Main Topics

Question 1

How often (and what dates) should individual taxpayers who are not subject to withholding make estimated tax payments?

Answer 1

For a calendar-year taxpayer, the installments are due by April 15, June 15, and September 15 of the current year and January 15 of the following year. Dates are adjusted for weekends and holidays.

Question 2

What are the percentage amounts to be paid each quarter for estimated tax payments?

Answer 2

1. Each installment must be at least 25% of the lowest of the following amounts:

a. 100% [110% for taxpayers whose prior year’s AGI exceeds $150,000 ($75,000 for married filing separately)] of the prior year’s tax (if a return was filed)
b. 90% of the current year’s tax
c. 90% of the annualized current year’s tax (applies when income is uneven)

2. Tax refers to the sum of the regular tax, AMT, self-employment tax, and household employee tax.

Question 3

What is the penalty for under payment of an estimated tax payment?

Answer 3

1. A penalty is imposed if, by the quarterly payment date, the total of estimated tax payments and income tax withheld is less than 25% of the required minimum payment for the year.
   a. The penalty is determined each quarter.
   b. The penalty is the federal short-term rate plus 3% times the underpayment.
   c. The penalty is not allowed as an interest deduction.
2. The penalty will not be imposed if any of the following apply:
   a. Actual tax liability shown on the return for the current tax year (after reduction for amounts withheld by employers) is less than $1,000.
   b. No tax liability was incurred in the prior tax year.
   c. The IRS waives it for reasonable cause shown.

Question 4

What is the penalty for not paying tax on the original due date of the return?

Answer 4

Any tax liability must be paid by the original due date of the return. An automatic extension for filing the return does not extend time for payment. Interest will be charged from the original due date.
1. A penalty of 5% per month up to 25% of unpaid liability is assessed for failure to file a return. Additionally, the minimum penalty for filing a return over 60 days late is the lesser of $210 or 100% of tax due.

2. A penalty of 0.5% per month up to 25% of unpaid liability is assessed for failure to pay tax.
   a. In general, a failure-to-pay penalty is imposed from the due date for taxes (other than the estimated taxes) shown on the return. A failure-to-pay penalty may offset a failure-to-file penalty. When an extension to file is timely requested, a failure-to-pay penalty may be avoided by paying at least 90% of the actual liability by the original due date of the return and paying the remaining balance when the return is filed. Exceptions and adjustments to these rules may apply in unique situations.

Question 5

What is the statute of limitations for assessment of a tax deficiency?

Answer 5

1. The general statute of limitations (S/L) for assessment of a deficiency is 3 years from the later of the date the return was due or the date it was filed.
   a. A return filed before the due date is treated as filed on the due date.
   b. The IRS generally has 10 years following the assessment to begin collection of tax by levy or a court proceeding.
2. The S/L is 6 years if there is omission of items of more than 25% of gross income stated in the return. Specifically for goods or services from a trade or business, gross income includes gross receipts before deduction for cost of goods sold. Only items completely omitted are counted.
3. Failure to file. The S/L period does not commence before a return is filed.
   a. When no return has been filed, the assessment period is unlimited.

Question 6

How does someone qualify for head of household status?

Answer 6

1. To maintain a household for federal filing status purposes, an individual must furnish more than 50% of the qualifying costs of maintaining the household during the tax year.
   NOTE: Nonresident aliens cannot qualify for the head of household status.
2. Qualifying person and time. The taxpayer must maintain a household that constitutes the principal place of abode for more than half of the taxable year for at least one qualified individual who is
   a. An unmarried son or daughter, unmarried grandchild, or unmarried stepchild or
   b. Any other person eligible to be claimed as a dependent, except for those eligible under a multiple-support agreement.

Qualifying person:

1. Sister/Brother > Niece/Nephew
2. Child > Grand Child
3. Grand Parent > Parents
4. Aunt/Uncle

NB: Cousins are not a qualifying person

Question 7

How does someone qualify for single status?

Answer 7

An individual must file as single if (s)he neither is married nor qualifies for widow(er) or head of household status.

Question 8

How do you file as married filing a joint return?

Answer 8

Two individuals are treated as legally married for the entire tax year if, on the last day of the tax year, they are:

1. Legally married and cohabiting as spouses
2. Legally married and living apart but not separated pursuant to a valid divorce decree or separate maintenance agreement or
3. Separated under a valid divorce decree that is not yet final.

Question 9

How do you file a married filing a separate return

Answer 9

If one spouse files separately so must the other.

Question 10

How does someone qualify for qualifying widow(er)?

Answer 10

The qualifying widow(er) status is available for 2 years following the year of death of the husband or wife if the following conditions are satisfied:

1. The taxpayer did not remarry during the tax year.
2. The widow(er) qualified (with the deceased spouse) for married filing joint return status for the tax year of the death of the spouse.
3. A qualifying widow(er) maintains a household for the entire taxable year. Maintenance means the widow(er) furnishes more than 50% of the costs to maintain the household for the tax year.

a. The household must be the principal place of abode of a dependent of the widow(er). The widow(er) must be entitled to claim a dependency exemption amount for the dependent.
b. The dependent must be a son or daughter, a stepson or daughter, or an adopted child. This does not include a foster child.

4. A widow(er) can file a joint return in the tax year of the death of the spouse. (S)he is also entitled to the full personal exemption amount for the deceased spouse.

Question 11

How is the organisational expense and Start-Up cost deduction determined?

Answer 11

Initial deduction = $5,000

Less: costs over $50,000

Costs not taken in the initial deduction is amortised over 180 month (15 year) period beginning in the month business began.

Question 12

How are Charitable Contributions for corporations determined?

Answer 12

Deductible amounts must be paid during the tax year. An accrual method corporation may elect to deduct an amount authorized by the board during the current tax year and paid not later than 2 1/2 months after the close of the tax year.

a. Deductions are limited to 10% of taxable income (TI) before any
1. Charitable contributions
2. Dividends-received deduction
3. Domestic production activities deduction
4. NOL carryback
5. Capital loss carryback
6. Deduction allowed under IRC Sec. 249 for bond premium

b. Excess over the TI limit is deductible during the succeeding 5 tax years.
1. No carryback is allowed.
2. Current-year contributions are deducted first.
3. FIFO treatment applies to carryforwards.

Question 13

How is the Dividends-Received Deduction (DRD) determined for corporations?

Answer 13

% Ownership, % Dividends Deductible, Limit: % of TI of Receipient
<= 19%, 70%, 70%
>= 20% <= 79%, 80%, 80%
>= 80% & affiliated, 100% 100%

Limited by:

The DRD is limited by the recipient corporation’s adjusted taxable income. The TI limit amount varies with the recipient’s stock ownership of the corporation.

1. To compute the limit, use TI before any of the following:
   a. Dividends-received deduction
   b. Domestic production activities deduction
   c. NOL deduction
   d. Capital loss carryback
   e. Certain extraordinary dividend adjustments
2. First, compute the limit with respect to 20%-and-more-owned corporate dividends.
3. The TI limit does not apply if a current NOL exists or an NOL results from the DRD.

Question 14

How are gifts treated for corporate entities in regards to deductions?

Answer 14

Distinguish gifts from charitable contributions, which are made to qualified organizations. A deduction for business gifts is allowable only to the extent of $25 per donee per year. The following are not treated as gifts for this limit:

1. Signs or promotional materials used on the recipient’s business premises
2. An item costing less than $4 having a permanent imprint of the donor’s name

Question 15

How are Travel and Meals deductions for corporations determined?

Answer 15

a. Travel and meals are deductible business expenses. Meals bought while traveling or served on the business premises are deductible by 50% of the amount incurred.

1. All meals served on the business premises are fully deductible if provided to more than half of the employees for the convenience of the employer.
2. Expenses for entertainment that are ordinary and necessary to the business are deductible by up to 50% of the amount incurred.

b. Limitation of deduction

1. If the employee’s meal and entertainment expenses are reimbursed by his or her employer and the reimbursement is not treated as compensation, the employer’s deduction is limited to 50% of the expenses.
2. If the employee’s meal expenses are reimbursed by his or her employer and the reimbursement is treated as compensation, the employee’s deduction is limited to 50% of the expenses.
   a. Employers are not subject to the 50% limit to the extent they treat the reimbursement as compensation to employees.

Question 16

How can insurance for employees for corporations be deducted?

Answer 16

Reasonable amounts of expenditures to promote employee health, goodwill, and welfare are deductible. Reasonable amounts paid or incurred for employee life insurance are included.

Key employee. Premiums for life insurance covering an officer or employee are not deductible if the corporation is a direct or indirect beneficiary.

A deduction is denied for interest expense incurred with respect to corporate-owned life insurance policies, or endowment or annuity contracts.

Question 17

How can casualty losses be deducted for corporations?

Answer 17

Casualty losses are deductible. When business property is partially destroyed, the deductible amount is the lesser of the decline in FMV or the property’s adjusted basis (prior to the loss).

When business property is completely destroyed, the deductible amount is the property’s adjusted basis (prior to the loss).

Unlike individuals, there is no $100-per-loss or 10%-of-AGI floor for corporations.

Question 18

How can taxes be deducted for corporations?

Answer 18

State income taxes based on gross income are deductible. However, federal income taxes are not.

Question 19

If a corporation repurchases its own outstanding bonds at a price in excess of the issue price, how does that affect its tax liability?

Answer 19

If bonds are issued and subsequently repurchased by the corporation at a price in excess of the issue price, the excess of the purchase price over the issue price is deductible as interest expense for that taxable year.

Question 20

How can compensation paid be deducted for corporations?

Answer 20

a. Compensation, e.g., salary, wages, or bonuses, is a deductible business expense unless the services are capital in nature.
b. Unreasonable compensation to a shareholder is generally treated as a distribution, characterized as a dividend, to the extent of earnings and profits.
c. Compensation by an accrual taxpayer (corporation) to a cash-basis taxpayer (employee) is not deductible by the corporation until the period in which the cash-basis taxpayer receives the payment and recognizes the income.
d. Payments made by March 15 of the succeeding year may be accrued and expensed in a prior year if related to services rendered in that prior year.

e. Deduction is disallowed to a publicly held corporation for compensation in excess of $1 million paid in any tax year to certain employees.
1. The limit applies to compensation paid to the chief operating officer and to the four other officers whose compensation must be reported to shareholders under the Securities Exchange Act of 1934.

Question 21

Which of the following qualify as charitable donations for a corporate entity?

Tapper’s matching contribution to employee-designated qualified universities made during 2017

Board of directors’ authorized contribution to a qualified charity (authorized December 1, 2017; made February 1,

Answer 21

Both

Question 22

How do you calculate a NOL for a corporation?

Answer 22

a. An NOL is any excess of deductions over gross income.

b. Modified deductions for some items are used in computing an NOL.
1. An NOL carried over from other tax years is not allowed in computing a current NOL.
2. A dividends-received deduction (DRD) may produce or increase an NOL.
a. A corporation is entitled to disregard the limitations on a DRD when calculating an NOL. The DRD would increase the NOL.
3. Charitable contributions are not allowed in computing a current NOL.
4. The allowable depreciation may not create or increase an NOL.

Question 23

What are the carryback/forward rules for a corporate NOL?

Answer 23

c. Applying NOLs as a deduction. Generally, a corporation’s NOL is carried back to each of the 2 preceding tax years and forward to the 20 succeeding tax years.

1. A corporation may elect to forgo carryback and only carry the NOL forward.
2. The NOL must be applied to the earliest tax year to which it can be carried and used to the fullest extent possible in that year.
3. The NOL reduces TI, but not below zero, for that year.
4. TI for the carryover year is adjusted TI.
   a. A charitable contribution allowable in a carryback year remains deductible because the charitable contribution 10%-of-TI limit is applied before an NOL carryback.
   b. Applying an NOL as a deduction in a subsequent tax year and computing excess NOL carryover from the subsequent year are complex when the charitable contribution 10%-of-TI limit applies.

Question 24

How do you determine Capital Gain and Loss?

Answer 24

a. Capital gain net income (CGNI) occurs when net short-term capital gain (net STCG) exceeds net long-term capital loss (net LTCL).
b. Net capital gains (NCGs) constitute gross income.
c. Net capital gains (net LTCG – net STCL) are currently taxed as ordinary income.
1. The 35% alternative tax on NCGs does not apply at current rates.
2. Net STCGs (STCGs – STCLs) are treated as ordinary income (OI) unless offset by LTCLs.

d. A corporation’s capital losses are deductible only to the extent of capital gains, whether they are short- or long-term.
1. A net capital loss (NCL) is not deductible against OI in the tax year incurred.
NCL = Excess of CLs (ST & LT) over CG (ST & LT)
2. It cannot produce or increase an NOL.
3. When figuring a current-year net capital loss, capital losses carried from other years are not included.
4. A corporation may not carry a capital loss from, or to, a year during which it is an S corporation.

e. A corporation’s NCL for a particular tax year may be carried back to each of the 3 preceding tax years and forward to the 5 succeeding tax years.
1. No election to forgo carryback is provided.
2. The NCL must be used to the extent possible in the earliest applicable tax year.
3. The oldest unused NCL is applied first.

f. The NCL is treated as an STCL in a carryover tax year. It offsets only a net capital gain before the carryover, but it may not produce or increase an NOL.

Question 25

What are the carryback/forward rules for a Capital Gain/Loss?

Answer 25

e. A corporation’s NCL for a particular tax year may be carried back to each of the 3 preceding tax years and forward to the 5 succeeding tax years.
1. No election to forgo carryback is provided.

2. The NCL must be used to the extent possible in the earliest applicable tax year.
3. The oldest unused NCL is applied first.
   f. The NCL is treated as an STCL in a carryover tax year. It offsets only a net capital gain before the carryover, but it may not produce or increase an NOL.

Question 26

How do you reconcile book and taxable income?

Answer 26

Net income (loss) per books
+ Federal income tax
+ Excess of capital losses over capital gains
+ Income subject to tax not recorded on books
+ Expenses recorded on books not deducted on the tax return
– Income recorded on books not subject to tax
– Deductions on this return not charged against book income (e.g., depreciation)

= Taxable income

Question 27

How do you calculate recognised gain in a corporate transaction?

Answer 27

1. Check if cash or other property is received or liability assumed is > AB of property transferred

If yes, gain is recognised

Gain is calculated as:
+ Cash Received
+ FMV of other property received that is not the stock
= Gain recognised

NB: Don’t include value of stock in gain calculation

2. Check if the transaction is exempted from gain/loss resulting from Sec. 351.
   a. i.e. No gain/loss be recognised if property is transferred to a corporation in exchange for stock and immediately after the exchange such persons control (>= 80%) the corporation (and no cash, other property and AB of property transferred does not exceed its liability).

Question 28

How do you determine a corporation’s basis in property transferred?

Answer 28

Basis is determined:

Add: AB in property to shareholder
Add: Gain recognised by shareholder
= Basis in property to corporation

If shareholder does not control >=80%
Add: FMV in property
= Basis in property to corporation

Shareholder Gain is calculated as:
+ Cash Received
+ FMV of other property received that is not the stock
= Gain recognised

Question 29

What are the eligibility requirements of a S corporation?

Answer 29

1. An S corporation must have only one class of stock
2. No of shareholders must not exceed 100
3. Partnerships may not be shareholders

Question 30

How can an S corporation election be terminated?

Answer 30

1. An effective revocation. Majority of the shareholders (voting/non voting) must consent.
2. An eligibility requirement not being statisfied on any day.
3. Passive investment income (PII) termination)

NB: PII termination is when for 3 consercutive tax years the corp have both:;

1. subchapter C E&P
2. PII > 25% of gross receipts

Question 31

How are S corporation losses determined for an individual who owns stock in the entity?

Answer 31

1. Determine the basis in the S corp

Add: Initial Basis
Add: Loan to S corp
Add: Payments made on guaranteed Loan 
Less: Distributions
= Adjusted basis 

NB: Loss reportable is limited by the adjusted basis

Question 32

What is the penalty for not filing on time for an S Corporation?

Answer 32

of shareholders x $200 x # months*
= Penalty
* Up to 12 months

NB: S corp required to file within 2 1/2 months after the year end.

Question 33

How do you determine the amount of tax on excess net passive income (ENPI) for a S corporation?

Answer 33

If PII > 25% Gross receipts then

Tax = 35% x Net Passive Income

Question 34

A tax-exempt organization with a fiscal year end of June 30 must file its Year 1 Form 990 by which date?

Answer 34

November 15, Year 1.

Exempt organizations are generally required to file annual information returns on or before the 15th day of the fifth month following the close of the taxable year. The tax year closed on June 30, Year 1; therefore, the return is due November 15, Year 1.

Question 35

An exempt scientific research organization elected a $30,000 lobbying expenditure limit for 2017. During 2017, $40,000 was spent on political lobbying. What is the consequence of the 2017 expenditure?

Answer 35

A $2,500 excise tax.

No substantial part of activities of an exempt organization operated exclusively for scientific purposes may be attempts to influence legislation or a political candidacy. However, most organizations can elect to replace the substantial part of activities with a lobbying expenditure limit. An organization that exceeds the lobbying expenditure limit will be subject to an excise tax of 25% of the excess amount. This scientific organization exceeded its $30,000 limit by $10,000 and is therefore subject to a $2,500 excise tax ($10,000 × 25%).

Question 36

How do you determine basis for a partnership?

Answer 36

Add: Initial Basis
Add: Partner share of liabilities
Less: Distributions
Less: Liability relief
= Adjusted Basis

Question 37

How is a partnership’s basis in property contributed determined for partnerships treated as investment companies?

Answer 37

The partnership’s basis of property contributed to a partnership by a partner is the adjusted basis of the property to the contributing partner at the time of the contribution. However, if the partnership is an investment company partnership, the partnership’s basis for property contributed is increased by the amount of gain recognized by the contributing partner.

Question 38

If a partnership’s year end and a partner’s year end differs how is the income/loss reported by the partner?

Answer 38

When computing taxable income, a partner is required to include his or her share of partnership income and separately stated items for any partnership year that ends within his or her taxable year.

Question 39

Which of these is subject to self employment tax?

i. Guaranteed payment from services rendered to a partnership
ii. Ordinary income from an S corporation

Answer 39

Only Guaranteed payment.

Question 40

How do you determine gain/loss in a property sale involving a partnership and a partner?

Answer 40

1. Determine gain/loss

If the partner engages in a transaction with the partnership in a capacity other than that of a partner, the transaction is treated as if it were with a third party after arm’s-length negotiation.

Question 41

The Uniform Capitalization Rules of Code Sec. 263A apply to retailers whose average gross receipts for the preceding 3 years exceed what amount?

Answer 41

10 million.

Uniform capitalization rules do not apply if property is acquired for resale and the company’s annual gross receipts (for the past 3 years) do not exceed $10 million.

Question 42

How may basis in property inherited from a decedent be determined?

Answer 42

The fair market value at the date of death or the fair market value at an alternative valuation date.

The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death. If the executor elects the alternate valuation date for the estate tax return, the basis of the assets is their fair market value 6 months after death or the date of sale or distribution, if earlier.

Question 43

In the current year, Christian received a gift of property from his mother that had a fair market value of $50,000. Her adjusted basis was $20,000. She paid a gift tax of $9,000. What is Christian’s basis in the property?

Answer 43

$27,500
Answer (B) is correct.

The basis of property acquired by gift is generally the donor’s adjusted basis, increased by a gift tax paid applicable to appreciation. The gift tax applicable to appreciation is the appreciation divided by the taxable gift times the gift tax paid.

Add: Donor’s adjusted basis
$20,000

Add: Gift tax
7,500*

= $27,500

(FMV - Donor’s Basis) / (FMV - $14,000) x Gift tax Paid
= Gift Tax

Question 44

How do you calculate declining balance method, also what percentages are used?

Answer 44

AB x (200% / Useful Life)

200% is used for 3, 5, 7 and 10 years
150% is used for 15 & 20 year property and fram personal property

Question 45

What are the MACRS Recovery periods for personal property?

Answer 45

of Years, Description
3; Special Tools
5; Computers, office machinery, cars, trucks, R&E equipment
7; Most machinery, Office furniture and equipment

Question 46

Residential rental property that was placed in service during 2017 using MACRS is depreciated over how many years, using which depreciation method and convention?

Answer 46

27.5 years, straight-line method, mid-month convention.

Section 168(c) provides that the recovery period for residential rental property is 27.5 years. Section 168(b)(3) provides that the straight-line method shall be used for residential rental property. Section 168(d)(2) provides that mid-month convention shall be used for residential rental property.

Question 47

How do you determine the section 179 expense?

Answer 47

Deduction is
MIN ( $510,000 - Excess; Taxable income)

Excess = $2,030,000 - cost of assets

Question 48

What rule(s)/section(s) under the 1933 securities act has/have no maximum security offering amount?

Answer 48

1. Rule 147 (intrastate)

Investors: Buy/Sell must be state Residents

Resale: No resales to nonresidents for
min (9 months)

2. Regulation D: Rule 506 (Private Placement)

Investors: No more than 35 are non accredited investors (must be sophisticated)

Question 49

What must a plaintiff prove under section 18(a) of the 1934 act?

Answer 49

Section 18(a) of the 1934 act imposes civil liability for making or causing a false or misleading statement (or omission) of a material fact in any filing with the SEC under the act.

A plaintiff must prove the following:

1. A false statement about, or omission of, a material fact
2. Reliance on the misstatement in buying or selling the security

a. Proof that the price of the security was affected by the misstatement (fraud-on-the-market theory) may substitute for proof of reliance.
3. Damages (loss

Question 50

What must a plaintiff prove under the 1934 act section 10b-5?

Answer 50

A plaintiff must prove each of the following:

1. An oral or written misstatement or omission of a material fact or other fraud
   a. A misstatement or omission is material if a reasonable investor would be substantially likely to consider it important when deciding whether to buy or sell the security.
2. Its connection with any purchase or sale of securities
3. The defendant’s intent to deceive, manipulate, or defraud (scienter)
4. Reliance on the misstatement
   a. If the plaintiff is the SEC, reliance is not required.
   b. A private plaintiff ordinarily need not prove reliance in omission cases. Indirect reliance is presumed (fraud-on-the-market theory).
5. Loss caused by the reliance

Remedies include

1. Damages (the recovery is at least the amount caused by the fraud, and no resale is necessary)
2. Rescission of a securities contract
3. Injunctions

Question 51

What are the similarities and differences between Section 11 of the 1933 act, Section 10(b) of the 1934 act and Section 18 of the 1933 act?

Answer 51

A plaintiff needs to prove scienter (not required for section 18) reliance, and causation under Section 10(b), whereas he or she does not under Section 11. Under both provisions, the plaintiff needs to prove loss (damages) and misstatement or omission of a material fact.

A Section 10(b) plaintiff must prove either the purchase or sale of securities, while a Section 11 plaintiff must prove purchase of securities.

Remedies for Section 11 plaintiffs include only monetary damages, while remedies for Section 10(b) plaintiffs include damages, rescission of a securities contract, and injunctions.

Question 52

What is plaintiff required to prove for a finding of fraud to an accountant?

Answer 52

1. The accountant made a misrepresentation.
2. The misrepresentation was made with scienter, that is, with actual knowledge of fraud.
3. The misrepresentation was of a material fact.
4. The misrepresentation induced reliance.
5. Another person justifiably relied on the misstatement to his or her detriment.

Constructive fraud is a fraud claim with the scienter requirement of actual knowledge satisfied by gross negligence.
1. Gross negligence is such a reckless disregard for the truth that fraud is implied.

Question 53

What must a client prove in a negligence case against an accountant?

Answer 53

A client must prove all of the elements of negligence.

1. The accountant owed the plaintiff a duty.
2. The accountant breached this duty.
3. The accountant’s breach actually and proximately caused harm to the plaintiff.
   a. Proximate cause is a chain of causation that is not interrupted by a new, independent cause. Moreover, the harm would not have occurred without the proximate cause. However, actual causation is insufficient. The harm also must have been reasonably foreseeable. Thus, proximate cause is a limit on liability and a possible defense.
4. The plaintiff incurred damages.

Question 54

What is required to prove that an accountant is liable for fraud?

Answer 54

1. The accountant made a misrepresentation.
2. The misrepresentation was made with scienter, that is, with actual knowledge of fraud.
3. The misrepresentation was of a material fact.
4. The misrepresentation induced reliance.
5. Another person justifiably relied on the misstatement to his or her detriment.

Question 55

How often (and what dates) should individual taxpayers who are not subject to withholding make estimated tax payments?

Answer 55

For a calendar-year taxpayer, the installments are due by April 15, June 15, and September 15 of the current year and January 15 of the following year. Dates are adjusted for weekends and holidays.

Question 56

What are the percentage amounts to be paid each quarter for estimated tax payments?

Answer 56

1. Each installment must be at least 25% of the lowest of the following amounts:

a. 100% [110% for taxpayers whose prior year’s AGI exceeds $150,000 ($75,000 for married filing separately)] of the prior year’s tax (if a return was filed)
b. 90% of the current year’s tax
c. 90% of the annualized current year’s tax (applies when income is uneven)

2. Tax refers to the sum of the regular tax, AMT, self-employment tax, and household employee tax.

Question 57

What is the penalty for under payment of an estimated tax payment?

Answer 57

1. A penalty is imposed if, by the quarterly payment date, the total of estimated tax payments and income tax withheld is less than 25% of the required minimum payment for the year.
   a. The penalty is determined each quarter.
   b. The penalty is the federal short-term rate plus 3% times the underpayment.
   c. The penalty is not allowed as an interest deduction.

Question 58

What is the penalty for not paying tax on the original due date of the return?

Answer 58

Any tax liability must be paid by the original due date of the return. An automatic extension for filing the return does not extend time for payment. Interest will be charged from the original due date.
1. A penalty of 5% per month up to 25% of unpaid liability is assessed for failure to file a return. Additionally, the minimum penalty for filing a return over 60 days late is the lesser of $210 or 100% of tax due.

2. A penalty of 0.5% per month up to 25% of unpaid liability is assessed for failure to pay tax.
   a. In general, a failure-to-pay penalty is imposed from the due date for taxes (other than the estimated taxes) shown on the return. A failure-to-pay penalty may offset a failure-to-file penalty. When an extension to file is timely requested, a failure-to-pay penalty may be avoided by paying at least 90% of the actual liability by the original due date of the return and paying the remaining balance when the return is filed. Exceptions and adjustments to these rules may apply in unique situations.

Question 59

What is the statute of limitations for assessment of a tax deficiency?

Answer 59

1. The general statute of limitations (S/L) for assessment of a deficiency is 3 years from the later of the date the return was due or the date it was filed.
   a. A return filed before the due date is treated as filed on the due date.
   b. The IRS generally has 10 years following the assessment to begin collection of tax by levy or a court proceeding.
2. The S/L is 6 years if there is omission of items of more than 25% of gross income stated in the return. Specifically for goods or services from a trade or business, gross income includes gross receipts before deduction for cost of goods sold. Only items completely omitted are counted.
3. Failure to file. The S/L period does not commence before a return is filed.
   a. When no return has been filed, the assessment period is unlimited.