Question 1

Stealth taxes have the effect of generating additional taxes from all taxpayers.

Accepted Answer

Stealth taxes often target specific groups or behaviors, rather than generating additional taxes from all taxpayers. They can be structured in ways that may not affect everyone equally.

Question 2

If the tax deficiency is attributable to fraud, the negligence penalty will not be imposed.

Accepted Answer

If the tax deficiency is attributable to fraud, the IRS will not impose the negligence penalty. However, the IRS may impose a civil fraud penalty of 75% of the underpayment.

Question 3

The objective of pay-as-you-go paygo) is to improve administrative feasibility.

Accepted Answer

Pay-as-you-go (paygo) systems simplify the administrative process for collecting taxes and paying benefits, making it more feasible for governments to implement and manage.

Question 4

To mitigate the effect of the annual accounting period concept, the tax law permits the carryforward to other years of the excess charitable contributions of a particular year.

Accepted Answer

The tax law allows for the carryforward of excess charitable contributions from one year to another to mitigate the impact of the annual accounting period concept.

Question 5

The tax law provides various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. These provisions can be justified on both economic and equity grounds.

Accepted Answer

The answer of The tax law provides various tax credits,...

Question 6

In preparing an income tax return, the use of a client's estimates is not permitted.

Accepted Answer

The use of estimates is permitted in certain situations, such as when a client's exact income or expenses cannot be determined with absolute certainty. However, the estimates must be reasonable and based on accurate information.

Question 7

Upon audit by the IRS, Faith is assessed a deficiency of $40,000 of which $25,000 is attributable to negligence. The 20% negligence penalty will apply to $25,000.

Accepted Answer

The statement is correct. The negligence penalty is only applied to the portion of the deficiency that is due to negligence, which in this case is $25,000. Therefore, the penalty would be 20% of $25,000, which is $5,000.

Question 8

When Congress enacts a tax cut that is phased in over a period of years, revenue neutrality is achieved.

Accepted Answer

Revenue neutrality means that the revenue generated remains constant, and a phased-in tax cut would result in a gradual decrease in revenue. Therefore, a tax cut that is phased in over a period of years would not achieve revenue neutrality.

Question 9

Various tax provisions encourage the creation of certain types of retirement plans. Such provisions can be justified on both economic and social grounds.

Accepted Answer

Tax provisions such as tax-deferred contributions, employer matching contributions, and tax credits for small businesses all incentivize the establishment and maintenance of retirement plans, which can help people save for retirement and improve financial security. This can benefit both individuals and society as a whole by reducing reliance on government benefit programs and promoting financial independence.

Question 10

For the negligence penalty to apply, the underpayment must be caused by intentional disregard of rules and regulations without intent to defraud.

Accepted Answer

The answer of For the negligence penalty to apply, the...

Question 11

A CPA firm in California sends many of its less complex tax returns to be prepared by a group of accountants in India. If certain procedures are followed, this outsourcing of tax return preparation is proper.

Accepted Answer

Outsourcing tax return preparation to a group of accountants in India is allowed if certain procedures, such as obtaining client consent and ensuring the confidentiality of information, are followed.

Question 12

A tax cut enacted by Congress that contains a sunset provision will make the tax cut temporary.

Accepted Answer

A sunset provision means that the tax cut will expire after a certain period of time. So, the tax cut will be temporary.

Question 13

The civil fraud penalty can entail large fines and possible incarceration.

Accepted Answer

The civil fraud penalty typically involves monetary fines and does not include incarceration, which is a consequence associated with criminal fraud, not civil fraud.

Question 14

Jason's business warehouse is destroyed by fire. As the insurance proceeds exceed the basis of the property, a gain results. If Jason shortly reinvests the proceeds in a new warehouse, no gain is recognized due to the application of the wherewithal to pay concept.

Accepted Answer

This is correct. The wherewithal to pay concept allows for the non-recognition of gains if the proceeds from the destroyed property are reinvested in a replacement property within a certain time frame. In this case, as long as Jason reinvests the insurance proceeds in a new warehouse, he will not have to recognize a gain.

Question 15

Even though a client refuses to correct an error on a past return, it may be possible for a practitioner to continue to prepare returns for the client.

Accepted Answer

The practitioner can continue to prepare returns for the client, but they should not sign the returns as the preparer if they know there is an error that has not been corrected. Additionally, the practitioner should document their communication with the client about the error and advise the client of their legal obligations to correct any errors on their tax returns.

Question 16

As a matter of administrative convenience, the IRS would prefer to have Congress decrease rather than increase) the amount of the standard deduction allowed to individual taxpayers.

Accepted Answer

The statement is false. The IRS would prefer to have Congress increase the standard deduction allowed to individual taxpayers, as this would simplify tax preparation and reduce the number of taxpayers who choose to itemize their deductions.

Question 17

To lessen, or eliminate, the effect of multiple taxation, a taxpayer who is subject to both foreign and U.S. income taxes on the same income is allowed either a deduction or a credit for the foreign tax paid.

Accepted Answer

This is correct according to the U.S. tax code. Taxpayers can choose to take a credit for foreign taxes paid on their U.S. tax return to lessen or eliminate the effect of double taxation. A deduction may also be available for certain foreign taxes paid, but typically the credit is more beneficial.

Question 18

A provision in the law that compels accrual basis taxpayers to pay a tax on prepaid income in the year received and
not when earned is consistent with generally accepted accounting principles.

Accepted Answer

Generally Accepted Accounting Principles (GAAP) allow for the recognition of revenue when it is earned, not necessarily when it is received. This principle is in contrast to the described provision that requires tax on prepaid income to be paid in the year received.

Question 19

As it is consistent with the wherewithal to pay concept, the tax law requires a seller to recognize gain in the year the installment sale occurs.

Accepted Answer

The answer of As it is consistent with the wherewithal...

Question 20

In preparing a tax return, all questions on the return must be answered.

Accepted Answer

Taxpayers are not required to answer every question on a tax return if the question does not apply to their situation. They should only provide accurate and complete information to the best of their knowledge.

Quiz 1: An Introduction to Taxation and Understanding the Federal Tax Law