Question

1. What does a tax preparer need to show to avoid the penalty for understatement of tax liability (knew of or should have known)?

A. The avoidance was not willful or reckless.

B. The understatement was not shown to be caused by the preparer's negligence.

C. The preparer had completed all due diligence requirements.

D. There was reasonable cause and the preparer acted in good faith.

2. Generally, all the same tax principles applicable to ________ will apply to virtual currency.

A. Stock.

B. Ordinary income.

C. Property.

D. Wages.

Answer 1

Answer - D. There was reasonable cause and the preparer acted in good faith.

Reason -

If the understatement is present in the tax liabilities then the tax preparer should have knowledge of it and there is reasonable cause to believe the understatement is prepared in a good faith. If the preparer knows the fact and has the ability to justify the same then there is no misstatement

Answer - C. Property.

Reason -

Virtual currency is a digital representation of value. Virtual currency is treated as property for Federal income tax purposes and providing examples of how longstanding tax principles applicable to transactions involving property apply to virtual currency.