Tax Exam 1

Which of the following statements regarding tax credits is true?

A tax credit is a direct reduction in the income tax liability.

Which of the following is not a basic type of IRS examination?

Court-approved examinations

Which of the following statements is most accurate regarding ethical considerations in tax practice?

Anyone who prepares tax returns for monetary consideration or who is licensed to practice in a tax-related profession is subject to various rules and codes of professional conduct, and all tax practitioners are subject to the provisions of IRS Circular 230.

Which of the following statements regarding gross income is true?

Generally, gross income is the starting point for reporting income items on a tax return.

Which of the following statements regarding Treasury regulations is not true?

IRS rulings are given more weight as an authority than a Treasury regulation.

Which of the following statements regarding income shifting in tax planning is true?

Income shifting involves moving income among related taxpayers to achieve the lowest marginal taxes on the entire income of the related taxpayers.

An income tax is levied on which of the following?

Individuals, corporations, estates, and trusts

Which of the following concepts describes the marginal tax rate?

It is the rate of tax that will be saved by the next dollar of deduction.

Which of the following statements regarding sales tax is not true?

Sales tax is paid by the business where the goods or service are purchased.

Which of the following statements regarding the income tax system is true?

Tax accounting rules are not based on generally accepted accounting principles (GAAP).

Which of the following statements regarding tax planning and tax evasion is true?

Tax evasion is illegal and is subject to substantial penalties.

Secondary tax sources include which of the following?

Tax reference services, professional tax journals, and tax newsletters

Which of the following statements regarding income taxes is true?

Taxpayers pay income taxes on a pay-as-you-go basis.

Which of the following statements is true?

Taxpayers who do not agree to changes suggested by the IRS during an audit can take the matter directly to one of three trial courts.

Which of the following statements regarding the AICPA's Statements on Standards for Tax Services is true?

The AICPA's Statements on Standards for Tax Services provides useful guidance for all tax preparers, even those who are not members of the AICPA.

Which of the following statements regarding tax planning with respect to timing and income shifting is true?

To make decisions involving timing, it is necessary to compare the tax effects of changes in marginal tax rates and the time value of money.

The allowable deductions for adjusted gross income (AGI) include which of the following?

Trade or business expenses

Which of the following statements regarding tax planning and tax evasion is true?

Unintentional errors, such as a mathematical error on a tax return, are generally not considered to be tax evasion.

Which of the following statements regarding the IRS tax return selection process for audits is true?

Virtually all returns are checked for mathematical, calculation, and clerical errors during the initial processing of the returns.

Which of the following statements is not true?

When given an option, taxpayers must choose a method that will result in the highest tax liability.

Medical expenses are

deductible in excess of 10% of AGI.

The four general rules of thumb when planning the timing of income and deductions include all of the following except

put income into the year with the highest expected marginal tax rate.

Deductions from adjusted gross income (AGI) are

referred to as itemized deductions.

IRC violations with penalties for tax return preparers include which of the following?

Failure to furnish a copy of the return to the taxpayer

Primary sources of tax law include which of the following?

Legislative sources, administrative sources, and judicial sources

Which of the following is considered a tax according to the IRS definition?

Payment of property taxes, which are used to fund the local school system

Which of the following is not considered a tax under the IRS definition?

Payments to the city for water and sewer services