Penalties & Collections
Part 3 · 59 study cards · Active recall format
Q1.What is the Collection Statute Expiration Date (CSED)?
Exam wording
IRS generally has 10 years from the date of assessment to collect a tax liability. After the CSED, the debt is legally uncollectible.
Q2.A client requests records needed to satisfy federal tax obligations while disputing the practitioner's fee. What is the general Circular 230 rule?
Exam wording
Promptly return necessary client records despite the fee dispute.
Q3.After returning a client's records under Circular 230, what may the practitioner generally retain?
Exam wording
Copies of the returned records. Circular 230 permits the practitioner to retain copies of records returned to the client.
Q4.Absent an event that suspends or extends the period, how long is the IRS collection statute generally?
Exam wording
10 years. Publication 594 describes the collection statute expiration period as generally 10 years.
Q5.Tax was assessed on September 8, 2026, and no tolling event occurs. What is the general collection expiration date?
Exam wording
September 8, 2036. Applying Publication 594's general 10-year collection period gives September 8, 2036.
Q6.Give the practical federal-tax rule for assessment and appeal procedures for preparer penalties.
Exam wording
A preparer who believes an assessed preparer penalty is erroneous may use the IRS claim-for-refund procedure identified for that penalty.
Q7.What is the key limitation involving types of penalties (e.g., negligence, substantial understatement, overvaluation)?
Exam wording
Preparer penalties distinguish unreasonable positions from willful or reckless conduct, with different statutory computations.
Q8.How should a practitioner handle furnishing a copy of a return to a taxpayer?
Exam wording
A signing return preparer must furnish the taxpayer a completed copy of the return or claim no later than presentation for signature.
Q9.What is the exam-ready rule on signing returns and furnishing identifying numbers?
Exam wording
Separate §6695 rules address failure to sign and failure to furnish the preparer's identifying number.
Q10.What official rule governs keeping copies or lists of returns prepared?
Exam wording
A preparer must retain a completed copy or the prescribed list for the statutory retention period.
Q11.Summarize the correct treatment of employees engaged or employed during a return period (e.g., IRC section 6060).
Exam wording
A person employing return preparers must make the return-period information return required by §6060.
Q12.How should a practitioner handle taxpayer's ability to pay the tax (e.g., installment agreements, offer in compromise, currently not collectible)?
Exam wording
Collection alternatives depend on the taxpayer's ability to pay and verified financial information.
Q13.What is the exam-ready rule on general financial health (e.g., bankruptcy, lawsuits, garnishments, cash flow, assets, and insolvency)?
Exam wording
Collection analysis considers income, expenses, assets, equity, and other financial facts rather than one balance alone.
Q14.What official rule governs third-party research (e.g., property assessment for taxes, asset values, state and local tax information)?
Exam wording
Reliable third-party records can help substantiate ownership, values, income, and expenses in a collection matter.
Q15.Summarize the correct treatment of discharge of the tax liability in bankruptcy.
Exam wording
Bankruptcy can affect collection, but tax discharge depends on bankruptcy and tax-law requirements and is not automatic.
Q16.What common mistake should be avoided with the IRS Collection Financial Standards?
Exam wording
The IRS uses Collection Financial Standards when evaluating certain allowable living expenses and ability to pay.
Q17.What official rule governs tax avoidance vs tax evasion?
Exam wording
Tax avoidance uses lawful choices; tax evasion involves willful unlawful conduct to defeat tax.
Q18.What common mistake should be avoided with taxpayer Advocate Service (e.g., criteria for requesting assistance)?
Exam wording
TAS may assist when its case criteria are met, including specified hardship, delay, or systemic circumstances.
Q19.State the controlling rule for extension of time to pay (e.g., Form 1127).
Exam wording
An extension of time to pay is distinct from an installment agreement and requires the applicable form and hardship showing.
Q20.Give the practical federal-tax rule for offer in compromise.
Exam wording
An offer in compromise may be based on doubt as to liability, doubt as to collectibility, or effective tax administration under applicable rules.
Q21.What is the key limitation involving collection appeals program (e.g., denial of installment agreements, discharge applications)?
Exam wording
CAP provides administrative review for specified collection actions, but does not provide Tax Court review of the CAP decision.
Q22.How should a practitioner handle collection appeals and due process (e.g., lien, levy, and Form 12153)?
Exam wording
A timely Collection Due Process request can secure an Appeals hearing concerning a qualifying lien or proposed levy and may permit later Tax Court review.
Q23.What is the exam-ready rule on adjustments to the taxpayer’s account (e.g., abatements and refund offsets)?
Exam wording
The IRS may apply an overpayment to certain outstanding liabilities; account adjustments and offsets must be analyzed separately.
Q24.What common mistake should be avoided with collection notice and Notice of Federal Tax Lien?
Exam wording
A Notice of Federal Tax Lien publicly alerts creditors to the government's legal claim against a taxpayer's property after the lien arises.
Q25.What threshold rule applies to levy and seizure of taxpayer's property?
Exam wording
A levy is a legal seizure of property or rights to property after required collection procedures and notices.
Q26.How does current authority treat currently Not Collectible (e.g., reasons and reactivation)?
Exam wording
Currently-not-collectible status generally pauses active collection when payment would cause hardship, but the debt, interest, and possible liens remain.
Q27.What should a representative verify about the IRS Collection Summons (e.g., purposes)?
Exam wording
An IRS summons can compel testimony or production of records relevant to determining or collecting tax.
Q28.What must an EA remember about trust fund recovery penalty?
Exam wording
The trust fund recovery penalty may be assessed against a responsible person who willfully fails to collect, account for, or pay trust fund taxes.
Q29.Give the practical federal-tax rule for amended returns and claims for refund (e.g., Form 1040X, Form 843, effect on statute of limitations).
Exam wording
An amended return or refund claim must satisfy the applicable filing, form, and limitation-period rules.
Q30.How should a practitioner handle penalties subject to abatement?
Exam wording
Only penalties for which the law provides relief may be abated; the taxpayer must establish the applicable basis.
Q31.What is the exam-ready rule on basis for having penalties abated or refunded?
Exam wording
Reasonable cause, statutory exceptions, administrative waiver, or correction of IRS error can support penalty relief when their requirements are met.
Q32.What official rule governs basis for having interest abated or refunded?
Exam wording
Interest abatement is narrower than penalty relief and generally requires a statutory basis rather than ordinary inability to pay.
Q33.Summarize the correct treatment of interest recalculation.
Exam wording
Interest should be recomputed from the correct tax, payment, assessment, and suspension dates shown in the account history.
Q34.What common mistake should be avoided with procedures for requesting abatement?
Exam wording
A taxpayer requests abatement using the procedure and form appropriate to the penalty or interest at issue and preserves appeal or refund rights.
Q35.Which of the following is NOT a type of accuracy-related penalty under IRC §6662?
Exam wording
Failure to file a tax return
Q36.Gerold self-prepares his own tax return, which is later audited by the IRS. Gerold had claimed a very large deduction for medical expenses, which he could not substantiate. This led to a substantial understatement of income tax. What is the penalty rate for accuracy-related penalties under IRC §6662?
Exam wording
20% of the tax understatement
Q37.Norris was audited during the year, and a large deduction was disallowed on his return. He was assessed a penalty for substantial understatement. What percentage of the understatement of tax must a taxpayer pay if he is liable for this penalty?
Exam wording
20%
Q38.Paulette is married to Ronald, and the couple usually files jointly. Paulette is self-employed, and she files a fraudulent Schedule C, greatly inflating her deductions and underreporting her income. The IRS later discovers that Paulette had been making large cash deposits in a hidden bank account, and none of that income was reported on her return. Ronald only earns wages, and now he is terrified that the IRS will assess fraud penalties against him, too. All of the following statements regarding the fraud penalty are correct except:
Exam wording
The fraud penalty on a joint return will automatically apply to both spouses.
Q39.Suzie hires Gustav to prepare her income tax returns. Gustav has prepared returns for several years, but he is not a CPA, an attorney, or an enrolled agent. Although he knows that Suzie is single and childless, he prepares her tax return based on the head of household filing status with two qualifying children so that Suzie may qualify for the Earned Income Tax Credit, and thus a larger refund. Suzie reviews a copy of the tax return and signs it. Gustav also signs the return and submits it to the IRS for processing. If the IRS detects the fraudulent credit, which of they, if either, will face potential penalties?
Exam wording
Both Gustav and Suzie.
Q40.Accuracy-related penalties in IRC §6662 are imposed for substantial understatement of income tax and also for:
Exam wording
Substantial misstatement of the value of assets.
Q41.All of the following statements about the trust fund recovery penalty are correct except:
Exam wording
The IRS primarily targets employees for this penalty.
Q42.What penalty applies to a "substantial" valuation misstatement?
Exam wording
20%
Q43.What is the primary difference between tax evasion and tax avoidance?
Exam wording
Tax avoidance involves legally reducing taxable income, while tax evasion uses illegal methods.
Q44.An enrolled agent (EA) can be sanctioned under Circular 230 in each of the following ways, EXCEPT:
Exam wording
Imprisonment.
Q45.Which of the following statements is incorrect regarding the statute of limitations on the assessment of additional tax?
Exam wording
If a fraudulent return is filed, the statute of limitations is seven years after the return was filed.
Q46.What is a potential consequence of tax evasion?
Exam wording
A fine, penalty and/or imprisonment.
Q47.Keenan files a tax return that the IRS determined to be a frivolous return. What is the IRS penalty for a frivolous tax return?
Exam wording
$5,000, plus any other penalty provided by law.
Q48.At the end of April, Boris has not yet filed his individual tax return, and he did not file an extension. Boris estimates that he owes $2,000 in unpaid tax, but he doesn't have the money to pay this amount, so he doesn't file at all. Since he missed the filing deadline and did not file an extension, Boris will be subject to penalties for non-filing; which of the following penalties will accrue at a faster rate?
Exam wording
Failure-to-file penalty.
Q49.Axel is married to Emma; they live together and file joint returns. In which scenario would Axel qualify as an injured spouse?
Exam wording
Axel files a joint return, and his share of the refund is offset due to Emma's student loan debt.
Q50.All of the following property is exempt from an IRS levy except:
Exam wording
Social Security payments.
Q51.Waylen owes $40,000 in delinquent tax debt. He applies for an offer in compromise, but it is rejected. How much time does Waylen have to appeal his rejected offer?
Exam wording
30 days
Q52.Aziza owes $20,000 of unpaid federal tax liabilities. She agrees she owes the tax, but she has a serious medical problem, and her monthly income does not meet her necessary living expenses. She does not own any real estate and does not have the ability to fully pay the liability now or through monthly installment payments. What type of offer in compromise may she qualify for?
Exam wording
Doubt as to collectibility.
Q53.Jack's only income comes from wages. He has a high-paying job as a medical doctor, but did not properly estimate his withholding for several years. As a result, he currently owes $255,000 to the IRS. He would like to set up an installment agreement. Which of the following statements regarding his payment options is correct?
Exam wording
Jack may qualify for an installment agreement for this amount of unpaid tax.
Q54."Separation of liability" relief does not apply to taxpayers who are:
Exam wording
Single (never married).
Q55.Farida is an enrolled agent. She prepared a tax return for her client, Josue. Josue has a balance due of $25,900, but he cannot pay the entire amount upon filing and would like to set up an installment agreement. Which of the following is required before an installment agreement will be approved?
Exam wording
Josue must be in filing compliance.
Q56.Sheila and Dale were married in 2025. They are owed a refund on their joint return, but the refund is offset against Dale's past-due child support. Does Sheila have any recourse to recover her portion of the refund?
Exam wording
Sheila may be eligible for injured spouse relief.
Q57.Rosalyn is receiving a $4,500 federal tax refund this year. Which of the following methods is not available for her to receive her refund?
Exam wording
She may direct deposit her refund to her credit card account.
Q58.Jason cannot pay his tax liability because of a serious health issue that is causing significant hardship. How much extra time will the IRS grant for Jason to pay his tax liability under the undue hardship extension?
Exam wording
6 months.
Q59.Penalties and interest continue to accrue on a taxpayer's unpaid tax liability in which of the following instances?
Exam wording
All of the above.
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