Missed MCQ's Subunits 1 - 4 Aug 2023

Question 1

A CPA must sign the preparer’s declaration on a federal income tax return

A. Only when the CPA can declare that a tax is based on information of which the CPA has personal knowledge.
B. Whenever the CPA prepares a tax return for others.
C. Only when the return is for an individual or corporation.
D. Only when the CPA prepares a tax return for compensation.

Answer 1

D. Only when the CPA prepares a tax return for compensation.

Treasury Regulations require preparers to sign all the returns they prepare and to include their identification numbers. However, a preparer is defined as a person who prepares (or employs persons to prepare) for compensation any tax return, amended return, or claim for refund of tax imposed by Subtitle A of the Internal Revenue Code (which covers income taxes on all entities).

Question 2

Which of the following situations describes a disclosure of tax return information by a tax return preparer that would subject the preparer to a penalty?

A. After a client files for bankruptcy, the tax return preparer provides a copy of the last return filed to the court-appointed fiduciary without written permission.
B. A grandfather’s tax information is made available to his granddaughter to inform her that she will be claimed as a dependent on the grandfather’s return.
C. None of the answers are correct.
D. An employee of the tax return preparer makes corporate return information available to shareholders.

Answer 2

C. None of the answers are correct.

Disclosing tax information to a granddaughter is permissible provided there has not been a specific prohibition by the grandfather. This rule also applies to a corporation and its shareholders, and to a client who has filed for bankruptcy and a trustee.

Question 3

To avoid tax return preparer penalties for a return’s understated tax liability due to an intentional disregard of the regulations, which of the following actions must a tax preparer take?

A. Make reasonable inquiries if the taxpayer’s information is incomplete.
B. Review the accuracy of the taxpayer’s books and records.
C. Examine the taxpayer’s supporting documents.
D. Audit the taxpayer’s corresponding business operations.

Answer 3

A. Make reasonable inquiries if the taxpayer’s information is incomplete.

Question 4

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

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

Answer 4

A. 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 5

Pursuant to Treasury Circular 230, which of the following statements about the return of a client’s records is correct?

A. The client’s records are to be destroyed upon submission of a tax return.
B. The practitioner does not need to return any client records that are necessary for the client to comply with the client’s federal tax obligations.
C. The existence of a dispute over fees generally relieves the practitioner of responsibility to return the client’s records.
D. The practitioner may retain copies of the client’s records.

Answer 5

D. The practitioner may retain copies of the client’s records.

A practitioner must return client records on request, regardless of any fee dispute. However, the practitioner may retain copies of client records. In fact, a return preparer is required to retain a completed copy of each return or claim prepared for 3 years after the close of the return period.

Question 6

Arnie is a Certified Public Accountant who prepares income tax returns for his clients. One of his clients submitted a list of expenses to be claimed on Schedule C of the tax return. Arnie qualifies as a return preparer and, as such, is required to comply with which one of the following conditions?

A. Arnie is required to independently verify the client’s information.
B. Arnie can ignore implications of information known by him.
C. Inquiry is not required if the information appears to be incorrect or incomplete.
D. Appropriate inquiries are required to determine whether the client has substantiation for travel and entertainment expenses.

Answer 6

D. Appropriate inquiries are required to determine whether the client has substantiation for travel and entertainment expenses.

A practitioner (i.e., a CPA) may rely on information provided by a client without further inquiry or verification. However, if the information so provided appears incorrect, incomplete, or inconsistent, the practitioner must make reasonable inquiries about the information. This requirement includes inquiry about unsubstantiated travel and entertainment expenses (Circular 230).

Question 7

Which of the following acts, if any, constitute grounds for a tax preparer penalty?

A. Without the taxpayer’s consent, the tax preparer disclosed taxpayer income tax return information under an order from a state court.
B. 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.
C. Without the taxpayer expressly prohibiting it, the tax preparer used information from the taxpayer’s return in a related taxpayer’s return.
D. Without the taxpayer’s consent, the tax preparer disclosed taxpayer income tax return information to a CPA firm conducting a peer review.

Answer 7

B. 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.

A penalty is imposed on a tax return preparer if any part of an understatement of tax liability resulted from a willful attempt to understate the liability or from an intentional disregard of rules or regulations. A penalty for disclosure will not be imposed if client information is disclosed under a court order.

Question 8

Which of the following is not a tax return preparer?

A. Someone who does not physically prepare a tax return but offers enough advice that completion of the return is largely a mechanical matter.
B. Someone who prepares a substantial portion of a return or claim for refund under Title 26.
C. Someone who prepares a return or claim for refund for his or her employer.
D. A firm who offers computer tax preparation services if the program makes substantive tax determinations.

Answer 8

C. Someone who prepares a return or claim for refund for his or her employer.

Under Sec. 7701(a)(36), a tax return preparer is any person who prepares for compensation, or employs others to prepare for compensation, any tax return or claim for refund under Title 26. However, a person who prepares a return for his or her regular employer is disqualified as a tax return preparer.

Question 9

Penalties may be imposed on a tax return preparer for an understatement of tax liability because of a position for which there is not a reasonable belief that there is substantial authority that the position will be sustained on its merits. But the penalties may be excused if

A. The preparer knew or should have known of the position.
B. There is reasonable cause and good faith.
C. The position was disclosed.
D. The understatement was unintentional.

Answer 9

B. There is reasonable cause and good faith.

Taking an undisclosed position without a reasonable belief that there is substantial authority that the position will be sustained on its merits results in a penalty. If the position is disclosed, its tax treatment must have a reasonable basis. The penalty does not apply if the preparer proves that (1) (s)he acted in good faith and (2) there is a reasonable cause for the understatement.

Question 10

Which one of the following is considered disreputable conduct under Circular 230?

A. Being indicted of any felony under federal or state law which renders the practitioner unfit to practice before the Internal Revenue Service.
B. Having your motor vehicle license suspended as a result of numerous traffic violations.
C. Giving false or misleading information, or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof.
D. Being indicted for any criminal offense under the revenue laws of the United States.

Answer 10

C. Giving false or misleading information, or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof.

Question 11

Which of the following situations could result in a preparer penalty assessed by the IRS?

A. Taxpayer tells the preparer that the taxpayer’s income is $40,000, whereas it is actually $60,000.
B. Preparer does not sign the tax return.
C. Preparer takes an aggressive but realistic tax position that results in a decrease of tax.
D. Preparer inadvertently transposes two digits on a return, and the error results in an understatement of income by $90.

Answer 11

B. Preparer does not sign the tax return.

A tax return preparer is required to sign the return or claim for refund after it has been completed and before it is presented to the taxpayer. A preparer penalty is generally assessed by the IRS when the preparer does not sign the tax return.

Question 12

Louis, the volunteer treasurer of a nonprofit organization and a member of its board of directors, compiles the data and fills out its annual Form 990, Return of Organization Exempt From Income Tax. Under the Internal Revenue Code, Louis is not considered a tax return preparer because

A. Returns for nonprofit organizations are exempt from the preparer rules.
B. The return does not contain a claim for a tax refund.
C. He is a member of the board of directors.
D. He is not compensated.

Answer 12

D. He is not compensated.

A tax return preparer is anyone who prepares for compensation, or employs one or more persons to prepare for compensation, all or a substantial portion of any tax return or claim for refund under the IRC. If Louis is not compensated, he will not be considered a tax return preparer.

Question 13

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. Submit the expected tax return but omit the $25,000 of unsupported disbursements.
B. 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.
C. Include the unsupported disbursements in the tax return because you are not expected to obtain third-party verification.
D. Notify the owners that some of the claimed disbursements are unsupported and withdraw if the situation is not satisfactorily resolved.

Answer 13

D. 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 14

Which of the following individuals is acting as a tax return preparer under IRS regulations?

A. A CPA who prepares a substantial portion of a claim for refund of tax for a client.
B. A CPA who prepares a tax return for a taxpayer under the Volunteer Income Tax Assistance program.
C. An employee of the tax department of a corporation who prepares a tax return on behalf of the corporation’s wholly owned subsidiary.
D. An employee of the tax department of a corporation who prepares a claim for refund on behalf of the corporation’s parent company, which owns 100% of the corporation.

Answer 14

A. A CPA who prepares a substantial portion of a claim for refund of tax for a client.

A tax return preparer is anyone who prepares for compensation, or employs one or more persons to prepare for compensation, all or a substantial portion of any tax return or claim for refund under the Internal Revenue Service Code.

Question 15

If a CPA is engaged by an attorney to assist in the defense of a criminal tax fraud case involving the attorney’s client, information obtained by the CPA from the client after being engaged

A. Is not privileged because the matter involves a federal issue.
B. Will be deemed privileged communications provided that the CPA prepared the client’s tax return.
C. Will be deemed privileged communications under certain circumstances.
D. Is not privileged in jurisdictions that do not recognize an accountant-client privilege.

Answer 15

C. Will be deemed privileged communications under certain circumstances.

The attorney-client privilege protects the information. The defendant is the client of the attorney, and the CPA is the agent of the attorney. Thus, communications between the CPA and the defendant are, in effect, between the attorney and the defendant. However, if the defendant is the CPA’s client, their communications will not be privileged unless the case involves a state tax matter in a jurisdiction that has enacted a statute protecting accountant-client communications. The limited federal accountant-client privilege does not apply in criminal tax matters.

Question 16

A CPA firm’s working papers related to its tax practice are least likely to be protected from disclosure

A. To a state CPA society peer review team.
B. Pursuant to a state court subpoena.
C. Pursuant to an IRS administrative subpoena seeking information about tax advice rendered by the CPA.
D. To the trial board of the AICPA.

Answer 16

B. Pursuant to a state court subpoena.

Most states do not recognize a privilege for accountant-client communications, including those documented in the accountant’s working papers. Thus, a properly issued state court subpoena must be complied with.

Question 17

Which of the following elements, if present, would support a finding of common law constructive fraud on the part of a CPA who prepared a tax return?

A. Gross negligence.
B. Identified third-party users.
C. Ordinary negligence.
D. Scienter.

Answer 17

A. Gross negligence.

Scienter is a prerequisite to liability for fraud. Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth. For constructive fraud, the scienter requirement is met by proof of gross negligence (reckless disregard for the truth).

Question 18

To which of the following parties may a CPA partnership provide working papers related to its tax practice, without being lawfully subpoenaed, without the client’s consent, or without taking precautions, such as obtaining a confidentiality agreement, to prevent inappropriate disclosure of client information?

A. The FASB.
B. A CPA conducting a review of the practice before purchasing a partnership interest in the firm.
C. The IRS.
D. Any surviving CPA partner(s) on the death of a partner.

Answer 18

D. Any surviving CPA partner(s) on the death of a partner.

Working papers may be disclosed to another CPA partner of the accounting firm without the client’s consent because such information has not been communicated to outsiders. A CPA partner of the accountant has a fiduciary obligation, as well as an obligation under the Code of Professional Conduct, to the client not to disclose confidential information without consent.

Question 19

If a shareholder sues a CPA in state court for nonstatutory fraud based on false information contained in a tax return prepared by the CPA, which of the following, if present, would be the CPA’s best defense?

A. The contributory negligence of the client releases the CPA from liability.
B. The false information is immaterial.
C. The shareholder lacks privity to sue.
D. The CPA did not financially benefit from the alleged fraud.

Answer 19

B. The false information is immaterial.

The CPA’s best defense would be that the false information is immaterial.

Question 20

The firm Meek & Co., CPAs, was engaged by Reed, the president of Sulk Corp, to prepare its federal and state tax returns by March 15, Year 2, for the fiscal year ended December 31, Year 1. Meek’s engagement and its fee of $20,000 were approved by Sulk’s board of directors. Meek did not deliver the returns until April 15, Year 2, because Sulk did not provide Meek with the necessary information to complete the service. Sulk refuses to pay Meek. If Meek sues Sulk, Meek will

A. Prevail based on the contract.
B. Lose, because it breached the contract.
C. Lose, because the March 15 deadline was a condition precedent to Sulk’s performance.
D. Prevail based on quasi-contract.

Answer 20

A. Prevail based on the contract.

Meek’s failure to meet the deadline did not result in a breach of contract. Rather, the failure of performance was caused by Sulk’s failure to supply Meek with the necessary information to complete the service. Every contract contains an implied promise each party will not interfere with the other party’s performance. Consequently, Meek can enforce the contract because Meek was not in breach.

Question 21

An accountant engaged in tax practice before the IRS has a confidentiality privilege regarding communications with a client. This privilege applies

A. Only to advice on legal issues.
B. In state and federal courts.
C. Only if the IRS adjudicates the case.
D. In criminal tax matters.

Answer 21

A. Only to advice on legal issues.

A federal confidentiality privilege covers most tax advice provided to a current or prospective client by any individual (CPA, attorney, enrolled agent, or enrolled actuary) qualified under federal law to practice before the IRS. But the privilege applies only to advice on legal issues.

Question 22

Which of the following is the best defense a CPA firm can assert in a suit for common law fraud resulting from preparation of a tax return?

A. Lack of scienter.
B. A disclaimer contained in the engagement letter.
C. Lack of privity.
D. Contributory negligence on the part of the client.

Answer 22

A. Lack of scienter.

Fraud consists of a material misrepresentation made with scienter and an intent to induce reliance. The misrepresentation also must have caused damage to a defendant who reasonably relied upon it. Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth. The CPA firm’s best defense is that the plaintiff failed to prove an element of the fraud claim, i.e., scienter.

Question 23

A client suing a CPA for negligent preparation of a tax return in a state court must prove each of the following factors except

A. Breach of duty of care.
B. Proximate cause.
C. Reliance.
D. Injury.

Answer 23

C. Reliance.

A client suing an accountant for the unintentional tort of negligence must establish the following elements: (1) The accountant owed the client a duty, (2) the accountant breached this duty, (3) the accountant’s breach actually and proximately caused the client’s injury, and (4) the client suffered damages. Reasonable reliance on a misrepresentation is an element of fraud or of negligent misrepresentation.

Question 24

Which of the following statements is true with respect to ownership, possession, or access to a CPA firm’s working papers related to its tax practice?

A. Working papers may never be obtained by third parties unless the client consents.
B. Working papers are not transferable to a purchaser of a CPA practice unless the client consents.
C. Working papers are subject to the privileged communication rule, which, in most jurisdictions, prevents any third-party access to the working papers.
D. Working papers are the client’s exclusive property.

Answer 24

B. Working papers are not transferable to a purchaser of a CPA practice unless the client consents.

Transferring working papers to a purchaser of a practice is communication of the information they contain and violates the AICPA’s Confidential Client Information Rule. However, this rule does not prohibit review of the CPA’s practice, including a review in conjunction with the purchase, sale, or merger of the practice, if appropriate precautions are taken. One means of protecting the client’s information is to enter into a written confidentiality agreement with the prospective purchaser.

Question 25

A company engaged a CPA to perform an audit of the company’s financial statements for Year 2 in order to apply for a bank loan. After the bank made the loan, it was discovered that the company’s assets had been materially overstated. The overstatement was not discovered as part of the CPA’s audit procedures. If the company defaulted on the loan and the case occurred in a jurisdiction that follows the Restatement rule, then the CPA could have liability to which of the following? A. The bank, but not the company. B. The company, but not the bank. C. Both the bank and the company. D. Neither the bank nor the company.

Answer 25

C. Both the bank and the company.

Question 26

Sumner is an accountant accused of negligence by a client. Which of the following defenses should Sumner argue? A. Actual fraud was lacking. B. Contributory negligence negates liability for a client’s losses. C. The negligence was not the proximate cause of the client’s losses. D. Scienter was lacking.

Answer 26

C. The negligence was not the proximate cause of the client’s losses. Negligence includes any failure to make a reasonable attempt to either comply with the provisions of the Internal Revenue laws or exercise ordinary and reasonable care in the preparation of a return. A client must prove all four 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. 4. The plaintiff incurred damages. Therefore, Sumner should take the position that negligence was not the proximate cause of the client’s losses.

Question 27

Ritz Corp. wished to acquire the stock of Stale, Inc. In conjunction with its plan of acquisition, Ritz hired Fein, CPA, to audit the financial statements of Stale and to prepare its state and federal income tax returns. Based on these documents, Ritz acquired Stale. Within 6 months, it was discovered that Stale’s revenues and taxable income had been grossly overstated. Ritz commenced an action against Fein. Ritz believes that Fein failed to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality but is not able to prove that Fein either intentionally deceived it or showed a reckless disregard for the truth. Ritz also is unable to prove that Fein had any knowledge that revenues and taxable income were overstated. Which of the following two common law causes of action provide Ritz with proper bases upon which Ritz will most likely prevail? A. Negligence and fraud. B. Negligence and breach of contract. C. Gross negligence and breach of contract. D. Negligence and gross negligence.

Answer 27

B. Negligence and breach of contract. A CPA’s nonstatutory liability to a client can be based upon breach of contract, negligence, or fraud. A breach of contract occurs when an accountant fails to perform duties required under a contract. These duties can either be express or implied. All contracts carry the implied duty to perform in a nonnegligent manner. To prevail in an action for negligence, the client must prove that the CPA did not act with the same degree of skill and judgment possessed by accountants in the locality. In an action for fraud, the client must prove scienter (intent to deceive or a reckless disregard for the truth). Ritz most likely prevails in an action brought for negligence or breach of contract if Fein failed to perform with the knowledge, skill, and judgment commonly possessed by CPAs in the area.

Question 28

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. Win because Third was contributorily negligent in granting the loan. D. Lose because Hark knew that banks would be relying on the financial statements.

Answer 28

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 29

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

Answer 29

A. 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 30

Mary Martinson is a CPA. One of her clients is suing her for common law negligence, alleging that she failed to follow federal tax law when preparing the current year’s tax return. Which of the following statements is true? A. Martinson cannot incur tort liability if she has committed criminal tax fraud. B. If Martinson failed to follow federal tax law, she would undoubtedly be found to have committed the tort of fraud. C. Martinson is not bound by federal tax law unless she is a member of the AICPA. D. Martinson’s failure to follow federal law results in tort liability.

Answer 30

D. Martinson’s failure to follow federal law results in tort liability. A CPA is a professional who must adhere to professional standards of care in the performance of his or her work. A CPA must perform in accordance with that degree of accounting knowledge and skill expected of an ordinary reasonable person who is a CPA. Whether the CPA has met the required standard is partly determined by compliance with (1) generally accepted auditing standards (GAAS), (2) PCAOB standards in a public-company audit, (3) other applicable auditing standards, or (4) statutes that establish the standard of conduct for a reasonable person. Failure to follow such standards results in liability for damages proximately caused by his or her negligence.

Question 31

A CPA qualified to practice before the IRS is assisting in the defense of a client in a proceeding in federal court. The plaintiff is the U.S. government. The federal accountant-client privilege A. Applies to related state tax matters. B. Does not apply if the testimony relates to a private civil matter. C. Does not apply because the matter is not before the IRS. D. Applies if the testimony relates to disclosures to another federal regulator.

Answer 31

B. Does not apply if the testimony relates to a private civil matter. The privilege does not apply to (1) criminal tax matters, (2) private civil matters, (3) disclosures to other federal regulatory bodies, or (4) state and local tax matters.

Question 32

A CPA quickly prepares the financial statements for WSA Co. without noticing that an asset was inadvertently overstated on the balance sheet by 10%. An investor who had purchased stock in WSA based on the financial statements, lost $10,000 as a result of the investment. The investor claims that WSA committed fraud. Which of the following is true concerning whether fraud was committed? A. Fraud was not committed because the misstatement was due to negligence. B. Fraud was committed because the reliance was placed on the statements by the investor. C. Fraud was committed because the balance sheet is misstated. D. Fraud was not committed because the investor’s damages are not material.

Answer 32

A. Fraud was not committed because the misstatement was due to negligence. Common law fraud requires (1) a false representation of a material fact, (2) made with scienter, (3) upon which another person was intended to and reasonably did rely, (4) resulting in a detriment to the other person. Scienter is a state of mind that implies intentional wrongdoing. Because the misstatement was inadvertent, the scienter element is not satisfied and fraud was not committed.

Question 33

Which of the following statements is correct regarding the liability of a CPA for services performed? A. A CPA’s liability for fraud extends only to the client and no further. B. A CPA is negligent for exercising only that degree of care a reasonably competent CPA would exercise under the circumstances. C. A CPA’s work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner. D. A CPA’s liability for negligence extends only to the client and no further.

Answer 33

C. A CPA’s work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner. A CPA has a duty to exercise reasonable care and diligence. This does not guarantee that the CPA’s work will be accurate.

Question 34

The traditional nonstatutory rules regarding accountant’s liability to third parties for negligence A. Have been substantially changed at both the federal and state levels. B. Remain substantially unchanged since their inception. C. Are of relatively minor importance to the accountant. D. Were more stringent than the rules currently applicable.

Answer 34

A. Have been substantially changed at both the federal and state levels. The traditional rules have been changed with the result that CPAs’ liability to third parties for negligence has been greatly increased. For example, under federal securities regulation, a CPA may be liable to any third party who purchases an initial issue of securities. At the state level, CPAs’ potential liability also has been increased. It now extends to (1) unknown third parties when the CPAs have been grossly negligent (have shown a reckless disregard for the truth) and (2) (in a majority of states) foreseen third parties (foreseen users and a foreseen class of users) when the CPAs have been ordinarily negligent.

Question 35

The Securities and Exchange Commission (SEC) may discipline accountants. Under its disciplinary powers, the SEC may suspend an accountant’s right to practice before it. What is a basis for suspension? A. Being subject to a temporary restraining order regarding securities practice. B. Conviction of any misdemeanor. C. Intentional or unintentional violation of SEC regulations. D. Conviction of a felony.

Answer 35

D. Conviction of a felony. The SEC may suspend or permanently revoke the right to practice before the SEC, including the right to sign any document filed by a registrant, if the accountant (1) does not have the qualifications to represent others; (2) lacks character or integrity; (3) has engaged in unethical or unprofessional conduct; or (4) has willfully violated, or willfully aided and abetted the violation of, the federal securities laws or their rules and regulations. Suspension by the SEC also may result from (1) conviction of a felony, or a misdemeanor involving moral turpitude; (2) revocation or suspension of a license to practice; or (3) being permanently enjoined from violation of the federal securities acts.

Question 36

A CPA qualified to practice before the IRS is assisting in the defense of a client in a proceeding in federal court. The plaintiff is the U.S. government. The federal accountant-client privilege A. Does not apply because the matter is not before the IRS. B Does not apply if the testimony relates to a private civil matter. C. Applies to related state tax matters. D/\. Applies if the testimony relates to disclosures to another federal regulator.

Answer 36

B Does not apply if the testimony relates to a private civil matter. The privilege does not apply to (1) criminal tax matters, (2) private civil matters, (3) disclosures to other federal regulatory bodies, or (4) state and local tax matters.

Question 37

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

Answer 37

A. 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 38

A CPA firm acts with scienter in all the following circumstances except when the firm A. Has actual knowledge of fraud. B. Intentionally disregards the truth. C. Negligently performs a professional service. D. Intends to gain monetarily by concealing fraud.

Answer 38

C. Negligently performs a professional service. Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth. Negligence, however, requires no wrongful intent.

Question 39

A married couple can file a joint return even if A. The spouses have different accounting methods. B. They were divorced before the end of the tax year. C. Either spouse was a nonresident alien at any time during the tax year, provided that at least one spouse makes the proper election. D. The spouses have different tax years, provided that both spouses are alive at the end of the year.

Answer 39

A. The spouses have different accounting methods. There is no provision disallowing spouses from filing a joint return because they have different accounting methods.

Question 40

Emil Gow’s wife died in Year 1. Emil did not remarry and continued to maintain a home for himself and his dependent infant child during Year 2 and Year 3, providing full support for himself and his child. For Year 1, Emil properly filed a joint return. For Year 3, Emil’s filing status is A. Single. B. Qualifying surviving spouse. C. Head of household. D. Married filing joint return.

Answer 40

B. Qualifying surviving spouse. Emil qualifies as a qualifying surviving spouse whose spouse died in either of the 2 preceding tax years, who has not remarried, and who maintains a household that constitutes a principal place of abode of a dependent who is a child or stepchild of the taxpayer.

Question 41

Sam’s Year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For Year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of Year 3 estimated tax payments that Sam can make? A. $33,000 B. $50,000 C. $45,000 D. $30,000

Answer 41

A. $33,000 To avoid penalties, a taxpayer must pay the lesser of 100% (110% for taxpayers whose prior year’s AGI exceeds $150,000) of the prior year’s tax or 90% of the current year’s tax. Sam’s prior year’s AGI exceeds $150,000 (because Sam’s prior year’s taxable income was $175,000). Sam must pay 110% of the prior year’s tax, or $33,000.

Question 42

Chris Baker’s adjusted gross income on her 2022 tax return was $160,000, which covered a 12-month period. For the 2023 tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of A. Neither I nor II. B. I only. C. II only. D. Either I or II.

Answer 42

D. Either I or II. In general, a taxpayer can avoid underpayment penalties if (s)he pays estimated taxes equal to either 90% of the tax on the return for the current year or 100% of the tax liability of the prior year. However, since Baker’s AGI exceeded $150,000 on the prior year’s return, she must pay 110%, instead of 100%, of the prior year’s tax liability if she wants to qualify for the prior year safe harbor.

Question 43

Which of the following, if any, are among the requirements to enable a taxpayer to be classified as a “qualifying surviving spouse”? A. I only. B. II only. C. Both I and II. D. Neither I nor II.

Answer 43

D. Neither I nor II. Filing as a qualifying surviving spouse requires the individual’s spouse to have died during one of the previous 2 tax years. In addition, the survivor must maintain a household that is the principal place of residence for a dependent child. “Maintain” means the spouse furnishes over 50% of the costs of the household for the entire year.

Question 44

For head of household filing status, which of the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household?

Answer 44

Food Consumed in the Home = Yes Value of Services Rendered in the Home by the Taxpayer = No The cost of maintaining a household for head of household status includes expenditures for the mutual benefit of the occupants, e.g., food consumed in the home, rent, or real estate taxes. Not included is the value of services rendered in the home by the taxpayer or the rental value of a home owned by the taxpayer.

Question 45

Harold Thompson, a self-employed individual, had income transactions for Year 1 (duly reported on his return filed in April Year 2) as follows: In March Year 5, Thompson discovers that he had inadvertently omitted some income on his Year 1 return. He retains Mann, CPA, to determine his position under the statute of limitations. Mann should advise Thompson that the 6-year statute of limitations would apply to his Year 1 return only if he omitted from gross income an amount in excess of A. $20,000 B. $109,000 C. $29,000 D. $100,000

Answer 45

B. $109,000 The normal statute of limitations is 3 years after the return was filed. A 6-year statute of limitations applies if gross income omitted from the return exceeds 25% of gross income reported on the return. For a trade or business, gross income means the total of the amounts received from the sale of goods before deductions and cost of goods sold + Capital gains. (NOTE: There are other provisions in the tax laws where gross income includes a reduction for cost of goods sold.) The 6-year statute of limitations will apply if Thompson omitted from gross income an amount in excess of $109,000 [($400,000 + $36,000) × 25%].

Question 46

Which of the following is published by the IRS in the Internal Revenue Bulletin (IRB) when temporary guidance of a substantive or procedural nature is needed quickly? A. Citator. B. Delegation order. C. Announcement. D. Notice.

Answer 46

C. Announcement. Announcements are public pronouncements on matters of general interest, such as effective dates of temporary regulations, clarification of rulings, and form instructions. They are issued when guidance of a substantive or procedural nature is needed quickly.

Question 47

All of the following statements are true except A. A son, age 21, was a full-time student who earned $4,700 from his part-time job. The money was used to buy a car. Even though he earned $4,700, his parents can claim him as a dependent if the other dependency tests were met. B. If a married person files a separate return, (s)he cannot claim his or her spouse as a dependent even if the spouse had no gross income and was not the dependent of another taxpayer. C. A brother-in-law must live with the taxpayer the entire year to be claimed as a dependent even if the other tests are met. D. For each person claimed as a dependent, the Social Security number, adoption taxpayer identification number, or individual taxpayer identification number must be listed.

Answer 47

C. A brother-in-law must live with the taxpayer the entire year to be claimed as a dependent even if the other tests are met. The relationship requirement is satisfied by existence of an extended (by blood) or immediate (by blood, adoption, or marriage) relationship. The relationship need be present to only one of the two married persons who file a joint return. Any relationship established by marriage is not treated as ended by divorce or by death. An individual must satisfy either a relationship or a domicile requirement but does not have to satisfy both.

Question 48

Mr. W died early in the current year. Mrs. W remarried in December of the same year and therefore was unable to file a joint return with Mr. W. What is the filing status of the decedent, Mr. W? A. Married filing separate return. B. Head of household. C. Single. D. Married filing joint return.

Answer 48

A. Married filing separate return. Generally, a surviving spouse may file a joint return for himself or herself and the decedent. In that case, the decedent’s filing status on the final return would be married filing jointly. However, a joint return with the deceased spouse may not be filed if the surviving spouse remarried before the end of the year of the decedent’s death. In this case, the filing status of the deceased spouse is that of married filing separate return [Sec. 6013(a)(2)].

Question 49

Debbie’s husband died 2 years ago. Debbie correctly filed a married joint return for the tax year of his death. Debbie has not remarried and has two qualifying dependent children. What is Debbie’s filing status for the current year? A. Single. B. Qualifying surviving spouse. C. Married filing jointly. D. Head of household.

Answer 49

B. Qualifying surviving spouse. The qualifying surviving spouse status is available for 2 years following the year of death of the spouse if all of the following conditions are satisfied: 1. The taxpayer did not remarry during the tax year. 2. The surviving spouse qualified (with the deceased spouse) for married filing jointly return status for the tax year of the death of the spouse. 3. The qualifying surviving spouse maintains a household for the entire taxable year. Maintenance means the surviving spouse furnishes more than 50% of the costs to maintain the household for the tax year. The household must be the principal place of abode of a qualifying dependent of the surviving spouse. The dependent must be a son or daughter, a stepson or stepdaughter, or an adopted child. This does not include a foster child. (This is an exception to the general dependent rules.)

Question 50

The spouse of a married taxpayer died on January 15, Year 1. The taxpayer’s qualifying child moved to live with grandparents in their home on August 30, Year 2. If the taxpayer did not remarry before the end of Year 2, then which filing status should the taxpayer choose for Year 2? A. Married filing jointly. B. Qualifying surviving spouse. C. Married filing separately. D. Head of household.

Answer 50

D. Head of household. The qualifying surviving spouse status is available for 2 years following the year of death of the spouse if the following conditions are satisfied: 1. The taxpayer did not remarry during the tax year. 2. The surviving spouse qualified (with the deceased spouse) for married filing joint return status for the tax year of the death of the spouse. 3. A qualifying surviving spouse maintains a household for the entire taxable year. It is assumed (unless stated otherwise) that the married taxpayer can file a joint return in the tax year of the death of the spouse. Though the taxpayer did not remarry, the taxpayer’s qualifying child lived with the taxpayer for only 8 months of the year. The taxpayer therefore is ineligible for qualifying surviving spouse status.

Question 51

Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim’s widowed parent, Grant. For 2023, Dale, a 19-year-old, full-time college student, earned $6,850 as a bookkeeper. Kim, a 23-year-old bank teller, earned $14,350. Grant received $8,525 in dividend income and $7,525 in nontaxable Social Security benefits. Grant, Dale, and Kim are U.S. citizens and were over one-half supported by Jim and Kay. How many dependents can Jim and Kay claim on their 2023 joint income tax return? A. 5 B. 2 C. 3 D. 1

Answer 51

D. 1 Kim does not qualify as a dependent because she had gross income in excess of $4,700 in 2023. Although a parent can also qualify as a dependent, Grant has gross income in excess of $4,700 and therefore cannot be claimed. The gross income test does not apply to a person such as Dale, who is a child of the claimant, under age 24, and a full-time student. Jim and Kay cannot claim themselves. Thus, only Dale qualifies. Dale is a dependent because he is a child of the claimant under age 24 and a full-time student.

Question 52

When should a noncorporate taxpayer elect to forgo Sec. 179 or elect out of bonus depreciation deductions in the current year? A. When the taxpayer has low marginal tax rates in the current year and expects to be in higher marginal rates in the future. B. When the taxpayer expects lower rates in the future. C. When the taxpayer has high marginal tax rates in the current year and expects to be in lower marginal rates in the future. D. When the taxpayer expects net operating losses in the future.

Answer 52

A. When the taxpayer has low marginal tax rates in the current year and expects to be in higher marginal rates in the future. If a taxpayer has high marginal tax rates in future years and expects to have lower marginal rates in the current year, the taxpayer should forgo Sec. 179 or bonus depreciation deductions in the current year, leaving larger depreciation deductions for future years with high marginal tax rates. This will result in a smaller total tax liability.

Question 53

With regard to revenue rulings and revenue procedures, which of the following statements is false? A. A revenue procedure is a published official statement of procedure that either affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code and related statutes and regulations or, if not necessarily affecting the rights and duties of the public, should be a matter of public knowledge. B. A revenue ruling is a published official interpretation of tax law by the IRS that sets forth the conclusion of the IRS on how the tax law is applied to an entire set of facts. C. Revenue rulings have the force and effect of Treasury Regulations. D. Revenue procedures do not have the force of law, but they may be cited as precedent.

Answer 53

C. Revenue rulings have the force and effect of Treasury Regulations. While Treasury regulations have the same force and effect of law, revenue rulings are merely published to provide precedents.

Question 54

Ms. W, who is single, determined that her total tax liability for Year 2 would be $10,000. W is required to make estimated tax payments if A. Her Year 1 tax liability was $12,000 and her Year 2 income tax withholding will be $9,000. B. Her Year 1 tax liability was $12,000 and her Year 2 income tax withholding will be $9,750. C. Her Year 1 tax liability was $5,000 and her Year 2 income tax withholding will be $9,750. D. Her Year 1 tax liability was $9,000 and her Year 2 income tax withholding will be $8,500.

Answer 54

D. Her Year 1 tax liability was $9,000 and her Year 2 income tax withholding will be $8,500. The annual estimated payment that must be made is equal to the lesser of (1) 90% of the tax for the current year, or (2) 100% of the tax for the prior year. Assuming Ms. W’s tax liability for Year 2 is $10,000 and her Year 1 tax liability was $9,000, the $8,500 withheld from her Year 2 wages does not meet the required annual estimated payment.

Question 55

Under Treasury Circular 230, in which of the following situations is a CPA prohibited from giving written advice concerning one or more federal tax issues? A. The CPA takes into consideration assumptions about future events related to the relevant facts. B. The CPA reasonably relies upon representations of the client. C. The CPA takes into account the possibility that a tax return will not be audited. D. The CPA considers all relevant facts that are known.

Answer 55

C. The CPA takes into account the possibility that a tax return will not be audited. Written advice cannot rely upon representations, statements, findings, or agreements that are unreasonable, i.e., that are known to be incorrect, inconsistent, or incomplete. Also, written advice cannot consider the possibility that either a tax return will not be audited or the matter in question will not be raised during an audit. In other words, a practitioner cannot base a written opinion on the likelihood of not being “caught.” Therefore, a CPA is prohibited from providing written advice when the CPA takes into account the possibility that a tax return will not be audited.

Question 56

A CPA may be disbarred or suspended from IRS practice for which of the following conduct? A. Criminal conviction of an offense under the Internal Revenue Code. B. All of the answers are correct. C. Disbarment or suspension from practice as an attorney, CPA, accountant, or actuary. D. Misappropriation of funds received from a client for the purpose of tax payments.

Answer 56

B. All of the answers are correct.

Question 57

Which of the following statements is false regarding tax return preparers? A. Unpaid preparers, such as volunteers who assist low-income individuals, are not considered to be preparers for purposes of preparer penalties. B. The preparation of a substantial portion of a return for compensation is treated as the preparation of that return. C. An employee who prepares the return of his or her employer does not meet the definition of a tax preparer. D. Only a person who signs a return as the preparer may be considered the preparer of the return.

Answer 57

D. Only a person who signs a return as the preparer may be considered the preparer of the return. Under Sec. 7701(a)(36), a tax return preparer is any person who prepares for compensation, or employs others to prepare for compensation, any tax return or claim for refund under Title 26. A person who prepares a substantial portion of a return is considered a preparer even though someone else may be required to sign the return.

Question 58

Under the common law, which of the following statements is generally true regarding the liability of a CPA who negligently prepares a client’s tax return? A. The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion. B. The CPA is liable only to the client. C. The CPA is liable to all possible foreseeable users of the CPA’s opinion. D. The CPA is liable only to those third parties who are in privity of contract with the CPA.

Answer 58

A. The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion. Nearly all American courts once followed the landmark case of Ultramares v. Touche. The Ultramares rule limits a CPA’s liability to persons in privity of contract with the accountant. Under Ultramares, only clients and primary beneficiaries of the engagement are permitted to sue the CPA. Currently, most courts 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 59

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. Win because Third was contributorily negligent in granting the loan. D. Lose because Hark knew that banks would be relying on the financial statements.

Answer 59

A. Win because Hark and Third were not in privity of contract. 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 60

All of the following are considered examples of disreputable conduct for which a CPA can be disbarred or suspended except A. Directly or indirectly attempting to influence the official action of any employee of the Internal Revenue Service by use of threats or false accusations or by bestowing any gift, favor, or thing of value. B. Knowingly aiding and abetting another person to practice before the Internal Revenue Service during a period of suspension or disbarment. C. Failure to timely pay personal income taxes. D. Misappropriation or failure to remit funds received from a client for the purpose of payment of taxes or other obligations due the United States.

Answer 60

C. Failure to timely pay personal income taxes. 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. Failure to timely pay personal income taxes is not disreputable conduct under Sec. 10.51 of Circular 230.

Question 61

In which of the following circumstances does the 3-year statute of limitations on additional tax assessments apply? A. A taxpayer willfully attempts to evade tax in filing income tax returns. 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. The IRS files a substitute income tax return when it learns that a taxpayer failed to file a return.

Answer 61

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. The statute of limitations is 6 years if there is omission of items of more than 25% of gross income stated in the return. Gross income includes gross receipts before deductions for cost of goods sold. Only items completely omitted are counted.

Question 62

With regard to the statute of limitations, all of the following statements apply to requests to extend the statute. All of the statements are true except A. The 10-year collection period may not be extended after it has expired, even if there has been a levy on any part of the taxpayer’s property prior to the expiration and the extension is agreed to in writing before the levy is released. B. Each time an extension is requested, the IRS must notify the taxpayer that the taxpayer may refuse to extend the period of limitations or may limit the extension to particular issues or to a particular period of time. C. An omission of items of more than 25% of gross income extends the assessment period to 6 years. D. If tax has been assessed within the 3-year limitation period, the IRS generally has 10 years following the assessment to collect the tax by levy or in a court proceeding.

Answer 62

A. The 10-year collection period may not be extended after it has expired, even if there has been a levy on any part of the taxpayer’s property prior to the expiration and the extension is agreed to in writing before the levy is released. The period of limitations on collection after assessment of any tax may be extended after the expiration thereof if there has been a levy on part of the taxpayer’s property prior to such expiration and if the extension is agreed upon in writing prior to a release of the levy.

Question 63

Which of the following is the best defense a CPA firm can assert in a suit for common law fraud resulting from preparation of a tax return? A. Lack of privity. B. Contributory negligence on the part of the client. C. Lack of scienter. D. A disclaimer contained in the engagement letter.

Answer 63

C. Lack of scienter. Fraud consists of a material misrepresentation made with scienter and an intent to induce reliance. The misrepresentation also must have caused damage to a defendant who reasonably relied upon it. Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth. The CPA firm’s best defense is that the plaintiff failed to prove an element of the fraud claim, i.e., scienter.

Question 64

A CPA who fraudulently performs a professional service will A. Probably be liable to the corporation even though its management was aware of the fraud and did not rely on the material misrepresentation. B. Probably be liable to any person who suffered a loss as a result of the fraud. C. Be liable only to the corporation and to third parties who are members of a class of intended users of the financial statements. D. Be liable only to third parties in privity of contract with the CPA.

Answer 64

B. Probably be liable to any person who suffered a loss as a result of the fraud. Because fraud involves moral corruption, the courts permit all reasonably foreseeable users of an accountant’s work product to bring suit. The distinctive feature of fraud is scienter, that is, intentional misrepresentation or reckless disregard for the truth (sometimes found in gross negligence).

Question 65

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. Breach of the accountant’s duty of care and loss. C. Willful misrepresentation and breach of the accountant’s duty of care. D. Scienter.

Answer 65

B. 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 66

On April 15, 2024, a married couple filed their joint 2023 calendar-year return showing gross income of $120,000. Their return had been prepared by a professional tax preparer who mistakenly omitted $45,000 of income, which the preparer in good faith considered to be nontaxable. No information with regard to this omitted income was disclosed on the return or attached statements. By what date must the Internal Revenue Service assert a notice of deficiency before the statute of limitations expires? A. December 31, 2029. B. April 15, 2030. C. December 31, 2026. D. April 15, 2027.

Answer 66

B. April 15, 2030. If an omission in excess of 25% of gross income stated in the return occurs, the statute of limitations for assessment is 6 years from the date the return was filed (or the due date, if later). This applies even if the omission is made in good faith.

Question 67

Under state law, which of the following statements most accurately reflects the liability of a CPA who fraudulently prepares a client’s tax return? A. The CPA is liable only to known users of the financial statements. B. The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion. C. The CPA is liable only to third parties in privity of contract with the CPA. D. The CPA probably is liable to any person who suffered a loss as a result of the fraud.

Answer 67

D. The CPA probably is liable to any person who suffered a loss as a result of the fraud. Because fraud involves intentional wrongdoing, the courts permit all foreseeable users of an accountant’s work product to sue for damages proximately caused by the fraud.

Question 68

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

Answer 68

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 69

To which of the following parties will a CPA be liable if the CPA fraudulently issues an unqualified opinion on a corporation’s materially misstated financial statements?

Answer 69

B. Corporate shareholders = Yes Corporate bondholders = Yes In some states, if the CPA has not contracted to perform for the third party, (s)he is not liable to that third party for negligence. Lack of privity is a defense. However, reckless departure from the standards of due care is treated as a form of constructive fraud and results in liability to foreseeable third parties that may be unknown to the CPA. Thus, corporate shareholders and corporate bondholders are foreseen and reasonably foreseeable third parties.

Question 70

Fact Pattern: Brown & Co., CPAs, prepared tax returns for its client, King Corp. Based on the strength of King’s tax returns, Safe Bank lent King $500,000. Brown was unaware that Safe would receive a copy of the tax returns or that they would be used in obtaining a loan by King. King defaulted on the loan. Safe commences an action for common law negligence against Brown. If Brown is able to prove that it prepared the returns in accordance with standards applicable to preparers, Brown will A. Not be liable because the conclusive presumption is that following applicable standards is the equivalent of acting reasonably and with due care. B. Be liable because Safe relied on the financial statements. C. Be liable because the statute of frauds has been satisfied. D. Not be liable because Safe was not a foreseen user.

Answer 70

D. Not be liable because Safe was not a foreseen user. The CPAs could not be held liable for fraud or gross negligence because they prepared the returns in accordance with standards applicable to preparers. Gross negligence or fraud involves an intentional or reckless failure to exercise due care, but adherence to the applicable standards of conduct for a reasonable person in the circumstances indicates at least a good faith effort to apply professional standards. Thus, the CPAs are liable at most for ordinary negligence. In most jurisdictions, however, a party who is merely a reasonably foreseeable user and not (1) a foreseen user, (2) a member of a class of foreseen users, or (3) in privity of contract or a primary beneficiary will have no standing to bring suit for ordinary negligence.

Question 71

Richard Baker filed his Year 1 individual income tax return on April 15, Year 2. On December 31, Year 2, he learned that 100 shares of stock that he owned had become worthless in Year 1. Since he did not deduct this loss on his Year 1 return, Baker intends to file a claim for refund. This refund claim must be filed no later than April 15 of which year (assuming no relevant days are Saturdays, Sundays, or holidays)? A. Year 3. B. Year 5. C. Year 9. D. Year 8.

Answer 71

C. Year 9. A 7-year period of limitation for filing a refund claim is allowed if the overpayment of tax is due to losses from worthless securities, where the fact of worthlessness is discovered after filing the original return. The period of limitation is 7 years from the date prescribed for filing the return for the year with respect to which the claim is made.

Question 72

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

Answer 72

D. 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 73

A company engaged a CPA to perform an audit of the company’s financial statements for Year 2 in order to apply for a bank loan. After the bank made the loan, it was discovered that the company’s assets had been materially overstated. The overstatement was not discovered as part of the CPA’s audit procedures. If the company defaulted on the loan and the case occurred in a jurisdiction that follows the Restatement rule, then the CPA could have liability to which of the following? A. The company, but not the bank. B. The bank, but not the company. C. Neither the bank nor the company. D. Both the bank and the company.

Answer 73

D. Both the bank and the company. An accountant may be liable for losses caused by the accountant’s negligence. Ordinary negligence may result from an accountant’s act or failure to act given a duty to act, for example, failing to observe inventory or confirm receivables. Thus, an accountant has a duty to exercise reasonable care and diligence. Accountants may be liable for failure to communicate to the client findings or circumstances that indicate misstatements in the accounting records or fraud.

Question 74

An individual received $50,000 during the current (2023) year pursuant to a pre-2019 divorce decree. A check for $25,000 was identified as annual alimony, checks totaling $10,000 were identified as annual child support, and a check for $15,000 was identified as a property settlement. What amount should be included in the individual’s gross income? A. $25,000 B. $40,000 C. $50,000 D. $0

Answer 74

A. $25,000 For pre-2019 divorces, alimony is gross income to the recipient and deductible by the payor. Alimony is payment in cash, paid pursuant to a written divorce decree, not designated as other than alimony (e.g., child support), terminated at death of recipient, not paid to a member of the same household, and not paid to a spouse with whom the taxpayer is filing a joint return. Child support and property settlement payments are not alimony. Thus, the $25,000 of alimony is included in gross income.

Question 75

Roberta Warner and Sally Roger formed the Acme Corporation on October 1, 2023. On the same date Warner paid $75,000 cash to Acme for 750 shares of its common stock. Simultaneously, Roger received 100 shares of Acme’s common stock for services rendered. How much should Roger include as taxable income for 2023, and what will be the basis of her stock?

Answer 75

Taxable Income = $10,000 Basis of Stock = $10,000 The IRC provides that if property is received in exchange for the performance of services, the excess of the fair market value of such property over the amount paid for such property is included in gross income. Since Roger did not pay anything for the stock, the fair market value of the stock ($10,000) is included in her gross income as payment (revenue) for her services. The basis of property is its “tax cost basis,” the amount paid for the property ($0) increased by the amount which was included in income ($10,000). Therefore, Roger’s basis in the stock is her tax cost of $10,000.

Question 76

During 2023, Adler had the following cash receipts: What is the total amount that must be included in gross income on Adler’s 2023 income tax return? A. $18,000 B. $19,900 C. $19,500 D. $18,400

Answer 76

C. $19,500 The IRC specifically includes wages and unemployment compensation as gross income. Furthermore, the IRC excludes from gross income interest on most obligations of states or political subdivisions of a state (e.g., municipal bonds). Interest on state and local government obligations is specifically excluded from gross income.

Question 77

Baker, an unmarried individual, sold a personal residence, which has an adjusted basis of $70,000, for $165,000. Baker owned and lived in the residence for 7 years. Selling expenses were $10,000. Four weeks prior to the sale, Baker paid a handyman $1,000 to paint and fix-up the residence. What is the amount of Baker’s recognized gain? A. $0 B. $84,000 C. $85,000 D. $95,000

Answer 77

A. $0 While the correct amount of realized gain is $85,000, Sec. 121 excludes the gain on the sale of a principal residence, up to $250,000 per taxpayer, subject to certain rules and limitations. As none of the facts would lead us to reduce this exclusion, no gain is recognized on the disposition of the home.

Question 78

In 2023, Joan accepted and received a $10,000 award for outstanding civic achievement. Joan was selected without any action on her part, and no future services are expected of her as a condition of receiving the award. What amount should Joan include in her 2023 gross income in connection with this award? A. $4,000 B. $0 C. $5,000 D. $10,000

Answer 78

D. $10,000 Prizes and awards made primarily in recognition of charitable, scientific, educational, etc., achievement are excluded from gross income only if the recipient was selected without any action on his or her part, is not required to render substantial future services as a condition of receiving the prize or award, and assigns it to charity. Thus, Joan cannot exclude any amount of the $10,000 award from gross income since she failed to assign it to charity.

Question 79

Cassidy, an individual, reported the following items of income and expense during the current year (2023): What is the amount of Cassidy’s adjusted gross income? A. $50,000 B. $125,000 C. $115,000 D. $40,000

Answer 79

D. $40,000 The inheritance and proceeds for physical injury are excluded from gross income.

Question 80

With regard to the inclusion of Social Security benefits in gross income for the 2023 tax year, which of the following statements is true? A. The Social Security benefits in excess of the modified adjusted gross income over $32,000 are included in gross income. B. 85% of the Social Security benefits is the maximum amount of benefits to be included in gross income. C. The Social Security benefits in excess of modified adjusted gross income are included in gross income. D. The Social Security benefits in excess of one-half the modified adjusted gross income are included in gross income.

Answer 80

B. 85% of the Social Security benefits is the maximum amount of benefits to be included in gross income. For 2023, the taxable portion of Social Security benefits will depend upon the amount of provisional income in relation to the base amount and the adjusted base amount. If provisional income exceeds the adjusted base amount, then up to 85% of Social Security benefits may be taxable.

Question 81

Barkley owns a vacation cabin that was rented to unrelated parties for 10 days during the year for $2,500. The cabin was used by Barkley for 3 months and left vacant for the rest of the year. Expenses for the cabin were as follows. How much real income (loss) is included in Barkley’s adjusted gross income? A. $0 B. $(1,500) C. $500 D. $(500)

Answer 81

A. $0 The IRC states that income from rental of a personal dwelling is excluded from income if rented for less than 15 days during the year. In addition, no deductions are allowed for rental use if rented for less than 15 days during the year.

Question 82

Which payment(s) is(are) included in a recipient’s gross income? A. Neither I nor II. B. I only. C. Both I and II. D. II only.

Answer 82

C. Both I and II. Payments made to graduate students in return for services performed, including teaching and research, must be included in gross income. Only payments that are used for required tuition, fees, books, supplies, or equipment are excluded from gross income.

Question 83

Randolph is a single individual who always claims the standard deduction. Randolph received the following in the current year: What is Randolph’s gross income? A. $22,000 B. $32,000 C. $28,425 D. $32,425

Answer 83

B. $32,000 Wages, unemployment compensation, and fully taxable pension distributions are all included in gross income. Since Randolph always claims the standard deduction, he would not take the deduction for state taxes paid and would not have to include the refund in this year’s gross income.

Question 84

Sam and Ann Hoyt filed a joint federal income tax return for the calendar year 2023. Among the Hoyts’ cash receipts during 2023 was the following: $6,000 first installment on a $75,000 life insurance policy payable to Ann in annual installments of $6,000 each over a 15-year period, as beneficiary of the policy on her uncle, who died in 2022. What portion of the $6,000 installment on the life insurance policy is excludable from 2023 gross income in arriving at the Hoyts’ adjusted gross income? A. $0 B. $1,000 C. $5,000 D. $6,000

Answer 84

C. $5,000 Proceeds under a life insurance contract paid by reason of death of the insured are excluded from gross income. But the amount of each payment in excess of the death benefit prorated over the period of payment ($75,000 ÷ 15 years = $5,000 per year) is interest income ($6,000 – $5,000), which is included in gross income.

Question 85

Clark filed Form 1040 for the 2022 taxable year and claimed the standard deduction. In July 2023, Clark received a state income tax refund of $900, plus interest of $10, for overpayment of 2022 state income tax. What amount of the state tax refund and interest is taxable in Clark’s 2023 federal income tax return? A. $0 B. $10 C. $900 D. $910

Answer 85

B. $10 Interest on state income tax refunds is not excludable. It is expressly included in gross income.

Question 86

Charles and Marcia are married cash-basis taxpayers. In 2023, they had interest income as follows: What amount of interest income is taxable on Charles and Marcia’s 2023 joint income tax return? A. $500 B. $1,100 C. $1,900 D. $2,900

Answer 86

C. $1,900 Interest income on most obligations of states or political subdivisions of a state (e.g., municipal bonds) is excluded from gross income.

Question 87

Willie Smith was injured during the year and was not able to work due to his injury and the associated emotional distress. Willie received the following payments during the year: Willie has paid the premiums for all of his policies and has not taken any deductions for the medical expenses. The total amount of compensation for injury that Willie may exclude from gross income is A. $3,500 B. $17,500 C. $5,500 D. $12,500

Answer 87

D. $12,500 Gross income does not include benefits specified that might be received in the form of disability pay, health or accident insurance proceeds (even if the benefits are a substitute for lost income), workers’ compensation awards, or other damages for personal physical injury or physical sickness. Also excluded are damages received for emotional distress if an injury has its origin in a physical injury or physical sickness (regardless of whether the damages are received by a lawsuit or an agreement). However, punitive damages received are includible in gross income even if in connection with a physical injury or physical sickness. Thus, Willie may exclude $12,500 from gross income ($3,500 + $7,000 + $2,000).

Question 88

Robbie, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $15,000, consisting of $10,000 of state income taxes and $5,000 of investment interest, paid last year. Robbie’s itemized deduction amount, which exceeded the standard deduction available to single taxpayers for last year by $1,150, was fully deductible, and it was not subject to any limitations or phase-outs. In the current year, Robbie received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund? A. Include $1,150 in income in the current year. B. Include none of the refund in income in the current year. C. Amend the prior year’s return and reduce the claimed itemized deductions for that year. D. Include $1,500 in income in the current year.

Answer 88

A. Include $1,150 in income in the current year. Gross income includes items received for which the taxpayer received a tax benefit in a prior year, but amounts recovered during the tax year that did not provide a tax benefit in the prior year are excluded. Since Robbie’s itemized deduction amount for the previous year exceeded the standard deduction available to him by $1,150, Robbie only received a tax benefit for that amount and therefore must only include $1,150 of the tax refund in income for the current year.

Question 89

As a result of a fire, Sam had to vacate his apartment for a month and move to a motel. His rent for the apartment had been $600 per month. No rent was charged for the month the apartment was vacated. His motel rent for this month was $1,000. He normally pays $200 a month for food, but food expenses for the month he lived in the motel were $500. He received $1,100 from his insurance company to cover his living expenses. Based on this information, determine the amount, if any, he must include in income. A. $400 B. None of the answers are correct. C. $0 D. $300

Answer 89

A. $400 A taxpayer whose residence is damaged or destroyed and who must temporarily occupy another residence can exclude from gross income any insurance payment received as reimbursement for living expenses during such period. This exclusion is limited to the excess of actual living expenses incurred by the taxpayer, $1,500 ($1,000 rent + $500 food) over the normal living expenses of $800 ($600 rent + $200 food) the taxpayer would have incurred during the period, or $700 ($1,500 – $800). The exclusion covers additional costs incurred in renting suitable housing and any extraordinary expenses for transportation, food, and miscellaneous items. The amount of the reimbursement included in income is $400 ($1,100 reimbursement – $700 exclusion).

Question 90

Blake, a single individual, age 67, had a 2023 adjusted gross income of $60,000 exclusive of Social Security benefits. Blake received Social Security benefits of $8,400 and interest of $1,000 on tax-exempt obligations during 2023. What amount of Social Security benefits must be included in Blake’s 2023 taxable income? A. $7,140 B. $0 C. $4,200 D. $8,400

Answer 90

A. $7,140 Provisional income [$65,200 ($60,000 AGI + 1/2 of $8,400 SS benefits + $1,000 tax-exempt interest)] exceeded the adjusted base amount ($34,000) by $31,200. Since 85% of this excess plus 50% of Social Security benefits equals $30,720 ($26,520 + $4,200), which exceeds 85% of the total Social Security benefits ($7,140), the latter amount is included.

Question 91

During the year, Barbra Carrey received an inheritance of $20,000 and a $500 gift from her employer. What amount of gifts received should Barbra include in her income tax return? A. $0 B. $20,500 C. $500 D. $20,000

Answer 91

C. $500 A gift is a transfer for less than full or adequate consideration which results from the detached and disinterested generosity of the transferor. The IRC provides for exclusion from the gross income of the recipient the value of property acquired by gift. Gift transfers include inter vivos gifts and gifts by bequest, devise, and inheritance. However, voluntary transfers from employer to employee are presumed to be compensation, not gifts. Accordingly, the $500 gift from Barbra’s employer must be included in her income tax return.

Question 92

Jose started renting a house to Bill for $600 per month beginning February 1, 2023. Bill paid $1,200 on January 15, 2023, which included one month’s rent and one month’s security deposit. The rent is due by the 5th of the month. The lease specifies that the security deposit will also be used as the final month’s rent. Bill pays the rent on the 2nd of each month. Bill also paid $150 for repairs to the air-conditioning system in July and $80 for a roof repair in September. He deducted the amounts from the rent paid to Jose for those months. Bill was unable to pay December’s rent until January of the next year. How much should Jose report as rental income for 2023? A. $7,200 B. $6,000 C. $6,600 D. $6,900

Answer 92

C. $6,600 Income, although not actually in a taxpayer’s possession, is constructively received in the taxable year during which it is credited to his or her account, set apart for him or her, or otherwise made available so that (s)he may draw upon it at any time, or so that (s)he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions. The last month’s rent ($600 security deposit) has been constructively received and is included; however, the rent received in January for December rent has not been constructively received and is not included for a total of $6,600 [$600 deposit/last month rent + ($600 × 10 months Feb-Nov)].

Question 93

During the current year, Hal Leff sustained a serious injury in the course of his employment. As a result of this injury, Hal received the following payments during the year: The amount to be included in Hal’s gross income for the current year should be A. $1,800 B. $0 C. $12,200 D. $8,000

Answer 93

D. $8,000 The IRC excludes from gross income compensation for personal physical injuries and physical sickness whether received as workers’ compensation benefits, accident or health insurance benefits, or as damages received by suit or agreement. The IRC exclusion does not apply to any punitive damages received by suit or agreement, even if in connection with a physical injury or physical sickness. Therefore, the $8,000 punitive damages should be included in Hal’s gross income.

Question 94

In which of the following situations will a controlled foreign corporation located in Ireland be deemed to have Subpart F income? A. Services are performed in Ireland by the Irish company under a contract entered into by its U.S. parent. B. Property is produced in Ireland by the Irish company and sold outside its country of incorporation. C. Services are provided by an Irish company in England under a contract entered into by its U.S. parent. D. Property is bought from the controlled foreign corporation’s U.S. parent and is sold by an Irish company for use in an Irish manufacturing plant.

Answer 94

C. Services are provided by an Irish company in England under a contract entered into by its U.S. parent. Section 954 of Subpart F defines foreign base company income (which is a component of Subpart F income) as including foreign base company services income. Foreign base company services income is income derived from the performance of a service of a skill on behalf of a related party and performed outside of the country of incorporation of the foreign subsidiary. Taxing Subpart F income ensures that companies cannot defer income tax by setting up corporations in low tax jurisdictions. Flowing the money into Ireland’s low tax jurisdiction for service performed in England’s higher tax jurisdiction creates Subpart F income.

Question 95

Which of the following conditions must be present in a post-1984 but pre-2019 divorce agreement for a payment to qualify as deductible alimony? A. I only. B. II only. C. Both I and II. D. Neither I nor II.

Answer 95

C. Both I and II. In order for payments to qualify as deductible alimony, they must meet all of the following requirements: 1. Paid in cash 2. Paid pursuant to a written divorce or separation instrument 3. Not designated as other than alimony 4. Terminated at death of recipient 5. Not paid to a member of the same household 6. Not paid to a spouse with whom the taxpayer is filing a joint return

Question 96

Rachel Robinson, age 52, receives a $500 per month annuity from her pension plan. The annuity started January 1, 2023. Her contributions to the plan totaled $39,600. The number of anticipated monthly payments is 360. What is Rachel’s nontaxable part of the annuity payment? A. The full amount received until the original cost of the annuity has been recovered. B. The investment in the contract divided by the number of anticipated monthly payments. C. Any amount received once the original cost of the annuity has been recovered. D. One-half of each payment.

Answer 96

B. The investment in the contract divided by the number of anticipated monthly payments. Taxpayers are permitted to recover the cost of the annuity (the price paid) tax free. A simplified method for qualified retirement plan (employee) annuities is available if the annuity start date is after November 18, 1996. The nontaxable portion of an annuity is calculated by dividing the investment in the contract, as of the annuity starting date, by the number of anticipated monthly payments.

Question 97

George Black is single and files Form 1040 for 2023. He received the following income in 2023: George also received Social Security benefits during 2023. Form SSA-1099 shows $5,980 in box 5, Net Benefits for 2023. How much of George’s Social Security is taxable? A. $5,980 B. $4,700 C. $2,990 D. $6,980

Answer 97

C. $2,990 If the sum of the “modified” adjusted gross income plus one-half of Social Security benefits exceeds $25,000 but does not exceed $34,000, part of the Social Security benefits will be included in gross income. Modified adjusted gross income equals adjusted gross income plus tax-exempt interest. The includible portion of Social Security benefits is the lesser of one-half of the Social Security benefits or one-half of the excess as noted above. George would include $2,990 since it is less than one-half of the excess.

Question 98

A painter and an accountant agree to trade their services. The painter provides services valued at $550, and the accountant provides services worth $500. What amount should the accountant report as income or expense? A. $50 income. B. $550 income. C. $50 expense. D. $500 income.

Answer 98

B. $550 income. The amount of $550 would be the amount of income reported by the accountant. Bartered services or goods are included in gross income at the fair market value of the item(s) received in exchange for the services.

Question 99

Mary Martinson is a CPA. One of her clients is suing her for common law negligence, alleging that she failed to follow federal tax law when preparing the current year’s tax return. Which of the following statements is true? A. Martinson cannot incur tort liability if she has committed criminal tax fraud. B. Martinson is not bound by federal tax law unless she is a member of the AICPA. C. If Martinson failed to follow federal tax law, she would undoubtedly be found to have committed the tort of fraud. D. Martinson’s failure to follow federal law results in tort liability.

Answer 99

D. Martinson’s failure to follow federal law results in tort liability. A CPA is a professional who must adhere to professional standards of care in the performance of his or her work. A CPA must perform in accordance with that degree of accounting knowledge and skill expected of an ordinary reasonable person who is a CPA. Whether the CPA has met the required standard is partly determined by compliance with (1) generally accepted auditing standards (GAAS), (2) PCAOB standards in a public-company audit, (3) other applicable auditing standards, or (4) statutes that establish the standard of conduct for a reasonable person. Failure to follow such standards results in liability for damages proximately caused by his or her negligence.

Question 100

A CPA firm acts with scienter in all the following circumstances except when the firm A. Intentionally disregards the truth. B. Has actual knowledge of fraud. C. Negligently performs a professional service. D. Intends to gain monetarily by concealing fraud.

Answer 100

C. Negligently performs a professional service. Fraud consists of a material misrepresentation made with scienter and an intent to induce reliance. The misstatement also must have caused damage to a defendant who reasonably relied upon it. Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth. Negligence, however, requires no wrongful intent.

Question 101

Trish Durwood works for a small retail-clothing store. She earned $26,000 in wages during the entire calendar year. Because of a cash flow problem in April, Trish did not receive her $500 weekly check but instead was given a credit of $500 toward clothing purchased for her family. How much income should be shown on her Form W-2 and reported on her Form 1040? A. $25,500 B. $26,500 C. $26,000 D. $25,000

Answer 101

C. $26,000 The $500 applied to Trish’s account is not additional compensation. It is compensation in lieu of receiving her paycheck.

Question 102

With regard to revenue rulings and revenue procedures, which of the following statements is false? A. Revenue procedures do not have the force of law, but they may be cited as precedent. B. A revenue ruling is a published official interpretation of tax law by the IRS that sets forth the conclusion of the IRS on how the tax law is applied to an entire set of facts. C. Revenue rulings have the force and effect of Treasury Regulations. D. A revenue procedure is a published official statement of procedure that either affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code and related statutes and regulations or, if not necessarily affecting the rights and duties of the public, should be a matter of public knowledge.

Answer 102

C. Revenue rulings have the force and effect of Treasury Regulations. While Treasury regulations have the same force and effect of law, revenue rulings are merely published to provide precedents.

Question 103

With regard to the alimony deduction in connection with a 2018 divorce, which one of the following statements is true? A. The divorced couple may be members of the same household at the time alimony is paid, provided that the persons do not live as husband and wife. B. Alimony is deductible by the payor spouse, and includible by the payee spouse, to the extent that payment is contingent on the status of the divorced couple’s children. C. Alimony may be paid either in cash or in property. D. Alimony payments must terminate on the death of the payee spouse.

Answer 103

D. Alimony payments must terminate on the death of the payee spouse. Payments to a former spouse under a pre-2019 divorce decree are treated as alimony if made in cash and if the divorce decree does not designate the payments as other than alimony and the payments are deductible by the payor. If payments are required to continue after the death of the recipient spouse, however, they are not alimony.