Recordkeeping and Electronic Filing Flashcards
With regard to effective recordkeeping, which of the following statements is false?
A. Records should show how much of an individual’s earnings are subject to self-employment tax.
B. A canceled check always proves payment and establishes a tax deduction.
C. The invoice, paid receipt, or canceled check that supports an item of expense should be retained.
D. Records should identify the source of income in order to determine if an income item is taxable or nontaxable.
A canceled check always proves payment and establishes a tax deduction.
Answer (B) is correct.
The IRS recommends that taxpayers keep all sales slips, invoices, receipts, canceled checks, or other financial documents that prove the amounts shown on a return as income, deductions, and credits. Although a canceled check indicates payment, the IRS may require more substantive proof of payment in order for a deduction to be allowed.
Employers are required to keep records on employment taxes (income tax withholding, Social Security, Medicare, and federal unemployment tax) for
A. An indefinite time.
B. The statutory period for assessment of the employees’ taxes.
C. At least 4 years after the date the tax becomes due or is paid, whichever is later.
D. At least 3 years after the due date of the return or 2 years after the date the tax was paid, whichever is later.
At least 4 years after the date the tax becomes due or is paid, whichever is later.
Answer (C) is correct.
A person required to keep records relating to employment taxes and the collection of income tax must keep them at a convenient and safe location accessible to the IRS and available for inspection at all times. The records must be maintained for at least 4 years after the due date of the tax for the return period or the date such tax was paid, whichever is later.
In the process of preparing Purple Corporation’s 2019 return, John, an enrolled agent, provided to Purple Corporation calculations he had prepared computing basis of property that was sold and reported on the Form 4797 filed with Form 1120. Later, when Purple Corporation’s 2019 return was examined by the Internal Revenue Service, Purple Corporation refused to provide the Internal Revenue Service with the calculations, claiming that this was a privileged communication between Purple and its federally authorized practitioner. Which of the following statements is true?
A. Purple Corporation does not have to provide the calculations to the Internal Revenue Service because it is privileged under the Federal Tax Practitioner privilege rules.
B. Purple Corporation must provide the calculations to the Internal Revenue Service because privilege does not apply to a determination with respect to an item that will be presented to the government on an original return.
C. Purple Corporation must provide the calculations to the Internal Revenue Service because the Federal Tax Practitioner privilege does not apply to documents written by John as he is not a CPA.
D. Purple Corporation does not have to provide the calculations to the Internal Revenue Service if they believe this transaction might be construed as a tax shelter.
Purple Corporation must provide the calculations to the Internal Revenue Service because privilege does not apply to a determination with respect to an item that will be presented to the government on an original return.
Answer (B) is correct.
Section 7525 states that the taxpayer has a privilege of confidentiality with his or her federally authorized tax preparer with regard to tax advice. This privilege can only be asserted in noncriminal hearings. However, this privilege does not apply to the determination of an item on an original income tax return. Finally, this section does not apply to any tax shelters.
Which of the following statements with respect to effective recordkeeping is false?
A. Records should identify the source of income in order to determine if an income item is taxable or nontaxable.
B. If an individual cannot provide a canceled check to prove payment of an expense item, (s)he may be able to prove it with certain financial account statements.
C. Records that support the basis of property should be kept until the statute of limitations expires for the year that the property was acquired.
D. Records should show how much of an individual’s earnings is subject to self-employment tax.
Records that support the basis of property should be kept until the statute of limitations expires for the year that the property was acquired.
Answer (C) is correct.
Section 6001 requires every person liable for any tax imposed by the Internal Revenue Code to keep records sufficient to establish the amount of items required to be shown by such a person in any return of tax or information. Regulation 1.6001-1(a) provides that books of account or records should be sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such persons in any tax or information return.
Regulation 1.6001-1(e) provides that a taxpayer’s records must be kept as long as the contents may be material in the administration of any Internal Revenue law. Records relating to the basis of property should be retained as long as they may be material [Reg. 1.6001-1(e)]. The basis of property is material until the statute of limitations expires for the year in which the property is sold.
How long should you keep your records?
A. 3 years if you owe additional tax.
B. 7 years if you file a claim for a loss from worthless securities.
C. No limit if you do not file a return.
D. All of the answers are correct.
All of the answers are correct.
Answer (D) is correct.
Generally, tax records should be retained 3 years from the date a return was due or 2 years from the date the tax is paid, whichever is later. If a taxpayer owes additional tax, records should be retained for 3 years. If a taxpayer claims a loss from worthless securities, records should be kept for 7 years. If a taxpayer does not file a return, there is no limitation period. Therefore, records should be retained indefinitely (Publication 552).
Leslie Oak, an enrolled agent, prepared the 2019 tax return for Ms. Barbara Smith. The Form 1040 tax return of Ms. Smith contained capital gains and losses (Schedule D), wages (Form W-2), and rental income (Schedule E). Ms. Smith signed a Form 8879, IRS e-file Signature Authorization, which allowed Leslie to electronically file Ms. Smith’s tax return. Based upon the information in the 2019 tax return of Ms. Smith, which statement below best describes the documents that Leslie Oak is required to maintain for Ms. Smith’s 2019 electronically filed tax return?
A. Leslie Oak must retain two signed copies of Form 8879.
B. Leslie Oak does not have to retain any of the documents used in preparation of Ms. Smith’s return. Leslie should secure from Ms. Smith a list of all the documents used in preparation of the return and that they were all returned to Ms. Smith.
C. Leslie Oak must retain a copy of the signed Form 8879, copies of all Forms W-2, and supporting documents not included in the electronic records submitted to the IRS.
D. Leslie Oak must only retain a copy of the signed Form 8879.
Leslie Oak must retain a copy of the signed Form 8879, copies of all Forms W-2, and supporting documents not included in the electronic records submitted to the IRS.
Answer (C) is correct.
An income tax return preparer must furnish a completed copy of any return or refund claim pertaining to tax that (s)he prepares for the taxpayer either before or at the same time as (s)he presents the return to him or her for signing. The preparer or employer of the preparer must retain a completed copy of the return for a 3-year period. A return filed in the Form 1040 IRS e-file Program consists of electronically transmitted data and certain paper documents. The paper portion of the return consists of Form 8879 and other paper documents that cannot be electronically transmitted. Leslie Oak must retain a copy of Form 8879.
Bethany timely filed her 2016 1040 tax return and paid the $2,000 tax as shown on the return at the time of filing. The return was subsequently examined and Bethany signed an agreement form for the proposed changes on August 20, 2018. She paid the additional tax due of $5,000 on September 30, 2018. In 2019, Bethany located missing records, which she believes would make $3,000 of the additional assessment erroneous. Which of the following statements accurately states the date by which Bethany must file a claim for refund to get the $3,000 back?
A. August 20, 2020, 2 years from signing the agreement form.
B. April 15, 2020, 3 years from the due date of the original return.
C. September 30, 2020, 2 years from when the additional tax was paid.
D. No claim for refund can be filed since an examination agreement form was signed.
September 30, 2020, 2 years from when the additional tax was paid.
Answer (C) is correct.
The records must be kept available at all times for inspection by IRS officers and designated employees and must be retained as long as they may be material. Since the IRS generally has 3 years from the date a return was due or filed or 2 years from the date the tax was paid, whichever is later, to assess tax, a taxpayer must retain all records and forms until the later time. If Bethany files for a credit or refund after she files her return, then the statute of limitations is the later of 3 years or 2 years after the tax was paid. Since she paid the most recent assessment on September 30, 2018, Bethany has until September 30, 2020, to file a claim for a refund.
Nancy, a calendar-year taxpayer, filed her federal income tax return for tax year 2017, which was due on April 15, 2018, on May 1, 2018. Nancy did not request and therefore did not receive an extension of time to file her 2017 federal income tax return. Nancy paid the amount due as shown on the 2017 return on June 30, 2018. Based on these facts, the last day for the IRS to assess additional tax with respect to Nancy’s 2017 return is
A. June 20, 2020.
B. April 15, 2021.
C. May 1, 2021.
D. June 20, 2021.
May 1, 2021.
Answer (C) is correct.
The IRS generally has 3 years from the date a return was due or filed or 2 years from the date the tax was paid, whichever is later. Because Nancy filed her return on May 1, 2018, the 3-year period ending on May 1, 2021, is the time the IRS has to assess additional tax.
Which of the following is NOT a specific record required to be kept for income tax withholding?
A. Each employee’s date of birth.
B. The fair market value and date of each payment of noncash compensation made to a retail commission salesperson if no income tax was withheld.
C. The total amount and date of each wage payment and the period of time the payment covers.
D. For accident or health plans, information about the amount of each payment.
Each employee’s date of birth.
Answer (A) is correct.
Under Reg. 31.6001-5(a), every employer required to withhold income tax on wages must keep records of all remuneration paid to the employees. The list of items required to be shown in such records does not include each employee’s date of birth.
With regard to expenses, the taxpayer should keep all of the following records EXCEPT
A. Canceled checks.
B. Cash register receipts.
C. Invoices.
D. Original copies of all records.
Original copies of all records.
Answer (D) is correct.
A taxpayer can replace hard copies of books and records using an electronic storage system provided the system is in compliance with IRS requirements.
You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support items shown on your return until the period of limitations for that return runs out. The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the Internal Revenue Service can assess additional tax. Which statement listed below is incorrect?
A. If no other provisions apply, the statute of limitations is 3 years after the return was due.
B. If more than 25% of gross income has been omitted from the tax return, the statute of limitations is 6 years after the return was filed, unless the omitted amount was disclosed in the return or in a statement attached to the return, in a manner adequate to apprise the Internal Revenue Service of the nature and amount of the omission.
C. If a fraudulent return is filed, the statute of limitations is 7 years.
D. If a tax return is not filed at all, there is no statute of limitations.
If a fraudulent return is filed, the statute of limitations is 7 years.
Answer (C) is correct.
Publication 552 lists the statute of limitations in certain situations as follows:
1. If you owe tax and items 2., 3., and 4. below do not apply to you, then the statute of limitations is 3 years.
2. If you do not report income that you should and it is more than 25% of the gross income on the return, then the statute of limitations is 6 years.
3. If you file a fraudulent return, then there is no statute of limitations on that return.
4. If you do not file a return, then there is no statute of limitations on that return.
5. If you file for a credit or refund after you file a return, then the statute of limitations is the later of 3 years or 2 years after the tax was paid.
6. If you file a claim for a loss from worthless securities, then the statute of limitations is 7 years.
Thus, a fraudulent return does not have a statute of limitations.
Which of the following items represents sufficient documentary evidence to substantiate expenditures for travel, entertainment, or gift expenses?
A. A canceled check written to pay a motel bill on a business trip.
B. A statement from the taxpayer’s employer.
C. An account book maintained daily by the taxpayer for business meals (no meal was over $75).
D. Memos on a desk calendar.
An account book maintained daily by the taxpayer for business meals (no meal was over $75).
Answer (C) is correct.
Regulation 1.274-5 outlines rules for substantiation. Substantiation of who, when, where, why, and how much is generally required. A taxpayer must maintain adequate records or sufficient evidence corroborating the taxpayer’s statement. An account book maintained daily by the taxpayer would meet the rules for substantiation. Documentary evidence such as a receipt is not required for meals costing less than $75 [Reg. 1.274-5(c)(2)(iii)].
Jackson Corp., a calendar-year corporation, mailed its Year 6 tax return to the IRS by certified mail on Friday, April 7, Year 7. The return, postmarked April 7, Year 7, was delivered to the IRS on April 19, Year 7. The required length of time to maintain sufficient records ends on
A. December 31, Year 9.
B. April 7, Year 10.
C. April 16, Year 10.
D. April 19, Year 10.
April 16, Year 10.
Answer (C) is correct.
A calendar-year C corporation return is due on April 15 of the following year. Assuming delivery in due course, a postmarked date will be deemed the filing date. Returns filed early will be considered as filed on the last day prescribed for filing, which is April 15. Thus, the required length of time to maintain sufficient records ends on April 16, Year 10.
A calendar-year taxpayer filed an individual tax return for Year 6 on March 20, Year 7. The taxpayer neither committed fraud nor omitted amounts in excess of 25% of gross income on the tax return. What is the latest date that the taxpayer must keep records available?
A. March 20, Year 10.
B. March 20, Year 9.
C. April 15, Year 10.
D. April 15, Year 9.
April 15, Year 10.
Answer (C) is correct.
The general statute of limitations for assessment of a deficiency is 3 years from the later of the return filed or due date. Thus, the taxpayer must make records available for 3 years from the date the return was filed or due. An income tax return filed before the due date for the return is treated as if filed on the due date. Since the taxpayer’s return was due April 15, Year 7, the statute of limitations will expire 3 years from that date.
Keen, a calendar-year taxpayer, reported gross income of $100,000 on his Year 6 income tax return. Inadvertently omitted from gross income was a $20,000 commission that should have been included in Year 6. Keen filed his Year 6 return on March 17, Year 7. To collect the tax on the $20,000 omission, the Internal Revenue Service can review the records no later than
A. March 17, Year 10.
B. April 15, Year 10.
C. March 17, Year 13.
D. April 15, Year 13.
April 15, Year 10.
Answer (B) is correct.
The general statute of limitations for assessment of a deficiency is 3 years from the later of the return filed or due date. Thus, the taxpayer must make records available for 3 years from the date the return was filed or due. An income tax return filed before the due date for the return is treated as if filed on the due date for statute of limitations purposes. Since Keen’s return was due April 15, Year 7, the statute of limitations will expire 3 years from that date.
On April 15, Year 7, a married couple filed their joint Year 6 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. Until what date must the couple maintain their tax records?
A. April 15, Year 13.
B. December 31, Year 12.
C. April 15, Year 10.
D. December 31, Year 9.
April 15, Year 13.
Answer (A) is correct.
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.
Which of the following is a situation in which records must be maintained indefinitely?
A. Overstatement of a credit on a return that equals 25% of gross income.
B. De minimis mathematical error on a return.
C. Waiver of restrictions.
D. Failure of the taxpayer to file a return.
Failure of the taxpayer to file a return.
Answer (D) is correct.
There are several exceptions to the statute of limitations. If you do not file a tax return or you file a fraudulent return, then there is no statute of limitations.
Books of account or records sufficient to establish the amount of gross income, deductions, credit, or other matters required to be shown in any tax or information return
A. Do not need to be kept.
B. Must be maintained forever.
C. Must be maintained for at least 4 years after the
due date of the return or payment of tax.
D. Must be maintained as long as the contents may be material in administration of any internal revenue law.
Must be maintained as long as the contents may be material in administration of any internal revenue law.
Answer (D) is correct.
Books of account or records sufficient to establish the amount of gross income, deductions, credit, or other matters required to be shown in any tax or information return must be kept. Records must be maintained as long as the contents may be material in administration of any internal revenue law.
Harold Thompson, a self-employed individual, had income transactions for 2015 (duly reported on his return filed in April 2016) as follows:
Gross receipts——————————————–$400,000
Less: Cost of goods sold and deductions——(320,000)
Net business income————————————-$80,000
Capital gains————————————————–36,000
Gross income———————————————–$116,000
In March 2019, Thompson discovers that he had inadvertently omitted some income on his 2015 return. He retains Mann, EA, to determine his position under the statute of limitations. Mann should advise Thompson that the 6-year statute of limitations would apply to his 2015 return only if he omitted from gross income an amount in excess of
A. $20,000
B. $29,000
C. $100,000
D. $109,000
$109,000
Answer (D) is correct.
The normal statute of limitations is 3 years after the later of the due date of the return or when 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 [Sec. 6501(e)(1)]. 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. 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].
Richard Baker filed his 2019 individual income tax return on April 15, 2020. This return reflected that 100 shares of stock that he owned had become worthless in 2019. How long must he maintain records of this stock transaction?
A. 2020.
B. 2022.
C. 2025.
D. 2026.
2026.
Answer (D) is correct.
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. 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.
Which of the following statements about the Freedom of Information Act (FOIA) is false?
A. The FOIA requires the IRS to release all documents that are subject to FOIA requests.
B. All IRS records are subject to FOIA requests.
C. The IRS may withhold information pursuant to nine exemptions and three exclusions contained in the FOIA statute.
D. Documents must be made available electronically by the IRS.
The FOIA requires the IRS to release all documents that are subject to FOIA requests.
Answer (A) is correct.
All IRS records are subject to FOIA requests. However, FOIA does not require the IRS to release all documents that are subject to FOIA requests. The IRS may withhold information pursuant to nine exemptions and three exclusions contained in the FOIA statute. Documents must be made available electronically.
A 2019 Form W-2 for a calendar-year taxpayer will first be available from the IRS as part of a transcript in which of the following years?
A. 2019
B. 2020
C. 2021
D. 2022
2020
Answer (B) is correct.
Form W-2, Form 1099 series, Form 1098 series, or Form 5498 series transcripts for the current year (2019) are generally available after July of the following year. The W-2 for a calendar year taxpayer is filed the following year; therefore, a 2019 Form W-2 filed in 2020 will generally be available from the IRS after July of 2020.
According to Publication 1915, which of the following documents is only acceptable for foreign status requests of dependents under the age of 6?
A. Divorce decree.
B. Civil birth certificate.
C. National identification card.
D. Medical record.
Medical record.
Answer (D) is correct.
Publication 1915 lists documentation requirements for foreign status and for identification: Passport; U.S. citizenship and immigration services photo ID; visa from the U.S. Department of State; U.S. driver’s license; U.S. military ID card; foreign driver’s license; foreign military ID card; national ID card; U.S. state ID card; foreign voter’s registration card; civil birth certificate; medical records (only valid for dependents under 6 years of age); school records (only valid for dependents under 18 years of age).
Which of the following records is NOT listed by the IRS as a recommended item for taxpayers to keep?
A. Sales slips.
B. Applications.
C. Invoices.
D. Receipts.
Applications.
Answer (B) is correct.
Persons subject to tax or required to file an information return with respect to income must keep permanent books of account or records that are sufficient to establish the amount of gross income and deductions, credits, and other matters shown on a return. The IRS recommends that taxpayers keep all sales slips, invoices, receipts, canceled checks, or other financial account statements relating to a particular transaction. Although an application may lead to a contract or other documentation that shows a taxable transaction has taken place, an application alone does not document a taxable transaction.
Specific records required to be kept for income tax withholding by an employee include
A. The amount of tax collected with respect to a remuneration payment.
B. The amount of remuneration that constitutes wages subject to withholding.
C. Health and accident plan payments.
D. None of the answers are correct.
None of the answers are correct.
Answer (D) is correct.
An employer required to withhold income tax on wages must keep records of all employee compensation. Employees are not required to keep additional records relating to employment taxes and withholding of income tax.
Select the true statement regarding a person who employs one or more income tax return preparers.
A. The employer must prepare a return setting forth certain information.
B. Each preparer’s place of work does not have to be disclosed.
C. Required records must be kept for 2 years.
D. The employer must disclose the wage paid to each employee.
The employer must prepare a return setting forth certain information.
Answer (A) is correct.
A person who employs one or more income tax return preparers must make a return setting forth the name, identifying number, and place of work of each preparer and keep the records for up to 3 years.
Identify the true statement regarding charitable cash contributions.
A. Contributions of $250 or more require acknowledgment from the donee.
B. A canceled check is not sufficient documentation for a cash contribution of less than $250.
C. A taxpayer may deduct charitable cash contributions without supporting documentation.
D. Separate contributions are combined to determine whether a contribution is $250 or more.
Contributions of $250 or more require acknowledgment from the donee.
Answer (A) is correct.
For cash contributions of less than $250, a canceled check, bank/credit union/credit card statement or receipt letter/other written communication from the donee is sufficient and permissible documentation. Contributions of $250 or more require acknowledgment from the donee. The documentation must show the name of the donee, date contributed, and amount contributed.
Which of the following statements is false regarding IRS transcripts used by tax practitioners?
A. Transcripts are printouts of a taxpayer’s account that show actions taken by the IRS.
B. Tax practitioners use transcripts when representing their clients before the IRS.
C. Tax practitioners can make an online request of a client’s transcript and receive it within a few days.
D. In many cases, transcripts are used instead of making copies of tax returns.
Tax practitioners can make an online request of a client’s transcript and receive it within a few days.
Answer (C) is correct.
Tax practitioners can request transcripts of their client’s tax records and receive them within minutes (not days) using an online tool delivered through the IRS Business Systems Modernization program. Authorized tax practitioners use the electronic tool to order tax information for their clients. The documents are returned to the practitioner’s computer through a secure online connection within minutes. Paper requests for the same information can take days or weeks to complete.
