IRS Rules and Regulations

Question 1

Which of the following loans is clearly NOT subject to the IRS mortgage interest reporting requirement?
a. A loan made to purchase securities, secured by rural acreage
b. A loan made to finance a college education, secured by a piece of commercial real estate
c. A loan made to purchase a lot on a lake, secured by a certificate of deposit
d. A loan made to purchase a residence, secured by the dwelling

Answer 1

c. A loan made to purchase a lot on a lake, secured by a certificate of deposit

Question 2

Which of the following actions subjects a lender to mortgage interest reporting requirements?
a. The lender holds mortgage loans in the course of its trade or business
b. The lender is a qualified FHA or VA lender
c. The lender receives at least $500 in interest on a mortgage loan during a calendar year
d. The lender offers unsecured home improvement loans

Answer 2

a. The lender holds mortgage loans in the course of its trade or business

Question 3

If the lender is subject to the mortgage interest reporting requirement, which of the following actions is NOT required?

a. The lender must file an information return with the IRS.
b. The lender must report the amount of interest and points on the information return.
c. The lender must report the loan balance as of December 31 of the year preceding the year the report is filed.
d. The lender must send a statement to the borrower.

Answer 3

c. The lender must report the loan balance as of December 31 of the year preceding the year the report is filed.

Question 4

Information reports must include which of the following details?
a. Name, address, and TIN of the borrower
b. Purpose of the loan
c. Original Loan Amount
d. Fair market value of the property at the time of the loan

Answer 4

a. Name, address, and TIN of the borrower

Question 5

Mrs. Franklin has two mortgage loans at First National Bank on which she makes monthly payments. On Loan A she made 13 payments last year, mailing the last payment on December 28. It was received the afternoon of January 2 and credited on January 3. The amount of interest paid on Loan A in the first 12 payments was $1,000. There was $155 of interest on the 13th payment. On Loan B, she made 12 payments; each contained interest accrued to the fourth day of the month. The last payment was mailed on December 19 and was received and credited on December 23. The last payment contained interest accrued to January 4. The total interest paid on Loan B was $2,000, of which $100 accrued between January 1 and January 4 of the next year. How much interest must First National Bank report?
a. $1,155 for Loan A and $2,000 for Loan B
b. $1,155 for Loan A and $2,100 for Loan B
c. $1,000 for Loan A and $2,000 for Loan B
d. $1,000 for Loan A and $2,100 for Loan B

Answer 5

c. $1,000 for Loan A and $2,000 for Loan B

Question 6

First National Bank sold several of its mortgage loans to individual investors and now services the loans for the individuals. First National Bank collects more than $600 on most of these mortgages and deposits the money into the account of the investors. At the end of each year, First National Bank sends the investors a summary of transactions on the mortgages and a detailed breakdown of the principal and interest payments made. Who is responsible for filing the mortgage interest information returns?
a. The investors, because they own the loans and the money is collected for them
b. The investors, because they have the necessary information from the servicer
c. First National Bank, because it was the first owner of the loans
d. First National Bank, because it collects the interest and has the information necessary to file the information return

Answer 6

d. First National Bank, because it collects the interest and has the information necessary to file the information return

Question 7

First National Bank does not have the TINs of several borrowers with mortgage loans. What is the bank required to do to fulfill the mortgage interest reporting regulations?
a. Mail a one-time request for TINs by certified mail to each borrower who has failed to provide one
b. Post a notice in its mortgage lending lobby that TINs are required for mortgage loans
c. Mail a separate request for TINs annually to borrowers who have failed to provide one
d. Include a request for TINs in the annual mailing of the payment coupon book

Answer 7

d. Include a request for TINs in the annual mailing of the payment coupon book

Question 8

Mr. Roberts has three loans at First National Bank: Loan A made to purchase a car, secured by the car; Loan B made to purchase stock, secured by a lake lot; and Loan C made to pay taxes, secured by a rental house he owns. Last year he paid $2,500 in interest on Loan A; $550 in interest on Loan B; and $1,000 in interest on Loan C. How much mortgage interest is First National Bank required to report to the IRS?
a. $4,050
b. $1,000
c. $1,550
d. $2,500

Answer 8

b. $1,000

Question 9

For a U.S. bank with domestic and foreign locations, which transaction does NOT require an information return to report the amount of interest paid?
a. A loan made to James Roberts, a U.S. resident, payable at the bank’s New York office, to purchase securities secured by the borrower’s home in Mexico
b. A loan made to Robert and Louise LeBlanc, who are resident aliens, payable at the bank’s New York office, secured by a piece of real property located in Canada
C. A loan made to Smith and Withers, a partnership formed for the practice of law, located in the United States, payable at the bank’s New York office, guaranteed by Mr. Smith and Mr. Withers, and secured by the law firm’s office building
d. A loan made by Mrs. West, a U.S. citizen, to purchase a mobile home and the lot on which it will be placed; both the mobile home and lot are located in the United States

Answer 9

C. A loan made to Smith and Withers, a partnership formed for the practice of law, located in the United States, payable at the bank’s New York office, guaranteed by Mr. Smith and Mr. Withers, and secured by the law firm’s office building

Question 10

By which date must an interest reporting statement be sent to the borrower’s last known address?

a. January 15 of the year following the year the interest is paid ·
b. January 31 of the year following the year the interest is paid
c. February 28 of the year following the year the interest is paid ·
d. March 1 of the year following the year the interest is paid

Answer 10

b. January 31 of the year following the year the interest is paid

Question 11

On foreclosure, which of the following loans is subject to the reporting requirements for foreclosed and abandoned property?

a. A loan made to purchase a family car, secured by the car
b. An unsecured loan made to purchase a computer used in the borrower’s business
c. A loan made to purchase a residence, secured by the residence
d. A loan made to purchase a home computer, secured by the computer

Answer 11

c. A loan made to purchase a residence, secured by the residence

Question 12

First National Bank has foreclosed on several loans. One of the loans is not subject to the requirement to submit an information return on the foreclosed property. Which loan is most likely NOT covered by the regulations?

a. A loan to Brown & Associates, a local law firm, to purchase furniture, secured by the furniture
b. A loan to Mrs. Lynch to purchase stereo equipment for use in her office waiting room
c. A loan to Dr. Stevens to purchase kitchen appliances for use at his personal residence
d. A loan to Mr. and Mrs. Sanders to purchase a computer for their antique shop

Answer 12

c. A loan to Dr. Stevens to purchase kitchen appliances for use at his personal residence

Question 13

First National Bank made a loan to Lawrence & Co. for the purpose of purchasing landscape equipment, secured by a storage lot the company owned. The borrower made payments for a year and then defaulted. Three months passed without any communication or payments from the borrower, despite the bank’s efforts to locate the company’s owners. The company appears to have ceased operations. What is the bank’s BEST course of action?
a. Do nothing because the bank has no actual knowledge of abandonment and has not foreclosed on the property
b. Make reasonable inquiries to determine whether the property is abandoned and if so, report it as abandoned
c. Locate the borrower, foreclose on the property, and report the transaction as a foreclosure
d. Report the property as abandoned

Answer 13

b. Make reasonable inquiries to determine whether the property is abandoned and if so, report it as abandoned

Question 14

Which of the following pieces of information is the bank NOT required to report on Form 1099 for foreclosed and abandoned property?
a. The name, address, and TIN of the borrowers
b. A description of the property
c. The original loan amount
d. Whether the borrower is personally liable for the debt

Answer 14

c. The original loan amount

Question 15

By what date must the bank send the borrower a statement in connection with an information return on foreclosed or abandoned property?
a. January 15 of the year following the year of the foreclosure or abandonment
b. January 31 of the year following the year of the foreclosure or abandonment
C. February 28 of the year following the year of the foreclosure or abandonment
d. March 1 of the year following the year of the foreclosure or abandonment

Answer 15

b. January 31 of the year following the year of the foreclosure or abandonment

Question 16

Which account is NOT subject to backup withholding?
a. A money market savings account owned by Brenda Wilson
b. A time deposit account owned by Bob and Nancy Dawson
c. An IRA owned by Max Jones
d. A savings account owned by Karen Hitchings

Answer 16

c. An IRA owned by Max Jones

Question 17

Walter Johnson has two accounts at First National Bank. His savings account
was opened in 1975, and his money market savings account was opened in 1985. He has never supplied a TIN number to the bank. What must First National Bank do?
a. Withhold 24 percent of the payments on each of the accounts
b. Withhold 24 percent of the payments on each account and annually request a TIN on the savings account
c. Annually request a TIN on both accounts
d. Refuse to open future accounts without a TIN

Answer 17

b. Withhold 24 percent of the payments on each account and annually request a TIN on the savings account

Question 18

On March 1, First National Bank opened three accounts: 1) a savings account
for Margaret Nelson, who did not have a TIN but signed a certification that she had applied for one; 2) a money market savings account for Linda Miller, who could not remember her TIN but promised to provide it at the earliest possible date; and 3) a certificate of deposit for John Whiteside, who completed a Form W-9 but provided a TIN with only eight numbers. Ms. Nelson provided her newly acquired TIN to the bank on April 15, Ms. Miller provided her TIN on April 5, and Mr. Whiteside provided his TIN to the bank on March 10. Interest was paid on all of these accounts on March 31, and the bank withheld 24 percent of the interest payments. On April 20 all the payees requested that the withheld interest be refunded. What should the bank do?
a. Refund the withheld interest to all payees
b. Refund to Ms. Nelson and Mr. Whiteside because the interest was erroneously withheld
c. Refund only to Mr. Whiteside because the interest was erroneously withheld
d. Refund only to Ms. Nelson because the interest was erroneously withheld

Answer 18

b. Refund to Ms. Nelson and Mr. Whiteside because the interest was erroneously withheld

Question 19

First National Bank receives a notice from the IRS to begin withholding 24 percent of the interest payments on the money market savings account of Myra Wilcox because of payee underreporting. What is the most proper action for First National Bank to take?

a. Send a notice to Ms. Wilcox within 15 days of the receipt of the IRS notice and begin withholding; stop withholding if Ms. Wilcox can prove to the bank that she is not underreporting
b. Begin withholding and send a notice to Ms. Wilcox within 15 days of beginning the withholding; stop withholding only on written notice from the IRS
C. Begin withholding with the first payment after 30 days and send a notice to Ms. Wilcox at least 15 days before the first payment from which funds are to be withheld; stop withholding only on written notice from the IRS
d. Send notice to Ms. Wilcox within 15 days of the receipt of the IRS notice and begin backup withholding with the first payment following 30 days after the notice; stop withholding only on written notice from the IRS

Answer 19

b. Begin withholding and send a notice to Ms. Wilcox within 15 days of beginning the withholding; stop withholding only on written notice from the IRS

Question 20

In which of the following loans does First Savings Bank NOT have to provide a 1098-E (Student Loan Interest) report?

a. A $10,000 tuition loan made to Bobby Wilcox, a student at the state university, guaranteed by the Department of Education
b. A $35,000 line of credit made to Don and Barbara Cocelli, secured by their home, for the payment of certified school expenses for their twin daughters at an accredited private school for post-secondary education.
C. A $15,000 loan to Linda Chu to be used for the purpose of paying tuition and fees and purchasing college books, lab equipment, and a computer for use in her education at the local community college
d. A $12,000 loan to Paul and Rhonda Pena and their daughter Jennifer, used to pay her college tuition as well as the tuition at the private high school her sister, Jeanne, attends

Answer 20

d. A $12,000 loan to Paul and Rhonda Pena and their daughter Jennifer, used to pay her college tuition as well as the tuition at the private high school her sister, Jeanne, attends

Question 21

Which of the following interest-bearing accounts is EXEMPT from Form 1099
annual information reporting requirements under IRS regulations?
a. Time certificates of deposit
b. Money market deposit accounts
c. Individual retirement accounts
d. Negotiable order of withdrawal accounts

Answer 21

c. Individual retirement accounts

Question 22

Which of the following groups of employees should be trained on the detailed use of W-9 forms?
a. Senior management
b. New account officers
c. Auditors and accountants
d. Security officers

Answer 22

b. New account officers

Question 23

A bank has given a customer a merchandise gift with a fair market value of $25.00 for opening a deposit account. Which of the following statements describes the proper reporting status of this gift?

a. If the cost of the gift is under $20.00, it is not reportable to the IRS
b. The cost of the gift is credited to the customer’s account as a bonus, increasing the account balance
C. The fair market value of the gift is reported to the customer on the periodic statement
d. The fair market value of the gift is added to the interest paid and reported on Form 1099-INT

Answer 23

d. The fair market value of the gift is added to the interest paid and reported on Form 1099-INT