Question 1

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

Accepted Answer

Clients may use estimates to prepare their tax return if they do not have all the necessary information to determine the exact amounts, but the tax preparer must make it clear on the return that estimates were used. However, the tax preparer should not base their calculations solely on the client's estimates without attempting to verify them or obtain more accurate information.

Question 2

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 3

Jason's business warehouse is destroyed by fire.Because 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

The statement is true. The wherewithal to pay concept allows for the deferral of gain recognition if insurance proceeds from a casualty loss are reinvested in similar property. In this case, since the insurance proceeds exceed the basis of the destroyed warehouse, a gain is realized. However, if Jason reinvests the proceeds in a new warehouse, no gain is recognized due to the application of the wherewithal to pay concept.

Question 4

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

Accepted Answer

This statement is true. The tax law does allow for the carryforward of excess charitable contributions to future years in order to mitigate the effect of the annual accounting period concept. This allows taxpayers to still receive a tax benefit for their charitable donations even if they do not exceed the annual limit in a particular year.

Question 5

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 incorrect. The IRS don't prefer to have Congress decrease the standard deduction allowed to individual taxpayers. It is not a matter of administrative convenience, but a matter of tax policy and political decisions made by Congress.

Question 6

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 foreign country is permissible if certain procedures are followed, such as obtaining written consent from clients and ensuring that the foreign firm has proper security measures in place to protect client information. However, it is important to note that some states have restrictions or limitations on this practice, so it is important to comply with all applicable regulations.

Question 7

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 statement is true. The deduction or credit is allowed to prevent double taxation of the same income.

Question 8

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

While it is important to encourage clients to correct any errors on their tax returns, a practitioner can still prepare future returns for a client who refuses to correct a past error. However, it is important to document the situation and any advice given to the client in case of any future issues or audits.

Question 9

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

Accepted Answer

Not all questions on a tax return may apply to every taxpayer. Only relevant questions should be answered, and if a question is not applicable, it can be left blank or filled with "N/A" or "0". Answering incorrectly or leaving out information can result in penalties or errors on the return.

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 negligence penalty applies when the underpayment is caused by intentional disregard of rules and regulations, but without intent to defraud.

Question 11

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

Accepted Answer

Pay-as-you-go (paygo) is a system in which a portion of a person's income is taken out and paid directly to the government as taxes. The objective of this system is to improve administrative feasibility, as it is easier to collect taxes in smaller amounts spread out over time rather than in one lump sum at a later date.

Question 12

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 13

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

Accepted Answer

Under the installment sale method, the seller recognizes gain as payments are received, not necessarily in the year the sale occurs, allowing for tax payment to be spread over the period payments are received.

Question 14

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 15

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 16

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

Accepted Answer

When a tax deficiency is attributable to fraud, the IRS typically imposes a fraud penalty, which is more severe than the negligence penalty, and the negligence penalty is not additionally applied for the same act or portion of the deficiency.

Question 17

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 is set to expire or end after a certain period of time. Therefore, the tax cut would be temporary.

Question 18

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 that incentivize retirement savings can have economic benefits, such as reducing the burden on government-funded retirement programs, and social benefits, such as improving individuals' financial security in old age.

Question 19

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 tax cut does not result in a decrease in government revenue. If the tax cut is phased in over a period of years, it will initially result in a decrease in revenue before eventually reaching revenue neutrality. Therefore, revenue neutrality is not immediately achieved when a tax cut is phased in over time.

Question 20

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 true. The 20% negligence penalty applies only to the portion of the deficiency that is attributable to negligence, which in this case is $25,000.

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