Concepts in Federal Taxation - Chapter 1

Which of the following statements regarding tax credits is true? a. If Johan and Elisabeth have a tax liability of $4,125 (before any credits) and are allowed a $1,000 child tax credit, the tax they owe for the year will be reduced by $1,000. b. Tax credits should be multiplied by the highest marginal tax rate to determine the net benefit to the taxpayer. c. Businesses are allowed tax credits, whereas individuals are not. d. Tax credits are less valuable than tax deductions.

a. If Johan and Elisabeth have a tax liability of $4,125 (before any credits) and are allowed a $1,000 child tax credit, the tax they owe for the year will be reduced by $1,000.

Which of the following statements describes the average tax rate? a. It is the federal income tax divided by taxable income. b. It is the rate of tax that will be paid on the next dollar of income. c. It is the total federal income tax divided by the taxpayer's economic income. d. It is the rate of tax that will be saved by the next dollar of deduction.

a. It is the federal income tax divided by taxable income.

Which of the following statements regarding sales tax is not true? a. Sales tax is paid by the business where the goods or service are purchased. b. Sales tax is based on a flat percentage of the selling price of a product or service. c. Sales tax is collected by the business that sells the goods or services subject to the tax. d. Sales tax is based on a taxpayer's consumption of goods and services (in contrast to income taxes, which are based on income).

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

Which of the following statements regarding income taxes is true? a. Taxpayers pay income taxes on a pay-as-you-go basis. b. Taxpayers must estimate future income and prepay based on that. c. Employers must withhold income taxes from wages and salaries of their employees and remit them in intervals that they determine, to the appropriate government body. d. Income taxes are determined on a quarterly basis.

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

Which of the following statements regarding tax planning with respect to timing and income shifting is true? a. 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. b. The primary consideration when making tax-planning decisions is the time value of money. c. The traditional planning technique of deferring income and accelerating deductions is always the best tax plan. d. Focusing on reducing tax for one year without considering other years is effective tax planning.

a. 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.

Medical expenses are a. deductible in excess of 7.5% of AGI. b. deductible, whether or not they were reimbursed. c. no longer allowed. d. limited to $10,000 per year.

a. deductible in excess of 7.5% of AGI.

Tax return preparers may be penalized for all of the following except a. disclosure of relevant facts concerning the tax treatment of a transaction. b. aiding and abetting an understatement of tax liability. c. failure to file the correct information on a return. d. aiding or assisting in the preparation of a false return.

a. disclosure of relevant facts concerning the tax treatment of a transaction.

Tax evasion usually involves all of the following except a. planning a transaction to lower the tax liability. b. willfulness on the part of the taxpayer. c. an affirmative act by the taxpayer to evade the tax. d. an underpayment of tax.

a. planning a transaction to lower the tax liability.

Which of the following statements regarding tax credits is true? a. A tax credit is less valuable than a deduction of an equal amount. b. A tax credit is a direct reduction in the income tax liability. c. A tax credit is added to the income tax liability. d. A tax credit is deducted from gross income to arrive at taxable income.

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

Which of the following statements regarding IRS examinations is true? a. In field examinations, the taxpayer most often will have his/her attorney present for representation. b. Correspondence examinations may be resolved with a written reply to the questions raised by the IRS, along with copies of supporting documents. c. Office examinations are formal and generally aimed at C corporations. d. Office examinations are conducted in the taxpayer's business office with an IRS agent examining all aspects of the taxpayer's business.

b. Correspondence examinations may be resolved with a written reply to the questions raised by the IRS, along with copies of supporting documents.

Which of the following statements regarding deductions is true? a. There is no such thing as allowable personal expenses that may be deductions. b. Deductions are amounts that the tax law specifically allows as subtractions from gross income. c. Some items may be deducted even if the tax law does not specifically permit it. d. Deductions are granted in totality, and then certain items are exempted.

b. Deductions are amounts that the tax law specifically allows as subtractions from gross income.

Which of the following statements regarding income shifting in tax planning is true? a. Shifting is commonly done by using corporations that taxpayers control to shift income into the highest marginal tax rates. b. Income shifting involves moving income among related taxpayers to achieve the lowest marginal taxes on the entire income of the related taxpayers. c. Shifting is commonly done by transferring income-producing property among unrelated individuals. d. Income shifting involves moving income among related taxpayers to achieve the lowest total tax on one taxpayer; however, it ignores the total income tax of all related taxpayers.

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

The allowable deductions for adjusted gross income (AGI) include which of the following? a. State income taxes b. Items related to the earning of other forms of income c. Charitable contributions d. Personal expenditures

b. Items related to the earning of other forms of income

Primary sources of tax law include which of the following? a. Legislative sources, administrative sources, and professional tax journals b. Legislative sources, administrative sources, and judicial sources c. Administrative sources, legislative sources, and tax newsletters d. Legislative sources, judicial sources, and tax textbooks

b. Legislative sources, administrative sources, and judicial sources

Which of the following is not considered a tax under the IRS definition? a. A payment of 2.5% property taxes used to fund the local school system b. Payments to the city for water and sewer services c. An additional 8% that is charged for all goods purchased in San Bernardino County d. A payment of .8% local tax to the Borough of Queens

b. Payments to the city for water and sewer services

Secondary tax sources include which of the following? a. The IRC, tax reference services, and professional tax journals b. Tax reference services, professional tax journals, and tax newsletters c. Professional tax journals, Treasury regulations, and tax newsletters d. Tax textbooks, the Internal Revenue Code (IRC), and court cases

b. Tax reference services, professional tax journals, and tax newsletters

When analyzing a transaction for its tax implications, the rate that applies to the next dollar of income is very important. Which of the following describes this rate? a. The effective tax rate b. The marginal tax rate c. The state tax rate d. The average tax rate

b. The marginal tax rate

The allowable deductions for adjusted gross income (AGI) include which of the following? a. Home mortgage interest related to the acquisition of a home b. Trade or business expenses c. Unreimbursed medical expenses d. Allowable itemized deductions

b. Trade or business expenses

Which of the following statements is true? a. IRS audits are very narrow in scope. b. The federal income tax system is based on the "big brother system," whereby a high percentage of taxpayers are audited. c. 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. d. Taxpayers do not have any recourse when they disagree with a RAR.

c. 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? a. The AICPA's Statements on Standards for Tax Services is irrelevant to tax preparers who are not members of the AICPA. b. The AICPA's Statements on Standards for Tax Services provides ten advisory guidelines for CPAs who prepare tax returns. c. 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. d. Tax practitioners who are not members of the AICPA are bound by the Statements on Standards for Tax Services.

c. 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 and tax evasion is true? a. Tax avoidance is based on the idea that if you don't get caught, the tax plan is legitimate. b. An intentional misrepresentation of facts on a tax return to avoid paying tax is acceptable taxpayer behavior. c. Unintentional errors, such as a mathematical error on a tax return, are generally not considered to be tax evasion. d. Tax evasion can be legal if structured properly.

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

The four general rules of thumb when planning the timing of income and deductions include all of the following except a. put deductions into the year with the highest expected marginal tax rate. b. defer recognition of income. c. put income into the year with the highest expected marginal tax rate. d. accelerate recognition of deductions.

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

IRC violations with penalties for tax return preparers include which of the following? a. Failure to retain a copy of the taxpayer's return for 15 years b. Failure to successfully complete the CPA exam c. Failure to file correct information returns by January 15 of the subsequent year d. Failure to furnish a copy of the return to the taxpayer

d. Failure to furnish a copy of the return to the taxpayer

Which of the following is a major type of tax in the United States? a. Luxury tax b. Estate tax c. Fuel tax d. Sales/excise tax

d. Sales/excise tax

Which of the following statements regarding tax planning and tax evasion is true? a. Tax planning using tax avoidance methods is considered a type of tax evasion and is illegal. b. An intentional misrepresentation of facts on a tax return to avoid paying tax is acceptable taxpayer behavior. c. Unintentional errors on a return are generally considered to be tax evasion. d. Tax evasion is illegal and is subject to substantial penalties.

d. Tax evasion is illegal and is subject to substantial penalties.

The Social Security tax is imposed on employees and self-employed individuals, with a current year cap for Medical Health Insurance (MHI) of a. 1.45%. b. $132,900. c. 6.2%. d. There is no cap for MHI.

d. There is no cap for MHI.

Which of the following statements regarding the IRS tax return selection process for audits is true? a. Currently, the Taxpayer Compliance Measurement Program (TCMP) is the most widely used method for selecting returns to audit. b. Due to increased technological capability, the IRS can examine virtually every return that is filed. c. Information from banks, employers, and others on forms such as the W-2 for wages and withholding and the 1099 for miscellaneous income cannot be matched to the taxpayer's return. d. Virtually all returns are checked for mathematical, calculation, and clerical errors during the initial processing of the returns.

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