20 Representation, Audits & Collection Practice Questions & Answers

1. 1. An unenrolled return preparer who holds a valid Annual Filing Season Program record of completion both prepared and signed a client's individual income tax return. That return is later selected for examination. What may this preparer do?

   • A.Represent the client at every level of the IRS, including Appeals and Collection
   • B.Represent the client at any level, provided the client signs a written engagement letter
   • C.Nothing at all, because only attorneys, certified public accountants and enrolled agents may ever contact the IRS on a taxpayer's behalf
   • D.Represent the client before the IRS examination function regarding that return, but not before Appeals or Collection✓ Answer

   Attorneys, certified public accountants and enrolled agents have unlimited practice rights before the IRS. A record-of-completion holder has only limited representation rights: he or she may represent a taxpayer before examination, customer service and the Taxpayer Advocate Service, and only for a return that he or she both prepared and signed. Those limited rights never extend to Appeals or Collection.

   Source: Treasury Circular 230 — limited practice by unenrolled return preparers; IRS Annual Filing Season ProgramReport a problem with this question

2. 2. All of the following activities constitute practice before the Internal Revenue Service EXCEPT:

   • A.Corresponding and communicating with the IRS on behalf of a taxpayer about the taxpayer's rights, privileges or liabilities
   • B.Representing a taxpayer at a conference, hearing or meeting with the IRS
   • C.Appearing before the IRS solely as a witness for a taxpayer✓ Answer
   • D.Preparing and filing documents with the IRS on behalf of a taxpayer

   Practice before the IRS covers all matters connected with a presentation to the IRS relating to a taxpayer's rights, privileges or liabilities, including correspondence, representation at conferences and hearings, filing documents, and rendering written tax advice. Appearing as a witness, and merely furnishing information at the IRS's request, are expressly outside the definition, and so is the act of preparing a return by itself.

   Source: Treasury Circular 230, section 10.2(a)(4) — definition of practice before the IRSReport a problem with this question

3. 3. A taxpayer wants a mortgage lender to be able to inspect and receive copies of the taxpayer's federal tax information for specified years, but does not want the lender to argue any issue with the IRS or make any commitment on the taxpayer's behalf. Which authorization accomplishes exactly that?

   • A.Form 8821, Tax Information Authorization✓ Answer
   • B.The third-party designee checkbox on the taxpayer's return
   • C.Form 2848, Power of Attorney and Declaration of Representative
   • D.Form 56, Notice Concerning Fiduciary Relationship

   Form 8821 is a tax information authorization: it permits inspection and receipt of confidential tax information only, confers no right to represent or advocate, and may be given to an entity such as a lender. Form 2848 confers representation authority and may name only an eligible individual representative. Form 56 reports a fiduciary relationship, and the third-party designee checkbox is limited to the processing of the single return on which it appears.

   Source: Form 8821 (Tax Information Authorization) and Form 2848 (Power of Attorney and Declaration of Representative)Report a problem with this question

4. 4. The IRS asserts the civil fraud penalty against a taxpayer for an underpayment. Which statement about that penalty is correct?

   • A.The IRS bears the burden of proving fraud by clear and convincing evidence, and the penalty applies to the portion of the underpayment attributable to fraud✓ Answer
   • B.The taxpayer bears the burden of disproving fraud by a preponderance of the evidence
   • C.The accuracy-related penalty and the fraud penalty are both imposed on the same portion of the underpayment
   • D.Fraud is presumed whenever the accuracy-related penalty for a substantial understatement applies

   The civil fraud penalty equals 75 percent of the portion of the underpayment attributable to fraud, and because fraud requires proof of an intentional wrongdoing the government, not the taxpayer, must establish it by clear and convincing evidence. The 20 percent accuracy-related penalty for negligence or a substantial understatement is never stacked on the same portion of the underpayment that carries the fraud penalty.

   Source: IRC section 6663 (civil fraud) and IRC section 6662 (accuracy-related penalty)Report a problem with this question

5. 5. After an unagreed examination, the IRS issues a statutory notice of deficiency to a taxpayer who lives in the United States. To obtain review by the United States Tax Court without first paying the deficiency, the taxpayer must file a petition within:

   • A.30 days after the notice is mailed
   • B.60 days after the notice is mailed
   • C.2 years after the date the tax is paid
   • D.90 days after the notice is mailed, or 150 days if the notice is addressed to a person outside the United States✓ Answer

   The statutory notice of deficiency is the taxpayer's only ticket to the Tax Court, and the petition period is 90 days from the mailing date, extended to 150 days for a notice addressed to a person outside the United States. During that period, and while a timely filed Tax Court case is pending, the IRS is barred from assessing the deficiency. The earlier 30-day letter merely offers an administrative appeal and confers no court jurisdiction.

   Source: IRC sections 6212 and 6213 — notice of deficiency and petition to the Tax CourtReport a problem with this question

6. 6. During an in-person interview in an examination, a taxpayer who is not accompanied by a representative clearly states a desire to consult an enrolled agent. No administrative summons has been issued. What must the IRS employee do?

   • A.Finish the interview and then allow the representative to submit written comments
   • B.Continue the interview but stop asking about the disputed item
   • C.Require the taxpayer to sign a waiver of appeal rights before ending the interview
   • D.Suspend the interview so the taxpayer can consult a representative✓ Answer

   When a taxpayer being interviewed clearly states a desire to consult with an attorney, certified public accountant, enrolled agent or other person permitted to represent taxpayers, the IRS employee must suspend the interview; the only exception is where an administrative summons has been issued. The same protection means a representative holding a valid power of attorney generally cannot be required to accompany the taxpayer to an interview absent a summons.

   Source: IRC section 7521(b)(2) — suspension of an interviewReport a problem with this question

7. 7. In an examination, the burden of proof on a factual issue shifts from the taxpayer to the IRS only if the taxpayer:

   • A.Denies the proposed adjustment in a signed written statement
   • B.Introduces credible evidence on the issue, has met all substantiation requirements, has maintained required records, and has cooperated with reasonable IRS requests✓ Answer
   • C.Requests that the case be transferred to the Appeals office
   • D.Files an amended return before the examination is closed

   The burden of proof in a tax controversy is normally on the taxpayer. It shifts to the IRS on a factual issue only when the taxpayer introduces credible evidence and independently satisfies the substantiation, recordkeeping and cooperation conditions, because those conditions are what make the taxpayer's evidence testable. Separately, the IRS always carries the burden of production for penalties asserted against an individual.

   Source: IRC section 7491 — burden of proof and burden of productionReport a problem with this question

8. 8. Which statement best distinguishes the IRS Independent Office of Appeals from the examination and collection functions?

   • A.Appeals will decide cases based on a taxpayer's moral, religious or constitutional objections to the tax laws
   • B.Appeals determinations are legally binding on the federal courts
   • C.Appeals is authorized to apply the tax law more generously to taxpayers than examination is
   • D.Appeals may settle a case by weighing the hazards of litigation, that is, the risk that the government would lose in court, while examination and collection may not✓ Answer

   Appeals exists to resolve disputes without litigation on a basis that is fair and impartial to both the taxpayer and the government, and it is the only IRS function permitted to consider the hazards of litigation when settling. Examination and collection must apply the law as they understand it and cannot trade away part of a proposed adjustment because of litigating risk. Appeals will not consider positions based solely on moral, religious, political or constitutional grounds.

   Source: IRS Independent Office of Appeals — settlement authority; IRS Publication 5, Your Appeal Rights and How To Prepare a Protest If You DisagreeReport a problem with this question

9. 9. A formal written protest requesting Appeals consideration of unagreed examination adjustments must include all of the following EXCEPT:

   • A.The law or other authority on which the taxpayer relies
   • B.An itemized schedule of the adjustments with which the taxpayer disagrees and the reasons for the disagreement
   • C.A statement of the facts supporting the taxpayer's position on each contested issue
   • D.A numerical estimate of the taxpayer's probability of winning the case in court✓ Answer

   A written protest must identify the taxpayer and the periods, state the intent to appeal and identify the letter being appealed, itemize each disputed adjustment with reasons, set out the supporting facts and the law or authority relied on, and be signed under penalties of perjury by the taxpayer, or with a corresponding declaration by the representative. Weighing the hazards of litigation is Appeals' own settlement function, not an element the taxpayer must quantify in the protest.

   Source: IRS Publication 5, Your Appeal Rights and How To Prepare a Protest If You DisagreeReport a problem with this question

10. 10. A calendar-year individual files a complete and accurate income tax return one month before the return's due date and does not obtain an extension. Absent fraud or a substantial omission of gross income, the IRS generally may assess additional tax until:

    • A.Three years after the return's due date, because a return filed early is treated as filed on the due date✓ Answer
    • B.Three years after the date the return was actually filed
    • C.Ten years after the return was filed
    • D.Three years after the date the IRS first contacts the taxpayer about the return

    The general assessment period is three years measured from the later of the return's due date or the date it was actually filed, and a return filed before its due date is deemed filed on the due date. Filing early therefore does not start the clock any sooner. The ten-year period is the separate collection period, which runs from assessment rather than from filing.

    Source: IRC section 6501(a) and section 6501(b)(1)Report a problem with this question

11. 11. A taxpayer files a return that omits an amount of gross income exceeding 25 percent of the gross income stated on the return. The omission is careless but not fraudulent. The period during which the IRS may assess the resulting tax is:

    • A.Six years✓ Answer
    • B.Three years
    • C.Unlimited
    • D.Ten years

    A substantial omission of gross income, meaning more than 25 percent of the gross income stated on the return, extends the assessment period from three years to six years, because the omission deprives the IRS of the information needed to evaluate the return within the normal period. The period is unlimited only for a false or fraudulent return or where no return was filed, and the ten-year figure belongs to collection after assessment, not to assessment itself.

    Source: IRC section 6501(e) — substantial omission of itemsReport a problem with this question

12. 12. A taxpayer who timely filed a return and paid the tax shown with it later discovers an overpayment for that year. A claim for refund must generally be filed by:

    • A.Three years from the due date of the return in every case, regardless of when the tax was paid
    • B.The later of three years from the date the return was filed or two years from the date the tax was paid✓ Answer
    • C.Two years from the date the return was filed
    • D.Ten years from the date the tax was assessed

    A refund claim must be filed by the later of three years from the date the return was filed or two years from the date the tax was paid, so that a taxpayer who pays long after filing still has a window. A separate lookback rule then limits the amount refundable to the tax paid within the applicable period preceding the claim, which is why a timely claim can still produce no refund.

    Source: IRC section 6511(a) and section 6511(b)(2)Report a problem with this question

13. 13. The federal tax lien in favor of the United States arises when:

    • A.The tax is assessed, notice and demand for payment is made, and the taxpayer neglects or refuses to pay within 10 days, and the lien then relates back to the assessment date✓ Answer
    • B.The IRS files a Notice of Federal Tax Lien in the appropriate public records
    • C.A federal court enters judgment in favor of the government
    • D.The IRS issues the final notice of intent to levy and notice of the right to a hearing

    The lien arises by operation of law once tax is assessed, notice and demand is made, and the taxpayer fails to pay within 10 days, and it relates back to the assessment date and attaches to all of the taxpayer's property and rights to property. Filing the Notice of Federal Tax Lien does not create the lien; it perfects the government's priority against purchasers, holders of security interests, mechanic's lienors and judgment lien creditors.

    Source: IRC sections 6321, 6322 and 6323Report a problem with this question

14. 14. A taxpayer received a final notice of intent to levy and notice of the right to a hearing but did not request a hearing within the 30-day period. Several months later, still within one year of the notice, the taxpayer submits a hearing request. Which statement is correct?

    • A.The taxpayer receives a collection due process hearing ending in a notice of determination that may be petitioned to the Tax Court
    • B.The late request bars Appeals from considering the case in any form
    • C.The late request suspends the collection period exactly as a timely request would
    • D.The taxpayer receives an equivalent hearing, which ends in a decision letter, does not suspend the collection period, and cannot be petitioned to the Tax Court✓ Answer

    A collection due process hearing must be requested within 30 days of the final notice; a timely request suspends levy action and suspends the collection period, and the resulting notice of determination may be petitioned to the Tax Court. A late request made within one year still gets Appeals consideration, but only as an equivalent hearing, which produces a decision letter with no judicial review, no statutory bar on levy and no suspension of the collection period.

    Source: IRC sections 6320 and 6330 — collection due process and equivalent hearing proceduresReport a problem with this question

15. 15. Which statement about the Collection Appeals Program is correct?

    • A.It becomes available only after a collection due process hearing has been completed
    • B.It suspends the collection period in the same way a timely collection due process request does
    • C.It permits the taxpayer to challenge the underlying tax liability and then petition the Tax Court
    • D.It may be used before or after a lien filing or a levy and to contest the rejection, modification or termination of an installment agreement, but the underlying liability may not be disputed and the decision is not subject to judicial review✓ Answer

    The Collection Appeals Program is broader and faster than a collection due process hearing: it reaches proposed and completed lien filings, levies and seizures and installment agreement rejections, modifications and terminations. The trade-off is that the taxpayer cannot use it to argue that the tax is not owed, and the Appeals decision is final with no route to court, whereas a collection due process determination may be petitioned to the Tax Court.

    Source: IRS Collection Appeals Program (Form 9423); IRS Publication 1660, Collection Appeal RightsReport a problem with this question

16. 16. The 10-year period during which the IRS may collect a tax by levy or by a court proceeding begins on:

    • A.The due date of the return for the year involved
    • B.The date the taxpayer's last payment was applied to the account
    • C.The date the tax was assessed✓ Answer
    • D.The date the return was filed

    The collection period runs for 10 years from the date of assessment, not from the filing or due date, which is why two liabilities reported on the same return can have different collection expiration dates if they were assessed at different times. The period is suspended by events such as a pending offer in compromise, a pending installment agreement request, a timely collection due process request, bankruptcy, and certain periods the taxpayer is outside the United States.

    Source: IRC section 6502(a) — collection after assessmentReport a problem with this question

17. 17. An individual whose assessed income tax liability, excluding penalties and interest, is within the statutory ceiling for a guaranteed installment agreement asks whether the IRS is required to accept the proposal. The IRS must accept only if, among other conditions, the taxpayer:

    • A.Filed all returns and paid all tax due for the preceding five taxable years, entered into no installment agreement during that period, and agrees to full pay the liability within three years✓ Answer
    • B.Submits a complete Form 433-A with supporting documentation of income and expenses
    • C.Agrees to pay the balance within six years and posts a bond for the unpaid amount
    • D.First completes a collection due process hearing before Appeals

    A guaranteed installment agreement is one the IRS has no discretion to refuse, so the statute imposes strict conditions: the taxpayer must be an individual within the statutory dollar ceiling, must have been fully compliant for the preceding five taxable years with no prior installment agreement, must be unable to pay in full, must agree to full payment within three years, and must agree to comply with the tax laws while the agreement is in effect. No collection information statement is required for such an agreement.

    Source: IRC section 6159(c) — guaranteed installment agreementsReport a problem with this question

18. 18. A taxpayer wishes to compromise an assessed liability solely on the ground that the tax is not actually owed. That offer is:

    • A.An offer based on doubt as to liability, submitted on Form 656-L, which requires no application fee and no initial payment✓ Answer
    • B.An offer based on doubt as to collectibility, requiring the application fee and an initial payment with the offer
    • C.Not permitted, because a disputed liability may be raised only by petitioning the Tax Court
    • D.An offer based on effective tax administration, requiring proof of economic hardship

    An offer in compromise rests on one of three statutory grounds: doubt as to liability, doubt as to collectibility, and effective tax administration. Because a doubt-as-to-liability offer questions whether the tax is owed rather than whether it can be collected, it is filed on its own form, requires no collection information statement, and carries neither the application fee nor the initial payment that accompany collectibility and effective tax administration offers.

    Source: IRC section 7122; Form 656-L, Offer in Compromise (Doubt as to Liability)Report a problem with this question

19. 19. An individual's account is reported currently not collectible because paying anything now would leave the taxpayer unable to meet basic living expenses. Which statement is correct?

    • A.Penalties and interest continue to accrue, the collection period keeps running, and the IRS may still file a Notice of Federal Tax Lien✓ Answer
    • B.The liability is permanently forgiven once the status is granted
    • C.The collection period is suspended for the entire time the account remains in that status
    • D.Interest stops accruing while the status is in effect, although penalties continue

    Currently not collectible status only suspends active collection effort; it does not forgive the debt or stop the statutory consequences of an unpaid assessment, so penalties and interest keep accruing and a lien notice may still be filed to protect the government's priority. Because the collection period continues to run, the liability can eventually expire, and the IRS will reactivate the account if the taxpayer's income improves.

    Source: IRC section 6502; IRS Publication 594, The IRS Collection ProcessReport a problem with this question

20. 20. For a month in which both the failure-to-file penalty and the failure-to-pay penalty apply to the same return, which statement is correct?

    • A.Both penalties are imposed at their full monthly rates with no adjustment
    • B.Neither penalty accrues until the examination of the return is completed
    • C.The failure-to-file penalty for that month is reduced by the amount of the failure-to-pay penalty for that month✓ Answer
    • D.Only the failure-to-pay penalty applies, because it continues for a longer period

    The failure-to-file penalty accrues at 5 percent of the unpaid tax per month or part of a month up to 25 percent, and the failure-to-pay penalty at one-half of one percent per month up to 25 percent. To avoid double-counting the same delinquency, the statute reduces the failure-to-file penalty by the failure-to-pay penalty for any month both apply. Either penalty may be removed for reasonable cause and not willful neglect, or through the administrative first-time abatement waiver where the taxpayer has a clean prior compliance history.

    Source: IRC section 6651(a) and section 6651(c)(1)Report a problem with this question

Practice questions based on the Internal Revenue Code, Treasury Department Circular No. 230, and the IRS Special Enrollment Examination content outline. Enrolled Agent and the SEE are administered by the IRS; this site is not affiliated with or endorsed by the IRS or Treasury. Questions deliberately avoid inflation-adjusted figures — rates, brackets, standard deductions, contribution and phase-out limits, mileage rates and penalty amounts change every year, so look those up for the tax year you are tested on. This is study material, not tax advice. About the Enrolled Agent exam →