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

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 inconsistent with generally accepted accounting principles.

Accepted Answer

Generally accepted accounting principles require that revenue be recognized when earned, not when received. Therefore, the provision in the law that requires accrual basis taxpayers to pay a tax on prepaid income in the year received and not when earned is inconsistent with GAAP.

Question 3

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

Accepted Answer

The answer of Various tax provisions encourage the creation of...

Question 4

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

It is possible for a practitioner to continue to prepare returns for a client even if the client refuses to correct an error on a past return. However, the practitioner should document the client's refusal in the client's file and consider the risks of preparing future returns with potential errors.

Question 5

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

Accepted Answer

If the standard deduction is increased, more taxpayers will opt for it rather than itemizing their deductions, thereby reducing the workload of the IRS in processing tax returns.

Question 6

As it is consistent with the wherewithal to pay concept, the tax law requires a seller to recognize gain in the years the proceeds from the installment sale are collected.

Accepted Answer

The wherewithal to pay concept states that a taxpayer should recognize income when they have the ability to pay associated taxes, and in the case of an installment sale, this means recognizing gain in the years the proceeds are actually collected.

Question 7

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

Accepted Answer

This statement is true. The tax law permits the carryforward of excess capital losses from a particular year to other years to mitigate the effects of the annual accounting period concept.

Question 8

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

Accepted Answer

Client's estimates may be used in preparing an income tax return, but the preparer must make sure that they are reasonable and based on factual information.

Question 9

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

Accepted Answer

A sunset provision sets a specific date when the tax cut will expire, making it temporary.

Question 10

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 maintaining client confidentiality and ensuring the Indian accountants have the necessary training and knowledge, are followed.

Question 11

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 social grounds.

Accepted Answer

Tax credits, deductions, and exclusions for education can promote economic growth by improving the skills and knowledge of the workforce. Additionally, education is considered a social good, so offering tax incentives for education can help increase access to education and reduce inequality.

Question 12

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 13

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 increase or decrease government revenue. Phasing in a tax cut over a period of years would result in a revenue loss for the government during those years, so revenue neutrality would not be achieved.

Question 14

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 $40,000.

Accepted Answer

The 20% negligence penalty only applies to the portion of the deficiency that is attributable to negligence, which in this case is $25,000. Therefore, the penalty would be $5,000 (20% of $25,000) not $8,000 (20% of $40,000).

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 for the deferral of gain recognition if the proceeds from the destroyed property are reinvested in a replacement property. As long as the replacement property is of a similar nature or use as the destroyed property and the proceeds are reinvested in a timely manner, no gain needs to be recognized.

Question 16

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 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 statement is true. The foreign tax credit or deduction is used to avoid double taxation on the same income earned in both foreign and US jurisdictions.

Question 18

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

Accepted Answer

Taxpayers are not required to answer questions on the tax return that do not apply to their specific tax situation. However, they are required to provide accurate and complete information for all applicable questions.

Question 19

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 20

The objective of pay-as-you-go (paygo) is to achieve revenue neutrality.

Accepted Answer

Pay-as-you-go (paygo) aims to ensure that new spending or tax cuts do not add to the federal deficit, resulting in revenue neutrality. This means that any new spending or tax cuts must be offset by corresponding revenue increases, such as tax hikes or spending cuts, so that there is no net increase in the deficit.

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