Question 1

If a project results in a loss, the tax effect causes a decrease in cash flow.

Accepted Answer

The tax effect of a loss typically results in a tax benefit, reducing the overall tax liability and potentially increasing cash flow due to tax savings.

Question 2

Legal income shifting includes shifting income among relatives and between a business and its owner/employee.

Accepted Answer

Legal income shifting can involve transferring income from a higher tax bracket family member to a lower tax bracket family member, as well as structuring business transactions to reduce the tax burden on both the business and the owner/employee. However, it is important to note that there are strict rules and regulations surrounding income shifting, and any attempts to do so illegally can result in severe penalties.

Question 3

The Golsen rule requires the Tax Court to follow all other Federal District Court decisions in the same Circuit.

Accepted Answer

The Golsen rule requires the Tax Court to follow the ruling of the Court of Appeals for the circuit to which a case would be appealable, not all Federal District Court decisions in the same Circuit.

Question 4

A memo to file for a client should be more detailed than the client letter.

Accepted Answer

A memo to file is an internal document that provides a detailed account of a client's situation or interactions with the firm. It is not meant to be shared with the client, so it can include more specific and sensitive information than a client letter. A client letter is typically intended for the client to read and should be written in clear and concise language.

Question 5

The business purpose doctrine requires a transaction to have an economic purpose other than one based solely on tax avoidance.

Accepted Answer

The business purpose doctrine is a legal principle where a transaction must have a legitimate business purpose other than solely for tax benefits in order to be considered valid for tax purposes. Therefore, the statement is true.

Question 6

A letter ruling can only be relied on by the taxpayer for whom it is written.

Accepted Answer

A letter ruling is specific to the taxpayer who requested it and cannot be used as legal precedent for others.

Question 7

Only CPAs, Enrolled Agents, and Attorneys who prepare tax returns for pay must obtain preparer tax identification numbers.

Accepted Answer

All paid tax preparers are required to obtain a Preparer Tax Identification Number (PTIN), not just CPAs, Enrolled Agents, and Attorneys.

Question 8

If a CPA finds an error on a previously filed tax return of a client, he or she should advise the client to file an amended return to correct the error.

Accepted Answer

It is the responsibility of a CPA to advise their clients to file an amended return if they find any errors on a previously filed tax return.

Question 9

The Internal Revenue Service has the burden of proof when it is asserting fraud with the intent to evade taxes on the part of the taxpayer.

Accepted Answer

This is known as the "clear and convincing evidence" standard, which means the IRS has a higher burden of proof than with other types of tax cases.

Question 10

The Internal Revenue Service is part of the Justice Department.

Accepted Answer

The Internal Revenue Service (IRS) is not part of the Justice Department, it is a bureau of the Department of the Treasury.

Question 11

If a firm's discount rate is lower than another firm's, the present value of its future cash flows will be higher.

Accepted Answer

A lower discount rate means that the firm places a higher value on future cash flows, leading to a higher present value.

Question 12

The statute of limitations for an error overstating expenses by more than 25 percent is 3 years.

Accepted Answer

The statute of limitations for an error overstating expenses by more than 25 percent is indeed 3 years. After 3 years have passed, the IRS cannot audit or make adjustments to tax returns based on that error.

Question 13

A transaction for which there is no legitimate business purpose is automatically assessed a 50% penalty.

Accepted Answer

The statement is too absolute. While certain transactions without legitimate business purposes may incur penalties, the specific penalty rate (such as 50%) depends on the jurisdiction, the specific laws violated, and the discretion of the tax authority or regulatory body assessing the penalty. Penalties vary widely based on the nature of the transaction and the legal framework.

Question 14

A proposed regulation can be relied on when planning a transaction.

Accepted Answer

The answer of A proposed regulation can be relied on...

Question 15

15 The Cumulative Bulletin contains reports of all the committees involved in tax writing as well as statements made on the floor of the House or Senate.

Accepted Answer

The Cumulative Bulletin primarily publishes Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest, but it does not contain reports of all the committees involved in tax writing or statements made on the floor of the House or Senate.

Question 16

Circular 230 is issued by the AICPA to provide guidance on tax return preparation by CPAs.

Accepted Answer

Circular 230 is actually issued by the IRS to provide guidance on standards of practice for tax professionals, including CPAs.

Question 17

The Internal Revenue Service must pay interest on any refund that is not mailed within 30 days of the date the taxpayer's tax return is filed.

Accepted Answer

The Internal Revenue Service is required to pay interest on a refund if it is not issued within 45 days of the tax return filing deadline or the date the return was filed, whichever is later.

Question 18

Acquiescence by the Internal Revenue Service's Commissioner means that the IRS will follow the decision in the future.

Accepted Answer

Acquiescence means that the IRS will follow the decision in the future.

Question 19

The higher a firm's marginal tax rate used for project evaluation, the greater the net cash flow from the project.

Accepted Answer

The higher a firm's marginal tax rate, the lower the net cash flow from the project due to increased tax payments.

Question 20

Tax avoidance is the minimization of the tax burden by using acceptable, legal alternatives.

Accepted Answer

Tax avoidance is the legal use of tax laws to reduce the amount of tax owed. It is different from tax evasion, which is illegally avoiding paying taxes.

Quiz 2: The Tax Practice Environment