Question 1

Copp Co. can invest in a project that costs $200,000. It is expected to provide a lump sum after-tax return of $300,000. If Copp uses an 8 percent discount rate for evaluation, in what year must it recover the $300,000 to produce a positive net cash flow?

Accepted Answer

To find out the year in which Copp must recover the $300,000, we need to calculate the present value (PV) of the investment using the formula PV = FV / (1+r)^n, where FV is the future value or the expected return, r is the discount rate, and n is the number of years. 
Here, PV = $200,000 (the cost of the project), FV = $300,000, r = 0.08, and n = ? 
200,000 = 300,000 / (1+0.08)^n 
(1.08)^n = 1.5 
n = log 1.5 / log 1.08 = 5.12 
Therefore, Copp must recover the $300,000 in the 5th year to produce a positive net cash flow.

Question 2

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

Accepted Answer

The answer of What is the first notice of a...

Question 3

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

Accepted Answer

All paid tax return preparers, including CPAs, attorneys, and enrolled agents, are required to have a preparer tax identification number (PTIN) in order to file tax returns with the IRS.

Question 4

An offer in compromise is initiated by

Accepted Answer

An offer in compromise is a tax settlement option initiated by the taxpayer, who requests to negotiate with the IRS to settle their tax debt for an amount less than what they owe. The taxpayer makes an offer based on their financial situation and the IRS will then review the offer to determine if they will accept it.

Question 5

Eduardo filed his 2017 tax return on March 15, 2018. Eduardo accidentally omitted $10,000 of income from his individual tax return. The total gross income shown on the tax return was $35,000. When will the statute of limitations expire for Eduardo's 2017 tax return?

Accepted Answer

The answer of Eduardo filed his 2017 tax return on...

Question 6

A taxpayer will receive a 30-day letter

Accepted Answer

The answer of A taxpayer will receive a 30-day letter
...

Question 7

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

Accepted Answer

According to Statement on Standards for Tax Services No. 6, a CPA who discovers an error in a prior year's return prepared by another tax return preparer should notify the client of the error and request permission to disclose the error to the IRS. The CPA should also consider whether it is appropriate to recommend the client seek professional advice from the prior return preparer or another CPA. The CPA should document any discussions with the client and any actions taken in response to the error. The CPA is not required to withdraw from the engagement or correct the prior year's return if the error does not affect the current year's return.

Question 8

Which penalty can equal 75 percent of the tax underpayment?

Accepted Answer

The penalty for fraud can equal 75 percent of the tax underpayment. This penalty is much higher than the penalties for the other options. Failure to file penalty can be up to 5 percent of the tax underpayment per month, not to exceed 25 percent. Failure to pay penalty can be up to 0.5 percent of the tax underpayment per month, not to exceed 25 percent. Negligence penalty can be up to 20 percent of the tax underpayment.

Question 9

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

Accepted Answer

If a tax preparer is convicted of criminal tax evasion, they may face imprisonment and a fine of up to $100,000, as well as other penalties such as restitution and forfeiture of assets. Therefore, choice C is the correct answer.

Question 10

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

Accepted Answer

"Discovery of Fraud" is not one of the Statements on Standards for Tax Services; the others (Tax Return Positions, Use of Estimates, and Departure from a Previous Position) are.

Question 11

A six-year statute of limitations applies if the taxpayer

Accepted Answer

According to the IRS rules, a six-year statute of limitations applies if the taxpayer understates gross income by 25% or more. This means that the IRS has six years from the date of filing to assess additional taxes and penalties if the taxpayer did not report all of their income.

Question 12

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

Accepted Answer

Taxpayers can appeal an IRS deficiency notice to the Tax Court without paying the tax first. The Tax Court is a specialized court that hears only tax-related cases and provides taxpayers with an opportunity to contest the IRS deficiency determination.

Question 13

In 2018, Coral Corporation (a C corporation) sold $100,000 of merchandise for which it paid $40,000. It also paid $35,000 of other expenses. All transactions were in cash. What is Coral Corporation's after-tax net cash inflow?

Accepted Answer

To find the after-tax net cash inflow, we need to calculate the net income first.

Net income = Revenue - Cost of goods sold - Other expenses 
Net income = $100,000 - $40,000 - $35,000 
Net income = $25,000

Next, we need to calculate the taxes paid by Coral Corporation.

Taxable income = Net income - Deductions 
Since we don't have any information about deductions, we'll assume there are none. 
Taxable income = $25,000 
Corporate tax rate = 21% 
Taxes paid = Taxable income x Corporate tax rate = $25,000 x 0.21 = $5,250

Finally, we can calculate the after-tax net cash inflow:

After-tax net cash inflow = Revenue - Cost of goods sold - Other expenses - Taxes paid 
After-tax net cash inflow = $100,000 - $40,000 - $35,000 - $5,250 
After-tax net cash inflow = $19,750

Therefore, the correct answer is D, $19,750.

Question 14

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

Accepted Answer

The answer of Which type of audit is most frequently...

Question 15

James can invest in a project that will cost $70,000. The project is expected to pay him $95,000 after-tax in 5 years. What is the maximum discount rate, as a whole number, that he could use to evaluate the project that would yield a positive cash flow?

Accepted Answer

The answer of James can invest in a project that...

Question 16

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

Accepted Answer

The requirement that the individual must have been abandoned by her spouse for more than 6 months is not a requirement for innocent spouse relief. The correct requirements are B, C, and D, which involve the individual's lack of knowledge or reason to know about the understatement, the inequitable nature of holding the individual liable for the deficiency, and the timely election of innocent spouse relief.

Question 17

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

Accepted Answer

The taxpayer has 90 days from the date the Statutory Notice of Deficiency is mailed to file a petition with the Tax Court.

Question 18

A high DIF score indicates which of the following?

Accepted Answer

A high DIF score indicates that the taxpayer's chances of audit are fairly high. DIF (Discriminant Function) score is a statistical formula used by the IRS to determine the likelihood of tax returns containing errors or fraud. A higher DIF score means a higher risk of audit. Therefore, option D is the correct answer.

Question 19

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

Accepted Answer

According to the IRS, if a tax return preparer prepares a return that involves a "listed transaction," the preparer can avoid all penalties if they can establish that they had "substantial authority" for the position taken on the return. This means that the preparer must have a reasonable basis for the tax treatment of the transaction, which is a higher standard than a "more likely than not" standard but lower than a "more likely than not" standard with the evaluation of all relevant facts and circumstances. Therefore, Option C is the best choice.

Question 20

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

Accepted Answer

The Internal Revenue Service Manual provides guidance to IRS employees on how to administer tax laws and procedures. It does not deal with a CPA's standard of conduct. Whereas, Treasury Circular 230, AICPA Code of Conduct, and Statement of Standards for Tax Services all deal with a CPA's standard of conduct in different contexts.

Quiz 2: The Tax Practice Environment