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Tax Compliance - Sample Questions 1 - 6

1. Which of the following could increase your chances of an audit from the IRS?

(1) Claiming large investment deductions
(2) Excessively large deductions for meal & entertainment expenses
(3) Prior audit that resulted in no additional tax liability
(4) Operating a cash business
(5) Your refund claimed is twice as large as the previous year and your income remained the same

A) 1, 2, and 4 only
B) 3, 4, and 5 only
C) 1, 2, 4, and 5 only
D) 1, 2, 3, 4, and 5

 2. The IRS called Joe Smith concerning a return he filed two years ago for his business. They informed him that they would be coming to his office in three weeks to audit several items listed on the return. They gave him a list of these items and asked him to be prepared to substantiate his position on the tax return. This is an example of which type of audit?

A) Field audit
B) Correspondence audit
C) Fact Find audit
D) Office audit

3. All of the following are TRUE statements EXCEPT:

A) If you fail to file a return the IRS can audit you 10 years after the fact
B) If you failed to report 50% of your gross income, the IRS has six years to audit
C) If the IRS disagrees with some of your large itemized deductions, they have three years from the due date of your return to audit you
D) If your return is found to contain fraudulent data, then the IRS has six years to audit

4. It was determined by the IRS, two months after the required filing date, that Stacey underpaid her federal income tax liability by $1,000. The current federal short-term rate is 2% and the federal long-term rate is 4%. What is the interest rate charged to Stacey on the underpayment?

A) 2%
B) 4%
C) 5%
D) 7%

5. Larry was late in paying his taxes by four months, even though he filed his return on time. He can expect to pay which of the following as a result of this?

I. 15% late payment penalty
II. 5% late payment penalty
III. 0.5% late payment fee for each month it's late
IV. Interest charges

A) I and IV only
B) II and IV only
C) III only
D) III and IV only

6. Which of the following is TRUE about filing a tax return extension?

A) If tax is due, payment must be made when the extension return is filed
B) If tax paid is less than 90% of the actual amount, then a late-payment penalty will be assessed
C) Most tax return extension requests are denied
D) No interest is due on any tax liability unless the payment is not made by October 15


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