tax return is chosen for return for audit?
audit because of his large charitable contributions, which

D) Information
A) DIF system matching
B) Deduction Detective E) None of the
C) Document perfection choices are correct.

51) Ramon's tax return was randomly selected for audit.

Which IRS program likely selected Ramon's return for audit?

D) Information
A) DIF system matching
B) National Research Program E) None of the
C) Document perfection choices are correct.

52) Which of the following audits is the most common

and typically less comprehensive?

D) Field
A) Correspondence E) None of the
B) Random choices are correct.
C) Office

53) Which of the following audits is the least common,

broadest in scope, and typically most complex?

D) Field
A) Correspondence E) None of the
B) Targeted choices are correct.
C) Office

54) Dan received a

Version 1 16
letter from the IRS that gave him the choice of (1) requesting proposed tax adjustment.
a conference with an appeals officer or (2) agreeing to a Dan received the:

D) Tax
A) 30-day letter. adjustment letter.
B) 90-day letter. E) None of the
C) Appeals letter. choices are correct.

55) Basu received a letter from the IRS that gave him the petition with the U.S. Tax
choice of (1) paying a proposed deficiency or (2) filing a Court. Basu received the:

D) Tax
A) 30-day letter. adjustment letter.
B) 90-day letter. E) None of the
C) Appeals letter. choices are correct.

56) Which of the following courts is the only court that

provides for a jury trial?

D) U.S. Circuit
A) Tax Court Court of Appeals
B) U.S. Court of Federal Claims E) None of the
C) U.S. District Court choices are correct.

57) Lavonda discovered that the 5 th Circuit (where Lavonda should choose
Lavonda resides) has recently issued a favorable opinion with which of the following trial
respect to an issue that she is going to litigate with the IRS. courts to hear her case?

E) Tax Court or
A) Tax Court only the U.S. Court of Federal
B) U.S. Court of Federal Claims only Claims
C) U.S. District Court only
D) Tax Court or the U.S. District Court

58) Lavonda

Version 1 17
discovered that the U.S. Circuit Court of Appeals for the Lavonda should choose
Federal Circuit has recently issued a favorable opinion with which of the following trial
respect to an issue that she is going to litigate with the IRS. courts to hear her case?

E) Tax Court or
A) Tax Court only the U.S. Court of Federal
B) U.S. Court of Federal Claims only Claims
C) U.S. District Court only
D) Tax Court or the U.S. District Court

59) Rowanda could not settle her tax dispute with the IRS deficiency, Rowanda
at the appeals conference. If she wants to litigate the issue but should litigate in the:
does not have sufficient funds to pay the proposed tax

D) Tax Court
A) U.S. District Court E) None of the
B) U.S. Circuit Court of Appeals choices are correct.
C) U.S. Court of Federal Claims

60) Which of the following is not considered a primary

authority?

D) Tax service
A) Tax Court case E) None of the
B) Treasury Regulation choices are correct.
C) Revenue ruling

61) Which of the following is not considered a secondary

authority?

D) Tax service
A) Textbook E) None of the
B) Private letter ruling choices are correct.
C) Tax article

Version 1 18
 D) Tax service
A) Textbook E) Tax article
B) Private letter ruling
C) Revenue ruling

63) Which of the following has the highest authoritative

weight?

D) Action on
A) Legislative regulation decision
B) Private letter ruling E) Revenue
C) Revenue ruling procedure

64) Josephine is considering taking a six-month rotation in

Paris for her job. Which type of authority may be especially
helpful in determining the tax consequences of Josephine's
job in Paris?

D) Regulation
A) Determination letter E) Revenue
B) Private letter ruling procedure
C) Tax treaty

65) Generally, code sections are arranged (grouped

together):

D) by length.
A) chronologically. E) None of the
B) by topic. choices are correct.
C) randomly.

66) Which of the following has the lowest authoritative

weight?

A) Legislative

Version 1 19
regulation E) Revenue
B) Private letter ruling procedure
C) Revenue ruling
D) Interpretative regulation

67) Which judicial doctrine means that a court will rule courts with appellate
consistently with its previous rulings and the rulings of higher jurisdiction?

D) Stare decisis
A) Judicial hierarchy E) None of the
B) The Goldman rule choices are correct.
C) Judicial consistency

68) The regulation with the lowest authoritative weight is

the:

D) Legislative
A) Procedural regulation. regulation.
B) Interpretative regulation. E) None of the
C) Proposed regulation. choices are correct.

69) Princess, who resides in the 2 nd Circuit, recently prefer to have issued the
found a circuit court case that is favorable to her income tax opinion?
research question. Which of the following circuits would she

D) 2 nd Circuit or
A) 2 nd Circuit the Federal Circuit
B) Federal Circuit E) None of the
C) 1 st Circuit choices are correct.

70) Jaime recently found a "favorable" trial- level court

opinion directly on point for her tax question. Which trial-
level court would she prefer to have issued the opinion?

A) Tax Court

Version 1 20
 D) Divorce Court
B) District Court E) None of the
C) Circuit Court choices are correct.

71) Which of the following committees typically initiates

tax legislation?

D) Senate Tax
A) House Ways and Means Committee Committee
B) Joint Conference Committee E) None of the
C) Senate Finance Committee choices are correct.

72) Edie would like to better understand a new code

section enacted four weeks ago. Which of the following
authorities will help Edie understand the newly enacted code
section?

D) IRS revenue
A) IRS regulations rulings
B) U.S. Tax Court cases E) None of the
C) Committee reports choices are correct.

73) If the president vetoes tax legislation, Congress:

D) can override
A) cannot override the president's veto. the president's veto with a
B) can override the president's veto with a 50 75 percent positive vote in
percent positive vote in the House and Senate. the House and Senate.
C) can override the president's veto with a two-thirds E) None of the
positive vote in the House and Senate. choices are correct.

74) Jeremy has a new

client. He has identified a

Version 1 21
research question that relates to a transaction that the client
completed several months ago. This type of research question
will primarily involve:

D) closed facts.
A) open facts. E) None of the
B) new facts. choices are correct.
C) old facts.

75) In a planning context,

D) open facts are

A) closed facts are preferred to open facts. preferred to closed facts.
B) new facts are preferred to old facts. E) None of the
C) old facts are preferred to new facts. choices are correct.

76) Which of the following types of tax services is

arranged by code section?

D) Topical tax
A) Legal tax service service
B) Annotated tax service E) None of the
C) Professional tax service choices are correct.

77) Which of the following is not a common tool used in

conducting tax research?

D) Keyword
A) Citator search
B) Annotated tax service E) None of the
C) Topical tax service choices are correct.

Version 1 22
 D) State board of
A) AICPA Code of Professional Conduct accountancy statutes
B) Statements on Standards for Tax Services E) None of the
C) Circular 230 choices are correct.

79) According to Statements on Standards for Tax

Services No. 1, a tax practitioner can recommend a tax return
position:

D) only if the
A) if the position is frivolous and disclosed on the position meets the "clear
tax return. and convincing evidence"
B) if the position complies with the standards standard.
imposed by the applicable tax authority. E) None of the
C) only if the position meets the "more likely than choices are correct.
not" standard.

80) Circular 230 was issued by:

D) IRS.
A) AICPA. E) None of the
B) State boards of accountancy. choices are correct.
C) American Bar Association.

81) Which of the following is a false statement? A

taxpayer filing a fraudulent tax return:

the fraudulent tax return.

A) is potentially subject to criminal penalties. E) None of the
B) is potentially subject to civil penalties. choices are correct.
C) is potentially subject to fines and a prison
sentence.
D) will have an unlimited statute of limitations for

Version 1 23
 E) None of the
A) Failure to file a tax return choices are correct.
B) Failure to pay tax owed
C) Fraud
D) Failure to make estimated tax payments

83) A taxpayer can avoid a substantial understatement of

tax penalty:

D) if the position
A) if the position is frivolous and disclosed on the has a reasonable basis and
tax return. is not disclosed on the tax
B) if the position has a realistic possibility of being return.
sustained by the IRS or courts. E) None of the
C) if there is substantial authority to support the choices are correct.
position.

84) A taxpayer can avoid a substantial understatement of

tax penalty:

D) if the position
A) if the position is frivolous and disclosed on the has a reasonable basis and
tax return. is disclosed on the tax
B) if the position has a realistic possibility of being return.
sustained by the IRS or courts. E) None of the
C) if the position is not frivolous and disclosed on choices are correct.
the tax return.

85) Which types of penalties are only imposed after

normal due process including a trial?

D) Failure-to-file
A) Criminal penalties penalty
B) Civil penalties E) None of the
C) Criminal and civil penalties choices are correct.

Version 1 24
86) A tax practitioner can avoid IRS penalty relating to a tax return position:

D) if the position
A) if the position is frivolous and disclosed on the has a reasonable basis and
tax return. is not disclosed on the tax
B) if the position has a realistic possibility of being return.
sustained by the IRS or courts. E) None of the
C) if there is substantial authority to support the choices are correct.
position.

87) A tax practitioner can avoid IRS penalty relating to a

tax return position:

D) if the position
A) only if the position has a more likely than not has a reasonable basis and
chance of being sustained by the IRS or courts. is disclosed on the tax
B) if the position has a realistic possibility of being return.
sustained by the IRS or courts. E) None of the
C) if there is not substantial authority to support the choices are correct.
position.

ESSAY. Write your answer in the space provided or on a consequences if Tina does
separate sheet of paper. not file or pay her tax in a
88) Tina has a very complex tax return and it looks like timely manner? Be
she will not be able to file her tax return by its due date. When specific.
is her tax return due? What are Tina's options for paying her
tax due and filing her tax return this year? What are the

89) For the following

taxpayers, indicate whether

Version 1 25
the taxpayer should file a tax return and why. taxes withheld from his
paycheck. He will have no
a. Robert earned $50,000 this year as a staff accountant. His federal tax liability this
estimated tax liability is $4,500, and he expects to receive a year.
$500 tax refund. d. Startup Corporation had
b. Amy earned $4,000 this year working part-time. She will a $50,000 loss this year.
have no federal tax liability and has not made any federal tax e. The Walker Family
payments. Trust earned $500 of gross
c. Ty earned $2,500 this summer and had $200 of federal income this year.

90) For the 2020 tax returns, indicate when the statute of return.
limitations expires and why. d. Jerry filed his tax return
on May 22, 2021, but has
a. Phoenix filed his tax return on February 28, 2021. accidentally underreported
b. Jill and Randy filed their tax return on August 16, 2021. his taxable income by 30
c. Although required to file, Catherine chose not to file a tax percent.
return this year because she was expecting a tax refund and
could not pull together all the information needed to file the

91) For the 2020 tax

returns, indicate when the
statute of limitations
expires and why.

a. Simon filed his tax

return on April 10, 2021.
b. Billy and Barbara filed
their tax returns late on
December 1, 2021.

Version 1 26
 c. Pearson earns a living through various illegal activities. He accidentally underreported
filed his tax return on March 14, 2021, but did not report his his gross income by 20
illegal income on his tax return. percent.
d. Luther filed his tax return on July 17, 2021, but has

92) For the following tax returns, identify the method the d. Paul and Melissa
IRS likely used to select the return for audit. recently went through a
very nasty divorce. One of
a. Dan made a mistake in adding his income on his tax return. the issues was Paul's less
than forthright accounting
b. Juanita failed to report her salary from her second job on of his income in
her tax return. determining the
c. Michael and Venita deducted a relatively large amount of appropriate level of
travel expenses on their tax return for their business. The alimony.
travel expense is large relative to other taxpayers in similar
businesses with similar levels of income.

93) For the following

tax returns, identify which
of the three audit types will
most likely be utilized.

a. The IRS selected Don's

return for audit because of
his high itemized
deductions. The IRS would
like documentation of
these deductions.
b. Large Public

Version 1 27
Corporation is a very large publicly traded corporation. It is because of some of their
involved in many complex transactions that have significant investment sales. They
tax ramifications. would like a better
c. George and Barbara operate a small business out of their understanding of the
home. The IRS has identified a couple of issues that may transactions and parties
relate to their business. involved.
d. The IRS selected Bill and Hillary's tax return for review

94) The IRS has recently completed its audit of Lorene's the post-audit process for
corporation. As a tax novice, she has very little understanding Lorene and identify her
regarding the audit process and what happens next. Describe options.

95) Mel recently received a 30-day letter from the IRS. choices with respect to the
Although his tax return being audited has several potential 30-day letter and what
large issues (potential tax consequences of $70,000 − factors should influence
$80,000), the IRS agent auditing his return only identified one his decisions?
item that will require a modest adjustment of $10,000. Mel
feels strongly that the $10,000 adjustment would not hold up
in court and was surprised that the IRS agent did not identify
some of the other potential larger issues. What are Mel's

Version 1 28
96) Kim has decided to litigate a tax issue with the IRS.
Describe the trial-level courts that Kim may use to litigate the
case.

97) For the following taxpayers, please recommend the that Hank plans to litigate
most advantageous trial-level court(s) to litigate a tax issue with the IRS.
with the IRS. d. The 7 th Circuit (where
Elizabeth resides) recently
a. Joe is litigating a tax issue with the IRS that is considered a issued an opinion that is
question of fact (i.e., the answers depend on the facts of the very favorable to the issue
case). There is not a lot of authority on point for this case, but that Elizabeth plans to
Joe has a very appealing story to justify his position that is litigate with the IRS.
likely to be viewed sympathetically by his peers.
b. The Circuit Court of Appeals for the Federal Circuit
recently issued an opinion that is very favorable to the issue
that Jesse plans to litigate with the IRS.
c. The Circuit Court of Appeals for the Federal Circuit
recently issued an opinion that is not favorable to the issue

98) A client has recently learned of a proposed tax bill that

would increase the tax rates on investment gains by 5 percent.
The president does not support this increase. Please describe
for your client the process by which new tax legislation is
created and how the president's disapproval may influence the
enactment of the bill.

Version 1 29
99) Chris and Chuck were recently debating whether the
Internal Revenue Code is "logical." Chris offers that she has
briefly reviewed the Code and could hardly understand its
organizational structure, if there is one. Please describe the
basic organization of the Code and how understanding its
organization may be especially beneficial to the tax
researcher.

100) Carey was researching a tax issue and located what authority that carries a lot
appears to be a favorable IRS regulation. He knows that of weight for the long
regulations serve different purposes and are issued in different term? How could Carey
forms. Which purpose and which form of regulation would check the status of this
provide Carey the most confidence that he has found an regulation?

101) Campbell was researching a tax issue and found a research process? If so,
favorable tax court opinion and an IRC Code Section that why? If not, what must she
appear to answer the question. Is she finished with the do?

Version 1 30
102) Roddy was researching an issue and found a favorable would it affect Roddy's
tax court decision that addresses his issue. He also determined reliance on the court case?
that there was a nonacquiescence for the case. Who issued the
nonacquiescence? What is it? What does it mean and how

103) Raul was researching an issue and found two tax court
decisions issued within six months of each other, one for a
taxpayer residing in California and the other for a taxpayer
residing in New York, whose rulings were inconsistent. Raul
knows that the federal tax law does not differ by state and the
issue was exactly the same in both cases. Raul is confused
because he thought that a basic judicial doctrine was that a
court is supposed to rule consistently. Name and describe this
judicial doctrine that requires judicial consistency and discuss
why the tax court may have intentionally ruled inconsistently
in this example.

104) Rebecca is at a
loss. A new tax law was

Version 1 31
recently passed, and she needs to get a better understanding of helpful to Rebecca and
why the tax law was passed and the intent of the law from an why she can't find many
official authority. Describe what authorities may be especially authorities that discuss the
new law.

105) Lakeisha, a first-year staff accountant, was researching Can Lakeisha base her
a tax issue and found what appears to be the answer to her research conclusion on the
question in her introductory tax textbook that she bought three textbook or similar
years ago. She is thrilled because she thought it would take authorities? Any
much longer to find her answer. What type of authority is the suggestions for Lakeisha?
textbook? What are other examples of this type of authority?

106) Kodak is a beginning tax researcher. He knows that

the first step of the research process is to get an understanding
of the facts surrounding the transaction being researched.
Describe the two basic types of facts, the sources of facts for a
research project, and any advice that may help Kodak.

Version 1 32
Version 1 33
107) Caitlin is a tax manager for an accounting firm, and
Duff is a first-year staff accountant. Describe the differences
in the manner in which Caitlin and Duff may identify research
issues and in general how one may identify research
questions.

108) Lindy, a tax intern, is beginning her first tax research research tools available to
case for her employer. Her manager has given her a basic help a tax researcher locate
understanding of the facts and has identified the basic relevant authority and
research question. Lindy is now ready to begin searching for identify which type may be
relevant tax authorities. Describe the different types of especially useful for Lindy.

109) Hong, an introductory tax student, is beginning his

first research project. He has a complete understanding of the
relevant facts for his project and has identified the initial
research questions. He is now ready to begin using a tax
service to identify relevant authorities. What are some
suggestions for him on how to use tax services to identify
relevant authorities?

Version 1 34
110) Mary Ann is working on a pretty big research project. between the two types of
Her manager has alerted her to the possibility that some of her questions and how this
research questions are likely to be questions of fact, whereas would influence her
others are likely to be questions of law. Explain the difference research.

111) Nolene suspects that one of her new clients may be underreporting income?
intentionally underreporting his taxable income. What are the Any advice for Nolene?
potential ramifications to her client for this behavior? What
are the consequences to Nolene if she assists the client in

112) Houston has found conflicting authorities that address this position on its tax
a research question for one of his clients. The majority of the return, will Houston be
authorities provide a favorable answer for his client. subject to penalty? Will the
Nonetheless, there are several authorities that provide an client potentially be
unfavorable answer. Houston estimates that if the client takes subject to penalty?
the more favorable position on its tax return there is
approximately a 60 percent chance that the position will be
sustained upon audit or judicial proceeding. If the client takes

Version 1 35
Version 1 36
Answer Key

Test name: ch2

Version 1 37
1) TRUE
2) FALSE
3) FALSE
4) TRUE
5) FALSE
6) TRUE
7) FALSE
8) FALSE
9) FALSE
10) FALSE
11) FALSE
12) FALSE
13) TRUE
14) FALSE
15) TRUE
16) FALSE
17) FALSE
18) FALSE
19) TRUE
20) TRUE
21) FALSE

Version 1 38
22) TRUE
23) FALSE
24) TRUE
25) TRUE
26) TRUE
27) FALSE
28) FALSE
29) TRUE
30) TRUE
31) FALSE
32) TRUE
33) TRUE
34) TRUE
35) TRUE
36) C
37) B
38) A
39) E
40) D
41) B
42) A

Version 1 39
43) D
44) C
45) E
46) E
47) E
48) B
49) C
50) A
51) B
52) A
53) D
54) A
55) B
56) C
57) D
58) B
59) D
60) D
61) B
62) C
63) A

Version 1 40
64) C
65) B
66) B
67) D
68) C
69) D
70) A
71) A
72) C
73) C
74) D
75) D
76) B
77) E
78) E
79) B
80) D
81) E
82) E
83) C
84) D

Version 1 41
85) A
86) C
87) D
88) Tina's tax return is due on April 15th. Tina rate for tax
may request an automatic six-month extension underpayments for
to file her tax return (i.e., until October 15th). individuals equals
Extensions allow the taxpayer to delay filing a the federal short-
tax return but do not extend the due date for term rate plus three
tax payments. If a taxpayer fails to pay the percentage points.
entire balance of tax owed by the original due Penalties are also
date of the tax return, the IRS charges the imposed when a
taxpayer interest on the underpayment from taxpayer fails to file
the due date of the return until the taxpayer a tax return. Also,
pays the tax. The interest rate charged depends there is no statute of
on taxpayer type (e.g., individual versus limitations if Tina
corporation) and varies quarterly with the fails to file her
federal short-term interest rate. The interest return.

89) (a) Because his gross income exceeds the all corporations are
applicable gross income threshold, Robert is
required to file a tax return. (b) Amy is not
required to file a tax return because her
income is below the applicable gross income
threshold. (c) Ty is not required to file a tax
return because his gross income is below the
applicable gross income threshold. However,
he should file a tax return to receive a refund
of the $200 of taxes withheld. (d) Startup
Corporation is required to file a tax return as

Version 1 42
required to file an annual tax return regardless
of their profitability. (e) Because the trust's
income is below the applicable threshold, the
Walker Family Trust is not required to file a
tax return this year.

Version 1 43
90) (a) April 15, 2024. The statute of 2020 tax return. (d)
limitations expires three years from the later May 22, 2027.
of the original due date of the return or the Because Jerry
date the return was filed. (b) August 16, 2024. underreported his
The statute of limitations expires three years gross income by 30
from the later of the original due date of the percent, the statute
return or the date the return was filed. (c) of limitations is
Because Catherine failed to file a tax return, extended to six
the statute of limitations will not lapse for her years.

91) (a) April 15, 2024. The statute of income by only 20

limitations expires three years from the later percent, the statute
of the original due date of the return or the of limitations will
date the return was filed. (b) December 1, expire three years
2024. The statute of limitations expires three from the date the
years from the later of the original due date of return is filed (i.e.,
the return or the date the return was filed. (c) the statute of
Because Pearson filed a fraudulent tax return, limitations is not
the statute of limitations will not lapse for his extended to six
2020 tax return. (d) July 17, 2024. Because years).
Luther accidentally underreported his gross
92) (a) Document perfection (b) Information
matching (c) DIF system (d) Spousal tip.

93) (a) Correspondence examination (b) Field office examination.

examination (c) Office examination (d)
Correspondence examination and possibly an
94) After the examination, the IRS agent any) to the taxpayer
provides a list of proposed adjustments (if for review. If the

Version 1 44
taxpayer agrees to the proposed changes, the would prefer that
taxpayer signs an agreement form (Form 870) the case be heard in
and pays the additional tax owed (or receives the local U.S.
the proposed refund). If the taxpayer disputes District Court or the
the proposed changes, the taxpayer will U.S. Court of
receive a "30-day letter," which instructs the Federal Claims, the
taxpayer that he or she has 30 days to either taxpayer must pay
(1) request a conference with an appeals the tax deficiency
officer, who is independent and resides in a first and then sue
separate IRS division from the examining the IRS for refund
agent or (2) agree to the proposed adjustment. in the court.
An appeals officer would consider the merits
of the unresolved issues as well as the
"hazards of litigation"—that is, the probability
that the IRS will lose if the case is brought to
court and the resulting costs of a taxpayer-
favorable ruling. If the taxpayer chooses the
appeals conference and reaches an agreement
with the IRS there, the taxpayer can then sign
the Form 870. If the taxpayer and IRS still do
not agree on the proposed adjustment at the
appeals conference, or the taxpayer chooses
not to request an appeals conference, the IRS
will then send the taxpayer a "90-day letter."
The 90-day letter (also known as a statutory
notice of deficiency) explains that the
taxpayer has 90 days to either (1) pay the
proposed deficiency or (2) file a petition in the
U.S. Tax Court to hear the case. If the
taxpayer would like to litigate the case but

Version 1 45
95) The "30-day letter" instructs the taxpayer continues without
that he or she has 30 days to either (1) request resolution, the more
a conference with an appeals officer, who is interest will accrue
independent and resides in a separate IRS on the assessment.
division from the examining agent or (2) agree In Mel's case, the
to the proposed adjustment. An appeals officer potential risk of the
would consider the merits of the unresolved appeals officer
issues as well as the "hazards of litigation"— raising additional
that is, the probability that the IRS will lose if questions probably
the case is brought to court and the resulting outweighs the
costs of a taxpayer-favorable ruling. Thus, the potential benefits of
appeals officer has a bit more latitude to settle appeal. Thus, it may
cases than examining agents. Because the be better for him to
appeals division is independent, it may be forgo the appeals
possible for the taxpayer to receive a more conference and
favorable resolution as the appeals officer is either agree to the
less emotionally invested in the audit. On the proposed
downside, the appeals officer may raise new adjustment or
issues, and thus, increase the taxpayer's tax litigate the case.
exposure. In addition, the longer the dispute
96) There are three trial-level courts that hear less); the U.S. Tax
federal tax cases: the U.S. Tax Court, the U.S. Court judges are tax
District Court, and the U.S. Court of Federal experts, whereas the
Claims. The U.S. District Court is the only U.S. District Court
court that provides for a jury trial; the U.S. and U.S. Court of
Tax Court is the only court that allows tax Federal Claims
cases to be heard before the taxpayer pays the judges are
disputed liability and is the only court with a generalists. Both the
small claims division (hearing claims U.S. Tax Court and
involving disputed liabilities of $50,000 or local U.S. District

Version 1 46
Court cases appeal to the specific circuit court Federal Circuit.
based on the taxpayer's residence. In contrast,
all U.S. Court of Federal Claims cases appeal
to the U.S. Circuit Court of Appeals for the
97) (a) U.S. District Court because it is the Federal Circuit. (d)
only court that offers a jury trial. (b) The U.S. The U.S. Tax Court
Court of Federal Claims because its appellate or the U.S. District
court is the Circuit Court of Appeals for the Court because they
Federal Circuit. (c) The U.S. Tax Court or the will appeal to the 7th
U.S. District Court because they will not Circuit.
appeal to the Circuit Court of Appeals for the
98) As required by the U.S. Constitution the Senate for
(Article 1, Section 7), "All bills for raising debate and vote.
revenue shall originate in the House of Unlike the process
Representatives." The Senate may propose tax in the House of
legislation, but the first to formally consider a Representatives,
bill will be the House, typically within its Senators may
Ways and Means Committee. After the modify the
committee debates the proposed legislation proposed legislation
and drafts a bill, the bill is sent to the House of during their debate.
Representatives for debate and ultimately a If the Senate passes
vote (either yea or nay without modification). the act, both the
If the bill is approved, it becomes an "act" and House and Senate
is sent to the Senate, which refers the act to versions of the
the Senate Finance Committee. Not to be legislation are sent
outdone by the House, the Senate Finance to the Joint
Committee typically amends the act during its Conference
deliberations. After the revised act passes the Committee, which
Senate Finance Committee, the act is sent to consists of members

Version 1 47
of the House Ways and Means Committee and all codified laws of
the Senate Finance Committee. During the the U.S.). If the
Joint Conference Committee deliberations, president vetoes the
committee members debate the two versions legislation,
of the proposed legislation. Possible outcomes Congress may
for any specific provision in the proposed override the veto
legislation include adoption of the Senate with a two-thirds
version, House version, or some compromise positive vote in both
version of the two acts. Likewise, it is possible the House of
that the Joint Conference Committee will Representatives and
simply choose to eliminate specific provisions Senate. Given the
from the proposed legislation or fail to reach a president's
compromise on the proposed legislation, disapproval of the
thereby terminating the legislation. After the proposed tax
Joint Conference Committee approves the act, increase and
the revised legislation is sent to the House and supermajority
Senate for vote. If approved by both the House required to override
and Senate, the act is sent to the president for a presidential veto,
his or her signature. If the president signs the the legislation most
act, it becomes law and is incorporated into likely will not be
the Internal Revenue Code of 1986 (i.e., Title enacted.
26 of the United States Code, which contains
99) The Internal Revenue Code is segregated Code sections are
into subtitles, chapters, subchapters, parts, numbered from 1 to
subparts, and sections. All existing and any 9834, with gaps in
new tax laws are placed in the Code within a the section numbers
specific subtitle, chapter, subchapter, part, to allow new code
subpart, and section of the Code. When sections to be added
referencing a tax law, the researcher generally to the appropriate
refers to the law simply by its code section. parts of the Code as

Version 1 48
needed. Each code section is further the Code has been
segregated into subsections, paragraphs, arranged such that,
subparagraphs, and clauses to allow more in general, similar
specific reference or citation.<br>One must code sections are
understand the organization of a code section grouped together.
(i.e., into subsections, paragraphs, Understanding this
subparagraphs, and clauses) to be able to cite organization allows
the respective law correctly (e.g., IRC Section. the researcher to be
162(b)(2)). Many provisions in the Code apply much more efficient
only to specific parts of the Code. If one does in locating relevant
not understand what laws are encompassed in code sections.
the chapter, it would be very difficult to
interpret the code section and determine its
applicability to a research question. Finally,
100) Regulations are the Treasury the same
Department's official interpretation of the authoritative weight
Internal Revenue Code and have the highest as temporary or
authoritative weight. Regulations are issued in final regulations.
three different forms: proposed, temporary, In addition to being
and final. Final regulations are regulations that issued in three
have been issued in final form, and thus, until different forms,
revoked, they represent the Treasury's regulations also
interpretation of the Code. Temporary serve three basic
regulations, as the name suggests, have a purposes:
limited life (three years for regulations issued interpretative,
after November 20, 1988). Nonetheless, procedural, and
during their "life," they carry the same legislative. Most
authoritative weight as final regulations. regulations are
Finally, proposed regulations are, as the name issued as
suggests, "proposed," and thus do not carry interpretative or

Version 1 49
procedural regulations. As the names suggest, specific conditions)
interpretative regulations represent the that all Treasury
Treasury's interpretation of the Code. regulations warrant
Procedural regulations explain Treasury deference.
Department procedures as they relate to Checking the status
administering the Code. Legislative of regulations is a
regulations, the rarest type, are issued when bit complicated.
Congress specifically directs the Treasury Most tax services
Department to create regulations to address an alert researchers if a
issue in an area of law. In these instances, the regulation has not
Treasury is actually writing the law instead of been updated for
interpreting the Code. Because legislative certain changes in
regulations actually represent tax law instead the Code. If this is
of an interpretation of tax law, legislative the case, the
regulations generally have been viewed to researcher should
have more authoritative weight than evaluate whether
interpretative and procedural regulations. the changes in the
However, in Mayo Foundation for Medical Code make the
Education & Research v. U.S., 131 S.Ct. 704 regulation obsolete.
(2011), the Supreme Court held (subject to
101) Campbell is not finished. Once the tax Citators can also be
researcher has identified relevant authorities,
she must make sure that the authorities are
still valid and up to date. For court cases, a
citator can be used to review the history of the
case to find out, for example, whether it was
subsequently appealed and overturned and to
identify subsequent cases that cite the case.
Favorable citations strengthen a case, while
unfavorable citations weaken the case.

Version 1 50
used to check the status of revenue rulings,
revenue procedures, and other IRS
pronouncements. Checking the status of the
Code is fairly simple: just locate the current
version.

Version 1 51
102) Except for Supreme Court cases, can still rely on the
whenever the IRS loses, it may issue an favorable tax court
acquiescence or nonacquiescence as guidance case but should alert
for how the IRS intends to respond to the loss. his client that the
An acquiescence indicates that the IRS has IRS has stated very
decided to "follow" the court's adverse ruling clearly that it does
in the future—i.e., the IRS will no longer not agree with the
litigate this issue. A nonacquiescence has the tax court opinion
exact opposite implications. A and will continue to
nonacquiescence alerts taxpayers that the IRS litigate this issue.
plans to continue to litigate this issue. Roddy
103) In rendering court decisions, all courts because it appeals to
apply the judicial doctrine of stare decisis. different circuits
This doctrine means that a court will rule based on the
consistently with (a) its previous rulings (i.e., taxpayer's
unless, due to evolving interpretations of the residence. To
tax law over time, they decide to overturn an implement the
earlier decision) and (b) the rulings of higher doctrine of stare
courts with appellate jurisdiction (i.e., the decisis, the tax court
courts their cases are appealed to). The applies the Golsen
implication of stare decisis is that a circuit rule. The Golsen
court will abide by Supreme Court rulings and rule simply states
its own rulings, whereas a trial-level court will that the tax court
abide by Supreme Court rulings, its respective will abide by rulings
circuit court's rulings, and its own rulings. For of the circuit court
example, a district court in California would that has appellate
follow 9th Circuit and Supreme Court rulings jurisdiction for a
as well as the court's own rulings. case. The
The doctrine of stare decisis presents a implication of the
special problem for the U.S. Tax Court Golsen rule is that

Version 1 52
tax courts may issue conflicting opinions in Raul located.
different circuits, and thus most likely
explains the differing tax court decisions that
104) The House Ways and Means Committee, interpreting the new
Senate Finance Committee, and Joint law (i.e., no judicial
Conference Committee each produce a or administrative
committee report that explains the current tax authorities because
law, proposed change in the law, and of the time it takes
justification for the change. These committee for the new law to
reports are considered "statutory" sources of be litigated or for
the tax law and may be very useful in the IRS to issue
interpreting tax law changes and interpretative
understanding congressional intent. This is guidance—e.g.,
especially important after new legislation has regulations, etc.).
been enacted because, with the exception of
the Code, there will be very little authority
105) There are two broad categories of tax such as tax research
authorities: primary authorities and secondary services, tax
authorities. Primary authorities are "official" articles, newsletters,
sources of the tax law generated by the and textbooks.
legislative branch (i.e., statutory authority Secondary
issued by Congress), judicial branch (i.e., authorities may be
rulings by the U.S. District Court, U.S. Tax very helpful in
Court, U.S. Court of Federal Claims, U.S. understanding a tax
Circuit Court of Appeals, or U.S. Supreme issue, but they hold
Court), or executive/administrative branch little weight in a tax
(i.e., IRS pronouncements). Secondary dispute (hence the
authorities are "unofficial" tax authorities that term "unofficial"
interpret and explain the primary authorities, tax authorities).

Version 1 53
Thus, tax advisors should always be careful to three years old.
verify their understanding of tax law by Thus, not only is the
examining primary authorities directly and textbook not an
never citing a secondary authority in a "official" tax
research memo. In Lakeisha's case, this is authority, it may
particularly important because her textbook is also be out of date.

106) To answer a tax question, you must clients, you must

understand the question. To understand the remember that
question, you must know the facts. There are many clients are not
two basic types of facts: open facts and closed tax experts. Thus, it
facts. Open facts have not yet occurred, such is up to the tax
as the facts associated with a proposed researcher to ask the
transaction. Closed facts have already correct initial and
occurred. The distinction between open and follow-up questions
closed facts is important because unlike closed to obtain all the
facts, open facts can be altered, and different relevant facts.
facts may result in very different tax Within a tax
consequences. Open facts allow the taxpayer planning context,
to arrange a transaction to achieve the most one should also
advantageous outcome. Thus, they are consider nontax
especially important in tax planning.There are factors, such as a
several sources of facts for the typical research client's personal
projects. Common sources include values or objectives,
interviewing clients, speaking with third as these often put
parties (e.g., attorneys, brokers), and constraints on tax
reviewing client documents (contracts, prior planning strategies.
tax returns, wills, trust documents, deeds,
corporate minutes, etc.). When interviewing
107) A tax researcher's ability to identify issues is largely a

Version 1 54
function of his or her type of tax expertise. A (3) In what year
tax expert in a particular area will typically be should the expense
able to identify quickly the specific tax issues be deducted? (4) In
that relate to transactions in that area. For what year should
example, an expert in corporate acquisitions the item of income
would quickly identify the tax consequences be taxed? etc. After
and specific issues of alternative acquisition you identify these
types. A novice, on the other hand, would types of general
likely identify broader issues first and then issues, your
more specific issues as he researched the research will enable
relevant tax law.The best method to identify you to identify the
tax issues is to first get a good understanding more specific issues
of the client's facts. Then combine your that ultimately
understanding of the facts with your determine the tax
knowledge of the tax law. For an expert in this ramifications of the
particular area, the issues will be immediately transaction being
evident. For a novice, the initial response to a researched.
set of facts may take the form of a series of
general questions: (1) Is this item of expense
deductible? (2) Is that item of income taxable?
108) Tax services aid the researcher in issued for the
identifying relevant authorities. There are two specific code
basic types of tax services: annotated tax section, the service's
services and topical tax services. Annotated "unofficial"
tax services are arranged by code section, i.e., explanation of the
for each code section, an annotated service code section, and
includes the code section, a listing of the code brief summaries
section history, copies of congressional (called annotations)
committee reports that explain changes to the of relevant court
code section, a copy of all the regulations cases, revenue

Version 1 55
rulings, revenue procedures, letter rulings, prefer topical
etc., that address issues specific to the code services, as they
section. Two examples of annotated tax generally are easier
services are Commerce Clearing House's to read. Some
(CCH) Standard Federal Tax Reporter and examples of topical
RIA's United States Tax Reporter.Topical tax federal tax services
services are arranged by topic (e.g., taxable include BNA's Tax
forms of income, tax-exempt income, trade or Management
business expenses, etc.). For each topic, the Portfolios, CCH's
services identify tax issues that relate to the Tax Research
topic, and then explain and cite authorities Consultant, and
relevant to the issue (code sections, RIA's Federal Tax
regulations, court cases, revenue rulings, etc.). Coordinator.
Beginning tax researchers (like Lindy) often
109) A novice may conduct a keyword search a break.While
in the service, use the tax service's topical utilizing keyword
index, or "browse" the tax service to identify searches or other
the relevant portions. Some suggestions for research methods to
identifying keywords: try to describe the identify potentially
transaction in three to five words. An ideal relevant areas of
keyword search typically includes (1) the law and tax
relevant area of law and (2) a fact or two that authorities, you
describes the transaction. Try to avoid must constantly ask
keywords that are too broad (e.g., income, yourself whether
deduction, taxable, etc.) or that may be too you are indeed in
narrow.If keyword searching is not proving the correct area of
beneficial, check your spelling, make sure you law. Once the
are searching the correct database, rethink answer to this
your keywords, use another research method, question is an
use another tax service, or as a last resort, take authoritative "yes,"

Version 1 56
you can delve deeper into the area of law and related authorities to
answer the question.
110) Two basic types of issues that upon the
researchers will encounter are questions of interpretation of the
fact and questions of law. The answer to a law, such as
question of fact hinges upon the facts and interpreting a
circumstances of the taxpayer's transaction. particular phrase in
For example, whether a trade or business a code section. If a
expense is "ordinary," "necessary," and researcher is faced
"reasonable," and thus deductible, is a with this type of
question of fact. If you are researching a question, she will
question of fact, it is important for the spend much of her
researcher to understand which facts time researching the
determinethe answer—in this case, which various
facts make an expense "ordinary," interpretations of
"necessary," and "reasonable" and which facts the code section and
do not. In this type of question, the researcher taking note of which
will focus much of her efforts toward authorities interpret
understanding how various facts affect the the code differently
research answer and identifying authorities and why.
with fact patterns similar to her client's fact
pattern.The answer to a question of law hinges
111) There are serious ramifications for the penalties
committing fraud for both the taxpayer and the associated with
tax practitioner. First, there is no statute of fraud are
limitations on assessing tax due to fraudulent substantial. In
reporting. Thus, Nolene's client will be at risk addition to having
for additional tax, interest, penalties, etc., for to pay the assessed
the period of time he commits fraud. Second, tax and interest on

Version 1 57
the assessed tax (which can be quite tax fraud (civil and
substantial), the client may be subject to both criminal penalties)
civil and criminal penalties for fraud. Both as well as her own
penalties carry potentially substantial professional
monetary fines, and the criminal penalty may standards with her
include a prison term.For Nolene, assisting in client. If Nolene
fraud will clearly violate her professional suspects that her
responsibilities established by the Statements client is not fully
on Standards for Tax Services, Circular 230, reporting his
and her state board of accountancy. She will income, she should
also be subject potentially to both civil and carefully consider
criminal penalties.Nolene should discuss the terminating the
severe negative consequences of committing client relationship.

112) A tax preparer (Houston) may subject to the same

recommend any tax return position and avoid standards as tax
penalty if there is substantial authority that practitioners
supports the tax return position. Substantial (substantial
authority suggests that the probability that the authority without
taxpayer's position is sustained upon audit or disclosure;
litigation is in the 35 to 40 percent range or reasonable basis
above. The tax practitioner can also avoid with disclosure).
penalty if the tax return position has a Thus, Houston's
reasonable basis (i.e., supported by one or client will not need
more tax authorities) and the position is to disclose the
disclosed on the taxpayer's return. Given that position on its tax
there is a 60 percent chance that the position return to avoid
will be sustained upon audit or by the courts, penalty.
Houston should not be subject to penalty and
no disclosure is required.Taxpayers are

Version 1 58
Version 1 59