Question 1

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 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

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

Accepted Answer

If the IRS determines that a taxpayer's tax deficiency is due to fraud, they may impose a fraud penalty instead of a negligence penalty. The fraud penalty is much more severe than the negligence penalty and can result in substantial fines and even criminal prosecution. Therefore, the negligence penalty is not imposed when fraud is involved.

Question 4

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

As long as the CPA firm follows certain procedures, outsourcing tax return preparation to a group of accountants in India is considered proper. The procedures typically include ensuring confidentiality of client information, providing adequate training to the offshore accountants, and maintaining oversight and quality control over the outsourced work.

Question 5

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 statement is true. The tax law allows individuals and corporations to carry forward the excess charitable contributions of a particular year to the next year or future years, to mitigate the effect of the annual accounting period concept. This provision provides taxpayers with additional flexibility in managing their tax liability and supporting charitable causes over an extended period.

Question 6

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

As long as the practitioner is not aware of any fraudulent or incorrect information on the client's previous returns, they can continue to prepare future returns for the client. However, the practitioner should advise the client of the potential consequences of not correcting any errors on past returns.

Question 7

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 would not prefer for Congress to decrease the standard deduction as it would mean more taxpayers are required to itemize their deductions, causing more administrative burden on the IRS. The IRS would prefer to have a higher standard deduction allowed to reduce the number of taxpayers required to itemize.

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 tax cut does not decrease government revenue, which is not achieved with phased-in tax cuts as they initially reduce revenue and the full cost is not realized until later years.

Question 9

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 known as the foreign tax credit or deduction and is designed to prevent double taxation of the same income in both the United States and a foreign country.

Question 10

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 11

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 wherewithal to pay concept allows taxpayers to recognize gain as they receive payments, not necessarily in the year the sale occurs, which is why installment sales are taxed as payments are received.

Question 12

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

Accepted Answer

The objective of pay-as-you-go (paygo) is indeed to improve administrative feasibility by simplifying and reducing the costs of managing pension and social insurance schemes. Under paygo, current workers' contributions fund the benefits of current retirees, rather than setting aside funds for future payouts, which can be complicated and expensive to manage.

Question 13

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 14

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

Accepted Answer

Taxpayers do not have to answer all questions on the tax return if the questions do not apply to their situation. However, they must answer all questions that do apply to their situation truthfully and accurately.

Question 15

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

The wherewithal to pay concept allows taxpayers to defer recognition of gain if they reinvest the proceeds from a casualty or condemnation into similar property. As long as the amount reinvested is equal to or greater than the amount received, no gain is recognized. This applies even if the insurance proceeds exceed the basis of the property. Therefore, if Jason reinvests the proceeds in a new warehouse shortly, he can defer recognition of gain.

Question 16

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

Accepted Answer

The use of client's estimates is permitted in preparing an income tax return, but it is the responsibility of the preparer to ensure that the estimates are reasonable and supported by documentation.

Question 17

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 18

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 question statement is correct, as the 20% negligence penalty only applies to the portion of the deficiency that is attributable to negligence, which is $25,000 in this case.

Question 19

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 encourage retirement plans can have economic benefits, such as promoting savings and reducing reliance on government assistance in later years, as well as social benefits, such as enhancing financial security and well-being in retirement.

Question 20

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 date or period of time, making it temporary.

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