Federal Tax Legislation, Procedures, Planning, and Accounting

Question 1

Tax legislation is first referred to which Senate committee once it is approved by the House?

Answer 1

Finance. The House version is referred to the Senate Finance Committee before being considered by the full Senate

Question 2

What is the most authoritative source of tax law?

Answer 2

Internal Revenue Code.

Question 3

Which of the following is the primary source of Federal Tax Law?

Answer 3

The Internal Revenue Code of 1986 is the primary source of Federal Tax Law. It imposes income, estate, gift, employment, and miscellaneous excise taxes and provisions controlling the administration of Federal taxation.

Question 4

A taxpayer wishing to reverse the U.S. Tax Court’s ruling would appeal to which of these courts?

Answer 4

U.S. Circuit Court of Appeals.

Question 5

What are the primary authoritative sources when conducting tax research?

Answer 5

Tax Court cases
Treasury regulations
Internal Revenue Code

Question 6

Where do all bills for raising revenue originate?

Answer 6

“All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills . . .”

Question 7

when the IRS wants to receive public feedback, what type of regulation would be issued?

Answer 7

Proposed regulations are issued to elicit comments from the public. Public hearings are held if written requests are made. Proposed regulations might be used as somewhat of an authority for taking a tax position, but the regulations themselves do not state this and must be considered as a weak authority at best.

Question 8

Which of the following is required to override a presidential veto?

Answer 8

2/3 majority vote by Congress.

Question 9

To research whether the Internal Revenue Service has announced an opinion on a Tax Court decision, refer to?

Answer 9

The Internal Revenue Bulletin is published weekly and includes Treasury decisions, statutes, committee reports, U.S. Supreme Court decisions affecting the IRS, lists of the acquiescences and nonacquiescences of the IRS to decisions of the courts, and administrative rulings.

Question 10

What are the 3 classes of Treasury Regulations?

Answer 10

The three classes of Treasury Regulations are temporary, final, and proposed regulations.

Question 11

In order to show that a tax preparer’s application of tax law was in line with the intent of the tax law, the preparer should cite?

Answer 11

Committee reports are useful tools in determining Congressional intent behind certain tax laws and helping examiners apply the law properly. The committee reports are very high authority to which the courts are bound.

Question 12

What is writ of certiorari?

Answer 12

A writ of certiorari is an order by the Supreme Court to send the case up for its consideration. The court’s certiorari jurisdiction is purely discretionary. A denial of a petition for a writ of certiorari by the Supreme Court expresses no opinion on the merits of the case.

Question 13

Should publications be cited to sustain a position in defense of a position before the Appeals Office of the IRS?

Answer 13

IRS Publications explain the law in plain language for taxpayers and their advisors. They typically highlight changes in the law, provide examples illustrating Service positions, and include worksheets. Publications are not binding on the Service and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position.

Question 14

Congressional Committee Reports:

Answer 14

Congressional Committee Reports reflect Congress’ intent behind certain tax laws and help examiners apply the law properly.

Question 15

When a revenue ruling conflicts with a revenue procedure, which of the two tax authorities has precedence?

Answer 15

The most recently established. When there are conflicting sources of tax law within the same tier of the hierarchy (as is the case with revenue rulings and procedures), the most recent rule/law takes precedence.

Question 16

What is Income Shifting?

Answer 16

Income shifting typically relates to moving income and therefore the accompanying tax liability from one family member to another who is subject to a lower marginal rate or moving income between entities and their owner(s). When a taxpayer hires a family member subject to a lower marginal rate (typically one of the taxpayer’s children), the taxpayer, in essence, shifts income, reducing the overall (i.e., global) family tax liability.

Question 17

A cash-basis taxpayer should report gross income

Answer 17

For the year in which income is either actually or constructively received, whether in cash or in property.

Question 18

The cash method of accounting is only permitted for certain taxpayers. The following taxpayers use the accrual method of accounting as their overall method of accounting for tax purposes:

Answer 18

(1) C corporations, unless they are small C corporations or personal service corporations; (2) partnerships that have a C corporation as a partner; (3) trusts that are subject to the tax on unrelated income; and (4) tax shelters.

Question 19

If leasehold improvement were not in lieu of any required rent, is the value of leasehold improvement included or excluded from income?

Answer 19

leasehold improvements are excluded from income since they were not in lieu of rent.

Question 20

Is a TP required to obtain permission of the Commissioner of Internal Revenue to change from Accrual method to the installment method of reporting income?

Answer 20

The general rule is that to change an accounting method the taxpayer must obtain the permission of the IRS. In general, the installment method of reporting income may be used by a taxpayer without the permission of the IRS.

Question 21

What must be met to qualify for completed contract method?

Answer 21

Receipts and expenditures are accounted for, under the completed-contract method, in the tax year in which the contract is completed. The method is allowed only for a construction contract of a small business if expected to take no longer than 2 years to complete or home construction projects. A small business is one with average annual gross receipts not greater than $10 million for the 3 preceding tax years.

Question 22

Superior Construction Co. was contracted to plaster all the buildings of a historical preservation project for $2,500,000 over the next 2 years. Total estimated costs to complete are $2,000,000. Actual costs incurred in Years 1 and 2 were $800,000 and $900,000, respectively. Using the percentage-of-completion method, what amount of gross profit would Superior report in Year 1?

A. $500,000
B. $200,000
C. $225,000
D. $250,000

Answer 22

Answer (B) is correct.
Under the percentage-of-completion method, Superior calculates gross profit based on the ratio of costs for the tax year to total expected costs to complete the project. The ratio of costs is 40% ($800,000 actual costs ÷ $2,000,000 total costs to complete). The cost ratio is multiplied by the total contract for Year 1 gross receipts of $1,000,000 ($2,500,000 contract price × 40%). Year 1 gross receipts less Year 1 actual costs equals total gross profit for Year 1 of $200,000 ($1,000,000 – $800,000).

Question 23

What is the general term for a single geographic area that has its own distinct set of tax rules and regulations?

Answer 23

A tax jurisdiction is a geographic area that has its own distinct set of tax rules and regulations. Specific examples of tax jurisdictions include a municipality, county, state, or country.

Question 24

In accordance with the UDITPA, which of the following is correct for allocating interest and dividends?

Answer 24

Allocate based on the commercial domicile of the taxpayer.

Question 25

Example of unprotected in state activity?

Answer 25

Unprotected in-state activities establish nexus. Consigning goods for sale goes beyond solicitation of orders or ancillary activities.

Question 26

When is nexus not established?

Answer 26

Nexus is not established if the activity is limited to solicitation of orders for tangible personal property; the orders are sent out of state for approval or rejection and, if approved, the orders are filled by shipment or delivery from a point outside the state. Solicitation of orders approved out of state and delivery made from an out-of-state location is a situation that fulfills all three requirements.

Question 27

When must a claim for refund be filed?

Answer 27

A claim for refund must be made within the statute of limitations period for refunds. A claim must be filed by the later of 3 years from filing the return or 2 years after the tax was paid.

Question 28

An individual taxpayer agreed to a finding of fraud on an income tax return filed 2 years ago. What is the maximum time limitation, if any, after which the IRS may not assess any additional taxes against the taxpayer for this tax return?

Answer 28

Attempting to evade taxes results in an unlimited assessment period. Fraud cannot be cured by filing a correct amended return.

Question 29

To avoid penalties, what estimated tax payment must be made?

Answer 29

To avoid penalties, a taxpayer must pay the lesser of 100% (110% for taxpayers whose prior year’s AGI exceeds $150,000) of the prior year’s tax or 90% of the current year’s tax.

Question 30

In calculating the tax of a corporation for a short period, which of the following processes is correct?

Answer 30

Annualize income and calculate the tax on annualized income, then multiply the computed tax by the number of months in the short period divided by 12.

Question 31

What is the penalty amount for accuracy related penalty?

Answer 31

The penalty is equal to 20% of the underpayment.

Question 32

What is the failure to pay penalty?

Answer 32

The penalty for failure to pay tax is 0.5% of the amount due for each month (or fraction thereof) during which such tax remains unpaid. The maximum penalty under this provision is 25% (Sec. 6651).

Question 33

If additional tax on the return to be paid is $5,000 and it was paid on June 2nd, what is the failure to pay penalty?

Answer 33

$5,000x.005=$25x2 months=$50

Question 34

What is the failure to file penalty?

Answer 34

5% per month, up to max of 25%. Minimum penalty of $135

Question 35

What is the general rule of statute of limitations the IRS must assert a notice of deficiency?

Answer 35

The general statute of limitations for assessment of a deficiency is 3 years from the date the return was filed or due. An income tax return filed before the due date for the return is treated as if filed on the due date for statute of limitations purposes. Since Keen’s return was due April 15, 2016, the statute of limitations will expire 3 years from that date.

Question 36

What is the statute of limitations if there is an omission of items of more than 25% of gross income stated in the return?

Answer 36

The statute of limitations is 6 years if there is omission of items of more than 25% of gross income stated in the return.

Question 37

A claim for refund of previously paid income taxes is made by filing :

Answer 37

A claim for refund of previously paid income taxes is made by filing an amended return on Form 1040X within the appropriate statute of limitations period.

Question 38

A substantial understatement of income tax occurs when the understatement is:

Answer 38

A substantial understatement of income tax occurs when the understatement is more than the larger of 10% of the correct tax, or $5,000. A substantial understatement is subject to an accuracy-related penalty.

Question 39

Prepayment of tax includes all of the following:

Answer 39

Prepayment of tax includes all of the following:

1. Overpayment of tax in a prior tax year that has not been refunded
2. Amounts withheld from wages by an employer
3. Direct payment by the individual (or another on his or her behalf)
4. Excess FICA withheld when an employee has two or more employers during a tax year who withheld (in the aggregate) more than the ceiling on FICA taxes

Question 40

What is the statute of limitations for filing a refund claimed due to losses from worthless securities.

Answer 40

A 7-year period of limitation for filing a refund claim is allowed if the overpayment of tax is due to losses from worthless securities. The period of limitation is 7 years from the date prescribed for filing the return for the year with respect to which the claim is made.