Tax - Mod 8 - Practice Q's
Which of the following is the type of audit usually performed for a minor issue? A) Correspondence audit B) Field audit C) Office audit D) None of these types of audits
Answer: A A correspondence audit is usually performed through the mail because the disputed tax issue is minor. LO 8.2.2
Which one of the following is a statute of limitations that restricts the IRS in auditing a return? A) Six years if 25% of gross income is unreported B) Seven years from the filing date of the return or due date if later C) Twelve years if 50% of gross income is unreported D) Ten years for failure to file or if a fraudulent return is filed
Answer: A After the statute of limitations has passed, except in cases of fraud, the IRS cannot audit a return. The statutes to be aware of are as follows: three years from the filing date of the return or due date if later, six years if 25% of gross income is unreported, and no statute of limitations for failure to file or if a fraudulent return is filed. LO 8.2.2
Which of the following is a requirement for the IRS to assure protection of taxpayer rights? I. The IRS must disclose the criteria it uses in selecting returns for audit. II. The IRS must take steps to protect the confidentiality of personal and financial information. III. The IRS must follow due process when imposing tax levies. IV. The IRS must provide clear explanations in any tax notices or inquiries. A) I, II, III, and IV B) III only C) II and IV D) IV only
Answer: A All of these are requirements the IRS must follow to assure taxpayer rights. LO 8.2.2
Which of the following credentials permit an individual to appear before the IRS on behalf of a client? Enrolled agent (EA) Certified Public Accountant (CPA) Attorney Certified Financial Planner certificant A) I, II, and III B) II and IV C) I and II D) I, III, and IV
Answer: A An EA, CPA, or attorney may represent a client before the IRS. A CFP® certificant is not allowed to do so unless he or she possesses one of the other listed credentials. LO 8.2.2
Which one of the following summarizes code sections in layman's terms, but have only short-term value? A) Announcements B) Private Letter Rulings C) Technical Advice Memoranda D) Notices
Answer: A Announcements often summarize code sections in layman's terms or notify taxpayers of impending deadlines; they have only short-term value. Technical Advice Memoranda normally take place during an audit or during the appeals process of the audit; they give both the taxpayer and the revenue agent an opportunity to resolve a dispute over a technical question. Private Letter Rulings are taxpayer guidance from the IRS that apply only to the particular taxpayer(s) asking for the ruling; they are not applicable to all taxpayers. A Notice is a public pronouncement that contains official guidance about regulations or interpretations of the Code. LO 8.1.1
Which is the best source for obtaining information about the intent of a very recent change in the tax law? A) Congressional Committee Reports B) RIA Federal Tax Coordinator C) Treasury Regulations D) Tax Court Reports
Answer: A Congressional Committee Reports indicate the intent of Congress when the law was passed. They may not be cited as precedent, but are especially useful if Regulations are not available. LO 8.1.1
Which of the following represents the most severe tax penalty that may be imposed? A) Negligence B) Frivolous return C) Criminal fraud D) Civil fraud
Answer: C Criminal fraud is tax evasion, which is illegal. If convicted, a taxpayer will be subject to heavy fines, imprisonment, or both. LO 8.2.3
Which one of the following would normally prompt a decrease in taxation of individuals and corporations according to an economic objective of the federal taxation system? A) Increased inflation B) A period of economic boom C) Reduced inflation D) A period of recession or depression
Answer: D During periods of recession or depression, it seems sensible to decrease the amount of taxes paid by individuals and corporations. This should allow people to spend more money, thus increasing demand, creating more jobs, and stimulating the economy. LO 8.1.2
Mary reported an income tax liability of $50,000 (on AGI of $300,000) on her tax return for 2022. This year, Mary expects to have an income tax liability of $60,000. She also has estimated that the amount of income tax withheld from her wages will total $35,000. What minimum amount of estimated tax payments must Mary pay (in equal quarterly installments) for 2022? A) $0 B) $20,000 C) $15,000 D) $19,000
Answer: D The required annual payment (since the prior-year AGI is greater than $150,000) is the lesser of: • 90% of the current year tax ($60,000 x .90 = $54,000), OR • 110% of the tax shown in the preceding year ($50,000 x 1.10 = $55,000) • reduced by the withholding of $35,000. Thus, $54,000 reduced by the withholding of $35,000 equals $19,000. LO 8.2.3
Primary sources of tax information A) are opinions, but useful in understanding tax law. B) have no use for a tax planner. C) consist of periodicals and newsletters. D) are authoritative sources for use in tax planning.
Answer: D The statutory law and its official interpretations, referred to as primary sources, are the legal authorities that set forth the tax consequences for a particular set of facts. Secondary sources of tax information consist mainly of books, periodicals, articles, newsletters, and editorial judgments published by tax services and are unofficial interpretations—mere opinions—which have no legal authority; although, they are an indispensable aid when seeking an understanding of the tax law. LO 8.1.1
Paul was recently assessed a deficiency of $10,000, along with interest of $2,000, from a prior year's tax return. It has been determined that the deficiency was due to civil fraud. What is the amount of the fraud penalty? A) $7,500 B) $6,000 C) $2,000 D) $10,000
Answer: A Civil fraud, essentially, is taxpayer fraud that does not rise to the level of criminal fraud. If imposed, the penalty is 75% of the portion of tax underpayment attributable to fraud. In this case, the fraud penalty is $7,500 (75% of $10,000). The $2,000 from a prior year's return would be separate from the fraud penalty. LO 8.2.3
Disclosing or using client information given to a tax preparer may result in which one of the following maximum penalties? A) Imprisonment for up to one year B) 50% tax penalty C) Closure of business D) 100% penalty
Answer: A Disclosing or otherwise using any client information given to a tax return preparer pursuant to the preparation of a tax return is a crime for which the preparer may be imprisoned for up to one year. LO 8.2.1
Which one of the following amendments to the U.S. Constitution established federal taxation in the U.S.? A) Sixteenth Amendment B) Eighteenth Amendment C) Seventeenth Amendment D) Fifteenth Amendment
Answer: A In 1913, the required number of states ratified the Sixteenth Amendment, and taxation of income began on March 1 of that year. Since that time, the federal income tax system has played an important role in an individual's investment decisions. LO 8.1.2
John is a bartender who makes a significant amount of his income from tips. During the current year, John intentionally underreported by 20% the amount of tips that he received. Which one of the following penalties, potentially applicable to John, would most likely apply? A) Civil fraud B) Late payment C) Underpayment of estimated tax D) Negligence
Answer: A Negligence is the failure to make a reasonable attempt to comply with the provisions of the Code. The penalty for negligence is 20%. Civil fraud is knowing and showing intentional disregard of the Code and Regulations. The penalty for civil fraud is 75% of the amount underreported due to fraud by the taxpayer. Because the failure to report was intentional, the civil fraud penalty should apply. LO 8.2.3
Which of the following statements regarding IRS audits is CORRECT? I. A correspondence audit is usually performed through the mail because the disputed tax issue is minor. II. The IRS is not required to disclose the criteria it uses in selecting returns for audit. III. An office audit is usually restricted in scope to a specific item or items and is performed at the IRS office by an office auditor. IV. A field audit is an examination of numerous items and is usually performed on the premises of the taxpayer (such as a business office) by a revenue agent. A) I, III, and IV B) III only C) I, II, III, and IV D) I and IV
Answer: A Statements I, III, and IV are correct. Statement II is incorrect. The IRS is required to disclose the criteria it uses in selecting returns for audit and to take steps to protect the confidentiality of personal and financial information. LO 8.2.2
Which one of the following best describes the assignment of income doctrine? A) Income is taxed to the tree that grows the fruit, even though assigned to another prior to receipt. B) A complex transaction may be collapsed and treated as taking place in one transaction. C) Items may be reallocated among taxpayers to clearly reflect income. D) The substance of a transaction and not merely its form governs its tax consequences.
Answer: A The assignment of income doctrine prevents taxpayers from assigning to another the income from property that the taxpayer owns. The doctrine is also known as the fruit and tree doctrine. LO 8.2.3
Which one of the following is a CORRECT hierarchy of authority of sources published by the IRS from least authoritative to most? A) Technical Advice Memorandums, Private Letter Rulings, Revenue Rulings B) Technical Advice Memorandums, Announcements, Revenue Procedures C) Regulations, Technical Advice Memorandums, Private Letter Rulings D) Revenue Procedures, Revenue Rulings, Notices
Answer: A The hierarchy of sources published by the IRS from most authoritative to least is as follows: - Regulations - Revenue Rulings - Revenue Procedures - Private Letter Rulings - Technical Advice Memorandums - Notices - Announcements LO 8.1.1
Which one of the following is a taxation function of the economic objective? A) Reduction of taxes to stimulate the economy B) Renovation of a historic home C) Excluding life insurance proceeds from taxation D) Charitable deduction
Answer: A The reduction of taxes in order to stimulate the economy is due to the economic objective. Social objectives of the federal taxation system include the charitable deduction, excluding life insurance proceeds from taxation, and renovation of a historic home. LO 8.1.2
Last year, Soleyah deducted $21,500 of itemized deductions. In the current year, she received a state income tax refund of $465. The $465 may be taxable income in the current year. Which of the following tax doctrines may subject the refund to taxation? A) Tax benefit rule B) Assignment of income doctrine C) Substance over form doctrine D) Step transaction doctrine
Answer: A This rule converts otherwise nontaxable receipts into taxable income. The most common example is when a taxpayer is reimbursed in a subsequent year for medical expenses paid and deducted in a previous year. LO 8.1.2
A client currently is being audited by the IRS, and the agent has proposed a tax deficiency with which the client does not agree. The client has asked a CFP® certificant to research the issue. Which of the following sources is considered to be the most authoritative and, accordingly, would have the highest precedential value in defending the client's position to the IRS? A) Treasury Regulations B) Revenue Ruling C) Revenue Procedure D) Private Letter Ruling
Answer: A Treasury Regulations have the full force and effect of law. A Private Letter Ruling is never precedential, and Revenue Rulings and Revenue Procedures are merely administrative interpretations of the statutory tax law, with lower authority than Regulations. LO 8.1.1
Wayne and Gil are married taxpayers filing jointly. Wayne is the owner of an upscale restaurant, from which he receives a substantial portion of his income in cash. During the current year, the restaurant had sales of $80,000, but Wayne intentionally failed to report $15,000 of the sales that he received in cash. Which of the following penalties is the IRS most likely to apply if it determines that Wayne underreported his income? A) Civil fraud penalty B) Underreporting penalty C) Substantial understatement penalty D) Negligence penalty
Answer: A Wayne is attempting to deliberately deceive the IRS. This is civil fraud—essentially taxpayer fraud that does not rise to the level of criminal fraud. If imposed, the penalty is 75% of the portion of tax underpayment attributable to fraud. LO 8.2.1
Which one of the following statements regarding common tax traps is NOT accurate? A) Tax traps may result in the unexpected recognition of income. B) A transaction is based solely on its economic form. C) A transaction must be based on economic reality as well as economic form. D) Tax traps are of particular concern to owners of closely held businesses.
Answer: B A transaction cannot be based solely on form; it must also be based on "economic reality." LO 8.2.3
Which one of the following is NOT a statute of limitations that restricts or allows the IRS to audit a return? A) Three years from the filing date of the return or due date if later B) Twelve years if 50% of gross income is unreported C) Six years if 25% of gross income is unreported D) No statute of limitations for failure to file or if a fraudulent return is filed
Answer: B After the statute of limitations has passed, except in cases of fraud, the IRS cannot audit a return. The statutes to be aware of are as follows: three years from the filing date of the return or due date if later, six years if 25% of gross income is unreported, and no statute of limitations for failure to file or if a fraudulent return is filed. LO 8.2.2
Which of the following sources of authority on a tax issue may be relied upon in tax research? I. Treasury Regulation II. Tax Court opinion III. United States Supreme Court opinion A) II and III B) I, II, and III C) I and III D) I and II
Answer: B Congress has authorized the Secretary of the Treasury to prescribe and issue all rules and regulations needed for enforcement of the Code. Regulations can be classified into three groups: (1) legislative (Treasury Regulation), (2) interpretive (Tax Court opinion), and (3) procedural (United States Supreme Court opinion). LO 8.1.1
If an employer fails to withhold Social Security and federal income taxes from employee paychecks, what is the percentage penalty that is imposed by the IRS? A) 75% B) 100% C) 25% D) 50%
Answer: B Employers are required to withhold amounts from an employee's paycheck for Social Security taxes and federal income taxes. If the employer fails to do so or fails to pay such amounts to the IRS, they or any other responsible person will be subject to the 100% penalty, which is simply having to pay 100% of the amount they should have collected, accounted for, and paid; they are not subject to any additional penalty. LO 8.2.1
Frank is a single taxpayer who failed to report $500 of taxable income during the current tax year. Frank erroneously believed that the $500 was not considered to be income. Frank's adjusted gross income is $90,000 for the current tax year. Which one of the following penalties is the IRS most likely to impose? A) Criminal fraud penalty B) Negligence penalty C) Civil fraud penalty D) Substantial understatement penalty
Answer: B Penalties may be generally categorized as three types: (1) failure-to-file, (2) failure-to-pay penalties (which are automatically assessed by the IRS), and (3) underpayment penalties that are related to some negligence or intentional fault of the taxpayer. There are also underpayment penalties owing to some fault of the taxpayer. The least severe of these is the 90%/100% payment criteria to avoid the estimated tax penalty. However, there are also the following penalties, listed in order of their severity: criminal fraud, civil fraud, negligence, and frivolous return. LO 8.2.3
The doctrine of constructive receipt applies: A) to S Corporations mainly. B) when income is credited to a taxpayer's account, or otherwise made available without restriction (the taxpayer could access it during the current tax year). C) when accrual accounting methods are utilized. D) to large corporations only.
Answer: B The concept of constructive receipt applies to cash accounting by corporations as well as individuals (e.g., dividends from stocks posted by previous year end but not received until beginning of current year). LO 8.2.3
Which one of the following best describes the tax benefit rule? A) Stock owned by one person may be attributed to another related person who receives the tax benefits of ownership. B) Nontaxable receipts may be converted into taxable income. C) Income is taxed to the tree that grows the fruit, even though the income is assigned to another prior to receipt. D) A solvent taxpayer may have to realize income upon the forgiveness of a debt by a creditor.
Answer: B The tax benefit rule provides that a recovery or reimbursement of a previously-deducted item will cause that recovery or reimbursement to be taxable. For instance, if an insurance reimbursement is received for medical expenses, it is generally nontaxable. However, if the reimbursement was received in the year after a medical expense deduction was taken and a tax benefit was received for that deduction, then the reimbursement is converted into taxable income in that subsequent year. LO 8.2.3
Chip files a timely tax return but is later required to pay an additional $15,000 in tax. Of this amount, $6,000 is attributable to Chip's negligence. The negligence penalty will be: A) $500; there is a maximum of $500 penalty. B) $3,000; a 20% penalty is applied to all tax due. C) $1,200; a 20% penalty is applied to the $6,000. D) $0; there is no penalty because the return was filed timely.
Answer: C A 20% penalty ($6,000 × 0.20 = $1,200) applies to the negligence component. LO 8.2.3
A revenue ruling is: A) a judicial interpretation of specific circumstances related to a taxpayer. B) a judicial interpretation of an Internal Revenue Code provision or a Treasury regulation. C) an administrative interpretation of statutory tax law that is generally related to specific circumstances of fact. D) a court's general administrative interpretation of the Internal Revenue Code and regulations.
Answer: C A revenue ruling is an administrative interpretation of statutory tax law that is generally related to specific circumstances of fact. LO 8.1.1
Which one of the following objectives of the federal taxation system would include the addition of bonus depreciation to the tax code? A) Revenue raising B) Economic objective C) Social objective D) Writing tax code
Answer: C As a social objective, JGTRRA and TCJA significantly increased the Section 179 expense limit and the amount of depreciation deductions (bonus depreciation) that may be claimed in the first year in an attempt to stimulate purchases of business assets. The first, and perhaps most important, goal of the economic objective is price stability. Revenue raising through corporate, individual, and payroll taxes is an important objective of the federal taxation system. LO 8.1.2
If an employer withholds Social Security and federal income taxes from employee paychecks, but fails to pay those amounts to the IRS, what is the percentage penalty that is imposed? A) 75% B) 50% C) 100% D) 25%
Answer: C Employers are required to withhold amounts from an employee's paycheck for Social Security taxes and federal income taxes. If the employer fails to do so or fails to pay such amounts to the IRS, they or any other responsible person will be subject to the 100% penalty. (Meaning they have to pay 100% of what is owed) LO 8.2.1
Which of the following is NOT an example of the constructive receipt of income in 2022 for these cash basis taxpayers? I. On New Year's Eve 2022, Bart saw a client at lunch in a restaurant who told him that he would call his staff and tell them that if Bart dropped by his office before the end of the day, they could write a check for the $10,000 invoice the client owed Bart. If not, the client would write and mail a check to Bart on January 2, 2023. Bart was unable to go to his client's office before the end of the day. II. On January 13, 2023, Kayla received a statement from her bank advising that $290 was credited to her savings account on December 31, 2022, as interest income. Kayla did not know the interest amount until she received her bank statement. A) Both I and II B) II only C) I only D) Neither I nor II
Answer: C The check has not yet been written by Bart's client and would not be written in 2022 unless Bart was able to go to the client's office before the end of the day. Interest earned on a savings account in 2022 is income to the account owner in 2022. LO 8.2.3
Steve's tax return for a prior tax year has been audited, and the IRS has assessed a deficiency of $10,000 against him. In addition, he owes interest of $3,000 on the deficiency. The deficiency was due to negligence on Steve's part. What is the tax penalty that may be imposed on Steve? A) $700 B) $7,500 C) $2,000 D) $5,000
Answer: C The negligence penalty is imposed if any part of the underpayment of tax is due to taxpayer neglect or a disregard for the tax rules and regulations, without the intent to defraud. The negligence penalty is 20% of the portion of the underpayment attributable to negligence, which is $2,000 in this case. LO 8.2.2
Dan filed his 2021 income tax return on September 30, 2022. Dan did not file for an extension of time to file the return. The return showed a balance due of $10,000. What is Dan's penalty for late filing of his income tax return? A) $500 B) $3,000 C) $2,500 D) $7,500
Answer: C The penalty for failing to file an income tax return is 5% of the amount due for each month, or part thereof, that the return is late, up to a maximum penalty of 25%. Dan has filed his return five full months, and a part of the sixth month, late, which seemingly results in a 30% penalty for late filing (5% per month for six months). However, the maximum failure-to-file penalty is 25% of the amount owed. LO 8.2.3
Which one of the following is primarily used to explain and interpret particular IRS Code sections? A) Revenue Procedures B) Revenue Rulings C) Regulations D) Private Letter Rulings
Answer: C The primary purpose of the regulations is to explain and interpret particular IRS Code sections. Private Letter Rulings are taxpayer guidance from the IRS that apply only to the particular taxpayer(s) asking for the ruling; they are not applicable to all taxpayers. LO 8.1.1
Which one of the following is a federal taxation function of the social objective? A) Restricting spending through greater taxation B) Reduction of taxes during a recession to stimulate the economy C) Charitable deduction D) Promoting full employment
Answer: C The reduction of taxes in order to stimulate the economy is due to the economic objective, as well as restricting spending and promoting full employment. Social objectives of the federal taxation system include the charitable deduction, excluding life insurance proceeds from taxation, and renovation of a historic home. LO 8.1.2
Jim's 2021 income tax return, which was for a full year, showed an AGI of $185,000 and a tax liability of $35,000. He estimates his 2022 tax to be $40,000 and his total wage withholding to be $10,000. What minimum amount, if any, of estimated tax payments must Jim pay (in equal quarterly installments) for 2022? A) $36,000 B) $0 C) $26,000 D) $28,500
Answer: C The safe harbor for avoiding the underpayment penalty is the lesser of 90% of the current year tax liability or 110% of the prior-year tax liability if the prior year's AGI is over $150,000. 90% of the current year tax liability is $36,000; 110% of the prior-year tax liability is $38,500. The smaller of these numbers, reduced by the $10,000 withholding, equals $26,000. LO 8.2.3
Which one of the following provides the least amount of federal revenue from IRS taxation? A) Payroll taxes B) Corporate income taxes C) Estate taxes D) Individual income taxes
Answer: C The three main sources of federal tax revenue are individual income taxes, corporate income taxes, and payroll taxes. Individual income tax accounts for approximately 40% of the total tax revenue collected by the federal government. The federal estate tax and gift tax actually compose only a small percentage of annual tax revenues. LO 8.1.2
Which one of the following is NOT a main source of federal tax revenue? A) Corporate income taxation B) Payroll taxation C) Sales taxation D) Individual income taxation
Answer: C The three main sources of federal tax revenue are individual income taxes, corporate income taxes, and payroll taxes; sales taxation is used by states, not the federal government. LO 8.1.2
Lester owns a commercial building that generates substantial rental income. He is concerned about the effect the rental income would have on his federal income tax liability. Lester directs the management company to send the rent checks to his three grandchildren in equal shares. He reasons that including the rental income in the grandchildren's gross income would be beneficial because their tax rate is much lower than his. Which of the following tax law doctrines presents the biggest obstacle to Lester's plan? A) Tax benefit doctrine B) Constructive receipt doctrine C) Assignment of income doctrine D) Business purpose doctrine
Answer: C Under the assignment of income doctrine, a taxpayer cannot assign the income he earns to someone else for income tax purposes. The rental income would still be taxable to Lester. LO 8.2.3Under the assignment of income doctrine, a taxpayer cannot assign the income he earns to someone else for income tax purposes. The rental income would still be taxable to Lester. LO 8.2.3
Which one of the following often summarize code sections in layman's terms or notify taxpayers of impending deadlines? A) Notices B) Private Letter Rulings C) Technical Advice Memoranda D) Announcements
Answer: D Announcements often summarize code sections in layman's terms or notify taxpayers of impending deadlines; they have only short-term value. Technical Advice Memoranda normally take place during an audit or during the appeals process of the audit; they give both the taxpayer and the revenue agent an opportunity to resolve a dispute over a technical question. Private Letter Rulings are taxpayer guidance from the IRS that apply only to the particular taxpayer(s) asking for the ruling; they are not applicable to all taxpayers. A Notice is a public pronouncement that contains official guidance about regulations or interpretations of the Code. LO 8.1.1
Which one of the following is NOT a taxation function of the social objective? A) Excluding life insurance proceeds from taxation B) Renovation of a historic home C) Charitable deduction D) Reduction of taxes to stimulate the economy
Answer: D Social objectives of the federal taxation system include the charitable deduction, excluding life insurance proceeds from taxation, and renovation of a historic home. The reduction of taxes in order to stimulate the economy is due to the economic objective. LO 8.1.2
Which of the following statements regarding constructively received income is CORRECT? I. Income is constructively received in the taxable year in which there is no substantial limitation or restriction on a taxpayer's right to bring the funds under personal control. II. Constructive receipt occurs only when income is actually received during the taxable year. A) II only B) Both I and II C) Neither I nor II D) I only
Answer: D Statement II is incorrect; income may be constructively received in a taxable year even if it is not actually received. LO 8.2.3
Which of the following statements is CORRECT? I. Targeted program audits make up approximately 25% of each year's total of returns audited. II. The general statute of limitations for audits is three years from the filing date of the return, but six years if 25% of gross income is unreported. A) I only B) II only C) Neither I nor II D) Both I and II
Answer: D Targeted program audits make up approximately 25% of each year's total of returns audited. The general statute of limitations for audits is three years from the filing date of the return (or due date, if later), but six years if 25% of gross income is unreported. LO 8.2.2
Mary filed her 2020 income tax return on April 3, 2021. The IRS has recently determined that she worked a part-time job, but the employer failed to provide Mary with a W-2. Mary honestly did not realize that she was required to report the income, because she did not receive a W-2. The IRS has determined that her negligent failure to report the income resulted in an additional income tax liability of $2,000. What is Mary's tax penalty? A) $200 B) $100 C) $1,000 D) $400
Answer: D The answer is $400. The negligence penalty is 20% of the deficiency due to the taxpayer's negligence. For the $2,000 tax deficiency, 20% results in a negligence penalty of $400. It may be argued that the failure to report the income was fraud, but the fact pattern states that the act was merely negligent. LO 8.2.3
To be considered a responsible person by the IRS, which one of the following is among important factors? A) Not in charge of hiring and firing employees B) Impressive title C) Shareholder of a similar company D) Authority to sign checks
Answer: D The determination of whether someone is a responsible person is a test of facts and circumstances. Some of the questions the IRS usually asks in determining responsibility are as follows: Was the individual an officer or director? Was the individual a shareholder? Was the individual a member of a board of directors? Did the individual have the authority to sign checks? Was the individual responsible for hiring and firing employees? Did the individual have actual authority or merely an impressive title? LO 8.2.1
Which one of the following is a tax return preparer failure that would initiate a tax penalty from the IRS? A) Failure to have the clients sign their return B) Failure to provide a taxpayer with a receipt for their services C) Failure to maintain a list of all returns prepared for the past 10 years D) Failure to keep a copy of all returns prepared for at least the last three years or to maintain a list of returns prepared
Answer: D The following actions would constitute a tax return preparer's failure and be subject to a tax penalty: failure to provide a taxpayer with a copy of their return, failure to keep a copy of all returns prepared for at least the last three years or to maintain a list of returns prepared, and failure to sign a return as preparer and give their tax identification number on the return. LO 8.2.1
If a taxpayer deducted medical expenses on a prior year's tax return and receives a reimbursement of the expenses from her insurance company in the following year, which one of the following rules or doctrines might cause the reimbursement to be included in income? A) Constructive receipt doctrine B) Ownership attribution rules C) Assignment of income doctrine D) Tax benefit rule
Answer: D The tax benefit rule applies to situations in which a particular tax benefit exists. For instance, if an insurance reimbursement is received for medical expenses, it is generally nontaxable. However, if the reimbursement was received in the year after a medical expense deduction was taken and a tax benefit was received for that deduction, then the reimbursement is converted into taxable income in that subsequent year. LO 8.2.3
Ed deducted $6,500 in medical expenses as an itemized deduction on his prior-year tax return. During the current year, he receives a reimbursement from his insurance company of $5,000. Which of the following rules or doctrines may cause the reimbursement to be taxable to Ed? A) Step transaction doctrine B) Assignment of income doctrine C) Substance over form doctrine D) Tax benefit rule
Answer: D The tax benefit rule converts otherwise nontaxable receipts into taxable income. The most common example is when a taxpayer is reimbursed in a subsequent year for medical expenses paid and deducted in a previous year. LO 8.1.2
