MCQ REVIEW Flashcards
Which of the following defenses is likely to be successful in a suit alleging negligence by a CPA?
Due care
Negligence arises when a CPA breaches a duty of care. A CPA owes a duty to preform work with due care. Thus, if a CPA can prove due care, the CPA cannot be held liable for negligence.
Which of the following is a list of courts that are referred to as courts of original jurisdiction, or trial courts, for tax matters?
The Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims.
The courts of original jurisdiction for tax cases, i.e., the courts in which a taxpayer would first bring a lawsuit against the IRS, are the Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims.
Which of the following penalties is usually imposed against an accountant who, in the course of performing professional services, breaches contract duties owed to a client?
Money damages.
When a CPA breaches a contract for professional services, the client and any third party beneficiary of the contract are entitled to compensatory money damages.
A CPA in public practice may not disclose confidential client information regarding auditing services without the client’s consent in response to which of the following situations?
A letter to the client from the IRS.
A CPA is required to disclosed confidential client information if the information is subpoenaed and relevant to a court case. The IRS would have to do more than request the information in a letter. The IRS would have to subpoena the information and show that the information was relevant to an examination (audit).
Would the following expense items be reported on Schedule M-1 of the corporation income tax return showing the reconciliation of income per books with income per return?
NO. Interest Incurred
on Loan to Carry
U.S. Obligations
NO. Provision for
State Corporation
Income Tax.
Schedule M-1 of Form 1120 is used to reconcile the differences between book income and taxable income. Because the interest incurred on loans to carry U.S. obligations and the provision for state corporation income tax are treated the same for both book purposes and tax return purposes, no Schedule M-1 adjustment is required. However, if the interest expense were to carry nontaxable municipal obligations, then the interest would not be tax deductible and would be an adjustment on the Schedule M-1 reconciliation.
Simmons, an agent for Jensen, has the express authority to sell Jensen’s goods. Simmons also has the express authority to grant discounts of up to 5% of list price. Simmons sold Hemple goods with a list price of $1,000 and granted Hemple a 10% discount. Hemple had not previously dealt with either Simmons or Jensen. Which of the following courses of action may Jensen properly take?
Express authority occurs when an agent is working on behalf of his or her company to act on behalf of a principal. For example, a life insurance agent may have express authority under their company.
Implied Authority: It is created by the conduct and circumstances surrounding the relationship between the principal and the agent. Example: if a principal asks an agent to take his car to the mechanic, the agent has the implied authority to drive that car.
Apparent authority: is the power of an agent to act on behalf of a principal, even though not expressly or impliedly granted.
Seek recovery of $50 from Simmons only.
It would be reasonable for a third party, such as Hemple, to rely on a sales agent’s title and status to believe that the agent has authority to give a 10% discount. Thus, Simmons had apparent authority to grant the discount, and Jensen is bound to the contract with Hemple and cannot recover the extra $50 from Hemple. However, Jenson will be entitled to recover $50 (5% of $1,000) from Simmons because Simmons was disobedient and breached the agency relationship by giving a 10% discount instead of a 5% discount.
Which of the following statements is correct regarding a tax return preparer’s penalty for aiding and abetting the understatement of a tax liability?
Aiding and abetting
= refers to helping or encouraging someone to commit a crime, or in some cases, to commit suicide
The penalty applies to a return preparer who knows about and does not prevent the actions of a subordinate who understates the tax liability.
The IRC Section 6701 penalty for aiding and abetting the understatement of a tax liability applies to any person who knows about the actions of a subordinate to understate a tax liability and does not prevent those actions.
Tracy, an owner of an S corporation, has beginning basis of $13,000 in stock of the S corporation. During the year, Tracy contributed an additional $4,000 to partially offset the share of the S corporation’s net operating loss, which was $7,000 for this year. At the beginning of the year, Tracy received a $1,000 distribution from the S corporation. What was Tracy’s basis at year-end in the S corporation stock?
$9,000
$13,000 + $4,000 - $7,000 -$1,000 = $9,000
Which of the following acts constitute(s) grounds for a tax preparer penalty?
I.
Without the taxpayer’s consent, the tax preparer disclosed taxpayer income tax return information under an order from a state court.
II.
At the taxpayer’s suggestion, the tax preparer deducted the expenses of the taxpayer’s personal domestic help as a business expense on the taxpayer’s individual tax return.
II only.
A CPA sued a former client for nonpayment of the final bill. Although happy with the CPA’s performance of services, the client claimed that the CPA is not entitled to the final bill payment because the contract between the client and the CPA failed to meet the Statute of Frauds. The client argues that the contract allowed up to 15 months for the CPA to complete the work, the contract price was well over $5,000, and although the client sent signed checks to the CPA, the client did not sign the contract. Which of the following statements about this situation is correct?
The Statute of Frauds does not apply, allowing enforcement of the contract terms.
Statute of Frauds: a common law concept that requires written contracts for certain agreements to be binding. The statute applies to land sales and most purchases of goods of $500 or more. There are significant exceptions, such as oral contracts where work has already started.
An individual taxpayer’s adjusted gross income (AGI) for the current year is $200,000 and AGI for the prior year is $160,000. The taxpayer had federal income tax withholdings from wages throughout the year. In which of the following independent situations could the IRS impose a penalty for failure to pay sufficient estimated tax payments for the current year?
The taxpayer’s current year withholding is 100 percent of the prior year’s tax liability.
An individual taxpayer must pay taxes throughout the tax year, through withholdings and/or quarterly estimated tax payments, of the lesser of (a) 90 percent of the current year’s tax or (b) 100 percent of the prior year’s tax (110 percent if prior year’s AGI is more than $150,000). This question evaluates each situation independently. Here, the taxpayer’s prior year AGI of $160,000 is more than $150,000, so withholding of 100 percent of the prior year’s tax liability is not sufficient to avoid the penalty for failure to pay estimated tax payments.
With regard to an agreement for the sale of real estate, the Statute of Frauds:
Does not require that the agreement be signed by all parties.
The Statute of Frauds does not actually require an agreement to be signed by any party; instead, it requires written proof of the material terms of the agreement to be evidenced by a writing signed by the party being sued.
The accumulated earnings tax can be imposed:
On regular corporations not classified as personal holding companies.
Which of the following acts by a CPA will not result in a CPA incurring an IRS penalty?
Understating a client’s tax liability as a result of an error in calculation.
The IRS does not impose a penalty on a CPA for making an error in calculating a tax return.
Under agency law, which of the following sets of categories refer to principals?
Disclosed, partially disclosed, and undisclosed.
A taxpayer has just received a 90-day letter from the IRS related to the audit of the taxpayer’s Year 1 federal income tax return. Which of the following is a true statement about the 90-day letter?
The taxpayer has 90 days to either pay the tax deficiency or file a petition with the U.S. Tax Court.
Which of the following is considered a corporate equity security?
A share of callable preferred stock
An equity security represents an ownership interest in a corporation. All types of stock are considered equity securities.
An S corporation has 30,000 shares of voting common stock and 20,000 shares of non-voting common stock issued and outstanding. The S election can be revoked voluntarily with the consent of the shareholders holding, on the day of the revocation:
Shares of
voting stock
10,000 Shares of
voting stock
16,000 Shares of
nonvoting stock
S corporation status can be revoked if shareholders owning more than 50% of the total number of issued and outstanding shares consent. The specific percentage of voting and nonvoting shareholders is not considered, only the total. Holders of more than 25,000 total shares must approve the revocation. Note that there are many correct answers (any that the total exceeds 25,000 shares). But this is the only answer that is correct out of the choices presented.
Alex, Becky, and Cindy are limited partners in a limited partnership. Zack is the general partner. Unless otherwise stated in the partnership agreement, how will profits and losses be distributed?
Proportionally, based on each partner’s contribution to the partnership.
In a limited partnership, profits and losses are divided according to contributions of the partners.
A parent corporation owned more than 90% of each class of the outstanding stock issued by a subsidiary corporation and decided to merge that subsidiary into itself. Under the Revised Model Business Corporation Act, which of the following actions must be taken?
The subsidiary corporation’s dissenting stockholders must be given an appraisal remedy.
In a short form merger (one between a parent and a subsidiary 90% of which is owned by the parent), the subsidiary’s shareholders have a right to dissent and take advantage of the appraisal remedy.
On reaching majority, a minor may ratify a contract in any of the following ways, except by:
Affirming, in writing, some of the terms of the contract.
The term “ratification” refers to the process by which a minor by his/her action or “inaction” legally accepts an entire contract after he/she reaches the age of majority. Accepting some of the terms is not “ratification.”
Under the Secured Transactions Article of the UCC, which of the following security agreements does not need to be in writing to be enforceable?
A security agreement where the collateral is in the possession of the secured party.
Attachment of a security interest requires: (i) value given by the creditor, (ii) the debtor’s having rights in the collateral, and (iii) an agreement to create the security interest evidenced either by a written security agreement describing the collateral and authenticated (e.g., signed) by the debtor or by the creditor’s taking possession of the collateral. When a creditor takes possession, no written security agreement is required.
Under the position taken by a majority of the courts, to which third parties will an accountant who negligently prepares a client’s financial report be liable?
Any foreseen or known third party who relied on the report.
Under the majority position an accountant is liable for negligence only to third parties whom the accountant knows or should foresee will be relying on the accountant’s work.
Under the parol evidence rule, oral evidence will be excluded if it relates to:
A contemporaneous oral agreement relating to a term in the contract.
The parol evidence rule generally bars evidence of prior or contemporaneous oral statements offered to vary the terms of a fully integrated written contract. Oral evidence is permissible when the contract is incomplete, ambiguous, invalid, or subject to a condition precedent, or when modification is made after the original contract is written. A contemporaneous oral agreement will be excluded.
