The "Cohan Rule" States That

question 33

Multiple Choice

The "Cohan Rule" states that:

• A) A taxpayer is not liable for tax liability that arose due to a tax return preparer's negligence
• B) A taxpayer who incurred legitimate tax deductions may claim reasonable estimates of these deductions on her tax return
• C) A taxpayer who furnishes incomplete information to a tax return preparer may claim estimated deductions only if the tax return preparer independently determines the amounts of these estimates in good faith
• D) A tax return preparer who claims estimated deductions on a client's tax return is legally liable to the government for any tax liability that arises if the deductions are illegitimate and the taxpayer is unable or unwilling to pay the resulting increase in tax liability

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Definitions:

Raw Materials

Raw materials are the fundamental ingredients or components that are processed to manufacture goods.

Asset

An item or resource owned by an individual or a business, having economic value and expected to provide future benefits.

Direct Material

Raw materials that are directly incorporated into a finished product and can be easily traced.

Indirect Material

Materials used in the production process that can't be directly traced to a finished product, such as lubricants and cleaning supplies.