Section 1: Unit 1: Preliminary Work & Taxpayer Data

Question 1

Backup Withholding Requirement

Answer 1

24% for US citizens & legal US residents
30% for foreign person.

ex. Marco is a frequent visitor to the local casino, where his favorite activity is playing slot
machines. One day, he hits it big and wins over $20,000 from one of the machines. However, when he
goes to collect his winnings, he is asked for his SSN by the casino. Marco declines, expressing concerns
about privacy. As a result, the casino is legally required to withhold 24% of his winnings and remit
them to the IRS. Marco will later receive a Form W-2G, Certain Gambling Winnings, and it reflects his
winnings as well as the withheld amounts. Marco reports the backup withholding amount as taxes
when filing his tax return. Marco does not earn very much income for the year, other than the gambling
winnings, so he receives a tax refund of most of the withheld amounts.

Ex. if a taxpayer’s SSN/names does not match across accounts

Question 2

Three ways to apply for an ITIN

Answer 2

• Using Form W-7
• Using an IRS-authorized Certified Acceptance Agent (CAA) or
• In-person at a designated IRS Taxpayer Assistance Center

Question 3

ATIN

Answer 3

Adoption Taxpayer Identification Number. Rare.

Question 4

Special Rules for Deceased Child with no SSN

Answer 4

If child dies in same tax year, the family can still claim them as a qualifying child for tax purposes, even with no SSN.

Question 5

Recordkeeping & refund claims/amended returns requirement for individuals

Answer 5

3 years

Question 6

Form 1040 SR, 1040 NR, 1040-X

Answer 6

SR Senior
NR NonResident (alien)
X - Amended return

Question 7

Form 1040: Sch 1, 2, & 3

Answer 7

Sch 1 - Other Incomes; taxable alimony, unemployment, student loan int deduct, etc
Sch 2 - Additional taxes; AMT, SE, etc
Sch 3 - Additional credits & payments; nonrefundable & refundable credits

Question 8

Automatic 2-mo extension (June 15) taxpayers

Answer 8

• Nonresident aliens who do not have wage income subject to U.S. withholding,
• U.S. citizens or legal U.S. residents who are living outside the United States or Puerto Rico, and their main place of business is outside the U.S. or Puerto Rico,
• Taxpayers on active military service duty outside the U.S.

EVEN IF allowed an extension, taxpayer will have to pay interest on any tax not paid by April 15

Question 9

Mailbox Rule

Answer 9

return will be accepted if postmarked by April 15th. Does NOT apply to electronic payments.

Question 10

Filing an extension

Answer 10

Form 4868
+6 months (typically Oct 15)

Question 11

Taxpayers who live abroad - taxes due by:

Answer 11

Dec 15
Can request two month extension past 6-mo extension of Oct 15.

Question 12

Combat Zones

Answer 12

Any service member, red cross personnel, accredited correspondents, etc, in a combat zone
Tax deadlines are suspended from the day of service until 180 days after they leave the combat zone

Question 13

Failure to File Penalty

Answer 13

5% of the unpaid taxes for each month that a return is late; up to 25% of the taxpayer’s total unpaid taxes.

2023: Failure to file for a return over 60 days late shall not be less than (1) the lessor of $485 or (2) 100% of the tax due

Question 14

If both the failure-to-file and the failure-to-pay penalty apply in any month the:

Answer 14

5% failure-to-file penalty is reduced by the failure-to-pay penalty

Question 15

Failure to Pay Penalty

Answer 15

0.5% of unpaid taxes for each month. Can be as much as 25% of unpaid taxes.
Rate increase to a full 1% PER MONTH.

Taxpayer can request penalty abatement due to ‘reasonable cause’

Question 16

Estimated tax due dates

Answer 16

April 15
June 15
Sep 15
Jan 15 (of following year)

Question 17

Estimated tax due dates for Farmers & Fishermen

Answer 17

For those with 2/3+ income from farming/fishing:

March 1st (pays all tax and files by March 1)

OR Jan 15 “required annual payment”.

Question 18

A taxpayer needs to make estimated tax payments if:

Answer 18

• They expect to owe $1000+
• They expect the total amount of withholding & tax credits to be less than the smaller of:
  *100% of the prior year tax liability
  *90% of the current year tax liability

Question 19

Safe Harbor estimated payments for high-income earners

Answer 19

If AGI is >$150K (or $75K MFS), the taxpayer must pay the smaller of
- 110% (rather than 100%) of last year’s tax liability
- 90% of expected tax liability for current year

Question 20

Form W-4 & W-4V

Answer 20

W-4: Employee/payroll withholding certificate

W-4V: used to withhold from social security

Question 21

Innocent Spouse Relief: Form 8857

Answer 21

When you have a joint return and the tax liability includes ‘erroneous items’ attributable to the other spouse.
ex. unreported gambling income during a past marriage during year with a joint return. Spouse had “no knowledge of this”.

Question 22

Injured Spouse Claim: Form 8379

Answer 22

Must have
- filed joint return
- have paid federal income tax or claimed refundable tax credit
- all or part of the taxpayer’s refund was/is/expected to be applied to the spouse’s past financial obligations
- not responsible for the debt (delinquent student loans, unpaid child support, etc).

ex. Gerard marries and files jointly with Kim. Kim has delinquent student loan debt from before the marriage. Form 8379 allows Gerard to request his portion of the tax refund as an injured spouse, while the IRS will retain Kim’s portion to offset her debt.

Question 23

Exceptions for normal 3 year statute deadline

Answer 23

• natural disaster (FEMA)
• inability to obtain records
• death, serious illness, etc
• bad debt from worthless securities (up to 7 years)
• payment/accrual of foreign tax (up to 10 years)
• NOL carryback
• carryback of certain tax credits
• military personnel

Question 24

The statute of limitations for IRS collection is ___ years from the tax date is assessed.

Answer 24

The statute of limitations for IRS collection is 10 years from the tax date is assessed.

You need to file a tax return to start the ‘statute clock’

Question 25

**

Assessment Statute

• __ years to get a refund
• __ years for the IRS to audit you
• __ years for the IRS to collect
• __ years for the IRS to audit you IF it is believed your gross income was understated by __+% OR if a taxpayer never files a return OR if the return was fraudulent
• __ years if you fail to file a return (EVEN if you don’t have a filing requirement).

Answer 25

• 3 years to get a refund (current year and past two years)
• 3 years for the IRS to audit you
• 10 years for the IRS to collect
• 6 years for the IRS to audit you IF it is believed your gross income was understated by 25+% OR if a taxpayer never files a return OR if the return was fraudulent
• FOREVER if you fail to file a return. Recc’d to file a return even if there’s no requirement, to help prevent ID theft and start the clock for the assessment statute

Question 26

Kiddie Tax Amounts: Unearned Income

Answer 26

For a child (dependent) with unearned income
First $1,250 is not taxes
Next $1,250 is taxes at the child’s rate
Anything above $2,500 is taxed at the parent’s rate

Example: Javier is a 17-year-old high school student who is claimed as a dependent on his parents’ tax
return. He worked as a pizza delivery driver 10 hours a week and earned $6,200 of wages in 2023. He
also had $2,850 of interest income from a certificate of deposit that his grandmother gave him last
Christmas. Javier is required to file a tax return because his unearned income exceeded the filing
threshold, and he is subject to the kiddie tax. If Javier did not have any interest income, he would not
be required to file a return; his investment income is what triggers his filing requirement.

Question 27

Kiddie Tax Amounts: Earned Income

Answer 27

$13,850 + of earned income requires a return to be filed.

Barrett is a 17-year-old high school student living with his parents. He earned $5,650 from
a part-time job and received $200 of dividends from stocks gifted by his grandmother. Barrett’s
parents claim him as a qualifying child. Barrett’s total income is below the gross income filing threshold
for dependents. His investment income is also below the filing requirement for the kiddie tax. Barrett
is not required to file a tax return in 2023, and his parents can claim him as a qualifying child on their
tax return. Even if Barrett is not required to file a tax return, he may still choose to file to receive a
refund of any taxes he had withheld from his wages.

Question 28

If a SE person makes more than $___ they need to file a return

Answer 28

$400 or more in Self-Employment income.

Question 29

Penny was the victim of identity theft last year. She received an IP PIN from the IRS this year. She plans to use a paid preparer to file her return. How should the IP PIN be used?

A. The preparer does not need to enter Penny’s IP PIN on the tax return. It is for her records only
B. The preparer should enter Penny’s IP PIN on the tax return in the PTIN section.
C. The preparer should enter Penny’s IP PIN on the tax return next to her signature block.
D. The preparer should enter Penny’s IP PIN on the tax return in the third party designee area.

Answer 29

C. The preparer should enter Penny’s IP PIN on the tax return next to her signature block.

The preparer should enter Penny’s IP PIN on the tax return next to her signature block. An Identity Protection PIN is a six-digit number assigned to eligible taxpayers to help prevent their Social Security number from being used to file fraudulent federal income tax returns. This number helps the IRS verify a taxpayer’s identity and accept their tax return. An IP Pin can be entered on a paper filed return or an efiled return. A return that does not include an IP PIN (but where one is required, because the taxpayer was a victim of ID theft) will still be processed, but it must be mailed, and it will have an increased processing time.

Question 30

What form is used for filing for an ITIN?

Answer 30

W-7

Question 31

Every taxpayer that signs a U.S. tax return signs their return under _________________.

A. Penalty of forfeiture
B. Penalty of liability
C. Penalty of nullity
D. Penalty of perjury

Answer 31

D. Penalty of perjury

Question 32

Nonresident aliens who have income that is not subject to U.S. withholding are required to file an income tax return by:

A. June 15.
B. March 15.
C. October 15.
D. April 15.

Answer 32

A. June 15. (Part of automatic 2 month extension)

Question 33

Which of the following statements is correct about individual extensions?

A. Form 4868 provides a taxpayer an additional six months to file and pay his individual income tax return.
B. Form 4868 must be filed by October 15 in order to be a valid extension.
C. A taxpayer must estimate his tax liability when requesting an automatic six-month extension.
D. As long as Form 4868 is filed by April 15, a taxpayer will not owe interest on any taxes due.

Answer 33

C. A taxpayer must estimate his tax liability when requesting an automatic six-month extension.

If a taxpayer cannot file his tax return by the due date, he can request an extension by filing Form 4868, Application for Automatic Extension of Time to File, which may be filed electronically. An extension grants a taxpayer an additional six months to file his individual tax return, but does not extend the time to pay any tax due. A taxpayer should estimate his yearly tax liability, as he will owe interest on any amount that is not paid by the filing deadline plus a late payment penalty if he has not paid at least 90% of his total tax due by that date.

Question 34

Greer and Jose are married but they plan to file separate tax returns. Greer is 67 and had a gross income of $11,000 for the tax year. Jose is 64. His gross income was $5,000 for the year. Do they need to file?

A. Only Jose is required to file, because he is less than 65 years of age.
B. Only Greer is required to file, because her income is over the filing threshold.
C. Neither is required to file a return.
D. Both are required to file tax returns.

Answer 34

D. Both are required to file tax returns.

Both Jose and Greer are required to file, because they are filing separate tax returns (MFS). Taxpayers of any age who use the Married Filing Separately status must file a return if they had gross income of $5 or more.

Question 35

Janet is unmarried and files single. This year, Janet earned $99,800 in income from various income sources. The total tax liability shown on Janet’s prior-year return was $10,900. After estimating her allowable deductions and credits, her expected tax liability for 2023 is $14,000. The tax expected to be withheld in 2023 from her wages is $11,100. She plans to file right on April 15, 2024 the filing deadline, and pay any tax owed at the same time. Will Janet be subject to an estimated tax penalty when she files her return?

A. As long as Janet files her return and pays by March 1, she will not owe an estimated tax penalty.
B. Janet will not be subject to the estimated tax penalty because she paid at least 100% of the tax shown on her return for the prior year.
C. Yes, Janet will be subject to the estimated tax penalty if she does not adjust her withholding or make estimated tax payments, because she will owe more than $1,000 when she files her return.
D. Janet will not be subject to the estimated tax penalty because she owes less than the deemed personal exemption amount when she files her return.

Answer 35

B. Janet will not be subject to the estimated tax penalty because she paid at least 100% of the tax shown on her return for the prior year.

Janet will not be subject to the estimated tax penalty because she paid at least 100% of the tax shown on her return for the prior year. Most taxpayers will avoid the penalty for underpayment of estimated tax, if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. In addition, taxpayers who had $0 tax liability in a prior year are not required to make estimated tax payments in the current year. See the IRS Information page on estimated tax payments.

Question 36

Harry and Melanie are married. They live in a community property state (Texas). They lived together all year. Harry has $2,000 per month in retirement pay, which is considered to be community income. Harry also owns a rental (his name is on the deed, but his wife’s name is not). The rental produces $600 a month in net income. Melanie does not have a job and does not work. Melanie and Harry decide to file separate tax returns. How much is considered to be community income and reportable on Melanie’s separate return?

A. $1,300 per month.
B. $0, retirement pay and rental income is exempt from community property rules.
C. $2,000 per month.
D. $1,000 per month.

Answer 36

A. $1,300 per month.

If Melanie and Harry decide to file separate tax returns, and they live in a community property state, then one-half of the income would be treated as earned by Melanie. So $1,300 a month would be her portion of the community income (one-half the pension income and one-half of the rental income).

Note: Community property rules are complex and can vary from state to state. This question is based directly on an example in Publication 555, Community Property. According to Publication 555, in Idaho, Louisiana, Texas, and Wisconsin, income from most separate property is treated as community income. Couples can also choose to have a legal agreement that provides that no community property will be created during the marriage (such as a Prenuptial Agreement between the spouses).

Question 37

Rebekah filed a joint tax return with her new husband, Noah, and the entire refund was applied to Noah’s overdue student loans. What form should Rebekah file, in order to receive her portion of the refund?

A. CP 2000.
B. Form 656.
C. Form 8379.
D. Form 8857.

Answer 37

C. Form 8379; Injured Spouse Allocation

Question 38

Thomas and Hailey live in Wisconsin, which is a community property state. Both of them work full-time. They want to file separately. They do not have a marital agreement for the provision of separate property. If they file separate returns, how should their income be reported?

A. Community property laws state that each spouse is entitled to 100% of total community income and expenses, so they must report 100% of each spouse’s income on each separate return.
B. They can just file single if it is easier for them.
C. They can report only their own income on their own separate returns.
D. Community property laws state that each spouse is entitled to 50% of total community income and expenses, so they must divide their income equally on their separate returns.

Answer 38

D. Community property laws state that each spouse is entitled to 50% of total community income and expenses, so they must divide their income equally on their separate returns.

Community property laws state that each spouse is entitled to 50% of total community income and expenses, so they must divide their income equally on their separate returns. If a taxpayer in a community property state files a Married Filing Separate (MFS) return, they must fill out the MFS allocation for Community Property states using Form 8958.

Question 39

Patsy and Owen live in Texas, which is common-law state and a community property state. The couple lives together, own a house together, and tell family and friends that they are married. They have two children together. They do not have a formal marriage license, however. What is their filing status?

A. They are considered unmarried, and each would be able to file as “head of household” by claiming one of their children.
B. Since they do not have a formal marriage license, they are each considered “single” for tax purposes.
C. They are considered to be partners in a civil union.
D. Since Texas is a common-law state, they are likely considered married under state law, and must file either MFJ or MFS.

Answer 39

D. Since Texas is a common-law state, they are likely considered married under state law, and must file either MFJ or MFS.

Since Texas is a common-law state, they are likely considered married under state law, and must file either MFJ or MFS. A common law marriage is a legally recognized marriage between two people who have not purchased a marriage license, or had a formal ceremony. Taxpayers who live together in a common-law state may have a marriage recognized by the state, even without a formal license. Currently, the common-law states are: Alabama, Colorado, District of Columbia, Iowa, Kansas, Montana, Oklahoma, Pennsylvania, Rhode Island, South Carolina, and Texas.

Question 40

Rhett and Skylar are married and file jointly. They operate an unincorporated business together, but they do not want to file a partnership tax return. They live in New Jersey, which is not a community property state. The business is not an LLC or any other state-law entity. What are their options?

A. They are required by law to file a partnership tax return.
B. One spouse can claim all the income.
C. The spouses can elect to file as a Qualified Joint Venture.
D. The spouses can file a single Schedule C and alternate years.

Answer 40

C. The spouses can elect to file as a Qualified Joint Venture.

The spouses can elect to file as a Qualified Joint Venture. A qualified joint venture (QJV) conducted by married spouses who file a joint return for a tax year is not treated as a partnership for Federal tax purposes. A qualified joint venture is a joint venture that conducts a trade or business where:

The only members of the joint venture are a married couple who file a joint return,
Both spouses materially participate in the trade or business, and
Both spouses elect not to be treated as a partnership.
Spouses make the “qualified joint venture” (QJV) election on a jointly filed Form 1040 by dividing all items of income, gain, loss, deduction, and credit between them in accordance with each spouse’s respective interest in the joint venture, and each spouse filing with the Form 1040 a separate Schedule C, (or Schedule F). Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity, such as an LLC or LLP) qualify for the QJV election (there is a narrow exception for couples who reside in community property states, who can still elect QJV treatment if they operate a MMLLC together as sole owners).

Question 41

Gilbert and Brittney are getting divorced. Gilbert has decided to buy Brittney out of their jointly-owned rental property as a condition of the divorce. What is the proper classification of this payment?

A. A deductible property settlement.
B. A non-deductible property settlement.
C. Non-deductible child support.
D. The buyout is treated as a taxable sale to Brittney.

Answer 41

B. A non-deductible property settlement.

This is classified as a non-deductible property settlement. Property transfers “incident to divorce” are not taxable income to the recipient and, therefore, are not tax-deductible to the payor. For more information, see Publication 504, Divorced or Separated Individuals.

Question 42

Isabella files as single and has no dependents or refundable credits. All her income is from wages.
Based on the figures below, is she required to pay estimated taxes in the current year?
AGI for prior tax year (2022) $73,700
Total tax on her prior-year return (2022) $9,224
Anticipated AGI for the current year (2023)$82,800

Total current-year estimated tax liability (2023)$11,270
Tax expected to be withheld in the current year$10,250

A. Yes, she is required to make estimated tax payments.
B. No, she is not required to make estimated tax payments.
C. She is not required to make estimated tax payments because she is not self-employed.
D. None of the above is correct.

Answer 42

The answer is B. Isabella does not need to pay estimated tax because she expects her income tax
withholding in the current year ($10,250) to be greater than both—90% of the tax to be shown on her
current year return ($11,270 × 90% = $10,143) and 100% of her prior-year tax liability ($9,224).
Therefore, Isabella qualifies for the safe harbor rule and is not required to make estimated tax payments. A taxpayer is not required to pay estimated tax if:
* The taxpayer was a U.S. citizen or resident alien and had no tax liability in the prior year, and
* The prior tax year covered a twelve-month period. A taxpayer also does not have to pay estimated tax if she pays enough through withholding so that the
tax due on the return is less than $1,000. In most cases, a taxpayer must pay estimated tax if she expects withholding (plus any refundable credits) to be less than the smaller of:
* 90% of the tax to be shown on the current year tax return, or
* 100% of the tax shown on the prior-year tax return.

Question 43

3. Milla, age 26, and Leonardo, age 31, are married and live together. Leonardo’s income was $45,000
   in wages. Milla did not work and had no taxable income for the year. Milla refuses to file a joint tax
   return with Leonardo. Based on this information, which of the following statements is correct?
   A. Leonardo is required to file a tax return. He must file MFS. Milla is not required to file a return.
   B. They are both required to file tax returns, whether they file jointly or separately.
   C. Leonardo is required to file a tax return, and he can claim his wife as a dependent.
   D. Neither is required to file a tax return.

Answer 43

The answer is A. Leonardo is required to file a tax return. Milla is not required to file a return.
Leonardo will be required to file MFS (married filing separately) because Milla will not file jointly with
him. Milla does not have any taxable income and therefore does not have to file a return.