Deck 2: The Tax Practice Environment

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

14 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.

Question 6

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

Question 7

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.

Question 8

Explain how tax compliance differs from tax planning.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

The Internal Revenue Service is part of the Justice Department.

Question 15

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

Question 16

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

Question 17

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

Question 18

The statute of limitations for a fraudulent return is 6 years.

Question 19

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

Question 20

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

Question 21

Joaquin did not have any money to pay his $2,000 tax liability on April 15 so he did not file his tax return.He finally filed the return on July 25 and paid $1,000 of the tax due.He paid the remaining tax due on October 18.What is his total penalty?

Question 22

What are three factors that can affect the after-tax cash flow of a project? How does each affect this cash flow?

Question 23

Berman Corporation can accept only one of two projects.The revenue and expenses for each of the projects is shown below.Which project should Berman accept if the corporation has a 10 percent cost of capital and a 34 percent marginal tax rate?

Question 24

What is meant by the phrase "substance over form"?

Question 25

Explain the Golsen rule.

Question 26

What are the steps that are usually required between introduction and passage of a revenue bill?

Question 27

When may a CPA use estimates in the preparation of a client's tax return?

Question 28

What is meant when the Commissioner of the Internal Revenue Service acquiesces to a court decision?

Question 29

Explain the difference between a closed fact and an open fact transaction.

Question 30

Explain what is meant by the statute of limitations.

Question 31

Which tax return preparers are required to obtain preparer tax identification numbers?

Question 32

What is the difference between a primary and a secondary source of tax authority?

Question 33

Kitty's tax return,which she filed on April 15,showed a balance due of $8,500.She did not have the money to pay this amount.On September 20,she was finally able to borrow sufficient money to pay the debt.What is Kitty's late payment penalty?

Question 34

Explain the step transaction doctrine.

Question 35

Explain the difference between tax avoidance and tax evasion.

Question 36

What is the purpose of Treasury Regulations?

Question 37

What is the difference between an interpretive regulation and a legislative regulation?

Question 38

Explain what is meant by changing the character of income? Provide an example.

Question 39

What is the difference between a letter ruling and a revenue ruling?

Question 40

To which trial courts may a taxpayer contest a decision of the IRS?

Question 41

Which type of audit is most frequently used for examination of business returns?

A)Correspondence audit
B)Office audit
C)Noncompliance audit
D)Field audit

Question 42

To which court can a taxpayer appeal an IRS deficiency notice without paying the tax?

A)District Court
B)Tax Court
C)Court of Federal Claims
D)Court of Appeals for the Federal Circuit

Question 43

Which penalty is equal to 75 percent of the tax underpayment?

A)Failure to file
B)Failure to pay
C)Negligence
D)Fraud

Question 44

Shelly runs a small business as a sole proprietorship.The business has average annual income of $60,000 and Shelly takes $30,000 out of the business for living expenses each year.If her marginal tax rate is 25 percent due to other income,what is the net income tax effect if she incorporates her business and takes the $30,000 as salary? (Ignore employment taxes.)

Question 45

What is the after-tax net present value of a project costing $600,000 that Plud Corporation can invest in if the project has the following estimated revenues and expenses?
Plud uses an 8 percent discount rate for evaluation and expects a 34 percent marginal tax rate in the relevant years.

Question 46

Carol wants to invest in a project that requires a $20,000 investment.She expects a before-tax return of $16,000 in years 1 through 3 from this investment.She uses a 6 percent discount rate for evaluation but is not sure if her marginal tax rate will be 15 percent or 25 percent.What difference does the marginal tax rate make in the after-tax net present value of this investment?

Question 47

Cynthia and John have dependent twins ages 18.Their joint income places them in the 33 percent marginal tax bracket.What are their total tax savings if they can transfer $2,000 of taxable income to each of the children? The children have no other income that is taxable.

Question 48

If the due date for a tax return is extended for a taxpayer who has a $2,000 balance due,the taxpayer

A)has 30 days following the original due date to pay the $2,000 due without interest
B)has 60 days following the original due date to pay the $2,000 due without interest
C)has 6 months following the original due date to pay the $2,000 due without interest
D)must pay the tax due by the original due date to avoid interest

Question 49

What is the penalty for taxpayers who fail to pay their tax liability on a timely basis based on the taxes owing?

A)5% per month
B)2% per month
C)0.5% per month
D)$100 per month

Question 50

William purchased 10,000 shares of stock for $10 per share late last month.Due to a proposed hostile takeover of the company,the stock has jumped in price to $16 per share.If he holds the stock for at least a full year,he believes the price will decline to $14 per share but he will be eligible for the 15 percent long-term capital gains rate for his gain.If he sells now,his gain will be subject to his 33 percent marginal tax rate.Should William sell now or wait one year? Use a one-year present value factor of .909 in your evaluation.

Question 51

A taxpayer will receive a 30-day letter

A)only if the taxpayer is more than 30 days late in filing the tax return.
B)to provide notification that the taxpayer's return has been selected for audit.
C)after a 90-day notice of deficiency notifying the taxpayer there is only a 30-day period to file a protest in court
D)as the first notice of a proposed deficiency

Question 52

How long after receiving a Statutory Notice of Deficiency does the taxpayer have to file a petition with the Tax Court?

A)30 days
B)60 days
C)90 days
D)6 months

Question 53

What is the first notice of a proposed deficiency that a taxpayer receives?

A)Examination letter
B)90-day letter
C)60-day letter
D)30-day letter

Question 54

What is the minimum penalty for a taxpayer who fails to file his or her return for over 60 days past the due date without reasonable cause?

A)The amount owed on the return
B)$135
C)The amount owed on the return or $135,whichever is less
D)4.5% of the amount owed on the return.

Question 55

Which of the following types of returns does not have an unextended due date of the 15th day of the 4th month after the end of the tax year?

A)S corporations
B)Partnerships
C)Individuals
D)Trusts

Question 56

Claudia owns business property that has increased in value by $20,000.If she sells now,three weeks before the end of the tax year,it will be subject to her current 33 percent marginal tax rate.If she waits until the beginning of the next year,she expects her marginal tax rate to decrease to 25 percent.How much more tax will she pay if she sells now rather than waiting the three weeks until next year?

Question 57

An individual may apply for an automatic extension of time to file a return of

A)Extensions are not permitted
B)3 months
C)4 months
D)6 months

Question 58

Ryan filed his tax return 40 days after the due date and included a check for the $1,800 balance due with the return.Ryan's failure-to-file penalty is

A)25%
B)20% per month (or partial month)
C)5% per month (or partial month)up to a maximum of 25%
D)0.5% per month (or partial month)up to a maximum of 25%

Question 59

What is the unextended due date for a corporation with a March 31 year-end?

A)April 15
B)May 15
C)June 15
D)July 15

Question 60

The IRS must pay interest on

A)tax refunds paid later than 30 days after the due date.
B)tax refunds paid later than 45 days after the due date.
C)all tax refunds.
D)The IRS never pays interest on tax refunds.

Question 61

The business purpose doctrine:

A)Requires a transaction to be initiated by a business
B)Requires a transaction to benefit the business owner
C)Requires the transaction to have an economic purpose other than tax avoidance
D)Requires the treatment of a transaction to be based on reality not appearances

Question 62

Changing which of the following factors as indicated would increase the after-tax net cash flow of a project:

A)Delaying revenue recognition
B)Increasing the discount rate
C)Delaying expense recognition
D)Increasing the marginal tax rate
E)None increase cash flows

Question 63

All of the following are primary sources of tax law except:

A)Internal Revenue Code
B)Treasury regulations
C)Report of the House Ways and Means Committee
D)Supreme Court decisions
E)All are primary sources of the tax law

Question 64

If a tax preparer is convicted of criminal tax evasion,the preparer may be subject to a penalty of

A)a $100,000 fine only
B)prison only
C)Both a and b
D)Neither a nor b

Question 65

According to the Statements on Standards for Tax Services,if a CPA discovers an error in a prior return prepared by another tax return preparer,the CPA

A)is required to notify IRS immediately
B)should notify the client of the error and request permission to disclose the error to the IRS
C)must immediately withdraw from the engagement
D)is required to correct the error on the prior year's return even if it does not affect the current year's tax return

Question 66

An open-fact situation means that

A)all of the client's transactions have occurred and the research focuses on finding support for the action already taken.
B)all of the client's transactions have not yet occurred so the events may be carefully planned.
C)the client's tax return has not yet been filed.
D)the client is requesting assistance regarding a previously filed tax return.

Question 67

A high DIF score indicates which of the following?

A)The taxpayer is likely to get a refund
B)The taxpayer's chances of audit are substantially less than 2%
C)IRS will automatically grant an extension of time to appeal
D)The taxpayer's chances of audit are fairly high

Question 68

Failure to follow the AICPA Code of Conduct can result in

A)A fine
B)Suspension
C)Expulsion
D)Both a and b
E)Either b or c

Question 69

Which of the following is not a requirement to qualify for innocent spouse relief?

A)The individual electing innocent spouse relief must have been abandoned by her spouse for more than 6 months.
B)The individual establishes that she did not know and had no reason to know that there was an understatement
C)It would be inequitable to hold the individual liable for the deficiency attributable to the understatement when all facts and circumstances are considered
D)The individual elects innocent spouse relief within the time period that the statute of limitation is open for collection activities.

Question 70

A closed-fact situation means that

A)all of the client's transactions have occurred and the research focuses on finding support for the action already taken.
B)all of the client's transactions have not yet occurred so the events may be carefully planned.
C)the client's tax return has not yet been filed.
D)the client is requesting tax planning advice for a future transaction.

Question 71

Which of the following is the highest authority for tax research?

A)Internal Revenue Code
B)Treasury Regulations
C)Revenue Procedures
D)Revenue Rulings

Question 72

All of the following are part of the tax research process except:

A)Establish the facts
B)Locate relevant authority
C)Identify the issues
D)Communicate the findings
E)All are part of the tax research process

Question 73

Which of the following is not one of the Statements on Standards for Tax Services?

A)Tax Return Positions
B)Discovery of Fraud
C)Use of Estimates
D)Departure from a Previous Position

Question 74

Which of the following paid tax return preparers must have a preparer tax identification number?

A)CPAs
B)Attorneys
C)Enrolled Agents
D)All of the above

Question 75

Which of the following does not deal with a CPA's standard of conduct

A)Treasury Circular 230
B)AICPA Code of Conduct
C)Internal Revenue Service Manual
D)Statement of Standards for Tax Services

Question 76

What effect does an increased discount rate have on project evaluations?

A)Increases net cash flow
B)Decreases net cash flow
C)Increases the probability that a project will be accepted
D)It has no effect on project evaluation

Question 77

An offer in compromise is initiated by

A)The Tax Court
B)A Revenue agent
C)The taxpayer
D)IRS General Council

Question 78

A six-year status of limitations applies if the taxpayer

A)understates adjusted gross income by 25%
B)understates taxable income by 25%
C)understates gross income by 25%
D)overstates deduction by 25%

Question 79

If a tax return preparer prepares a return that involves a "listed transaction," the preparer can avoid all penalties if

A)the position is not unreasonable.
B)the position has a possibility of success.
C)the preparer has substantial authority for the position
D)the position has no support but there is no evidence of fraud.

Question 80

Changing which of the following factors as indicated would decrease the after-tax net cash flow of a project:

A)Delaying the years in which inflows occur
B)Delaying revenue recognition
C)Increasing the discount rate
D)All decrease cash flows
E)None decrease cash flows