Chapter 1
The tax law provides various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. These provisions can be justified on both economic and equity grounds. T/F
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The value added tax (VAT) has not had wide acceptance in the international community. T/F
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There is a Federal excise tax on hotel occupancy T/F
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Under state amnesty programs, all delinquent and unpaid income taxes are forgiven. T/F
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When Congress enacts a tax cut that is phased in over a period of years, revenue neutrality is achieved. T/F
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When interest is charged on a deficiency, any part of a month counts as a full month. T/F
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If an income tax return is not filed by a taxpayer, there is no statute of limitations on assessments of tax by the IRS. T/F
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If fraud is involved, there is no time limit on the assessment of a deficiency by the IRS. T/F
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Jason's business warehouse is destroyed by fire. Because the insurance proceeds exceed the basis of the property, a gain results. If Jason shortly reinvests the proceeds in a new warehouse, no gain is recognized due to the application of the wherewithal to pay concept. T/F
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Julius, a married taxpayer, makes gifts to each of his six children. A maximum of twelve annual exclusions could be allowed as to these gifts. T/F
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Mona inherits her mother's personal residence, which she converts to a furnished rental house. These changes should affect the amount of ad valorem property taxes levied on the properties. T/F
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On occasion, Congress has to enact legislation that clarifies the tax law in order to change a result reached by the U.S. Supreme Court. T/F
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On transfers by death, the Federal government relies on an estate tax, while states impose an estate tax, an inheritance tax, both taxes, or neither tax. T/F
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One of the major reasons for the enactment of the Federal estate tax was to prevent large amounts of wealth from being accumulated within a family unit. T/F
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One of the motivations for making a gift is to save on income taxes. T/F
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Sales made by mail order are not exempt from the application of a general sales (or use) tax. T/F
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Sally's neighbor often brags that his employer often pays him in cash "off the books" to save him taxes. Sally is tired of hearing this and contacts the IRS to report the neighbor. If this tip results in taxes collected by the IRS, Sally will likely receive an award of a portion of the tax and penalties collected. T/F
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Some states use their state income tax return as a means of collecting unpaid sales and use taxes. T/F
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The Federal estate and gift taxes are examples of progressive taxes. T/F
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The Federal excise tax on cigarettes is an example of a proportional tax. T/F
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The Federal income tax on individuals generates more revenue than the Federal income tax on corporations. T/F
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The IRS agent auditing the return will issue an RAR even if the taxpayer owes no additional taxes T/F
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The ad valorem tax on personal use personalty is more often avoided by taxpayers than the ad valorem tax on business use personalty. T/F
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The amount of a taxpayer's itemized deductions will increase the chance of being audited by the IRS T/F
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The first income tax on individuals (after the ratification of the Sixteenth Amendment to the Constitution) levied tax rates from a low of 2% to a high of 6%. T/F
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The majority of IRS audits are handled by correspondence. T/F
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The objective of pay-as-you-go (paygo) is to improve administrative feasibility. T/F
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To lessen or eliminate the effect of multiple taxation, a taxpayer who is subject to both foreign and U.S. income taxes on the same income is allowed either a deduction or a credit for the foreign tax paid. T/F
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To mitigate the effect of the annual accounting period concept, the tax law permits the carryforward of excess charitable contributions of a particular year to other years. T/F
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Two persons who live in the same state but in different counties may not be subject to the same general sales tax T/F
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Ultimately, most taxes are paid by individuals T/F
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Under Clint's will, all of his property passes to either the Lutheran Church or to his wife. No Federal estate tax will be due on Clint's death in 2019. T/F
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Under the usual state inheritance tax, two heirs, a cousin and a son of the deceased, would not be taxed at the same rate. T/F
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Unlike FICA, FUTA requires that employers comply with state as well as Federal rules. T/F
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Upon audit by the IRS, Faith is assessed a deficiency of $40,000 of which $25,000 is attributable to negligence. The 20% negligence penalty will apply to $25,000. T/F
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Various tax provisions encourage the creation of certain types of retirement plans. Such provisions can be justified on both economic and social grounds. T/F
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When a state decouples from a Federal tax provision, it means that this provision will not apply for state income tax purposes. T/F
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The principal objective of the FUTA tax is to provide some measure of retirement security. T/F
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The ratification of the Sixteenth Amendment to the U.S. Constitution was necessary to validate the Federal income tax on corporations. T/F
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If a tax deficiency is attributable to fraud, the negligence penalty will not be imposed. T/F
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Which, if any, of the following statements best describes the history of the Federal income tax? a. It did not exist during the Civil War. b. The Federal income tax on corporations was held by the U.S. Supreme Court to be allowable under the U.S. Constitution. c. The Federal income tax on individuals was held by the U.S. Supreme Court to be allowable under the U.S. Constitution. d. Both the Federal income tax on individuals and on corporations was held by the U.S. Supreme Court to be contrary to the U.S. Constitution. e. None of these.
B
Which, if any, is not one of Adam Smith's canons (principles) of taxation? a. Economy in collection b. Certainty c. Convenience of payment d. Simplicity e. Equality
D
The pay-as-you-go feature of the Federal income tax on individuals conforms to Adam Smith's canon (principle) of certainty. T/F
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A fixture will be subject to the ad valorem tax on personalty rather than the ad valorem tax on realty. T/F
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A provision in the law that compels accrual basis taxpayers to pay a tax on prepaid income in the year received and not when earned is consistent with generally accepted accounting principles. T/F
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A safe and easy way for a taxpayer to avoid local and state sales taxes is to make the purchase in a state that levies no such taxes. T/F
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An inheritance tax is a tax on a decedent's right to pass property at death T/F
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An office audit by the IRS takes place at the office of the taxpayer. T/F
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As a matter of administrative convenience, the IRS would prefer to have Congress decrease (rather than increase) the amount of the standard deduction allowed to individual taxpayers. T/F
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Because it is consistent with the wherewithal to pay concept, the tax law requires a seller to recognize a gain in the year the installment sale occurs. T/F
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Before the Sixteenth Amendment to the Constitution was ratified, there was no valid Federal income tax on individuals. T/F
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Currently, the tax base for the Social Security component of the FICA is not limited to a dollar amount. T/F
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During any month in which both the failure to file penalty and the failure to pay penalty apply, the failure to file penalty is increased by the amount of the failure to pay penalty. T/F
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For omissions from gross income in excess of 25% of that reported, there is no statute of limitations on additional income tax assessments by the IRS. T/F
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For state income tax purposes, a majority of states allow a deduction for Federal income taxes. T/F
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If a taxpayer files early (i.e., before the due date of the return), the statute of limitations on assessments begins on the date the return is filed. T/F
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If more IRS audits are producing a higher number of no change results, this indicates increased compliance on the part of taxpayers. T/F
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In 2019, José, a widower, sells land (fair market value of $100,000) to his daughter, Linda, for $50,000. José has not made a taxable gift T/F
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In cases of doubt, courts have held that tax relief provisions should be broadly construed in favor of taxpayers. T/F
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In preparing a tax return, all questions on the return must be answered. T/F
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In preparing an income tax return, the use of a client's estimates is not permitted. T/F
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Like the Federal counterpart, the amount of the state excise taxes on gasoline varies from state to state. T/F
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No state may offer an income tax amnesty program more than once T/F
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States impose either a state income tax or a general sales tax, but not both types of taxes. T/F
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Stealth taxes have the effect of generating additional taxes from all taxpayers. T/F
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The FICA tax (Medicare component) on wages is progressive since the tax due increases as wages increase.
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The Federal gas-guzzler tax applies only to automobiles manufactured overseas and imported into the United States. T/F
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The IRS is required to redetermine the interest rate on underpayments and overpayments once a year. T/F
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The annual exclusion, currently $15,000, is available for gift and estate tax purposes. T/F
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The civil fraud penalty can entail large fines and possible incarceration. T/F
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The formula for the Federal income tax on corporations is the same as that applicable to individuals. T/F
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A CPA firm in California sends many of its less complex tax returns to be prepared by a group of accountants in India. If certain procedures are followed, this outsourcing of tax return preparation is proper. T/F
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A calendar year taxpayer files his 2018 Federal income tax return on March 4, 2019. The return reflects an overpayment of $6,000, and the taxpayer requests a refund of this amount. The refund is paid on May 16, 2019. The refund need not include interest. T/F
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A major advantage of a flat tax type of income tax is its simplicity. T/F
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A parent employs his twin daughters, age 17, in his sole proprietorship. The daughters are not subject to FICA coverage. T/F
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A state income tax can be imposed on nonresident taxpayers who earn income within the state on an itinerant basis. T/F
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A tax cut enacted by Congress that contains a sunset provision will make the tax cut temporary. T/F
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An excise tax is often used to try to influence behavior. T/F
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Because the law is complicated, most individual taxpayers are not able to complete their Federal income tax returns without outside assistance. T/F
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Bracket creep will not exist if there is only a single (flat) tax rate for the income tax. T/F
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Currently, the Federal corporate income tax is less progressive than the individual income tax. T/F
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Even if property tax rates are not changed, the amount of ad valorem taxes imposed on realty may not remain the same. T/F
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Even though a client refuses to correct an error on a past return, it may be possible for a practitioner to continue to prepare returns for the client. T/F
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For Federal income tax purposes, there never has been a general amnesty period. T/F
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For individual taxpayers, the interest rate for income tax refunds (overpayments) is the same as that applicable to assessments (underpayments). T/F
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If a special agent becomes involved in the audit of a return, this indicates that the IRS suspects that fraud is involved T/F
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A VAT (value added tax): a. Is regressive in its effect. b. Has not proved popular outside of the United States. c. Is not a tax on consumption. d. Is used exclusively by third world (less developed) countries. e. None of these.
a
A rationale for the installment sale method tax rule is: a. Ability to pay. b. Equity and fairness. c. Simplicity. d. Revenue neutrality.
a
Regarding proper ethical accounting guidelines, which, if any, of the following is correct? a. The use of client estimates in preparing a return may be acceptable. b. Under no circumstances should a question on a tax return be left unanswered. c. If a client has made a mistake in a prior year's return and refuses to correct it, the accountant should withdraw from the engagement. d. If the exact amount of a deduction is not certain (e.g., around mid-$600s), it should be recorded as an odd amount (i.e., $649) so as to increase the appearance of greater certainty. e. None of these.
a
Social considerations can be used to justify: a. Allowance of a credit for child care expenses. b. Allowing excess capital losses to be carried over to other years. c. Allowing accelerated amortization for the cost of installing pollution control facilities. d. Allowing a Federal income tax deduction for state and local sales taxes. e. None of these.
a
State income taxes generally can be characterized by: a. The same date for filing as the Federal income tax. b. No provision for withholding procedures. c. Allowance of a deduction for Federal income taxes paid. d. Applying only to individuals but not to corporations. e. None of these.
a
Taxes levied by all states include: a. Tobacco excise tax. b. Individual income tax. c. Inheritance tax. d. General sales tax. e. None of these.
a
The AICPA Statements on Standards for Tax Services are: a. Enforceable. b. Educational. c. Out of date. d. Do not exist.
a
Which, if any, of the following provisions cannot be justified as mitigating the effect of the annual accounting period concept? a. Nonrecognition of gain allowed for involuntary conversions. b. Net operating loss carryover provisions. c. Carryover of excess charitable contributions. d. Use of the installment method to recognize gain. e. Carryover of excess capital losses
a
Which, if any, of the following taxes are proportional (rather than progressive)? a. State general sales tax b. Federal individual income tax c. Federal estate tax d. Federal gift tax e. All of these
a
Which, if any, of the following transactions will decrease a taxing jurisdiction's ad valorem tax revenue imposed on real estate? a. A tax holiday is granted to an out-of-state business that is searching for a new factory site. b. An abandoned church is converted to a restaurant. c. A public school is razed and turned into a city park. d. A local university sells a dormitory that will be converted for use as an apartment building. e. None of these.
a.
In terms of probability, which of the following taxpayers would be least likely to be audited by the IRS? a. Taxpayer owns and operates a check-cashing service. b. Taxpayer is an employed electrician. c. Taxpayer just received a $3 million personal injury award as a result of a lawsuit. d. Taxpayer just won a $1 million slot machine jackpot at a Las Vegas casino. e. Taxpayer has been audited several times before.
b
Indicate which, if any, statement is incorrect. State income taxes: a. Can piggyback to the Federal version. b. Cannot apply to visiting nonresidents. c. Can decouple from the Federal version. d. Can provide occasional amnesty programs. e. None of these.
b
Jane is the tax director for Tangent Software Corporation. She is unsure whether Tangent is required to charge sales tax when software is provided to customers in State X via the "cloud." This indicates that the sales tax does not meet the principle of: a. Equity. b. Certainty. c. Neutrality. d. Economic growth and efficiency
b
Provisions in the tax law that promote energy conservation and more use of alternative (nonfossil) fuels can be justified by: a. Political considerations. b. Economic and social considerations. c. Promoting administrative feasibility. d. Encouragement of small business. e. None of these.
b
The quote engraved on the IRS building in Washington, DC, at the entrance states: a. Nothing is certain, except death and taxes. b. Taxes are what we pay for civilized society. c. Everyone welcome. d. Taxes are the most difficult thing in the world to understand. e. None of these
b
Which of the following statements about a value added tax (VAT) is false? a. Many countries use a VAT. b. The United States has imposed a VAT since 1913. c. A VAT has been proposed in the United States to replace part of the income tax. d. A VAT operates similarly to a sales tax.
b
Which of the following taxes is paid only by the employer? a. FICA b. FUTA c. Social Security tax d. Medicare tax
b
A characteristic of FUTA is that: a. It is imposed on both employer and employee. b. It is imposed solely on the employee. c. Compliance requires following guidelines issued by both state and Federal regulatory authorities. d. It is applicable to spouses of employees but not to any children under age 18. e. None of these.
c
Allowing a tax credit for certain solar energy property can be justified: a. As helping small businesses. b. As promoting administrative feasibility. c. As promoting a government policy to use alternative energy sources. d. Based on the wherewithal to pay concept. e. None of these
c
**David files his tax return 45 days after the due date. Along with the return, David remits a check for $40,000. which is the balance of the tax owed. Disregarding the interest element, David's total failure to file and to pay penalties are: Failure to pay penalty [0.5% × $40,000 × 2 (two months violation)] $ 400 Plus: Failure to file penalty [5% × $40,000 × 2 (two months violation)] $4,000 Less: Failure to pay penalty (400) 3,600 Total penalties $4,000 Failure to pay penalty [0.5% × $40,000 × 2 (two months violation)] $ 400 Plus: Failure to file penalty [5% × $40,000 × 2 (two months violation)] $4,000 Less: Failure to pay penalty (400) 3,600 Total penalties $4,000 Failure to pay penalty [0.5% × $40,000 × 2 (two months violation)] $ 400 Plus: Failure to file penalty [5% × $40,000 × 2 (two months violation)] $4,000 Less: Failure to pay penalty (400) 3,600 Total penalties $4,000 a. $400. b. $3,600. c. $4,000. d. $4,400. e. None of these.
c
Both economic and social considerations can be used to justify: a. Favorable tax treatment for accident and health plans provided for employees and financed by employers. b. Disallowance of any deduction for expenditures deemed to be contrary to public policy (e.g., fines, penalties, illegal kickbacks, bribes to government officials). c. Various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. d. Allowance of a deduction for state and local income taxes paid. e. None of these.
c
Property can be transferred within the family group by gift or at death. One motivation for preferring the gift approach is: a. To take advantage of the higher unified transfer tax credit available under the gift tax. b. To avoid a future decline in value of the property transferred. c. To take advantage of the per donee annual exclusion. d. To shift income to higher bracket donees. e. None of these.
c
Taxes not imposed by the Federal government include: a. Tobacco excise tax. b. Customs duties (tariffs on imports). c. Tax on rental cars. d. Gas guzzler tax. e. None of these.
c
Which of the following is a characteristic of the audit process? a. Most taxpayer audits involve "special" agents. b. Self-employed taxpayers are less likely to be selected for audit than employed taxpayers. c. Less important issues are handled by means of a correspondence audit. d. If a taxpayer disagrees with the IRS auditor's finding, the only resort is to the courts. e. None of these.
c
Which, if any, of the following transactions will increase a taxing jurisdiction's revenue from the ad valorem tax imposed on real estate? a. A resident dies and leaves his farm to his church. b. A large property owner issues a conservation easement as to some of her land. c. A tax holiday issued 10 years ago has expired. d. A bankrupt motel is acquired by the Red Cross and is to be used to provide housing for homeless persons. e. None of these.
c.
Not all of the states that impose a general sales tax also have a use tax T/F
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"Bracket creep" is avoided by: a. Using sunset provisions. b. Providing special tax rules for small businesses. c. The statute of limitations. d. Adjusting the rate brackets for inflation annually.
d
A landlord leases property upon which the tenant makes improvements. The improvements are significant and are not made in lieu of rent. At the end of the lease, the value of the improvements are not income to the landlord. This rule is an example of: a. A clear reflection of income result. b. The tax benefit rule. c. The arm's length concept. d. The wherewithal to pay concept. e. None of these.
d
A use tax is imposed by: a. The Federal government and all states. b. The Federal government and a majority of the states. c. All states but not the Federal government. d. Most of the states but not the Federal government. e. None of these.
d
Before proposing that the state's sales tax be expanded to include food, a legislator should ask whether: a. The state tax agency will allow this expansion. b. A majority of his constituents agree. c. Grocery stores will be able to collect the tax. d. The state's constitution allows for this tax.
d
Burt and Lisa are married and live in a common law state. Burt wants to make gifts to their four children in 2019. What is the maximum amount of the annual exclusion they will be allowed for these gifts? a. $15,000. b. $30,000. c. $60,000. d. $120,000. e. None of these.
d
Characteristics of the "fair tax" (i.e., national sales tax) include which, if any, of the following: a. Abolition of the Federal individual (but not the corporate) income tax. b. Abolition of all Federal income taxes but retention of payroll taxes (including the self-employment tax). c. Abolition of all Federal income taxes and payroll taxes but retention of the Federal estate and gift taxes. d. Abolition of all Federal income and payroll taxes as well as the Federal estate and gift taxes. e. None of these.
d
Tax functions that accounting and finance professionals may assist clients with include all but the following: a. Tax compliance. b. Tax planning. c. Cash management to ensure timely payment of taxes. d. Tax evasion.
d
The proposed flat tax: a. Would increase the number of deductions available to individuals b. Would not require individuals to file returns. c. Would tax the increment in value as goods move through the production and manufacturing stages to the marketplace. d. Is a type of consumption tax. e. None of these.
d
Two years ago, State Y enacted a new income tax credit for college prep materials. The credit is available to individuals and is equal to 40% of the cost of the items. The credit may not exceed $50 in any year. State Y's director of finance has discovered this year that the amount of credit claimed is far higher than expected. Which principle of good tax policy might not have been considered in designing this tax that caused the original cost estimate to be too low? a. Equity. b. Simplicity. c. Economy in collection. d. Minimum tax gap
d
A characteristic of FICA is that: a. It does not apply when one spouse works for the other spouse. b. It is imposed only on the employer. c. It provides a modest source of income in the event of loss of employment. d. It is administered by both state and Federal governments. e. None of these.
e
Federal excise taxes that are no longer imposed include: a. Tax on air travel. b. Tax on wagering. c. Tax on the manufacture of sporting equipment. d. Tax on alcohol. e. None of these
e
Taxes levied by both states and the Federal government include: a. General sales tax. b. Customs duties. c. Hotel occupancy tax. d. Franchise tax. e. None of these.
e
The United States (either Federal, state, or local) does not impose: a. Franchise taxes. b. Severance taxes. c. Occupational fees. d. Custom duties. e. Export duties.
e
Which, if any, of the following provisions of the tax law cannot be justified as promoting administrative feasibility (simplifying the task of the IRS)? a. Penalties are imposed for failure to file a return or pay a tax on time. b. Prepaid income is taxed in the year received, not in the year earned. c. Annual adjustments for indexation increases the amount of the standard deduction allowed. d. Personal casualty losses in Federally declared disaster areas must exceed 10% of AGI to be deductible. e. A deduction is allowed for charitable contributions.
e