REG - Surgent - Federal Tax Procedures
Which of the following is a list of courts that are referred to as courts of original jurisdiction, or trial courts, for tax matters? A) The Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims B) The Tax Court, the U.S. District Court, and the U.S. Bankruptcy Court C) The Tax Court, the U.S. Court of Federal Claims, and the U.S. Court of Appeals D) The U.S. District Court, the U.S. Court of Federal Claims, and the U.S. Court of Appeals
Correct Answer: Reason:
A CPA's adjusted gross income (AGI) for the preceding 12-month tax year exceeds $150,000. Which of the following methods are available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty? I. The annualization method II. The seasonal method A) I only B) II only C) Both I and II D) Neither I nor II
Correct Answer: A Reason: To avoid a penalty for underpayment of estimated tax, a taxpayer must make tax payments throughout the year either by withholding or estimated tax payments. There are several safe harbors for computing the minimum amount to pay during the year to avoid the penalty. Under the annualization method, the safe harbor amount is computed based on the actual income and expense of the current year. There are no income limitations on the use of the annualization method. There is no safe harbor method called the seasonal method. The most common safe harbor method is to pay the lesser of 90% of the current-year tax or 100% of the prior-year tax (110% if AGI for the prior year was over $150,000).
Edge Corp., a calendar-year C corporation, had a net operating loss and zero tax liability for its Year 3 tax year. To avoid the penalty for underpayment of estimated taxes, Edge could compute its first-quarter Year 4 estimated income tax payment using: A) the annualized income method. B) the preceding-year method. C) both the annualized income method and the preceding-year method. D) neither the annualized income method nor the preceding-year method.
Correct Answer: A Reason: Even though Edge Corp. had a net operating loss and zero tax liability for its Year 3 tax year, to avoid the penalty for underpayment of estimated taxes, Edge must compute its first-quarter Year 4 estimated income tax payment using the annualized income method only. Edge Corp. cannot use the preceding-year method. A corporation that anticipates a year-end tax bill of $500 or more must estimate its income tax liability for the current tax year and pay four quarterly estimated tax installments during that year. If the prior year was less than 12 months or there was no tax liability in the prior year, the preceding year exception is not available.
In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions? A) Internal Revenue Code B) IRS regulations C) Tax court decisions D) IRS agents' reports
Correct Answer: A Reason: The Internal Revenue Code carries the greatest authoritative value for tax planning transactions. This is relevant for determining if a tax preparer has substantial authority for avoiding a preparer penalty.
A small corporation has $100,000 of taxes due in Year 3 and $110,000 of taxes due in Year 4. What is the "safe harbor" amount which must be paid in estimated taxes in Year 4 to avoid penalties for underpaid estimated taxes? A) $100,000 B) $106,700 C) $107,800 D) $121,000
Correct Answer: A Reason: The safe harbor rules protect a small corporation from a penalty on current-year underpayment as long as the business had a prior-year tax liability, had a current-year adjusted gross income of $150,000 or less, and paid 100% of the prior-year tax liability as current-year estimated tax payments. In other words, the safe harbor is $100,000 in this question.
Which of the following statements is correct if a taxpayer agrees to changes made during an examination and he signs an agreement, but does not pay the taxes due? A) If the taxpayer does not pay the additional tax when he or she signs the agreement, the taxpayer will receive a bill that includes interest and an additional penalty. B) If the taxpayer pays the amount due within 21 calendar days of the billing date and the amount is less than $100,000, the taxpayer will not have to pay more interest or penalties. C) If the taxpayer pays when he or she signs the agreement, the interest is generally waived from the due date of the return to the date of the payment. D) None of the answer choices are correct.
Correct Answer: B Reason: IRS Publication 556 provides that a taxpayer's return may be examined for a variety of reasons, and the examination may take place in any one of several ways. After the examination, if any changes to a taxpayer's tax are proposed, either the taxpayer can agree with those changes and pay any additional tax owed, or the taxpayer can disagree with the changes and appeal the decision. Publication 556 states, in part, that if a taxpayer agrees with the proposed changes after the examination, the taxpayer can sign an agreement form and pay any additional tax he or she may owe. A taxpayer must pay interest on any additional tax. - If the taxpayer pays when he or she signs the agreement, the interest is generally figured from the due date of the return to the date of the payment. - If the taxpayer does not pay the additional tax when he or she signs the agreement, the taxpayer will receive a bill that includes interest. - If the taxpayer pays the amount due within 10 business days of the billing date, the taxpayer will not have to pay more interest or penalties. This period is extended to 21 calendar days if the amount due is less than $100,000.
When researching tax law for a client, which committee report would not be used as a source of tax law? A) House Ways and Means Committee Report B) Accounting and Review Services Committee Report C) Senate Finance Committee Report D) Joint Conference Committee Report
Correct Answer: B Reason: The Committee on Accounting and Review Services is not a source of information for the tax law. It is concerned with entity accounting rules for unregistered companies and those CPAs providing review services. The other three committees are actually involved with writing the tax laws of the United States.
What is the definition of a writ of certiorari? A) The Supreme Court's denial to hear an appeal from a lower court B) The Supreme Court's decision to hear an appeal from a lower court C) A petition for the Supreme Court to review a lower court's decision D) A petition for a lower court to review the Supreme Court's decision
Correct Answer: C Reason: A writ of certiorari is a petition from the taxpayer or government asking the Supreme Court to review the decision of a lower court. In a tax case, such a decision will usually involve a case in which the Courts of Appeals have issued conflicting opinions about the case, or a case that concerns a large number of taxpayers or a large amount of tax revenue.
Which of the following is not a type of examination conducted by the IRS? A) Correspondence B) Office C) Verbal D) Field
Correct Answer: C Reason: Following are the three types of IRS examinations: 1. Correspondence examinations: if only a few items are under investigation 2. Office examinations: to examine more complex issues 3. Field examinations: to investigate even more complex issues
Blink Corp., an accrual-basis, calendar-year corporation, carried back a net operating loss from the tax year ended December 31, Year 3. Blink's gross revenues have been under $500,000 since inception. Blink expects to have profits for the tax year ending December 31, Year 4. Which methods of estimated tax payment can Blink use for its quarterly payments during the Year 4 tax year to avoid underpayment of federal estimated taxes? I. 100% of the preceding tax year method II. Annualized income method A) I only B) Both I and II C) II only D) Neither I nor II
Correct Answer: C Reason: Generally, a corporation must make installment payments equal to the lesser of (1) 100% of the tax shown on its return for the current year, or (2) 100% of the tax shown on its return for the preceding year. IRC Section 6655(d)(1)(B) However, a corporation cannot base its estimated tax payments for the tax year on the prior tax year if (1) it filed a return for the prior year showing zero tax (due to a net operating loss (NOL)), (2) the prior year was less than 12 months, or (3) it is a large corporation (taxable income of $1,000,000 or more for any of the three immediately preceding tax years).
In a principal-agent relationship that is not contractual, which of the following remedies is not available to the agent whose principal is guilty of violating a duty owed the agent? A) Recovery for past services B) Recovery for future damages C) Specific performance D) Withholding further performance
Correct Answer: C Reason: In a principal-agent relationship that is not contractual, specific performance is not available to the agent whose principal is guilty of violating a duty owed the agent. Specific performance is an order by a court to complete a previously established transaction in a contract. Specific performance has a unique matter stated in the contract. If there is no contract, the agency is considered an agreement. The principal owes the agent, if the agent completes their side of the agreement, compensation (past services), reimbursed expenses, and indemnification from any legal actions (future damages). Since the principal is guilty of violating a duty, the principal is not able to withhold further performance from the agent.
An individual taxpayer (whose adjusted gross income is above $150,000 in the previous year) may avoid the penalty for failure to pay estimated tax by: - paying at least ________ of the tax shown on the current year's return, or ________ of the tax shown on the prior year's return (assuming that the prior year's return was for a full 12-month period). A) 90%; 100% B) 110%; 110% C) 90%; 110% D) 110%; 90%
Correct Answer: C Reason: Individuals may generally avoid the penalty for failure to pay estimated tax by: - paying at least 90% of the tax shown on the current year's return or - paying 110% of the tax shown on the prior year's return (for individuals with AGIs of more than $150,000 in the previous year).
Which of the following is not considered a primary authoritative source when conducting tax research? A) Internal Revenue Code B) Tax Court cases C) IRS publications D) Treasury Regulations
Correct Answer: C Reason: The Internal Revenue Code, or IRC, is the most authoritative source when conducting tax research. Treasury Regulations and U.S. Tax Court cases are also primary sources. IRS publications are not considered a primary authoritative source when conducting tax research.
A routine review of a received return by the IRS looks for all of the following except: A) failure to report a 1099. B) failure to calculate the math correctly. C) failure of the taxpayer to sign the return. D) failure to submit a tax return.
Correct Answer: D Reason: A routine review cannot be performed on a tax return if one has not been submitted to the IRS. Therefore, the IRS looks to make sure the tax return has been signed, all items have been reported, and there are no mathematical or clerical errors.
If the Internal Revenue Service is forced to seize an individual's weekly paycheck in order to pay past-due taxes owed by the individual, the individual has the legal right to keep an amount of weekly income equal to: A) the individual's weekly salary times 1/2. B) the individual's weekly salary times 1/3. C) the current federal hourly minimum wage amount times 40. D) the individual's standard deduction and allowable personal exemptions divided by 52.
Correct Answer: D Reason: If the Internal Revenue Service is forced to seize an individual's weekly paycheck in order to pay past-due taxes owed by the individual, the individual has the legal right to keep an amount of weekly income equal to the individual's standard deduction and allowable personal exemptions divided by 52.
Which of the following courts listens to an appeal from a taxpayer or the government when there is a disagreement with the trial court's decision? A) U.S. Court of Federal Claims B) U.S. Tax Court C) U.S. District Court D) U.S. Federal Court of Appeals
Correct Answer: D Reason: The U.S. Federal Court of Appeals hears the appeals from taxpayers or the government if they disagree with the trial court's decision. The appropriate procedures must be followed in order for the process to begin. The Court of Appeals hears both tax and nontax cases.
Decisions by which of the levels of courts listed would result in the definitive answer on a tax issue? A) U.S. Federal District Court B) The Tax Court C) Circuit Court of Appeals D) U.S. Supreme Court
Correct Answer: D Reason: The higher the level of court that renders a decision, the more important that decision is. Decisions by the U.S. Supreme Court are the definitive answer to any question about the U.S. Tax Code. The only way a Supreme Court decision can be changed is when Congress disagrees and changes the tax law. Decisions in the Circuit Courts of Appeals are given a high degree of importance, but sometimes different appeals courts make opposite decisions in similar cases. When the Tax Court reaches a decision with all the judges agreeing, then the result is a strong decision.