Identify Taxpayer Rights And Remedies
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CPA Regulation (REG) › Identify Taxpayer Rights And Remedies
The Taxpayer Advocate Service (TAS) assists taxpayers experiencing significant hardship. Under Section 7803(c), which of the following correctly describes a Taxpayer Assistance Order (TAO)?
A TAO is an administrative order issued by the IRS Commissioner to accelerate a taxpayer's audit.
A TAO is issued by the National Taxpayer Advocate to require the IRS to take action, cease action, or refrain from action with respect to a taxpayer experiencing significant hardship as a result of IRS conduct.
A TAO automatically grants a taxpayer a refund of all disputed taxes.
A TAO is a court order issued by the U.S. Tax Court requiring the IRS to stop collection activities.
Explanation
Under Section 7803(c)(2)(B), the National Taxpayer Advocate may issue a Taxpayer Assistance Order (TAO) to the IRS to take or refrain from taking action when a taxpayer is suffering or about to suffer significant hardship from IRS actions. The TAO may require the IRS to release a levy, cease collection activity, or take other remedial action. The Commissioner may override a TAO only by personally intervening. Answer B is incorrect because TAOs are issued by the National Taxpayer Advocate, not a court. Answer C is incorrect because TAOs are not issued by the IRS Commissioner against taxpayers. Answer D is incorrect because TAOs do not automatically grant refunds.
Under Section 6015, innocent spouse relief allows a spouse to be relieved of joint and several liability. Which of the following describes 'traditional' innocent spouse relief under Section 6015(b)?
Relief is available if the taxpayer files a separate return after the joint return is filed.
Relief is available when there is an understatement attributable to erroneous items of the other spouse, the innocent spouse did not know and had no reason to know of the understatement, and it would be inequitable to hold the innocent spouse liable.
Relief is available for any portion of a joint return that the IRS disputes.
Relief is available whenever one spouse earns more income than the other.
Explanation
Under Section 6015(b), traditional innocent spouse relief requires: (1) a joint return was filed; (2) there is an understatement of tax attributable to erroneous items of the other spouse; (3) at the time of signing, the innocent spouse did not know and had no reason to know of the understatement; (4) it would be inequitable to hold the innocent spouse liable; and (5) the request is made within two years of the IRS beginning collection efforts. Answer A is incorrect because income disparity alone does not qualify. Answer B describes a different approach (separate filing) that is generally not available after a joint return is filed. Answer C is too broad; relief is tied to erroneous items of the other spouse.
Under Section 7122, a taxpayer may submit an Offer in Compromise (OIC) to settle their tax debt for less than the full amount owed. Which of the following correctly describes the bases on which an OIC may be accepted?
An OIC may be accepted based on doubt as to collectibility (the IRS cannot collect the full liability), doubt as to liability (there is genuine dispute about whether the full liability is owed), or effective tax administration (collection of the full amount would create economic hardship or be unfair and inequitable).
An OIC may be accepted only if the taxpayer has been unemployed for at least six months.
An OIC automatically settles all federal tax liabilities including payroll taxes.
An OIC may be accepted only for individual taxpayers, not corporations.
Explanation
Under Section 7122 and Rev. Proc. 2003-71, the IRS may accept an OIC based on three grounds: (1) Doubt as to Collectibility - the taxpayer's assets and income are insufficient to pay the full liability; (2) Doubt as to Liability - there is a genuine dispute about whether the assessment is correct; or (3) Effective Tax Administration - collection would create economic hardship or be unfair given special circumstances. Answer B is incorrect because unemployment is not a specific OIC basis. Answer C is incorrect because corporations may also submit OICs. Answer D is incorrect because an OIC must specifically identify which tax liabilities it covers.
A taxpayer believes the IRS has incorrectly assessed a penalty. Under Section 6751, which of the following protections does the taxpayer have regarding penalty assessments?
Under Section 6751(b), most penalties must be personally approved in writing by an IRS supervisor before they can be assessed; the IRS must provide written supervisory approval in the examination file.
The taxpayer may request that the IRS reduce any penalty by 50%.
The IRS must wait 90 days before assessing any penalty.
All IRS penalties must be reviewed by a federal court before they can be assessed.
Explanation
Section 6751(b) requires that most penalty assessments be personally approved in writing by a supervisor of the IRS employee who initially determines the penalty. This requirement was added to prevent arbitrary penalty assessments by line examiners. Penalties assessed without supervisory approval may be invalid. Answer A is incorrect because court review is not required before assessment. Answer B is incorrect because there is no general 90-day waiting period for penalties. Answer C is incorrect because there is no automatic 50% reduction right; abatement requests may reduce penalties based on reasonable cause or other grounds.
A taxpayer disagrees with an IRS examination report. The IRS has not yet issued a 90-day letter. What is the taxpayer's first administrative appeal option?
The taxpayer must wait for the 90-day letter before any appeal is available.
The taxpayer must pay the proposed deficiency first, then seek a refund.
The taxpayer may request a conference with the IRS Office of Appeals by responding to the 30-day letter and requesting Appeals consideration.
The taxpayer must immediately file a petition in Tax Court.
Explanation
After receiving the examination report (RAR) and 30-day letter, the taxpayer's first administrative appeal option is to request a conference with the IRS Office of Appeals. The 30-day letter informs the taxpayer of the proposed adjustments and gives 30 days to either agree, request an Appeals conference, or do nothing (which results in a 90-day letter). Appeals is an independent function that tries to resolve disputes without litigation. Answer B is incorrect because Tax Court is accessed via the 90-day letter, not the 30-day letter. Answer C is incorrect because payment is not required at this stage. Answer D is incorrect because Appeals access is available at the 30-day letter stage.
Under Section 7430, a taxpayer who prevails against the IRS in a civil tax proceeding may be entitled to an award of administrative and litigation costs. Which of the following is a requirement for recovering costs under Section 7430?
The taxpayer may recover unlimited attorney's fees under Section 7430.
The taxpayer may recover costs only if the IRS committed fraud.
The taxpayer must have a net worth of less than $1 million.
The taxpayer must have substantially prevailed on the amount in controversy or the most significant tax issue, must have exhausted administrative remedies, must not have unreasonably protracted the proceeding, and the IRS's position must have been not substantially justified.
Explanation
Under Section 7430, a taxpayer may recover administrative and litigation costs if: (1) they substantially prevailed on the amount in controversy or a significant issue; (2) they exhausted available administrative remedies; (3) they did not unreasonably protract the proceeding; and (4) the IRS's position was not substantially justified. Net worth and size requirements also apply to exclude large corporations. Awards are limited to specific per-hour rates for attorney's fees (not unlimited amounts). Answer A incorrectly states the net worth limit (it is $2 million for individuals, not $1 million). Answer C is incorrect because IRS fraud is not required. Answer D is incorrect because attorney's fees are capped at a specific statutory rate.
Under Section 6502, what is the general statute of limitations for the IRS to collect a tax after it has been assessed?
10 years from the date of assessment.
Unlimited; there is no collection statute of limitations.
3 years from the date of assessment.
6 years from the date of assessment.
Explanation
Under Section 6502(a), the IRS generally has 10 years from the date of assessment to collect a tax by levy or court proceeding. After the 10-year collection period expires, the tax debt is generally time-barred for collection. Certain events can toll or extend the collection period, such as an installment agreement, an offer in compromise, a bankruptcy filing, or the taxpayer's absence from the country. Answer B (3 years) is the assessment limitations period. Answer C (6 years) is the substantial omission assessment period. Answer D is incorrect because there is a 10-year collection limitation.
Under Section 7521, taxpayers have the right to audio record meetings with IRS officers or employees. Which of the following correctly describes this right?
The right to record applies only to Appeals hearings, not examination interviews.
Taxpayers have the right to audio record any in-person interview with IRS officers or employees, provided they give 10 days' advance notice; the IRS also has the right to record such meetings.
Taxpayers may audio record meetings only if they receive prior written approval from the IRS Commissioner.
Taxpayers may video record, but not audio record, IRS meetings.
Explanation
Under Section 7521(a), a taxpayer who receives an interview notice from the IRS has the right to make an audio recording of the interview, provided the taxpayer gives advance notice at least 10 days before the interview. The IRS may also record the interview; if the IRS records, the taxpayer has the right to a copy of the recording. This right applies to in-person interviews, not just Appeals hearings. Answer A is incorrect because prior written approval from the Commissioner is not required - advance notice is sufficient. Answer C is incorrect because the right is for audio (not video) recording. Answer D is incorrect because the right applies broadly to IRS interviews, not only Appeals.
Under Section 6325, a federal tax lien may be released in which of the following circumstances?
Only if the taxpayer's income drops below the federal poverty level.
Only after the taxpayer files bankruptcy.
When the liability is satisfied in full, becomes legally unenforceable (collection period expired), or when the taxpayer furnishes an acceptable bond; the IRS must release the lien within 30 days of satisfaction.
Only by a court order from the U.S. Tax Court.
Explanation
Under Section 6325(a), the IRS must release a federal tax lien within 30 days when: (1) the liability for which the lien was imposed is satisfied (paid in full) or becomes legally unenforceable (e.g., the collection statute has expired); or (2) a bond is accepted ensuring payment of the full amount. The IRS also has discretion to issue a certificate of discharge for specific property under Section 6325(b). Answer A is incorrect because a court order is not required for lien release. Answer B is incorrect because bankruptcy may affect the lien but is not the only mechanism for release. Answer C is incorrect because income level is not a basis for automatic lien release.
Under Section 6511(b), how much of an overpayment may a taxpayer recover if they file a claim for refund after the limitations period has expired?
The taxpayer may recover 50% of the overpayment.
The taxpayer may recover overpayments up to $10,000.
The taxpayer may recover the full overpayment regardless of when the claim is filed.
No refund is available if the claim for refund is filed after the applicable 3-year or 2-year period has expired; the taxpayer forfeits the refund.
Explanation
Under Section 6511(b), even if a refund claim is timely filed, the amount of the refund is limited to taxes paid within the look-back period (generally 3 years from the return filing date if the claim is within 3 years, or 2 years from payment if the claim is within 2 years from payment). If the claim is filed after both the 3-year and 2-year periods have expired, no refund is available at all - the claim is entirely time-barred. Answer B is incorrect because the limitations period bars stale claims. Answer C is incorrect because there is no 50% recovery rule. Answer D is incorrect because there is no $10,000 limit; rather, the bar is complete after the period expires.