R6

Question 1

What’s a requirement of a simple trust?

Answer 1

to not have a charitable beneficiary (cannot make distributions to charitable organizations)

they would only make contributions from current income

Question 2

What are attributes of a complex trust?

Answer 2

accumulate current income, distribute corpus (principal), and provide for charitable contributions

Question 3

What deductions would help determine the amount of taxable gifts?

Answer 3

-charitable contribution deduction
-gift tax annual exclusion
-marital deduction

Question 4

What are examples of items that would be included as gifts?

Answer 4

college books, supplies, and dorm fees
cash
room and board

rule: anything in excess of $17k is a taxable gift

Question 5

T/F: Marital transfers are excluded from gift tax.

Answer 5

true

-if spouses give each other money or gifts, these are deductions (not taxable)

Question 6

T/F: Gifts to trusts with beneficiaries under age 21 can be excluded if the beneficiary receives accumulated interest and assets at age 21.

Answer 6

true

Question 7

T/F: Amounts paid on behalf of a donee for tuition are only excluded from the gift tax if the payment is made directly to the educational institution.

Answer 7

true

Question 8

What types of business are eligible for exemption from federal income taxes?

Answer 8

-corporations
-foundations
-community chests
-funds

NOT partnerships

Question 9

What items would be included and excluded from unrelated business income?

Answer 9

included:
-rent from real property where substantial personal services are provided (ex. hotel room)

excluded:
-interest, dividends, and other investment income
-gains from the sale of property that is not held for sale to customers in the ordinary course of business
-income from research activities performed by a college, university, or hospital
-rent from real property

Question 10

What is unrelated business income?

Answer 10

-must be derived from an activity that constitutes a trade or business
-regularly carried on
-NOT substantially part of the organization’s tax-exempt purpose

Question 11

What happens when a CPA prepares a tax return for a client and notices an error they made when it’s signed and returned?

Answer 11

-notify the client and advise them of reasonably-likely penalties

you’re not allowed to prepare an amended tax return without the client’s permission

Question 12

When can a CPA charge a contingency fee to a client?

Answer 12

a claim for refund of interest and/or penalties (late or underpayment)

Question 13

T/F: A tax preparer is not required to obtain supporting documentation, unless the preparer has reason to suspect the accuracy of the information provided (inaccurate or incomplete).

Answer 13

true

Question 14

T/F: The term “reportable transaction” is any transaction that the Secretary of the U.S. Treasury Department has determined as having a potential for either tax avoidance or tax evasion.

Answer 14

true

Question 15

T/F: For each tax return prepared, a tax preparer must retain either the taxpayer’s name and ID number, or a copy of the return.

Answer 15

true

Question 16

What are the penalty fines if a tax preparer doesn’t sign the tax return?

Answer 16

$60 for each instance (up to $30k per calendar year)

Question 17

The CPA must retain a copy of each return for ______ years after the close of the return period.

Answer 17

three

Question 18

T/F: A client is prohibited from negotiating a client’s refund check.

Answer 18

true

Question 19

T/F: If a tax preparer feels justified by a client’s or third party’s response in an understatement or overstatement in a tax return, they don’t need to request support.

Answer 19

true; as long as the tax preparer asks the client if they have (sufficient) documentation

Question 20

What are the different burdens of proof?

Answer 20

1. civil – preponderance of the evidence (burden of proof is on the IRS)
2. criminal – beyond a reasonable doubt (burden of proof is on the government)

Question 21

What are the due diligence requirements for the earned income credit?

Answer 21

-eligibility checklists
-computation worksheets
-record retention
-reasonable inquiries to the taxpayer

Question 22

T/F: Disclosure of confidential client data may be made to any party on consent of the client.

Answer 22

true

exception: a tax return preparer can disclose confidential client info without the client’s consent if it’s to be evaluated for a quality or peer review

Question 23

What are the fines if a tax preparer wrongfully discloses client information?

Answer 23

civil penalty of $250 per disclosure; up to $10k per year

criminal penalty of up to $1,000 or imprisonment of up to 1 year

Question 24

T/F: Membership in the AICPA can be suspended or terminated without a hearing.

Answer 24

true

Question 25

A __________ audit is the most common type of IRS audit which is conducted by mail and typically arises from information errors, mathematical errors, or matching issues.

Answer 25

correspondence

Question 26

What happens if the taxpayer rejects one of the IRS's findings in the audit?

Answer 26

the IRS will issue the taxpayer a 30-day letter as a notice for the right to appeal

Question 27

What are the original jurisdiction, or trial, courts?

Answer 27

the Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims

Question 28

For non-mathematical or clerical errors, how long does the taxpayer have to file a petition with the Tax Court?

Answer 28

90 days from the mailing of the notice of the deficiency if the notice is not addressed to a taxpayer outside the U.S. to either pay the deficiency (interest and penalties) or file a petition with the Tax Court for a redetermination of the deficiency

Question 29

T/F: A decision of the Small Cases Division of the U.S. Tax Court cannot be relied on as precedent in any other court.

Answer 29

true; these decisions from the Small Cases Division are also not appealable

Question 30

T/F: U.S. District Court cases are heard before one judge, not a panel of judges.

Answer 30

true

Question 31

T/F: An individual taxpayer must pay taxes throughout the tax year, through tax liabilities minus withholdings and/or quarterly estimated tax payments of the lesser of 1) 90% of the current year AGI or 2) 100% of the prior year AGI.

Answer 31

true

Question 32

T/F: A civil fraud requires conduct that transcends negligence or stupidity.

Answer 32

true; there needs to be malicious intent to report fictitious transactions or evade taxes

Question 33

T/F: The taxpayer can generally avoid penalties if he/she acted in good faith, if there was a reasonable basis to support the tax return position, AND if the taxpayer did not have willful neglect.

Answer 33

true

Question 34

The ______ holds the most authoritative value.

Answer 34

IRC (Internal Revenue Code) - regulations (even if temporary)

Question 35

When a taxpayer needs guidance on a specific tax issue related to a specific transaction, the taxpayer can ask the IRS for _________.

Answer 35

a private letter ruling (the IRS's interpretation of the federal tax law)

Question 36

When a CPA breaches a contract for professional services, what kind of damages are the client and any third party entitled to?

Answer 36

money damages

Question 37

What are the four elements of a gross negligence claim?

Answer 37

1. the defendant owed a duty of care to the plaintiff 2. the defendant breached that duty of care 3. the breach of duty was the actual and proximate (main) cause of the plaintiff's losses 4. the plaintiff suffered damages (injury)

Question 38

What are the five elements of a common law fraud claim?

Answer 38

1. a misrepresentation of material fact 2. intent to deceive (scienter) *this is the best defense if you can prove it 3. actual and justifiable reliance by the plaintiff on the misrepresentation 4. an intent by the defendant to induce the plaintiff's reliance on the misrepresentation 5. damages

Question 39

T/F: A CPA is liable for negligence only to third parties whom the CPA knows or should foresee will be relying on the CPA's report.

Answer 39

true

Question 40

T/F: Constructive fraud requires intent.

Answer 40

false - it doesn't require intent; it only requires reckless disregard of truth note: actual fraud requires intent

Question 41

T/F: An action for gross negligence requires both reliance (by a client or third party such as a bank) on a misstatement and negligence.

Answer 41

true

Question 42

T/F: Working papers, owned by the CPA, cannot be turned over to another accountant without the client's permission.

Answer 42

true

Question 43

Who are the entities that a CPA would be able to share client confidential information without the client's consent?

Answer 43

1. lawful subpoena 2. prospective purchasers (as long as they don't disclose the info) 3. quality control panel 4. AICPA/State Trial Board 5. Court proceedings 6. When GAAP requires disclosure of such information in the F/S

Question 44

What is the fine for failure to give tax return preparers the info they need in time?

Answer 44

$60 for each failure $30k maximum for each return period

Question 45

What is Circular 230?

Answer 45

it prohibits a practitioner from endorsing or negotiating refund checks issued to the client

Question 46

T/F: The U.S. Tax Court is a specialized trial court that hears only Federal tax cases, and the trials are by a judge and not by a jury.

Answer 46

true

Question 47

What is the limit for 100% exclusion of gifts for medical or educational institutions?

Answer 47

$17,000

Question 48

T/F: IRS publications are not considered a primary authoritative source when one is conducting tax research.

Answer 48

true; tax court cases, treasury regulations, and the Internal Revenue Code are all primary authoritative sources