Missed MCQ's Practice Exams

Question 1

Teri is an attorney who is a member in good standing of the bar of the highest court in her state of residence. In her practice before the IRS, Teri

A. Is limited to practice before IRS revenue agents.
B. May provide written tax advice only on return or refund preparation.
C. Must file a written declaration for each party represented.
D. May represent the taxpayer for examinations only.

Answer 1

C. Must file a written declaration for each party represented.

To practice before the IRS, an attorney or a CPA must (1) not be suspended or disbarred and (2) file a written declaration for each party represented that (s)he (a) is currently qualified and (b) has been authorized to represent the party.

Question 2

All of the following are examples of disreputable conduct for which a CPA may be disbarred or suspended from practice before the Internal Revenue Service except

A. Failing to properly and promptly remit funds received from a client for the purpose of payment of taxes.
B. Advertising the hourly rates of the CPA.
C. Maintaining a partnership for the practice of tax law and accounting with a person who is under disbarment from practice before the Internal Revenue Service.
D. Suggesting that (s)he is improperly able to obtain special consideration from an Internal Revenue Service employee.

Answer 2

B. Advertising the hourly rates of the CPA.

Section 10.51 of Circular 230 lists several examples of disreputable conduct for which a CPA may be disbarred or suspended from practice before the Internal Revenue Service. Advertising the hourly rates of the CPA is not prohibited under Sec. 10.30(a)(2) and is not disreputable conduct under Sec. 10.51 of Circular 230.

Question 3

A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% possibility that the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer’s responsibility regarding disclosure of the penalty to the company?

A. The tax preparer is responsible for disclosing both penalties to the company.
B. The tax preparer is responsible for disclosing only the accuracy-related penalty to the company.
C. The tax preparer has no responsibility for disclosing any potential penalties to the company because the position will probably be sustained on audit.
D. The tax preparer is responsible for disclosing only the late-payment penalty to the company.

Answer 3

A. The tax preparer is responsible for disclosing both penalties to the company.

Tax advisors should provide clients with the highest quality representation concerning federal tax issues by adhering to best practices in providing advice and in preparing or assisting in the preparation of a submission to the IRS. Best practices include advising the client regarding the importance of the conclusions reached, including, for example, whether a taxpayer may avoid or incur accuracy-related penalties and late-payment penalties under the IRC if the taxpayer acts in reliance on the advice.

Question 4

William, a taxpayer, refuses to pay Sara, CPA, for the preparation of his tax return unless Sara changes the return to reduce William’s tax liability. The CPA

A. Is allowed to change the return.
B. May not retain copies of client records necessary for compliance with tax obligations.
C. May withhold the documents she prepared from the client.
D. Must return the documents she prepared regardless of payment of the fee.

Answer 4

C. May withhold the documents she prepared from the client.

A practitioner ordinarily must return client records on request, regardless of any fee dispute. However, if state law permits retention of records in a fee dispute, the practitioner may withhold documents (e.g., a tax return) prepared by the practitioner, pending payment of a fee with respect to the documents.

Question 5

Which agency is responsible for determining the continuing professional education requirements for licensed CPAs?

A. The American Institute of Certified Public Accountants.
B. The National Association of State Boards of Accountancy.
C. The Securities and Exchange Commission.
D. The board of accountancy for the state in which the licensed CPA practices.

Answer 5

D. The board of accountancy for the state in which the licensed CPA practices.

Requirements for licensure vary from state to state. In addition to passing the CPA examination, a candidate may need to satisfy a state’s educational, experience, and residency criteria. The board of accountancy for the state in which the licensed CPA practices is responsible for determining the continuing professional education requirements for licensed CPAs.

Question 6

Walters & Whitlow, CPAs, failed to discover a fraudulent scheme used by Davis Corporation’s head cashier to embezzle corporate funds during the past 5 years. Walters & Whitlow would have discovered the embezzlements promptly if they had not been negligent in their annual preparation of tax returns. The information provided by Davis for this purpose was incorrect on its face, but the CPAs made no inquiries. Under the circumstances, Walters & Whitlow will normally not be liable in a common law action for

A. The fees charged for the years in question.
B. Punitive damages.
C. Losses occurring prior to the time the fraudulent scheme should have been detected that could have been recovered had it been so detected.
D. Losses occurring after the time the fraudulent scheme should have been detected.

Answer 6

B. Punitive damages.

If the CPAs have merely been negligent, they will not be liable for punitive damages. Punitive damages are awarded only when the circumstances are extreme or aggravated.

Question 7

You are a CPA retained by the manager of a cooperative retirement village to prepare its tax returns. In performing the work, you discover that there are no invoices to support $25,000 of the manager’s claimed disbursements. The manager informs you that all the disbursements are proper. What should you do?

A. Notify the owners that some of the claimed disbursements are unsupported and withdraw if the situation is not satisfactorily resolved.
B. Submit the expected tax return but omit the $25,000 of unsupported disbursements.
C. Obtain from the manager a written statement that you informed him or her of the missing invoices and his or her assurance that the disbursements are proper.
D. Include the unsupported disbursements in the tax return because you are not expected to obtain third-party verification.

Answer 7

A. Notify the owners that some of the claimed disbursements are unsupported and withdraw if the situation is not satisfactorily resolved.

Although the CPA need not audit the information, (s)he is responsible to take further action regarding information that is incorrect, incomplete, or otherwise unsatisfactory. Such action includes communication with the owners.

Question 8

A CPA will be liable to a tax client for damages resulting from all of the following actions except

A. Failing to advise a client of certain tax elections.
B. Neglecting to evaluate the option of preparing joint or separate returns that would have resulted in a substantial tax savings for a married client.
C. Failing to timely file a client’s return.
D. Refusing to sign a client’s request for a filing extension.

Answer 8

D. Refusing to sign a client’s request for a filing extension.

A CPA owes a general duty to exercise the skill and care of an ordinarily prudent accountant in the same circumstances. Moreover, Treasury Circular 230 states that diligence must be exercised in preparing, approving, and filing returns, documents, and other papers relating to IRS matters. Accordingly, the CPA is responsible for exercising independent professional judgment and complying with the law. If the CPA does not agree that the client has a valid reason for obtaining an extension, (s)he will not be liable for refusing to sign the client’s request.

Question 9

Which of the following is not an example of disreputable conduct for which a CPA may be disbarred or suspended from practice before the Internal Revenue Service?

A. Being convicted of any offense involving dishonesty or breach of trust.
B. Circulating or publishing malicious or libelous matter in connection with practice before the Internal Revenue Service.
C. Maintaining a partnership for the practice of tax law and accounting with a person who is under disbarment from practice before the Internal Revenue Service.
D. Soliciting new business in matters relating to the Internal Revenue Service through the publishing of a range of fees for particular services.

Answer 9

D. Soliciting new business in matters relating to the Internal Revenue Service through the publishing of a range of fees for particular services.

The Secretary of the Treasury may suspend or disbar from practice before the IRS any practitioner who knowingly aids and abets another person to practice before the IRS during a period of suspension, disbarment, or ineligibility of such other person; is convicted of any criminal offense involving dishonesty or breach of trust; or circulates or publishes malicious or libelous matter in connection with practice before the IRS (Sec. 10.30 of Circular 230). Soliciting new business by publishing a range of fees for particular services is an acceptable practice for a CPA.

Question 10

Which of the following is a tax return preparer according to the tax return preparer rules?

A. Person C is a fiduciary and files returns for the trust.
B. Person D, an attorney, regularly advises clients in arranging future business transactions to minimize income tax.
C. Person A engages a number of persons to prepare tax returns on a commission basis but does not himself prepare returns.
D. Person B, controller of Corporation X, prepares and files X’s corporate tax return.

Answer 10

C. Person A engages a number of persons to prepare tax returns on a commission basis but does not himself prepare returns.

A tax return preparer is any person who prepares for compensation, or employs one or more persons to prepare for compensation, any income tax return or claim for refund under Subtitle A.

Question 11

A reportable transaction is one with respect to which additional information is required to be included with a federal income tax return because the transaction is of a type, according to an IRS determination, that has

A. A potential impact on more than one taxpayer.
B. A significant tax impact in the return year.
C. A significant tax impact on future years’ returns.
D. The potential for tax avoidance or evasion.

Answer 11

D. The potential for tax avoidance or evasion.

There are five categories of reportable transactions: listed transactions, transactions of interest, Sec. 165 loss transaction, a transaction with contractual protection, and a confidential transaction. A transaction of interest is a transaction that the IRS and Treasury Department believe has the potential for tax avoidance or evasion, but for which there is not enough information to determine if it should be identified as a tax avoidance transaction.

Question 12

Which of the following facts must be proven for a lender to prevail in a state-law negligent misrepresentation action against a CPA who prepared a borrower’s tax return that was disclosed to the lender?

A. The misrepresentations were in writing.
B. The misrepresentations concerned opinions.
C. The defendant made the misrepresentations with a reckless disregard for the truth.
D. The plaintiff justifiably relied on the misrepresentations.

Answer 12

D. The plaintiff justifiably relied on the misrepresentations.

Negligent misrepresentation occurs when the accountant makes a false representation of a material fact not known to be false but intended to induce reliance. The plaintiff must reasonably have relied on the accountant’s misrepresentation and incurred damages.

Question 13

Which of the following pairs of elements must a client prove to hold a CPA liable for common law negligence?

A. Freedom from contributory negligence and privity.
B. Willful misrepresentation and breach of the accountant’s duty of care.
C. Scienter.
D. Breach of the accountant’s duty of care and loss.

Answer 13

D. Breach of the accountant’s duty of care and loss.

To hold an accountant liable for negligence, the plaintiff-client must prove all of the following elements of negligence: (1) the CPA owed the client a duty of reasonable care and diligence, (2) the CPA breached this duty, (3) the CPA’s breach actually and proximately caused the client’s injury, and (4) the client suffered damages (loss).

Question 14

Which one of the following, if present, would support a finding of constructive common law fraud on the part of a CPA?

A. Privity of contract.
B. Ordinary negligence.
C. Intent to deceive.
D. Reckless disregard.

Answer 14

D. Reckless disregard.

Whether a CPA is liable for fraud depends on whether (s)he acted with scienter. Scienter means that the person making a representation knew that it was false at the time of making it or acted with a reckless disregard for the truth. The difference between actual and constructive fraud is that the scienter requirement for the latter is met by gross negligence (reckless disregard). Thus, the following four elements are necessary to prove constructive fraud: (1) misrepresentation of a material fact, (2) reckless disregard for the truth, (3) reasonable reliance by the injured party, and (4) injury. Thus, the presence of reckless disregard for the truth would support a finding of constructive fraud on the part of a CPA.

Question 15

A penalty may be assessed against an income tax return preparer who takes an unreasonable position that causes an understatement of liability on a return. For purposes of assessing the penalty, “understatement of liability” means

A. Any overstatement of the amount refundable that exceeds 5% of the amount refundable shown on the claim for refund.
B. Any understatement of tax liability greater than $100.
C. Any understatement of the tax liability or overstatement of the amount to be refunded or credited.
D. Any understatement that exceeds 10% of the tax liability shown on the return.

Answer 15

C. Any understatement of the tax liability or overstatement of the amount to be refunded or credited.

Section 6694(e) defines “understatement of liability” for purposes of assessing penalties against return preparers as any understatement of the net amount of tax payable under Title 26 or any overstatement of the net amount creditable or refundable under Title 26. Under Sec. 6694(d), penalties will not be assessed against tax return preparers unless there has been an understatement of liability.

Question 16

Identify the item below that does not describe information a preparer must maintain about every return prepared.

A. The taxpayer’s name and taxpayer identification number.
B. The type of return or claim for refund prepared.
C. The date the return or claim for refund was prepared.
D. The taxable year of the taxpayer (or nontaxable entity) for whom the return was prepared.

Answer 16

C. The date the return or claim for refund was prepared.

Section 6107(b) requires a tax return preparer to retain a completed copy of each return or claim prepared or a list of the names and taxpayer identification numbers of the taxpayers for whom such returns or claims were prepared. Under Reg. 1.6107-1(b)(1)(i)(B), the list must include the taxable year of the taxpayer and the type of return or claim for refund prepared. This copy or list must be retained by the income tax return preparer for 3 years after the close of the return period.

Question 17

In which of the following situations may the tax return preparer disclose the tax return information requested without first obtaining the consent of the taxpayer/client?

A. The preparer receives a state grand jury subpoena requesting copies of federal and state income tax returns.
B. A partner in a partnership, who was not involved with the return preparation or partnership records, requests a copy of the partnership return, including the Schedule K-1s for all partners.
C. All of the answers are correct.
D. An IRS agent, in his or her official capacity, visits the preparer and requests copies of state and federal income tax returns, related returns, schedules, and records of the taxpayer used in the preparation of the tax returns.

Answer 17

C. All of the answers are correct.

Generally, a preparer is prohibited from disclosing a taxpayer’s information without the client’s consent. However, several exceptions exist, including a disclosure made pursuant to a court order, pursuant to an IRS inquiry, or among partners in a partnership.

Question 18

In a nonstatutory action against a CPA, lack of privity is a viable defense if the plaintiff

A. Bases the action upon fraud.
B. Is the client’s creditor who sues the CPA for negligence.
C. Is the CPA’s client.
D. Can prove the presence of gross negligence that amounts to a reckless disregard for the truth.

Answer 18

B. Is the client’s creditor who sues the CPA for negligence.

A CPA’s liability for negligence may be restricted to those parties in privity of contract or who are primary beneficiaries of the engagement. The liability of the CPA also may extend to foreseen third parties. Some courts hold that reasonably foreseeable third parties have standing to sue. Thus, (1) the nature of the action, (2) the nature of the plaintiff, and (3) the jurisdiction whose law is to be applied determine whether lack of privity is a possible defense. A creditor of the client who sues for negligence is more likely to be subject to the defense than a party whose suit is based on gross negligence or fraud.

Question 19

Victor entered into a contract to sell land with a basis of $50,000 for $700,000. The sale was scheduled to close on May 1. On April 30, Victor unexpectedly died. Victor’s family attorney has advised the family to contact the IRS to get guidance about the treatment of the inherited property. What is the best source of administrative tax law the family should request from the IRS to address their concerns?

A. Revenue ruling.
B. Private letter ruling.
C. Executive order.
D. Revenue procedure.

Answer 19

B. Private letter ruling.

In response to a request for guidance, the IRS may issue a private letter ruling (PLR). A PLR is a written statement that interprets and applies tax laws to a taxpayer’s specific set of facts. The taxpayer requesting the ruling may rely on it, but other parties who may have similar circumstances may not rely on the PLR.

Question 20

Each of the following constitutes substantial authority for a taxpayer to take a tax position except

A. A technical advice memorandum conclusion in which the taxpayer is named.
B. An affirmative statement in a revenue agent’s report with respect to a prior year of the taxpayer.
C. A determination letter conclusion in which the taxpayer is named.
D. A Private Letter Ruling in which the taxpayer is named and that is inconsistent with a subsequently issued Treasury Regulation.

Answer 20

D. A Private Letter Ruling in which the taxpayer is named and that is inconsistent with a subsequently issued Treasury Regulation.

A tax position may not be adopted without substantial authority for the position. There is substantial authority for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment. What constitutes substantial authority is defined by statute and IRS statements. A revenue ruling, for example, constitutes legal authority that, together with other authority, may be found substantial. A Private Letter Ruling (PLR) binds the IRS, and the taxpayer requesting the ruling may rely on it, but other parties who may have similar circumstances may not rely on the PLR. Treasury Regulations are more authoritative than PLRs and, if issued subsequent to the PLR, would supersede the PLR.

Question 21

A taxpayer received a 90-day letter proposing a deficiency. The taxpayer challenged the proposed deficiency in the Small Cases Division of the U.S. Tax Court. If the taxpayer loses the case, then the decision is

A. Appealable to the U.S. Court of Federal Claims if the deficiency is paid.
B. Appealable to the United States District Court if the deficiency is paid.
C. Appealable to the regular division of the U.S. Tax Court.
D. Not appealable.
Answer (D) is correct.
Decisions from the Small Cases Division of the Tax Court are not appealable by either the IRS or the taxpayer.

Answer 21

D. Not appealable.

Decisions from the Small Cases Division of the Tax Court are not appealable by either the IRS or the taxpayer.

Question 22

A taxpayer does not have to pay estimated taxes if

A. All of the answers are correct.
B. The taxpayer’s withholding covers 90% of the tax liability for the previous year.
C. The taxpayer’s tax liability for the previous year was less than $1,000.
D. The taxpayer’s earned income credit will exceed his or her tax liability for the current year.

Answer 22

D. The taxpayer’s earned income credit will exceed his or her tax liability for the current year.

If tax credits exceed the tax liability, the taxpayer will not owe taxes and thus does not have to pay any estimated taxes. A $1 credit reduces tax liability by $1. Thus, if the earned income credit exceeds the tax liability, no taxes are due.

Question 23

Hark, CPA, failed to follow generally accepted auditing standards in auditing the financial statements of Long Corp., a nonpublic company. Hark also took several tax return positions that were not likely to be sustained on the merits because they were not supported by substantial authority. Long’s management had told Hark that the audited statements and tax returns would be submitted to several banks to obtain financing. Relying on these documents, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the traditional common law doctrine, if Third sues Hark, Hark will

A. Win because Hark and Third were not in privity of contract.
B. Lose because Hark was negligent in performing the audit.
C. Lose because Hark knew that banks would be relying on the financial statements.
D. Win because Third was contributorily negligent in granting the loan.

Answer 23

A. Win because Hark and Third were not in privity of contract.

An accountant is not liable to all persons who are damaged by his or her negligence. Lack of privity is still a defense in some states. For example, under the holding in the Ultramares case, an accountant is liable for negligence only if the plaintiff was in privity of contract with the accountant or a primary beneficiary of the engagement. Under the primary benefit test, the accountant must have been aware that (s)he was hired to produce a work product to be used and relied upon by a particular third party. Because Long’s management did not specifically name Third Bank to Hark, Hark will not be liable. However, most courts now extend a CPA’s liability to anyone in a class of foreseen (but not necessarily individually identified) third parties who the CPA knows will use the information.

Question 24

In which of the following circumstances does the 3-year statute of limitations on additional tax assessments apply?

A. The IRS files a substitute income tax return when it learns that a taxpayer failed to file a return.
B. A taxpayer inadvertently omits from gross income an amount in excess of 25% of the gross income stated on the income tax return.
C. A taxpayer inadvertently overstates deductions equal to 15% of gross income.
D. A taxpayer willfully attempts to evade tax in filing income tax returns.

Answer 24

C. A taxpayer inadvertently overstates deductions equal to 15% of gross income.

The general statute of limitations for assessment of a deficiency is 3 years from the date the return was filed.

Question 25

In order to show that a tax preparer’s application of tax law was in line with the intent of the tax law, the preparer should cite which of the following types of authoritative sources to make the most convincing case?

A. IRS publication.
B. Technical advice memorandum of another, similar case.
C. Committee report.
D. Delegation order.

Answer 25

C. Committee report.

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

Question 26

During 2023, Robert Moore, who is 50 years old and unmarried, maintained his home in which he and his widowed father, age 75, resided. His father had $3,750 interest income from a savings account and also received $3,750 from Social Security during 2023. Robert provided 60% of his father’s total support for 2023. What is Robert’s filing status for 2023, and how many dependents should he claim on his tax return?

A. Single and two dependents.
B. Single and one dependent.
C. Head of household and two dependents.
D. Head of household and one dependent.

Answer 26

D. Head of household and one dependent.

Robert’s father has less than $4,700 of gross income in 2023, so he qualifies as Robert’s dependent. Only the interest income is considered when determining the amount of gross income (Social Security received is excluded based on provisional income not in excess of base amount of $25,000). Since his father qualifies as a dependent, Robert qualifies for head-of-household filing status. Robert may file as a head of household with one dependent.

Question 27

Which of the following allows a taxpayer to legally avoid paying income tax?

A. Treating a portion of compensation as a tax-free fringe benefit.
B. Earning only interest income (nonlabor/passive income).
C. Bartering, not using cash.
D. Working for a charitable organization.

Answer 27

A. Treating a portion of compensation as a tax-free fringe benefit.

Tax avoidance is the minimization of tax liability through legal arrangements and transactions. Avoidance maneuvers take place prior to incurring a tax liability. By converting an employer payment to an employee from wages to a tax exempt benefit, the taxpayer legally avoids paying income tax that would otherwise be owed.

Question 28

Which of the following is not considered a primary authoritative source when conducting tax research?

A. Treasury regulations.
B. Internal Revenue Code.
C. IRS publications.
D. Tax Court cases.

Answer 28

C. IRS publications.

Publications are not binding on the Service and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position. Therefore, IRS Publications are not considered a primary authoritative source.

Question 29

Which of the following falls under the tax planning strategy of income shifting?

A. Filing a separate return in lieu of a joint return.
B. Hiring a family member in order to increase business expenses and increase family global net income.
C. Hiring a new employee in order to increase business expenses and decrease net income.
D. Shifting income from one spouse to the other on a joint return.

Answer 29

B. Hiring a family member in order to increase business expenses and increase family global net income.

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