Module 8 Tax Law Compliance and Procedures Flashcards
Mary reported an income tax liability of $50,000 (on AGI of $300,000) on her tax return for 2022. This year, Mary expects to have an income tax liability of $60,000. She also has estimated that the amount of income tax withheld from her wages will total $35,000. What minimum amount of estimated tax payments must Mary pay (in equal quarterly installments) for 2023?
A)
$0
B)
$15,000
C)
$19,000
D)
$20,000
c
The required annual payment (since the prior-year AGI is greater than $150,000) is the lesser of:
90% of the current year tax ($60,000 x .90 = $54,000), OR
110% of the tax shown in the preceding year ($50,000 x 1.10 = $55,000)
reduced by the withholding of $35,000.
Thus, $54,000 reduced by the withholding of $35,000 equals $19,000.
LO 8.2.3
Primary sources of tax information
A)
consist of periodicals and newsletters.
B)
are opinions, but useful in understanding tax law.
C)
are authoritative sources for use in tax planning.
D)
have no use for a tax planner.
c
The statutory law and its official interpretations, referred to as primary sources, are the legal authorities that set forth the tax consequences for a particular set of facts. Secondary sources of tax information consist mainly of books, periodicals, articles, newsletters, and editorial judgments published by tax services and are unofficial interpretations—mere opinions—which have no legal authority; although, they are an indispensable aid when seeking an understanding of the tax law.
LO 8.1.1
Melanie has city income taxes of $800 and state income taxes of $1,000 withheld from her paycheck last year. She deducted these amounts on her income tax return for last year. This year, Melanie received a refund from the state for $200 due to an overpayment of the state tax. What is the proper tax treatment of the refund this year?
A)
Melanie must reduce the amount she deducts for state income taxes in the current year by the $200 refund.
B)
Melanie need not take any action because refunds are not income.
C)
The $1,000 deducted last year must be included as income in the current year.
D)
Melanie must include $200 in her gross income this year.
d
The tax benefit rule or doctrine converts an otherwise nontaxable receipt—in this case, the $200 state income tax refund—into taxable income. Melanie received a tax benefit by deducting the state income taxes the prior year, and any portion refunded to her would be taxable in the year it is received.
LO 8.2.3
Disclosing or using client information given to a tax preparer may result in which one of the following maximum penalties?
A)
100% penalty
B)
50% tax penalty
C)
Closure of business
D)
Imprisonment for up to one year
d
Disclosing or otherwise using any client information given to a tax return preparer pursuant to the preparation of a tax return is a crime for which the preparer may be imprisoned for up to one year.
LO 8.2.1
If an employer fails to withhold Social Security and federal income taxes from employee paychecks, what is the percentage penalty that is imposed by the IRS?
A)
50%
B)
25%
C)
100%
D)
75%
c
Employers are required to withhold amounts from an employee’s paycheck for Social Security taxes and federal income taxes. If the employer fails to do so or fails to pay such amounts to the IRS, they or any other responsible person will be subject to the 100% penalty, which is simply having to pay 100% of the amount they should have collected, accounted for, and paid; they are not subject to any additional penalty.
LO 8.2.1
When the IRS assesses interest on the underpayment of income taxes by a taxpayer, when does the interest begin to be calculated?
A)
From the extended due date of the income tax return
B)
From the day the IRS contacts the taxpayer
C)
From the taxpayer’s tax year ending date
D)
From the original due date of the income tax return
d
Interest on underpayments (or overpayments) runs from the unextended due date of the tax return (i.e., April 15 of any given year if the individual taxpayer has a calendar tax year).
LO 8.2.3
Which one of the following is NOT a main source of federal tax revenue?
A)
Individual income taxation
B)
Payroll taxation
C)
Corporate income taxation
D)
Sales taxation
d
The three main sources of federal tax revenue are individual income taxes, corporate income taxes, and payroll taxes; sales taxation is used by states, not the federal government.
LO 8.1.2
Last year, Soleyah deducted $21,500 of itemized deductions. In the current year, she received a state income tax refund of $465. The $465 may be taxable income in the current year.
Which of the following tax doctrines may subject the refund to taxation?
A)
Tax benefit rule
B)
Step transaction doctrine
C)
Assignment of income doctrine
D)
Substance over form doctrine
a
This rule converts otherwise nontaxable receipts into taxable income. The most common example is when a taxpayer is reimbursed in a subsequent year for medical expenses paid and deducted in a previous year.
LO 8.1.2
Which one of the following provides the least amount of federal revenue from IRS taxation?
A)
Individual income taxes
B)
Estate taxes
C)
Payroll taxes
D)
Corporate income taxes
b
The three main sources of federal tax revenue are individual income taxes, corporate income taxes, and payroll taxes. Individual income tax accounts for approximately 40% of the total tax revenue collected by the federal government. The federal estate tax and gift tax actually compose only a small percentage of annual tax revenues.
LO 8.1.2
Which one of the following is a CORRECT hierarchy of authority of sources published by the IRS from most authoritative to least?
A)
Revenue Rulings, Regulations, Announcements
B)
Regulations, Technical Advice Memorandums, Private Letter Ruling
C)
Revenue Procedures, Revenue Rulings, Notices
D)
Regulations, Technical Advice Memorandums, Announcements
d
The hierarchy of sources published by the IRS from most authoritative to least is as follows:
Regulations
Revenue Rulings
Revenue Procedures
Private Letter Rulings
Technical Advice Memorandums
Notices
Announcements
LO 8.1.1
Mary filed her 2022 income tax return on April 3, 2023. The IRS has recently determined that she worked a part-time job, but the employer failed to provide Mary with a W-2. Mary honestly did not realize that she was required to report the income because she did not receive a W-2. The IRS has determined that her negligent failure to report the income resulted in an additional income tax liability of $2,000. What is Mary’s tax penalty?
A)
$400
B)
$100
C)
$200
D)
$1,000
a
The negligence penalty is 20% of the deficiency due to the taxpayer’s negligence. For the $2,000 tax deficiency, 20% results in a negligence penalty of $400. It may be argued that the failure to report the income was fraud, but the fact pattern states that the act was merely negligent.
LO 8.2.2
Which of the following sources of authority on a tax issue may be relied upon in tax research?
Treasury Regulation
Tax Court opinion
United States Supreme Court opinion
A)
I, II, and III
B)
II and III
C)
I and II
D)
I and III
a
Congress has authorized the Secretary of the Treasury to prescribe and issue all rules and regulations needed for enforcement of the Code. Regulations can be classified into three groups: (1) legislative (Treasury Regulation), (2) interpretive (Tax Court opinion), and (3) procedural (United States Supreme Court opinion).
LO 8.1.1
Margo files her tax return 39 days after the due date. Along with the return, she remits a check for $6,000 (the balance of the tax owed). Disregarding any interest element, her combined failure-to-file and failure-to-pay penalties are
A)
$440.
B)
$400.
C)
$600.
D)
$660.
c
The failure-to-file penalty is netted against the failure-to-pay penalty: $60 + ($600 − $60) = $600.
LO 8.2.3
Which one of the following statements regarding common tax traps is NOT accurate?
A)
Tax traps may result in the unexpected recognition of income.
B)
A transaction is based solely on its economic form.
C)
Tax traps are of particular concern to owners of closely held businesses.
D)
A transaction must be based on economic reality as well as economic form.
b
A transaction cannot be based solely on form; it must also be based on “economic reality.”
LO 8.2.3
If an employer withholds Social Security and federal income taxes from employee paychecks, but fails to pay those amounts to the IRS, what is the percentage penalty that is imposed?
A)
75%
B)
100%
C)
25%
D)
50%
fbbvbbbbbbbbbbb
Employers are required to withhold amounts from an employee’s paycheck for Social Security taxes and federal income taxes. If the employer fails to do so or fails to pay such amounts to the IRS, they or any other responsible person will be subject to the 100% penalty.
LO 8.2.1b
Which one of the following is a federal taxation function of the social objective?
A)
Reduction of taxes during a recession to stimulate the economy
B)
Restricting spending through greater taxation
C)
Promoting full employment
D)
Charitable deduction
d
The reduction of taxes in order to stimulate the economy is due to the economic objective, as well as restricting spending and promoting full employment. Social objectives of the federal taxation system include the charitable deduction, excluding life insurance proceeds from taxation, and renovation of a historic home.
LO 8.1.2
How much is the penalty for filing a federal income tax return that the IRS deems as frivolous?
A)
$5,000
B)
$50
C)
75% of the underpayment of the tax liability
D)
$500
a
The penalty is $5,000 for each frivolous return filed.
LO 8.2.3
Lana filed her 2021 income tax return on April 3, 2022. The IRS has recently determined that she worked a part-time job, but the employer failed to provide Lana with a W-2. Lana honestly did not realize that she was required to report the income, because she did not receive a W-2. The IRS has determined that her negligent failure to report the income resulted in an additional income tax liability of $2,000.
What is Lana’s tax penalty?
A)
$100
B)
$200
C)
$1,000
D)
$400
d
The answer is $400. The negligence penalty is 20% of the deficiency due to the taxpayer’s negligence. For the $2,000 tax deficiency, 20% results in a negligence penalty of $400. It may be argued that the failure to report the income was fraud, but the fact pattern states that the act was merely negligent.
LO 8.2.3
Which one of the following is a tax return preparer failure that would initiate a tax penalty from the IRS?
A)
Failure to have the clients sign their return
B)
Failure to maintain a list of all returns prepared for the past 10 years
C)
Failure to keep a copy of all returns prepared for at least the last three years or to maintain a list of returns prepared
D)
Failure to provide a taxpayer with a receipt for their services
c
The following actions would constitute a tax return preparer’s failure and be subject to a tax penalty: failure to provide a taxpayer with a copy of their return, failure to keep a copy of all returns prepared for at least the last three years or to maintain a list of returns prepared, and failure to sign a return as preparer and give their tax identification number on the return.
LO 8.2.1
The reduction of taxes in order to stimulate the economy is due to the economic objective, as well as restricting spending and promoting full employment. Social objectives of the federal taxation system include the charitable deduction, excluding life insurance proceeds from taxation, and renovation of a historic home.
LO 8.1.2
a
The negligence penalty is imposed if any part of the underpayment of tax is due to taxpayer neglect or a disregard for the tax rules and regulations, without the intent to defraud. The penalty is 20% of the portion of the underpayment attributable to negligence, which is $1,200 in this case.
LO 8.2.3
Which of the following statements is CORRECT?
Targeted program audits make up approximately 25% of each year’s total of returns audited.
The general statute of limitations for audits is three years from the filing date of the return, but six years if 25% of gross income is unreported.
A)
Neither I nor II
B)
II only
C)
I only
D)
Both I and II
d
Targeted program audits make up approximately 25% of each year’s total of returns audited. The general statute of limitations for audits is three years from the filing date of the return (or due date, if later), but six years if 25% of gross income is unreported.
LO 8.2.2
Frank is a single taxpayer who failed to report $500 of taxable income during the current tax year. Frank erroneously believed that the $500 was not considered to be income. Frank’s adjusted gross income is $90,000 for the current tax year. Which one of the following penalties is the IRS most likely to impose?
A)
Negligence penalty
B)
Criminal fraud penalty
C)
Civil fraud penalty
D)
Substantial understatement penalty
a
Penalties may be generally categorized as three types: (1) failure-to-file, (2) failure-to-pay penalties (which are automatically assessed by the IRS), and (3) underpayment penalties that are related to some negligence or intentional fault of the taxpayer. There are also underpayment penalties owing to some fault of the taxpayer. The least severe of these is the 90%/100% payment criteria to avoid the estimated tax penalty. However, there are also the following penalties, listed in order of their severity: criminal fraud, civil fraud, negligence, and frivolous return.
LO 8.2.3
Chip files a timely tax return but is later required to pay an additional $15,000 in tax. Of this amount, $6,000 is attributable to Chip’s negligence. The negligence penalty will be
A)
$0; there is no penalty because the return was filed timely.
B)
$500; there is a maximum of $500 penalty.
C)
$3,000; a 20% penalty is applied to all tax due.
D)
$1,200; a 20% penalty is applied to the $6,000.
d
A 20% penalty ($6,000 × 0.20 = $1,200) applies to the negligence component.
LO 8.2.3
Steve’s tax return for a prior tax year has been audited, and the IRS has assessed a deficiency of $10,000 against him. In addition, he owes interest of $3,000 on the deficiency. The deficiency was due to negligence on Steve’s part. What is the tax penalty that may be imposed on Steve?
A)
$7,500
B)
$5,000
C)
$700
D)
$2,000
d
The negligence penalty is imposed if any part of the underpayment of tax is due to taxpayer neglect or a disregard for the tax rules and regulations, without the intent to defraud. The penalty is 20% of the portion of the underpayment attributable to negligence, which is $2,000 in this case.
LO 8.2.2
Which of the following represents the most severe tax penalty that may be imposed?
A)
Civil fraud
B)
Negligence
C)
Criminal fraud
D)
Frivolous return
c
Criminal fraud is tax evasion, which is illegal. If convicted, a taxpayer will be subject to heavy fines, imprisonment, or both.
LO 8.2.3
Which of the following is the type of audit usually performed for a minor issue?
A)
Field audit
B)
Correspondence audit
C)
Office audit
D)
None of these types of audits
b
A correspondence audit is usually performed through the mail because the disputed tax issue is minor.
LO 8.2.2
Paul was recently assessed a deficiency of $10,000, along with interest of $2,000, from a prior year’s tax return. It has been determined that the deficiency was due to civil fraud. What is the amount of the fraud penalty?
A)
$6,000
B)
$7,500
C)
$10,000
D)
$2,000
b
Civil fraud, essentially, is taxpayer fraud that does not rise to the level of criminal fraud. If imposed, the penalty is 75% of the portion of tax underpayment attributable to fraud. In this case, the fraud penalty is $7,500 (75% of $10,000). The $2,000 from a prior year’s return would be separate from the fraud penalty.
LO 8.2.3
Which one of the following is a taxation function of the economic objective?
A)
Reduction of taxes to stimulate the economy
B)
Excluding life insurance proceeds from taxation
C)
Renovation of a historic home
D)
Charitable deduction
a
The reduction of taxes in order to stimulate the economy is due to the economic objective. Social objectives of the federal taxation system include the charitable deduction, excluding life insurance proceeds from taxation, and renovation of a historic home.
LO 8.1.2
Lester owns a commercial building that generates substantial rental income. He is concerned about the effect the rental income would have on his federal income tax liability. Lester directs the management company to send the rent checks to his three grandchildren in equal shares. He reasons that including the rental income in the grandchildren’s gross income would be beneficial because their tax rate is much lower than his. Which of the following tax law doctrines presents the biggest obstacle to Lester’s plan?
A)
Business purpose doctrine
B)
Assignment of income doctrine
C)
Constructive receipt doctrine
D)
Tax benefit doctrine
b
Under the assignment of income doctrine, a taxpayer cannot assign the income he earns to someone else for income tax purposes. The rental income would still be taxable to Lester.
LO 8.2.3
If a taxpayer deducted medical expenses on a prior year’s tax return and receives a reimbursement of the expenses from her insurance company in the following year, which one of the following rules or doctrines might cause the reimbursement to be included in income?
A)
Constructive receipt doctrine
B)
Assignment of income doctrine
C)
Ownership attribution rules
D)
Tax benefit rule
d
The tax benefit rule applies to situations in which a particular tax benefit exists. For instance, if an insurance reimbursement is received for medical expenses, it is generally nontaxable. However, if the reimbursement was received in the year after a medical expense deduction was taken and a tax benefit was received for that deduction, then the reimbursement is converted into taxable income in that subsequent year.
LO 8.2.3
To be considered a responsible person by the IRS, which one of the following is among important factors?
A)
Authority to sign checks
B)
Shareholder of a similar company
C)
Impressive title
D)
Not in charge of hiring and firing employees
a
The determination of whether someone is a responsible person is a test of facts and circumstances. Some of the questions the IRS usually asks in determining responsibility are as follows: Was the individual an officer or director? Was the individual a shareholder? Was the individual a member of a board of directors? Did the individual have the authority to sign checks? Was the individual responsible for hiring and firing employees? Did the individual have actual authority or merely an impressive title?
LO 8.2.1
Which of the following statements regarding constructively received income is CORRECT?
Income is constructively received in the taxable year in which there is no substantial limitation or restriction on a taxpayer’s right to bring the funds under personal control.
Constructive receipt occurs only when income is actually received during the taxable year.
A)
I only
B)
Neither I nor II
C)
Both I and II
D)
II only
a
Statement II is incorrect; income may be constructively received in a taxable year even if it is not actually received.
LO 8.2.3
Which one of the following is a tax return preparer failure that would initiate a tax penalty from the IRS?
A)
Failure to maintain a list of all returns prepared for the past five years
B)
Failure to have the clients sign their return
C)
Failure to provide a taxpayer with a copy of their return
D)
Failure to keep a copy of all returns prepared for at least the last 10 years
c
The following actions would constitute a tax return preparer’s failure and be subject to a tax penalty: failure to provide a taxpayer with a copy of their return, failure to keep a copy of all returns prepared for at least the last three years or to maintain a list of returns prepared, and failure to sign a return as preparer and give their tax identification number on the return.
LO 8.2.1
Which one of the following sources of information provides the most persuasive authority on a tax issue?
A)
Private Letter Ruling
B)
Treasury Regulation
C)
General Counsel Memorandum
D)
Revenue Ruling
b
Treasury regulations carry the full effect of law. The other choices apply only to specific situations and, although helpful, are not as authoritative.
LO 8.1.1
Which one of the following are IRS statements reflecting the internal management practices of the IRS that affect the rights and duties of taxpayers?
A)
Revenue Rulings
B)
Revenue Procedures
C)
Regulations
D)
Private Letter Rulings
b
Revenue Procedures are statements reflecting the internal management practices of the IRS that affect the rights and duties of taxpayers. Private Letter Rulings are taxpayer guidance from the IRS that apply only to the particular taxpayer(s) asking for the ruling; they are not applicable to all taxpayers. The primary purpose of the regulations is to explain and interpret particular IRS Code sections.
LO 8.1.1
Which one of the following best describes the tax benefit rule?
A)
Nontaxable receipts may be converted into taxable income.
B)
Stock owned by one person may be attributed to another related person who receives the tax benefits of ownership.
C)
Income is taxed to the tree that grows the fruit, even though the income is assigned to another prior to receipt.
D)
A solvent taxpayer may have to realize income upon the forgiveness of a debt by a creditor.
a
The tax benefit rule provides that a recovery or reimbursement of a previously-deducted item will cause that recovery or reimbursement to be taxable. For instance, if an insurance reimbursement is received for medical expenses, it is generally nontaxable. However, if the reimbursement was received in the year after a medical expense deduction was taken and a tax benefit was received for that deduction, then the reimbursement is converted into taxable income in that subsequent year.
LO 8.2.3
Which one of the following objectives of the federal taxation system involves the collection of corporate income taxes?
A)
Social objective
B)
Revenue raising
C)
Writing tax code
D)
Economic objective
b
Revenue raising through corporate, individual, and payroll taxes is an important objective of the federal taxation system. The first, and perhaps most important, goal of the economic objective is price stability. JGTRRA and TCJA significantly increased the Section 179 expense limit and the amount of depreciation deductions (bonus depreciation) that may be claimed in the first year in an attempt to stimulate purchases of business assets.
LO 8.1.2
Which one of the following is NOT a taxation function of the social objective?
A)
Charitable deduction
B)
Renovation of a historic home
C)
Reduction of taxes to stimulate the economy
D)
Excluding life insurance proceeds from taxation
c
Social objectives of the federal taxation system include the charitable deduction, excluding life insurance proceeds from taxation, and renovation of a historic home. The reduction of taxes in order to stimulate the economy is due to the economic objective.
LO 8.1.2
Ed deducted $6,500 in medical expenses as an itemized deduction on his prior-year tax return. During the current year, he receives a reimbursement from his insurance company of $5,000.
Which of the following rules or doctrines may cause the reimbursement to be taxable to Ed?
A)
Step transaction doctrine
B)
Assignment of income doctrine
C)
Tax benefit rule
D)
Substance over form doctrine
c
The tax benefit rule converts otherwise nontaxable receipts into taxable income. The most common example is when a taxpayer is reimbursed in a subsequent year for medical expenses paid and deducted in a previous year.
LO 8.1.2
Which one of the following amendments to the U.S. Constitution established federal taxation in the U.S.?
A)
Eighteenth Amendment
B)
Fifteenth Amendment
C)
Seventeenth Amendment
D)
Sixteenth Amendment
d
In 1913, the required number of states ratified the Sixteenth Amendment, and taxation of income began on March 1 of that year. Since that time, the federal income tax system has played an important role in an individual’s investment decisions.
LO 8.1.2
