Final

Question 1

A tax bill introduced in the House of Representatives is then

a. referred to the House Ways and Means Committee for hearings and approval.
b. referred to the entire House for hearings.
c. voted upon by the entire House.
d. forwarded to the Senate Finance Committee for consideration.

Answer 1

a. referred to the House Ways and Means Committee for hearings and approval.

Question 2

Assume that you want to read a description of a particular area of the law, along with one or more illustrations of how that law is applied. You will not find that type of material in

a. a citator.
b. the Treasury Regulations.
c. the Cumulative Bulletin.
d. the Committee Reports.

Answer 2

a. a citator.

Question 3

During the course of an audit, a CPA discovers an error in a prior return. According to the Statements on Standards for Tax Services, the CPA should

a. ask the client for permission to disclose the error to the IRS.
b. withdraw from the engagement.
c. inform the IRS of the error, regardless of whether the client grants permission.
d. correct the error in the current year’s tax return.

Answer 3

a. ask the client for permission to disclose the error to the IRS.

Question 4

Identify which of the following statements is true.

a. RIA United States Tax Reporter and CCH Standard Federal Tax Reporter are topical tax services.
b. An annotated tax service is organized by broad subject areas.
c. Annotations are summaries of IRS pronouncements and court opinions.
d. All of the above are false.

Answer 4

a. RIA United States Tax Reporter and CCH Standard Federal Tax Reporter are topical tax services.

Question 5

Internet versions of topical tax services include

a. Code and Regulations.
b. Revenue rulings, letter rulings, and revenue procedures.
c. Court cases involving tax issues.
d. All of the above.

Answer 5

d. All of the above.

Question 6

Investigation of a tax problem that involves a closed-fact situation means that

a. the client’s transactions have already occurred and the tax questions must now be resolved.
b. the client’s tax return has yet to be filed.
c. future events may be planned and controlled.
d. research is primarily concerned with applying the law to the facts as they exist.

Answer 6

a. the client’s transactions have already occurred and the tax questions must now be resolved.

Question 7

Ralph’s business records were lost as a result of Hurricane Katrina. CPA Jane prepares Ralph’s return using estimates. What do the Statements on Standards for Tax Services state about the use of estimates?

a. Estimates may not be used.
b. Estimates may be used without disclosing their use to the IRS.
c. Estimates may be used, but Jane should disclose their use to the IRS.
d. The Statements on Standards for Tax Services do not address the use of estimates.

Answer 7

c. Estimates may be used, but Jane should disclose their use to the IRS.

Question 8

Statements on Standards for Tax Services are issued by

a. the SEC.
b. the IRS.
c. the AICPA.
d. the FASB.

Answer 8

c. the AICPA.

Question 9

The term “tax law” includes

a. legislation.
b. treasury regulations.
c. judicial decisions.
d. all of the above.

Answer 9

d. all of the above.

Question 10

Title 26 of the U.S. Code includes

a. income tax legislation only.
b. gift tax and estate tax legislation only.
c. alcohol and tobacco tax legislation only.
d. all of the tax legislation mentioned above.

Answer 10

d. all of the tax legislation mentioned above.

Question 11

When a taxpayer contacts a tax advisor requesting advice as to the most advantageous way to dispose of a stock, the tax advisor is faced with

a. a restricted-fact situation.
b. a closed-fact situation.
c. an open-fact situation.
d. a recognized-fact situation.

Answer 11

c. an open-fact situation.

Question 12

Which of the following citations denotes a regular decision of the Tax Court?

a. 41 TCM 1272
b. 35 T.C. 1083 (2003)
c. 39 AFTR 2d 77-640
d. all of the above

Answer 12

b. 35 T.C. 1083 (2003)

Question 13

Which of the following statements about the Statements on Standards for Tax Services is true?

a. A CPA is never allowed to use a taxpayer’s estimates when preparing a tax return.
b. The CPA must tell the IRS upon becoming aware that an error has been made on a past tax return.
c. The CPA may in good faith rely on information provided by the taxpayer, without verifying the reliability of that information if reasonable inquiries are made where the information furnished appears to be incorrect.
d. The CPA should not recommend that a taxpayer take a certain position if there is any doubt as to whether the position would be approved by the IRS upon audit.

Answer 13

c. The CPA may in good faith rely on information provided by the taxpayer, without verifying the reliability of that information if reasonable inquiries are made where the information furnished appears to be incorrect.

Question 14

Which of the following statements regarding proposed regulations is not correct?

a. Proposed regulations expire after three years.
b. Practitioners and other interested parties may comment on proposed regulations.
c. Proposed and temporary regulations are generally issued simultaneously.
d. Proposed regulations do not provide any insight into the IRS’s interpretation of the tax law.

Answer 14

d. Proposed regulations do not provide any insight into the IRS’s interpretation of the tax law.

Question 15

Which of the following steps, related to a tax bill, occurs first?

a. signature or veto by the President of the United States
b. consideration by the Senate Finance Committee
c. consideration by the entire Senate
d. consideration by the House Ways and Means Committee

Answer 15

d. consideration by the House Ways and Means Committee

Question 16

Which tax service is usually deemed to be the most authoritative?

a. United States Tax Reporter
b. Standard Federal Tax Reporter
c. Federal Tax Coordinator 2d
d. All are equally authoritative.

Answer 16

d. All are equally authoritative.

Question 17

Why does a researcher use a citator?

a. to check on authorities issued subsequent to a court decision
b. to determine whether a private letter ruling exists on the subject
c. for examples of the application of a tax provision
d. none of the above

Answer 17

a. to check on authorities issued subsequent to a court decision

Question 18

Ali, a contractor, builds an office building for a construction partnership in exchange for a capital and profits interest in the partnership worth $500,000. Which of the following statements is correct?

a. Ali recognizes $500,000 of ordinary income and the partnership can deduct $500,000 in the current year.
b. Ali recognizes no income and the partnership can deduct nothing in the current year.
c. Ali recognizes $500,000 ordinary income and the partnership deducts the $500,000 over the building’s MACRS recovery period as a depreciation expense.
d. Ali recognizes ordinary income in the current year in an amount equal to the depreciation deduction the partnership claims this year for the $500,000 capitalized amount.

Answer 18

c. Ali recognizes $500,000 ordinary income and the partnership deducts the $500,000 over the building’s MACRS recovery period as a depreciation expense.

Question 19

Allen contributed land, which was being held for sale to Allen’s customers, to a partnership in exchange for a 20% interest. The partnership uses the land in its business for three years and then sells the property. When the property was contributed, it had a basis in Allen’s hands of $500,000 and an FMV of $600,000. The partnership sells the land for $700,000. The gain reported by the partnership is

a. $100,000 of ordinary income and $100,000 of Sec. 1231 gain.
b. $100,000 of Sec. 1231 gain and $100,000 of capital gain.
c. $200,000 of ordinary income.
d. $200,000 of Sec. 1231 gain.

Answer 19

c. $200,000 of ordinary income.

Question 20

Bao had investment land that he purchased in 1990 for $80,000. Two years ago, when the land was contributed to a partnership, the FMV was $50,000. The land is inventory in the hands of the partnership. The partnership then sells the land in the current year for $46,000. The partnership’s recognized loss is

a. a $34,000 capital loss.
b. a $34,000 ordinary loss.
c. a $30,000 capital loss and a $4,000 ordinary loss.
d. a $4,000 capital loss and a $30,000 ordinary loss.

Answer 20

c. a $30,000 capital loss and a $4,000 ordinary loss.

Question 21

David contributes investment land with a basis of $24,000 and an FMV of $40,000 to a partnership for a 10% interest in partnership capital, profits, and losses. The land is subject to a $30,000 recourse liability, which is assumed by the partnership. The partnership has other recourse liabilities of $18,000. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. David must recognize a

a. $3,000 capital gain.
b. $3,000 capital loss.
c. $1,200 capital gain.
d. $1,200 capital loss.

Answer 21

c. $1,200 capital gain.

Question 22

For a 20% interest in partnership capital, profits, and losses, Kasi contributes a machine having a basis of $30,000 and an FMV of $40,000. The partnership also assumes a $24,000 recourse liability secured by the machine. The partnership has $6,000 in recourse liabilities immediately preceding Kasi’s contributions. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. Kasi’s basis in the partnership interest is

a. $10,800.
b. $12,000.
c. $13,200.
d. $30,000.

Answer 22

b. $12,000.

Question 23

For a 30% interest in partnership capital, profits, and losses, Carol contributes a machine with a basis of $40,000 and an FMV of $80,000. The partnership assumes a $70,000 recourse liability on the machine. At the time of the contribution, the partnership had recourse liabilities of $10,000. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. Following the contribution, Carol has

a. a capital loss due to the contribution of $6,000 and a zero basis in the partnership interest.
b. a capital gain due to the contribution of $6,000 and a zero basis in the partnership interest.
c. a $34,000 basis in the partnership interest and no gain or loss.
d. a $43,000 basis in the partnership interest and no gain or loss.

Answer 23

b. a capital gain due to the contribution of $6,000 and a zero basis in the partnership interest.

Question 24

George pays $10,000 for a 20% interest in a general partnership, which has recourse liabilities of $20,000. The partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. George’s basis in his partnership interest is

a. $10,000.
b. $12,000.
c. $14,000.
d. $30,000.

Answer 24

c. $14,000.

Question 25

Identify which of the following statements is true.

a. Formation of a partnership requires legal documentation.
b. An individual engaged in the active conduct of a business must elect not to be taxed as a partnership.
c. A partnership exists as long as there are at least two individuals or entities engaged in the active conduct of a trade or business or a financial operation, and the business is not a trust or a corporation.
d. All of the above are false.

Answer 25

c. A partnership exists as long as there are at least two individuals or entities engaged in the active conduct of a trade or business or a financial operation, and the business is not a trust or a corporation.

Question 26

Identify which of the following statements is true.

a. All of the partners in a limited partnership have limited liability.
b. A limited partnership must have at least two general partners.
c. A limited partnership cannot have a corporate general partner.
d. All of the above are false.

Answer 26

d. All of the above are false.

Question 27

Identify which of the following statements is true.

a. Distribution of partnership income in the form of cash to partners is generally tax-free to the partners and the partnership.
b. When partners receive cash distributions from the partnership, they pay taxes on those distributions.
c. If money distributions exceed the partner’s basis in the partnership interest, the partner would have to recognize gain on the distribution from the partnership. Such gain is usually an ordinary gain.
d. All of the above are true.

Answer 27

a. Distribution of partnership income in the form of cash to partners is generally tax-free to the partners and the partnership.

Question 28

Identify which of the following statements is true.

a. Although a partner’s basis in the partnership cannot go below zero, a partner’s book capital account (equity) may be negative.
b. Tom purchased for cash a 40% capital, profits, and loss interest in the TP General Partnership. His $140,000 basis in his partnership interest includes his $45,000 share of recourse debt and his $30,000 of nonrecourse debt (that is not qualified nonrecourse real estate financing). His at-risk basis cannot be more than $65,000.
c. Terri is a limited partner in the STU Partnership, which manufactures children’s toys. Because the partnership is actively involved in a trade or business, Terri’s income from the partnership is classified as active income for the passive activity loss rules.
d. All of the above are false.

Answer 28

a. Although a partner’s basis in the partnership cannot go below zero, a partner’s book capital account (equity) may be negative.

Question 29

Identify which of the following statements is true.

a. A contribution of services for a partnership interest is a tax-free transaction.
b. For federal income tax purposes, formation of a partnership is governed by Sec. 721.
c. When a partnership assumes a liability on property contributed by a partner, the only effect on the contributing partner’s basis in his or her partnership interest is that his or her basis will be increased by the amount of the liability assumed by the other partners.
d. All of the above are false.

Answer 29

b. For federal income tax purposes, formation of a partnership is governed by Sec. 721.

Question 30

Identify which of the following statements is true.

a. A partner’s relief of debt is treated as if the partner receives a cash distribution.
b. When a partnership assumes any liabilities of the transferor, the transferor has an increase in the basis of his or her partnership interest.
c. Gain recognized by a contributing partner because of the assumption of liabilities by the partnership increases the partnership’s basis in the contributed property.
d. All of the above are false.

Answer 30

a. A partner’s relief of debt is treated as if the partner receives a cash distribution.

Question 31

Mario contributes inventory to a partnership on August 1 of this year in exchange for a 20% partnership interest. Mario had purchased the inventory on July 2 of last year. His holding period for the partnership interest begins

a. July 2 of last year.
b. July 3 of last year.
c. August 1 of the current year.
d. August 2 of the current year.

Answer 31

d. August 2 of the current year.

Question 32

On January 1, Helmut pays $2,000 for a 10% capital, profits, and loss interest in a partnership, which has recourse liabilities of $20,000. The partners share economic risk of loss from recourse liabilities in the same way they share partnership losses. In the same year, the partnership incurs losses of $6,000 and the recourse liabilities increase by $5,000. Helmut and the partnership use a calendar tax year-end. Helmut’s basis at year-end is

a. $1,500.
b. $2,000.
c. $3,500.
d. $3,900.

Answer 32

d. $3,900.

Question 33

On the first day of the partnership’s tax year, Karen purchases a 50% interest in a general partnership for $30,000 cash and she materially participates in the operation of the partnership for the entire year. The partnership has $40,000 in recourse liabilities when Karen enters the partnership. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. There is no minimum gain related to the nonrecourse liability. During the year, the partnership incurs a $120,000 loss and a $20,000 increase in liabilities. How much of the loss can Karen report on her tax return for the current year?

a. $30,000
b. $40,000
c. $50,000
d. $60,000

Answer 33

d. $60,000

Question 34

Rashad contributes a machine having a basis of $30,000 and an FMV of $25,000 to a partnership in exchange for a 20% interest in partnership capital, profits, and losses. Prior to the contribution, the partnership had recourse liabilities of $20,000. The partnership assumes a $20,000 recourse liability that is owed by Rashad on the machine. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. Rashad’s basis in his partnership interest is

a. $11,000.
b. $18,000.
c. $22,000.
d. $34,000.

Answer 34

b. $18,000.

Question 35

Stella acquired a 25% interest in the STUV Partnership by contributing land having an adjusted basis of $32,000 and a fair market value of $100,000. The land was subject to a $48,000 mortgage, which was assumed by STUV. No other liabilities existed at the time of contribution. What is Stella’s basis in her partnership interest?

a. $0
b. $32,000
c. $52,000
d. $64,000

Answer 35

a. $0

Question 36

The definition of a partnership does not include

a. a syndicate.
b. a group.
c. a pool.
d. All of the above are included.

Answer 36

d. All of the above are included.

Question 37

Yong contributes a machine having an adjusted basis of $20,000 and an FMV of $25,000 for a 10% partnership interest. Yong had taken $10,000 of depreciation prior to the contribution. The partnership has no liabilities. As a result of the contribution, Yong must recognize

a. no gain or loss.
b. a $5,000 Sec. 1245 gain.
c. a $5,000 capital gain.
d. $10,000 ordinary income.

Answer 37

a. no gain or loss.

Question 38

A new partner, Gary, contributes cash and assumes a share of partnership liabilities. Diane’s capital, profits, and loss interest in the partnership is reduced by 5% due to the admission of Gary. The Sec. 751 rules do not apply. Partnership liabilities at the time Gary is admitted are $200,000, and all of the liabilities are recourse debts for which the partners share the economic risk of loss in the same way they share partnership profits. Diane’s basis in the partnership interest prior to Gary’s admission is $5,000. Due to the admission of Gary, partner Diane has

a. no recognized gain or loss and a partnership interest basis of $10,000.
b. no recognized gain or loss.
c. a recognized gain of $5,000 and a partnership interest basis of zero.
d. a recognized gain of $5,000 and a partnership interest basis of $5,000.

Answer 38

c. a recognized gain of $5,000 and a partnership interest basis of zero.

Question 39

Carlos has a basis in his partnership interest of $30,000. He receives a current distribution of $6,000 cash, unrealized receivables (FMV $11,000, basis $10,000), inventory (FMV $8,000, basis $4,000), land held as an investment (FMV $7,000, basis, $6,000), and building (FMV $21,000, basis $9,000). The partners’ relative interests in the Sec. 751 assets do not change as a result of the current distribution. Carlos’s basis in the building is

a. $2,500.
b. $6,000.
c. $7,500.
d. $9,000.

Answer 39

b. $6,000.

Question 40

Danielle has a basis in her partnership interest of $12,000. She receives a current distribution of $8,000 cash and equipment with a basis of $7,000. There is no potential gain under Sec. 737. What is her basis in the equipment?

a. $0
b. $4,000
c. $7,000
d. none of the above

Answer 40

b. $4,000

Question 41

Derrick’s interest in the DEF Partnership is liquidated when his basis in the interest is $30,000. He receives a liquidating distribution of $20,000 cash and inventory with a basis of $8,000 and an FMV of $30,000. Derrick will recognize

a. no gain or loss.
b. $2,000 capital loss.
c. $2,000 ordinary loss.
d. $10,000 capital loss and $20,000 ordinary loss.

Answer 41

b. $2,000 capital loss.

Question 42

For tax purposes, a partner who receives retirement payments ceases to be regarded as a partner

a. on the last day of the taxable year in which the partner retires.
b. on the last day of the month in which the partner retires.
c. on the day on which the partner retires.
d. only after the partner’s last payment is received.

Answer 42

d. only after the partner’s last payment is received.

Question 43

Helmut contributed land with a basis of $5,000 and an FMV of $10,000 to the HG Partnership five years ago to acquire a 50% partnership interest. This year the land is distributed to another partner, Gail, when its FMV is $11,000. No other distributions have been made since Helmut became a partner. When the land is distributed to Gail, Helmut recognizes a gain of

a. $0.
b. $2,500.
c. $3,000.
d. $5,000.

Answer 43

d. $5,000.

Question 44

Identify which of the following statements is true.

a. The basis for property distributed by a partnership cannot be increased above the carryover basis amount when it is received by a partner in a nonliquidating distribution.
b. A partner’s partnership capital account balance cannot be less than zero.
c. The length of time a partner owns a partnership interest is relevant when determining the holding period for distributed property.
d. All of the above are false.

Answer 44

a. The basis for property distributed by a partnership cannot be increased above the carryover basis amount when it is received by a partner in a nonliquidating distribution.

Question 45

Identify which of the following statements is true.

a. If a partner sells property received in a partnership distribution for a gain and the property was inventory in the hands of the distributing partnership, the partner will always recognize ordinary income.
b. The primary purpose of Sec. 751 is to prevent partnerships from converting capital gains into ordinary income.
c. Unrealized receivables include rights to payments on the sale of a capital asset.
d. All of the above are false.

Answer 45

d. All of the above are false.

Question 46

Identify which of the following statements is true.

a. The depreciation recapture potential for a Sec. 1245 property is not included in the definition of a Sec. 751 asset.
b. For Sec. 751 purposes, “substantially appreciated inventory” means property held for sale to customers whose market value exceeds its adjusted basis.
c. Inventory for Sec. 751 purposes includes all property except cash, capital assets, and Sec. 1231 assets.
d. All of the above are false.

Answer 46

c. Inventory for Sec. 751 purposes includes all property except cash, capital assets, and Sec. 1231 assets.

Question 47

Identify which of the following statements is true.

a. A liquidating distribution that terminates a partnership interest cannot include more than one distribution.
b. A partnership with a large amount of unrealized receivables and substantially appreciated inventory items liquidated and distributed all of its assets in kind to each partner in proportion to their partnership interests. Each partner will report ordinary income at the time these assets are received equal to their FMV.
c. The rule for recognizing gain on a liquidating distribution is the same rule that is used for a current distribution.
d. All of the above are false.

Answer 47

c. The rule for recognizing gain on a liquidating distribution is the same rule that is used for a current distribution.

Question 48

Identify which of the following statements is true.

a. When unrealized receivables are distributed in a liquidating distribution, the basis of the receivables will be increased.
b. The bases of unrealized receivables and inventory distributed by a partnership in liquidation of a partnership interest are never increased above their bases in the hands of the partnership.
c. The basis of the partnership interest is apportioned between all of the assets received in a liquidating distribution based on the relative FMVs of the assets.
d. All of the above are false.

Answer 48

b. The bases of unrealized receivables and inventory distributed by a partnership in liquidation of a partnership interest are never increased above their bases in the hands of the partnership.

Question 49

Identify which of the following statements is true.

a. John Albin is a retired partner of Brill & Crum, a personal service partnership. Albin has not rendered any services to Brill & Crum since his retirement six years ago. Under the provisions of Albin’s retirement agreement, Brill & Crum is obligated to pay Albin 10% of the partnership’s net income each year through the end of the current year. In compliance with the agreement, Brill & Crum pay Albin $25,000 in the current year. Albin should treat this $25,000 as a long-term capital gain.
b. An exchange of partnership interests in different partnerships qualifies under the like-kind exchange rules.
c. The payment for partnership property to a retiring partner is not deductible by the partnership and often not income to the retiring partner.
d. All of the above are false.

Answer 49

c. The payment for partnership property to a retiring partner is not deductible by the partnership and often not income to the retiring partner.

Question 50

If a distribution occurs within ________ years of the contribution date, in a nonliquidating distribution that does not qualify for Sec. 751 treatment, the distribution event may trigger a precontribution gain or loss.

a. three
b. five
c. seven
d. unlimited

Answer 50

c. seven

Question 51

If a partner dies, his or her tax year closes

a. on the date of death.
b. on the day after death.
c. on the day before death.
d. on some other date.

Answer 51

a. on the date of death.

Question 52

Mirabelle contributed land with a $5,000 basis and a $9,000 FMV to MS Partnership four years ago. This year the land is distributed to Sergio, another partner in the partnership. At the time of distribution, the land had a $12,000 FMV. What is the impact of the distribution on Mirabelle’s partnership basis?
Select one:

a. 0
b. $4,000 increase
c. $4,000 decrease
d. $7,000 increase

Answer 52

b. $4,000 increase

Question 53

Ten years ago, Latesha acquired a one-third interest in Dana Associates, a partnership, for $26,000 cash. This year, Latesha’s entire interest in the partnership is liquidated when her basis is $24,000. Dana’s assets consist of the following: cash, $20,000; inventory with a basis of $46,000 and an FMV of $40,000. Dana has no liabilities. Latesha receives the cash of $20,000 in liquidation of her entire interest. What is Latesha’s recognized loss on the liquidation of her interest in Dana?

a. $0
b. $4,000 long-term capital loss
c. $4,000 short-term capital loss and $2,000 ordinary loss
d. $4,000 long-term capital loss and $2,000 ordinary loss

Answer 53

b. $4,000 long-term capital loss

Question 54

The Internal Revenue Code includes which of the following assets in the definition of Sec. 751 properties?

a. inventory, which is substantially appreciated
b. cash
c. capital assets
d. Sec. 1231 assets

Answer 54

a. inventory, which is substantially appreciated

Question 55

The total bases of all distributed property in the partner’s hands following a nonliquidating distribution is limited to

a. the partner’s predistribution basis in his partnership interest.
b. the FMV of the property distributed.
c. the partnership’s bases in the distributed property.
d. the predistribution FMV of the partner’s partnership interest.

Answer 55

a. the partner’s predistribution basis in his partnership interest.

Question 56

What is the definition of “substantially appreciated inventory”?

a. inventory with a FMV greater than its basis
b. inventory and unrealized receivables with a FMV greater than their basis
c. inventory with a FMV greater than 120% of its basis
d. inventory and unrealized receivables with a FMV greater than 120% of their basis

Answer 56

d. inventory and unrealized receivables with a FMV greater than 120% of their basis

Question 57

A six-year statute of limitation rule applies if the taxpayer

a. understates taxable income by 25%.
b. understates AGI by 25%.
c. understates gross income by 25%.
d. none of the above

Answer 57

c. understates gross income by 25%.

Question 58

A substantial understatement of tax liability involves which of the following?

a. understatement of tax exceeding the greater of 10% of tax required to be shown on the return or $5,000 for individuals
b. underpayment of tax exceeding the greater of 15% of the tax required to be shown on the return or $5,000 for individuals
c. underpayment of tax exceeding the lesser of 25% of the tax required to be shown on the return or $5,000 for individuals
d. $10,000 or more difference between the amount shown on the return and the correct amount due

Answer 58

a. understatement of tax exceeding the greater of 10% of tax required to be shown on the return or $5,000 for individuals

Question 59

A taxpayer can automatically escape the penalty for underpayment of taxes by

a. owing less than $1,000 in taxes over and above the taxes withheld from wages.
b. owing taxes in the previous year.
c. having a casualty loss.
d. none of the above

Answer 59

a. owing less than $1,000 in taxes over and above the taxes withheld from wages.

Question 60

All of the following requirements must be met in order to establish innocent spouse relief except which of the following?

a. The return contains an understatement of tax attributable to the erroneous item(s) of an individual filing it.
b. The request for innocent spouse relief is made no later than one year after the IRS begins its collection efforts.
c. The requesting individual establishes that he or she neither knew nor had reason to know of any or all of the understatement.
d. Based on all the facts and circumstances, holding the other individual for the deficiency would be inequitable.

Answer 60

b. The request for innocent spouse relief is made no later than one year after the IRS begins its collection efforts.

Question 61

Identify which of the following statements is false.

a. If fraud is asserted in a tax transaction, the burden of proof falls on the IRS.
b. The civil fraud penalty consists of 75% of the tax underpayment attributable to fraud plus 25% of the interest payable on the portion of the underpayment resulting from the fraud.
c. The government must prove its case “beyond a reasonable doubt” in order for the court or jury to convict a taxpayer of criminal fraud.
d. The fraud penalty can be imposed with respect to income, gift, and estate tax returns.

Answer 61

b. The civil fraud penalty consists of 75% of the tax underpayment attributable to fraud plus 25% of the interest payable on the portion of the underpayment resulting from the fraud.

Question 62

Identify which of the following statements is true.

a. The failure-to-pay penalty is waived if the additional tax due with the filing of the extended return does not exceed 15% of the tax owed for the year.
b. If both the failure-to-file and the failure-to-pay penalties are owed, the taxpayer will incur a maximum addition to tax of 5.5% per month.
c. Individuals having substantial income from sources not subject to regular withholding generally should make quarterly estimated tax payments to the IRS.
d. All of the above are false.

Answer 62

c. Individuals having substantial income from sources not subject to regular withholding generally should make quarterly estimated tax payments to the IRS.

Question 63

Identify which of the following statements is true.

a. An individual taxpayer may be subject to a penalty for underpayment of estimated taxes if his balance of tax due when he files is $500.
b. A penalty for substantial understatement will potentially be assessed on an individual if the underpayment of tax exceeds the greater of 15% of the tax shown on the return or $5,000.
c. Substantial authority exists for a position that is supported by a decision rendered by the Court of Appeals for the taxpayer’s own circuit.
d. All of the above are true.

Answer 63

c. Substantial authority exists for a position that is supported by a decision rendered by the Court of Appeals for the taxpayer’s own circuit.

Question 64

Identify which of the following statements is true.

a. The statute of limitations, which stipulates the time frame within which either the government or the taxpayer may request a redetermination of tax due, usually expires six years after the date on which the return is filed.
b. The statute of limitations limits the time during which a taxpayer may claim a refund of an overpayment of tax.
c. If a taxpayer omits from gross income an amount in excess of 25% of the gross income shown on his return, the statute of limitations is five years.
d. All of the above are true.

Answer 64

b. The statute of limitations limits the time during which a taxpayer may claim a refund of an overpayment of tax.

Question 65

Identify which of the following statements is true.

a. If a taxpayer fails to file a return, the statute of limitations is extended to 10 years.
b. If a couple files a joint return but only one spouse had income, only the spouse with income is responsible for paying any tax due.
c. Joint and several liability means that each spouse is potentially liable for the full amount of tax due.
d. All of the above are false.

Answer 65

c. Joint and several liability means that each spouse is potentially liable for the full amount of tax due.

Question 66

Steve files his return on April 1 and pays the entire amount of tax for the year at that time, $5,000. He is audited and pays the deficiency of $1,500 two years later. The maximum amount Steve may file a claim for refund for eighteen months later is

a. $6,500.
b. $5,000.
c. $1,500.
d. some other amount.

Answer 66

c. $1,500.

Question 67

Tax return preparers can be penalized for the following activities except

a. failure to sign a return.
b. failure to give a copy of the return to the taxpayer.
c. failure to maintain IRS continuing education requirements.
d. failure to provide the preparer’s identification number on the return.

Answer 67

c. failure to maintain IRS continuing education requirements.

Question 68

The “Statement on Practice in the Field of Federal Income Taxation” includes all of the following areas of mutual competence except

a. preparing federal income tax returns.
b. determining the tax effect of proposed transactions.
c. representing clients in criminal investigations.
d. representing taxpayers before the U.S. Tax Court.

Answer 68

c. representing clients in criminal investigations.

Question 69

The innocent spouse relief provision from tax liability covers all of the following except

a. improper deductions.
b. improper credits.
c. improper basis.
d. All are understatements subject to minimum thresholds.

Answer 69

d. All are understatements subject to minimum thresholds.

Question 70

What is the IRS guideline for determining whether a tax return position has substantial authority?

a. A person knowledgeable in the tax law concludes that the position has a something less than 50% likelihood of being supported.
b. A person knowledgeable in the tax law concludes that the position has at least a 50% likelihood of being supported.
c. A person knowledgeable in the tax law concludes that the position has at least a two-thirds likelihood of being supported.
d. A person knowledgeable in the tax law concludes that the position has at least a 75% likelihood of being supported.

Answer 70

a. A person knowledgeable in the tax law concludes that the position has a something less than 50% likelihood of being supported.

Question 71

What is the penalty for a tax return preparer who willfully attempts to understate taxes, or intentionally disregards the tax rules and regulations?

a. $50
b. $250
c. $5,000
d. 20% of the understatement

Answer 71

c. $5,000

Question 72

What is the requirement for a substantial understatement of tax for individuals?

a. The understatement exceeds 10% of the tax required to be shown on the return.
b. The understatement exceeds $5,000.
c. The understatement exceeds the lesser of 10% of the tax required to be shown on the return or $5,000.
d. The understatement exceeds the greater of 10% of the tax required to be shown on the return or $5,000.

Answer 72

d. The understatement exceeds the greater of 10% of the tax required to be shown on the return or $5,000.

Question 73

Which of the following activities is protected by accountant-client privilege?

a. written communications between a CPA and a corporation regarding a tax shelter
b. communications related to tax return preparation
c. communications related to criminal tax evasion
d. advice given regarding tax issues in a divorce

Answer 73

d. advice given regarding tax issues in a divorce

Question 74

Which of the following is not a reason for relief from the substantial understatement penalty?

a. disclosure of the relevant facts pertaining to the questionable tax return position
b. substantial authority for the tax return position
c. reliance on a tax return preparer
d. reasonable cause and a good faith effort to comply with the tax law

Answer 74

c. reliance on a tax return preparer

Question 75

Which of the following statements regarding Circular 230 is false?

a. Circular 230 applies to all tax return preparers.
b. Circular 230 defines practice before the IRS.
c. Circular 230 provides guidance as to the level of authority necessary for a CPA to take a tax return position.
d. Circular 230 applies to CPAs, enrolled agents, enrolled actuaries, and attorneys.

Answer 75

a. Circular 230 applies to all tax return preparers.

Question 76

Which, if any, of the following could result in penalties against an income tax return preparer? I. Knowing or reckless disclosure or use of tax information obtained in preparing a return. II. A willful attempt to understate any client’s tax liability on a return or claim for a refund.

a. I only
b. II only
c. neither I nor II
d. both I and II

Answer 76

d. both I and II