TAX PRACTICE AND ADMINISTRATION: SANCTIONS, AGREEMENTS, AND
DISCLOSURES
Test Bank, Chapter 14
Multiple Choice
Choose the best answer for each of the following questions:
1. Penalties that are based on a percentage of the delinquent tax are referred to as:
a. assessable penalties
b. ad valorem penalties
c. criminal penalties
d. nominal penalties
Answer: b
Rationale:
Ad valorem penalties are those that are calculated as a percentage of the delinquent tax
amount. This type of penalty is directly proportional to the tax owed, making it a percentagebased penalty.
2. William, a taxpayer, timely mailed his tax return. However, the same was returned for
insufficient postage. IRS imposed a penalty. Can William claim waiver of penalty?
a. Yes, William can claim a waiver of the penalty since it is his first tax return.
b. Yes, William can claim a waiver since the failure to file the tax return is due to a reasonable
cause.
c. No, William cannot claim a waiver since it is a case of willful neglect.
d. No, William cannot claim a waiver of the penalty as he is a delinquent taxpayer.
Answer: b
Rationale:
If the failure to file the tax return is due to a reasonable cause, such as insufficient postage,
the taxpayer may claim a waiver of the penalty.
3. If a taxpayer fails to file a return due to willful neglect, the minimum penalty is:
a. 25 percent or 5 months cumulative penalty
b. lesser of $125 or the full amount of taxes that are required to be shown on the return
c. 15 percent monthly penalty
d. lesser of $135 or the full amount of taxes that are required to be shown on the return
Answer: d
Rationale:
The minimum penalty for failure to file a return due to willful neglect is the lesser of $135 or
the full amount of taxes required to be shown on the return.
4. Which of the following would lead to the imposition of civil penalties?
a. violation of civil protocols
b. violation of tax laws as a result of negligence
c. violation of tax statutes due to reasonable cause
d. violation of social rules and norms
Answer: b
Rationale:
Civil penalties are typically imposed for violations of tax laws resulting from negligence or
disregard of the rules.
5. Robinson, a calendar-year taxpayer, filed his 2010 income tax return on October 20, 2011,
paying an amount due of $2,000. On April 1, 2011, he had obtained a six-month extension of
time in which to file his return. However, he could not assert a reasonable cause for failing to
file the return by October 15, 2011 (the extended due date), nor did he show any reasonable
cause for failing to pay the tax that was due on April 15, 2011. Robinson’s failure to file was
not fraudulent. The penalty for failure-to-pay tax is:
a. $35
b. $10
c. $70
d. $40
Answer: c
Rationale:
The penalty for failure to pay tax is generally 0.5% of the unpaid tax per month, up to a
maximum of 25%. In this case, the penalty would be $70 (0.5% of $2,000).
6. When the accuracy-related penalty applies, interest on the penalty accrues from the:
a. date on which assessment is made
b. date on which the penalty was imposed or December 31 whichever is earlier
c. date on which the penalty was imposed
d. due date of the return
Answer: d
Rationale:
Interest on the accuracy-related penalty accrues from the due date of the return, not from the
date of assessment or imposition of the penalty.
7. A ‘large corporation’ as defined in the Code is one which had a taxable income of:
a. $10 million or more in any of the 10 immediately preceding taxable years.
b. $2 million or more in any of the two immediately preceding taxable years.
c. $5 million or more in any immediately preceding five taxable years.
d. $1 million or more in any of the three immediately preceding taxable years.
Answer: d
Rationale:
According to the Internal Revenue Code, a "large corporation" is defined as one that had a
taxable income of $1 million or more in any of the three immediately preceding taxable
years.
8. The burden of proof in a fraud case is on the:
a. taxpayer
b. tax court
c. IRS
d. tax practitioner
Answer: c
Rationale:
In cases of fraud, the burden of proof is on the IRS to establish the taxpayer's fraudulent
intent or wrongdoing.
9. The standard for conviction in a criminal case is establishment of:
a. guilt with some reasonable doubt
b. guilt beyond reasonable doubt
c. any guilt even though highly doubtful
d. criminal intent even though not implemented
Answer: b
Rationale:
In a criminal case, the standard for conviction is establishing guilt beyond a reasonable doubt,
ensuring a high level of certainty before a conviction is made.
10. What is the general statute of limitations on assessment of income tax:
a. 6 years
b. 3 years
c. 7 years for criminal tax evasion.
d. None of the above.
Answer: b
Rationale:
The general statute of limitations on the assessment of income tax is three years from the date
the return was filed or the due date of the return, whichever is later.
11. In which of the following cases does a taxpayer hold the right to refuse to answer
inquiries that are made by the IRS in a criminal setting?
a. The taxpayer would suffer a monetary loss by answering a criminal inquiry.
b. The nature of crime is not severe.
c. The taxpayer is confident to obtain a conviction.
d. The taxpayer would suffer a loss of some constitutional right by answering a criminal
inquiry.
Answer: d
Rationale:
A taxpayer holds the right to refuse to answer inquiries made by the IRS in a criminal setting
if answering would result in the loss of some constitutional right.
12. A tax return preparer (TRP) is:
a. Necessarily a CPA as required by the IRS.
b. Not subject to any kind of penalty as he/she prepares return on behalf of taxpayer.
c. Any person who prepares tax returns gratuitously.
d. Any person who prepares tax return for compensation.
Answer: d
Rationale:
A tax return preparer (TRP) is any person who prepares tax returns for compensation,
regardless of whether they are a CPA or not.
13. Which of the following entities usually request to have their tax assessed within 18
months?
a. Estates.
b. Liquidating Corporations.
c. Income tax return of a decedent.
d. All of the above.
Answer: d
Rationale:
All of the above entities typically request to have their tax assessed within 18 months to
expedite the settlement of their tax liabilities.
14. An individual who is convicted of willfully aiding or assisting in the preparation of a false
return is subject to which of the following penalties?
a. Imprisonment up to 2 years and /or fine that cannot exceed $10,000.
b. Imprisonment up to 5 years and /or fine that cannot exceed $50,000.
c. Imprisonment up to 10 years and/or fine that cannot exceed $15,000.
d. Imprisonment up to 3 years and/or fine that cannot exceed $100,000.
Answer: d
Rationale:
An individual convicted of willfully aiding or assisting in the preparation of a false return is
subject to imprisonment for up to 3 years and/or a fine not to exceed $100,000.
15. A tax return preparer may disclose information obtained from the taxpayer without being
subject to civil and criminal penalties if such disclosure is:
a. For other than the specific purpose of preparing a tax return.
b. Pursuant to fulfillment of his own financial goals.
c. Pursuant to any provisions of the code, or to a court order.
d. Required for the growth of his profession.
Answer: c
Rationale:
A tax return preparer may disclose information obtained from the taxpayer without being
subject to civil and criminal penalties if such disclosure is pursuant to any provisions of the
tax code or to a court order.
16. When a taxpayer is subject to both underpayment and overpayment computations for the
same time period, which of the following rates of interest applies to the net amount payable
to or receivable from the government?
a. 4 %
b. 6 %
c. 0 %
d. 5 %
Answer: c
Rationale:
When a taxpayer is subject to both underpayment and overpayment computations for the
same time period, the interest rate applied to the net amount payable to or receivable from the
government is typically 0%. This ensures that the taxpayer does not pay interest on
overpayments nor receives interest on underpayments.
17. Smith, a calendar-year taxpayer, filed his 2008 Federal income tax return on October 1,
2011. His return showed an overpayment of $1,200, for which Smith requested a full refund.
The IRS refunds the amount without any interest. Which of the following could be the date of
refund by the IRS?
a. November 17, 2011
b. December, 29 2011
c. November, 12 2011
d. December, 12 2011
Answer: c
Rationale:
Since the IRS refunds the overpayment without any interest, the refund could be processed
shortly after the return is processed. Therefore, November 12, 2011, could be a feasible date
for the IRS to issue the refund.
18. The statute of limitations refers to a:
a. Set of provisions that limits a return preparer’s rights.
b. Specific period of time within which returns must be filed.
c. Set of provisions that limits a taxpayer’s rights.
d. Specific period of time within which all taxes must be assessed and collected, and all
refund claims must be made.
Answer: d
Rationale:
The statute of limitations refers to the specific period of time within which all taxes must be
assessed and collected, and all refund claims must be made, providing a time limit for various
tax-related actions.
19. After the assessment has been made, the taxes assessed must be collected within:
a. 2 years
b. 10 years
c. 5 years
d. 8 years
Answer: b
Rationale:
After the assessment has been made, the taxes assessed must be collected within a period of
10 years, ensuring that the government has a reasonable time frame to pursue collection
actions.
20. The period for filing a claim for refund is extended when overpayment results from:
a. Overstatement of incomes in the income statement.
b. Ignorance of tax laws on the part of return preparers.
c. Negligence on the part of return preparer while filing returns.
d. Carryback of a net operating loss, capital loss or certain credits.
Answer: d
Rationale:
The period for filing a claim for refund is extended when overpayment results from the
carryback of a net operating loss, capital loss, or certain credits, providing taxpayers with
additional time to claim refunds in such cases.
21. The statute of limitations can be suspended if:
a. The taxpayer is outside the United States for three consecutive months.
b. The taxpayer’s assets are in the custody of the court.
c. A fiduciary or receiver is yet to be appointed in a bankruptcy case.
d. The taxpayer is ignorant of such a statute.
Answer: b
Rationale:
The statute of limitations can be suspended if the taxpayer's assets are in the custody of the
court, ensuring that the government retains the ability to pursue collection actions even if the
statutory time limit has expired.
22. Form 9465 is used by the taxpayer to initiate which of the following?
a. Closing Agreement
b. Installment Agreement
c. Offer in Compromise
d. Tax Refund
Answer: b
Rationale:
Form 9465 is used by the taxpayer to initiate an Installment Agreement with the IRS,
allowing the taxpayer to pay their tax liability over time in smaller, more manageable
payments.
23. The civil fraud penalty is:
a. 5%
b. 20%
c. 25%
d. 75%
Answer: d
Rationale:
The civil fraud penalty is typically 75% of the underpayment of tax due to fraud, imposing a
significant financial consequence for intentional wrongdoing.
24. A taxpayer who files a corrected 1040 after filing a fraudulent 1040 will have a statute of
limitations on the assessment of that return of:
a. 3 years
b. 6 years
c. 1 and a half years
d. None
Answer: d
Rationale:
If a taxpayer files a fraudulent return, there is no statute of limitations on the assessment of
that return, meaning the IRS can pursue collection indefinitely.
True or False
Indicate which of the following statements are true or false by circling the correct answer.
1. Assessable penalties are subject to review by the Tax Court.
Answer: False
Rationale:
Assessable penalties are not subject to review by the Tax Court.
2. A fraudulent failure to file tax returns is subject to a 25 percent monthly penalty.
Answer: False
Rationale:
A fraudulent failure to file tax returns is subject to a percent monthly penalty.
3. A failure to pay penalty is imposed when the taxpayer fails to pay either a tax shown on his
or her return or an assessed deficiency within 10 days of an IRS notice or demand.
Answer: True
Rationale:
The failure to pay penalty is indeed imposed when the taxpayer fails to pay either the tax
shown on their return or an assessed deficiency within the specified timeframe, typically
within 10 days of receiving an IRS notice or demand. This penalty encourages timely
payment of taxes owed and ensures compliance with tax obligations.
4. If a taxpayer is convicted of criminal fraud, he or she can contest a civil fraud
determination.
Answer: False
Rationale:
If a taxpayer is convicted of criminal fraud, he or she cannot contest a civil fraud
determination.
5. The penalty for failure to make payment of quarterly estimated income taxes is computed
without any daily compounding and is not deductible.
Answer: True
Rationale:
The penalty for failure to make payment of quarterly estimated income taxes is typically
computed without any daily compounding, meaning it is calculated based on the amount of
underpayment and the number of days late without further adjustments. Additionally, this
penalty is not deductible, serving as a deterrent for taxpayers to ensure timely payment of
estimated taxes and avoid potential penalties.
6. The Employee Withholding Allowance Certificate is required to be given by the employer
to the employees.
Answer: False
Rationale:
All employees are required to give their employer a completed Form WEmployee Withholding Allowance Certificate.
7. The penalty for a willful failure to pay to the government a tax withheld from an
employee's paycheck is one hundred percent of the unpaid tax.
Answer: True
Rationale:
The penalty for a willful failure to pay to the government a tax withheld from an employee's
paycheck is indeed severe. It can be up to 100% of the unpaid tax amount. This penalty is
designed to deter employers from withholding taxes from employees' paychecks but failing to
remit those taxes to the government. It serves as a strong incentive for employers to fulfill
their obligation to remit withheld taxes in a timely manner.
8. Criminal and civil penalties are mutually exclusive.
Answer: False
Rationale:
Criminal and civil penalties are not mutually exclusive. Consequently, a taxpayer may be
acquitted of a criminal tax offense, but still be liable for a corresponding civil tax penalty.
9. Return preparers are subject to criminal prosecution for willful misconduct.
Answer: True
Rationale:
Return preparers are entrusted with sensitive financial information and play a crucial role in
accurately reporting tax liabilities. If a preparer engages in willful misconduct, such as
intentionally providing false information or aiding in tax evasion, they can indeed be subject
to criminal prosecution. This serves as a deterrent to prevent fraudulent practices and ensures
compliance with tax laws, protecting both taxpayers and the integrity of the tax system.
10. The code provides for payment of interest on underpayments and overpayments of tax at
an adjustable rate compounded annually.
Answer: False
Rationale:
The Code provides for the payment of interest on underpayments and overpayments of tax, at
an adjustable rate, compounded daily.
11. Assessment of an internal revenue tax must be made within three years of the later of date
that the return was actually filed or the actual (i.e., not extended) due date of the return.
Answer: True
Rationale:
The Internal Revenue Code specifies that the assessment of an internal revenue tax must
generally be made within three years of the later of the date that the return was actually filed
or the original due date of the return, without extensions. This time limit ensures that the IRS
has a reasonable period to review and assess taxes owed by taxpayers, promoting efficiency
and fairness in the tax assessment process.
12. The 10-year period of limitations for collection begins from the due date of filing the
return.
Answer: False
Rationale:
The 10-year period of limitations for collection begins only after an assessment is made.
13. An individual should make a claim for refund or credit in the Form 1040X.
Answer: True
Rationale:
Form 1040X, also known as the Amended U.S. Individual Income Tax Return, is used by
individuals to make corrections to their original tax return, including claiming a refund or
credit for overpaid taxes or correcting errors that result in a lower tax liability. Thus, it is the
appropriate form for taxpayers to use when seeking a refund or credit.
14. When the IRS mails a statutory notice of deficiency to the taxpayer, the assessment and
collection period is suspended for 150 days (210 days if the letter is addressed to a person
who is outside the United States).
Answer: True
Rationale:
The statutory notice of deficiency, also known as a 90-day letter, informs the taxpayer of the
IRS's proposed adjustments to their tax return and their right to challenge those adjustments
in Tax Court. During the 150-day period (or 210 days for taxpayers outside the United
States), the assessment and collection of the tax are suspended, providing the taxpayer with
an opportunity to dispute the IRS's proposed adjustments.
15. Generally, an overpayment can be refunded or credited to the person who was subject to
the original tax.
Answer: True
Rationale:
When an overpayment of taxes occurs, either due to an error in calculation or a change in
circumstances, the IRS typically refunds the overpayment to the taxpayer or credits it to their
future tax liabilities. This ensures that the taxpayer receives the benefit of any excess taxes
paid.
16. If a taxpayer understates gross income by 25 percent, the IRS has a 6-year Statute of
Limitations on assessment.
Answer: True
Rationale:
The Internal Revenue Code extends the statute of limitations for assessment to six years if the
taxpayer understates their gross income by 25 percent or more. This longer statute of
limitations allows the IRS additional time to discover and assess taxes owed in cases of
significant understatement of income, enhancing tax enforcement efforts.
17. If a taxpayer mistakenly overstates itemized deductions which results in an
understatement of adjusted gross income of 25 percent, the IRS has a 6-year Statute of
Limitations on assessment.
Answer: False
Rationale:
Itemized deductions are disclosed to the IRS and are then not part of the “Gross Income”
definition.
18. Some taxpayers may request to have their taxes assessed in 18 months.
Answer: True
Rationale:
Certain taxpayers, such as estates, liquidating corporations, or income tax returns of a
decedent, may request to have their taxes assessed within 18 months. This extended
assessment period allows these entities to resolve their tax liabilities more efficiently,
particularly in complex situations such as estate settlements or corporate liquidations.
19. If a taxpayer never files a tax return, then there is an endless Statute of Limitations on
assessment.
Answer: True
Rationale:
If a taxpayer fails to file a tax return, the statute of limitations on assessment does not begin
to run because there is no return upon which to base the assessment. As a result, the statute of
limitations never expires, leaving the taxpayer exposed to potential assessment by the IRS
indefinitely until a return is filed.
20. If the Statute of Limitations on assessment is about to expire, the IRS may request an
extension, but the taxpayer is not required to agree to such an extension.
Answer: True
Rationale:
When the statute of limitations on assessment is nearing expiration, the IRS may request an
extension of time to assess taxes owed. However, the taxpayer is not obligated to agree to
such an extension. If the taxpayer does not consent to the extension, the IRS must assess any
taxes owed within the original statute of limitations period. This provision ensures that
taxpayers have some control over the assessment process and are not unduly pressured to
extend the statute of limitations.
Short Answer
1. “In case of both civil and criminal frauds, the burden of proof is on the IRS.” Explain.
Answer: The burden of proof in criminal and civil fraud cases is on the IRS—it must show a
fraudulent intent for the tax payer. This usually entails more than mere negligence, but a plan
to defraud the government, often including a series of actions over time to evade the tax. In a
criminal fraud case, the IRS must prove ‘beyond a shadow of any reasonable doubt’ that the
taxpayer’s actions were fraudulent. In a civil fraud case, there must be ‘clear and convincing
evidence’ that the taxpayer committed fraud. Ordinarily, the evidence that indicates that a
taxpayer’s conduct was fraudulent is circumstantial. Thus, the court must infer the taxpayer’s
state of mind from the evidence.
2. List out some of the possible defenses that a tax payer may resort to against a charge of
criminal tax offence.
Answer: With respect to criminal tax cases, taxpayers have had some success in presenting
one or more of the following defenses—that is, to establish some doubt in the minds of the
court or the jury.
• Unreported income would have been fully offset by unreported deductions
• Unreported income was in reality a gift or some other excludible receipt
• The taxpayer was ignorant or confused as to the applicable law -- one cannot intend to
violate the tax law if he or she does not know what the law is
• The taxpayer relied on the erroneous advice of a competent tax advisor
• The taxpayer's mental or emotional abilities were such that he or she could not have formed
and executed a plan to evade tax
• The statute of limitations had expired
• The taxpayer enters a plea bargain and accepts conviction on a lesser offense
3. Cite two instances that would lead to imposition of criminal penalties on the return
preparers.
Answer: Criminal penalties would be imposed on a return preparer if he/she:
• aids or assists in the preparation or presentation of a false return, affidavit, claim, or other
document, or
• discloses or uses information for other than return preparation purposes
4. What are the requirements to be satisfied for the issue of an injunction by the IRS against a
TRP who is guilty of misconduct to prohibit him or her from engaging in such misconduct or
from practicing as a return preparer?
Answer: The IRS may seek an injunction against a TRP who is guilty of certain misconduct
to prohibit him or her from engaging in such misconduct or from practicing as a return
preparer. Before such an injunction can be issued, however, the preparer must have:
• violated a preparer penalty or a criminal provision of the Code,
• misrepresented his or her eligibility to practice before the IRS,
• guaranteed the payment of any tax refund or the allowance of a credit, or
• engaged in other fraudulent or deceptive conduct that substantially interferes with the
administration of the tax laws.
5. What is the procedure for claiming refund or credit for overpayment of tax?
Answer: A taxpayer must file a timely and valid claim at the service center for the district in
which the tax was paid to receive a refund or credit for an overpayment of tax. The claim
should be made by individuals on Form 1040X, Individual Amended Income Tax Return, and
by corporations on Form 1120X, Corporation Amended Income Tax Return.
6. Could a taxpayer make such a small amount of income that a tax return not be filed and
still have an unlimited Statute of Limitations on Assessment?
Answer: Yes, a taxpayer who innocently fails to file a tax return is subject to an u nlimited
period of assessment for the tax (§6501(c)(3).
Essay Answer
1. What is the statute of limitations? Explain the nature of statutes of limitations. List the
circumstances in which the statute of limitations can be suspended.
Answer: The Code establishes a specific period of time, commonly referred to as a statute of
limitations, within which all taxes must be assessed and collected, and all refund claims must
be made. After the pertinent statute of limitations expires, certain actions may not be taken,
because the expiration establishes an absolute defense for the party against whom legal action
is brought. In other words, a taxpayer cannot be required to pay taxes that he or she rightfully
owes if these taxes are not assessed and collected within the time periods that the Code has
established.
Nature of Statutes of Limitations:
Although the statute of limitations appears to be a legal loophole that rewards delinquent
taxpayers who avoid detection, Congress believes that, at some point, the right to be free of
stale claims must prevail over the government’s right to pursue them. If the statutes permitted
the lapse of an extended period of time between the initiation of a claim and its pursuit, the
defense could be jeopardized because witnesses might have died or disappeared, memories
might have faded, and records or other evidence might have been lost. Moreover, some
statutes of limitations are designed solely to protect the government (e.g., the statute of
limitations on credits or refunds). A number of such statutes limit the time period within
which assessment, collection, and claim for refund or credit activities must be conducted.
The running of the statutes of limitations on assessment or collection is suspended in the
following cases:
• When the IRS mails a statutory notice of deficiency (i.e., a ninety-day letter) to the
taxpayer, the assessment and collection period is suspended for 150 days (210 days if the
letter is addressed to a person who is outside the United States). The statutes of limitations on
assessment and collection also are suspended when a case is pending before the U.S. Tax
Court. This suspension period begins when the taxpayer files a petition in the Tax Court
contesting the deficiency, and it continues until sixty days after the decision of the Tax Court
becomes final.
• When a taxpayer submits an offer in compromise for consideration by the IRS, the statute
of limitations on assessment is suspended. This suspension period begins when the offer is
submitted, and it continues until one year after the offer is terminated, withdrawn, or formally
rejected.
In addition to the circumstances just discussed, the statute of limitations also can be
suspended when:
• the taxpayer’s assets are in the custody of the court;
• the taxpayer is outside the United States for six or more consecutive months;
• the taxpayer’s assets are wrongfully seized;
• a fiduciary or receiver is appointed in a bankruptcy case;
• the IRS is prohibited under bankruptcy law from any assessment or collection of a tax; or
• the collection of excise or termination taxes on certain retirement plans or private
foundations is suspended.
2. What are the two types of statutory agreements that may be used to resolve tax disputes?
Describe each one of them in detail.
Answer: The Code provides for two types of agreements that may be used to resolve tax
disputes, namely, closing agreements and offers in compromise.
Closing Agreement:
A closing agreement is a formal, written agreement that is made between a taxpayer and the
IRS. It is the only agreement that the Code recognizes as being binding. Once it is approved,
a closing agreement is final and conclusive on the part of both the government and the
taxpayer, unless there is a showing of fraud, malfeasance, or a misrepresentation of a material
fact, by either party. The purpose of a closing agreement is either (a) to enable the taxpayer
and the IRS to resolve, finally and completely, a tax controversy for any period prior to the
date of the agreement and to protect the taxpayer against the reopening of the matter at a later
date; or (b) to determine a matter in a tax year that arises after the date of the agreement. The
IRS is authorized to enter into a closing agreement in any case where there appears to be a
benefit to the government in closing the case permanently and conclusively, or if the taxpayer
demonstrates a need to close the case and the government’s interests are not harmed.
Typically, a closing agreement is used in cases where the IRS and the taxpayer have made
mutual concessions relative to the case, and it is necessary or desirable to bar further actions
by either party. Such an agreement also may be used when a corporation is winding up its
business affairs or when a taxpayer needs some authentic evidence of his or her tax liability,
say, to satisfy creditors. The IRS discourages the use of closing agreements because of their
finality. The IRS would have a difficult time processing a large number of requests for these
agreements. Consequently, it prefers to use a number of informal agreements that may not
resolve conclusively the tax dispute that is under examination, or that may not provide for the
same degree of finality as would a closing agreement.
Offers in Compromise:
The Commissioner can make an offer in compromise for any civil or criminal case that does
not involve sales of illegal drugs prior to the time that the case is referred to the Justice
Department for prosecution or defense. Once the case is referred to the Justice Department,
however, the U.S. Attorney General has the final authority to compromise the case.
Compromise proposals entailing more than $50,000 in tax also must be supported by an
opinion of the Chief Counsel. In this context, the government will compromise a case only if
there is doubt as to the liability or collectability of the assessed tax. The IRS will not enter
into a compromise with the taxpayer if the liability has been established by a valid judgment,
and if there is no doubt as to the ability of the IRS to collect the amounts that are due. A
compromise agreement may cover the principal amount of tax, plus any corresponding
interest or penalties. Ordinarily, the IRS will not compromise a criminal tax case unless it
involves a violation of a regulatory provision of the Code or of a related statute that was not
deliberately violated with intent to defraud. A compromise agreement relates to the entire
liability of the taxpayer, and it conclusively settles all of the issues for which an agreement is
to be made. It is a legally enforceable promise that cannot be rescinded unless there has been
a misrepresentation of the assets of the taxpayer by falsification or concealment, or a mutual
mistake relative to a material fact. Consequently, a taxpayer cannot decide later to bring a suit
for refund with respect to any item that is so compromised. Moreover, if a taxpayer defaults
on a compromise agreement, the IRS may collect the original tax liability, less any payments
that were actually made, or sue to enforce the agreement.
Test Bank for Federal Tax Research
Roby B. Sawyers, Steven Gill, Debra Sanders, William A. Raabe, Gerald E. Whittenburg
9781111221645, 9781337282987, 9781285439396
