Taxation Ch 1

IRS audit efforts are simplified by decreasing the amount of the standard deduction allowed to individual taxpayers.

False

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.

False

In preparing an income tax return, the use of a client's estimates is permitted.

True

Tax considerations should not be the controlling factor in most business decisions.

True

The Federal income tax on individuals generates more revenue than the Federal income tax on corporations.

True

Geoff underpaid his taxes in the amount of $2,500, of which $2,000 is attributable to negligence. Geoff's negligence penalty is: a.$400. b.$2,000. c.$500. d.$2,500. e.$100.

a.$400. $2,000 × 20% = $400

The ratification of which amendment to the U.S. Constitution sanctioned both the Federal individual and corporate income taxes? a.Sixteenth b.Fourteenth c.Eighteenth d.Twentieth e.Twelfth

a.Sixteenth

In terms of probability, which of the following taxpayers would least likely be audited by the IRS? a.Taxpayer is a plumber employed by a plumbing and heating company. b.Taxpayer just won a $1 million slot machine jackpot at a Las Vegas casino. c.Taxpayer just received a $3 million personal injury award resulting from a lawsuit. d.Taxpayer has been audited several times before and found to have tax deficiencies. e.Taxpayer is a sole proprietor who owns and operates a laundromat.

a.Taxpayer is a plumber employed by a plumbing and heating company.

In addition to ethical constraints, a tax return preparer may be subject to specific penalties, including penalties involving procedural matters. a.This statement is true for tax returns prepared for both individuals and corporations. b.This statement is true only for tax returns prepared for individuals but not for corporations. c.This statement is false because tax return preparers are not subject to any penalties. d.This statement is false because tax return preparers are not subject to penalties for procedural matters but may be subject to penalties for other reasons. e.This statement is true only for tax returns prepared for corporations but not for individuals.

a.This statement is true for tax returns prepared for both individuals and corporations.

The purpose of the FUTA tax is to provide funds for: a.Unemployment benefits. b.Adoption assistance. c.Disaster relief. d.Disability benefits. e.Medical benefits.

a.Unemployment benefits.

On December 31, 2020, Martina (a widow) gives $15,000 to each of her five married children, their spouses, and her six grandchildren. On January 2, 2021, she repeats the procedure. How much is her total annual exclusion for nontaxable gifts for 2020? a.$14,000 b.$240,000 c.$140,000 d.$70,000 e.$464,000

b.$240,000 5 children+5 spouses+6 grandchildren = 16; 16 × $15,000

Borrowing to cover a deficit is also a revenue source. In recent years, borrowing has made up approximately how much of total government revenues? a.50% b.10 to 40% c.50 to 60% d.5 to 6% e.1 to 4%

b.10 to 40%

Which of the following is not a characteristic of ad valorem taxes on real property? a.States may have a homestead exemption. b.Some states provide for higher valuations on property used for agriculture. c.Lower taxes may apply to residences owned by senior citizens. d.When a personal residence is converted to a rental house, the appraised value may be increased. e.Property owned by the Federal government is exempt from tax.

b.Some states provide for higher valuations on property used for agriculture.

In general, the IRS may assess an additional tax liability against a taxpayer within how many years of the filing of the income tax return? a.Seven b.Three c.Ten d.Thirteen e.One

b.Three

Under a proportional tax structure in a tax jurisdiction with a rate of 8%, if Gina pays $1,200 tax on $15,000 worth of income, how much tax will she pay on $23,000? a.$1,200 b.$500 c.$1,840 d.$23,000 e.$0

c.$1,840 ($23,000 × 8%).

Mason did not file for an extension and files his tax return on August 9. The balance of his tax owed is $3,000. Disregarding the interest element, for how much should he write a check to cover what he owes? a.$3,500 b.$3,000 c.$3,540 d.$3,660 e.$2,460

c.$3,540 Incorrect. For failure to file a tax return by the due date, a penalty of 5% per month up to a maximum of 25% is imposed on the amount of tax shown as due on the return. Any fraction of a month counts as a full month. A penalty for failure to pay the tax due as shown on the return is imposed in the amount of 0.5% per month up to a maximum of 25%. Any fraction of a month counts as a full month. During any month in which both the failure to file penalty and the failure to pay penalty apply, the failure to file penalty is reduced by the amount of the failure to pay penalty. Mason's check should be written for $3,540 which is his tax due plus applicable penalties. [$3,000 + $540 {($3,000 × 4 × 5%) − ($3,000 × 4 × 0.5%) = $540}].

For failure to file a tax return by the due date, a penalty of _____ per month up to a maximum of _____ is imposed on the amount of tax shown as due on the return. Any fraction of a month counts as a full month. a.4.5%; 13.5% b.2.5%; 10% c.5%; 25% d.7%; 35% e.1%; 5%

c.5%; 25%

FICA and FUTA are what type of tax? a.Local income b.General sales c.Employment d.Corporate income e.Excise

c.Employment

The American Institute of Certified Public Accountants (AICPA) has issued 12 principles that are commonly used as indicators of desirable tax policy. The first four principles are adapted from Adam Smith's The Wealth of Nations and are: a.Equity and fairness, certainty, economic growth and efficiency, and effective tax administration. b.Transparency and visibility, neutrality, economic growth and efficiency, and effective tax administration. c.Equity and fairness, certainty, convenience of payment, and effective tax administration. d.Equity and fairness, neutrality, convenience of payment, and effective tax administration. e.Transparency and visibility, certainty, convenience of payment, and effective tax administration.

c.Equity and fairness, certainty, convenience of payment, and effective tax administration.

Which of the following is an example of the way individuals pay taxes indirectly as opposed to paying them directly? a.Paying personal income tax to the local municipal government b.Paying property taxes on one's home c.Paying a state sales tax on the purchase of tangible goods such as clothing d.Paying personal income tax to the state e.Paying personal income tax to the Federal government

c.Paying a state sales tax on the purchase of tangible goods such as clothing

Which of the following statements regarding the ways tax legislation may be designed to help encourage small businesses is true? a.Shareholders of small business corporations are not allowed to make a special election that allows losses of the corporation to flow through to its shareholders. b.Shareholders of small business corporations are not allowed to make a special election that allows profits of the corporation to flow through to its shareholders. c.Shareholders of small business corporations are allowed to make a special election that allows profits and losses of the corporation to flow through to its shareholders, avoiding the corporate income tax. d.Tax legislation does not allow a shareholder in a small business corporation to take an ordinary deduction for any loss recognized on the stock investment. e.Tax legislation is never designed to encourage small businesses.

c.Shareholders of small business corporations are allowed to make a special election that allows profits and losses of the corporation to flow through to its shareholders, avoiding the corporate income tax.

The AICPA guidelines suggest that tax policy should follow the neutrality principle. This means that: a.Taxes should be due at the same intervals of time each calendar year. b.Taxpayers should have certainty rather than ambiguity as to when and how a tax is paid. c.The effect of tax rules on taxpayer decision making should be kept to a minimum. d.The collection of taxes should offset revenues so that the budget is balanced, or neutral. e.The tax affects similarly situated taxpayers in a similar manner.

c.The effect of tax rules on taxpayer decision making should be kept to a minimum.

Cora lives in Kansas where there is a sales tax rate of 6.5% on all taxable items. While out shopping one day, she buys a sweater for $24.50. What is the total cost of the sweater after taxes? a.$24.50 b.$35.00 c.$25.00 d.$26.09 e.$31.00

d. $26.09 [$24.50 + (6.5% × $24.50)].

Harry and Gloria are married and live in a common law state. Harry wants to make gifts to their four children in 2021. What is the maximum amount of the annual exclusion they will be allowed for these gifts? a.$30,000 b.$15,000 c.$60,000 d.$120,000 e.$0

d.$120,000 [4 (number of donees) × $15,000 (annual exclusion) × 2 (number of donors) = $120,000]

The AICPA guidelines suggest that taxes should be transparent and visible. This means that: a.Taxes should be due at the same intervals of time each calendar year. b.Taxpayers should have certainty rather than ambiguity as to when and how a tax is paid as well as how to calculate it. c.The effect of tax rules on taxpayer decision making should be kept to a minimum. d.Taxpayers should know that a tax exists and how and when it applies to them. e.The taxes affect similarly situated taxpayers in a similar manner.

d.Taxpayers should know that a tax exists and how and when it applies to them.

David lives in Illinois where there is a sales tax rate of 6.25% on most taxable items and a 1% tax rate on food or prescription drugs. On his way home one day, he stopped to pick up his prescription from his local drug store. His prescription was $49.40. What is the total cost of his prescription after taxes? a.$50.40 b.$50.00 c.$52.61 d.$55.90 e.$49.89

e.$49.89 [$49.40 + (1% × $49.40)].

The Federal courts have influenced tax law by: a.Making key decisions changing the Internal Revenue Code but not by developing a number of judicial concepts that help guide how tax provisions are applied. b.Developing a number of judicial concepts that help guide how tax provisions are applied but not by making key decisions changing the Internal Revenue Code. c.Delegating authority to the IRS for closing tax loopholes. d.Responding to political pressure to expand tax loopholes. e.Developing a number of judicial concepts that help guide how tax provisions are applied and by making key decisions changing the Internal Revenue Code.

e.Developing a number of judicial concepts that help guide how tax provisions are applied and by making key decisions changing the Internal Revenue Code.

How often does tax law typically change? a.Every four years b.With each new U.S. president c.Every decade d.Every two years, with each new Congress e.Yearly

e.Yearly