Question 1

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 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 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 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

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

Accepted Answer

The use of a client's estimates is permitted if they are reasonable and based on accurate information. However, it is the tax professional's responsibility to ensure the accuracy of the return and to inform the client of the potential consequences of inaccurate estimates.

Question 5

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 benefit individuals by incentivizing them to save for retirement and can benefit society as a whole by reducing the burden on social welfare programs in the future.

Question 6

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 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 prefer Congress to increase the standard deduction as it would simplify tax filing and reduce the workload for IRS employees.

Question 8

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 proper procedures are followed, outsourcing tax return preparation to a foreign country is allowed by the IRS. However, the CPA firm must ensure that the foreign accountants have the necessary qualifications and training to handle the specific tax returns, and that the information is kept confidential and secure. The CPA firm is ultimately responsible for the accuracy of the tax returns prepared by the outsourced accountants.

Question 9

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 answer of As it is consistent with the wherewithal...

Question 10

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 states that $25,000 of the deficiency is attributable to negligence, so the 20% negligence penalty would only apply to that portion.

Question 11

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

Accepted Answer

It is important to answer all questions on the tax return accurately, but if a question does not apply to the taxpayer's situation, they should leave it blank rather than providing incorrect information.

Question 12

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 13

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 14

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 take time for the full impact to be felt, and thus it is not immediately revenue neutral.

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 gains when they reinvest the proceeds in similar property shortly after the loss. As long as the reinvestment is timely and the property is similar in nature or use, no gain will be recognized. Therefore, if Jason reinvests the insurance proceeds in a new warehouse shortly after the fire, he can defer the gain resulting from the destruction of the old warehouse.

Question 16

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

Accepted Answer

A sunset provision is a clause in a law that causes the law to expire after a certain date, unless further action is taken to extend it. In the case of a tax cut with a sunset provision, the tax cut would be temporary and expire after the specified date, unless Congress takes further action to extend it.

Question 17

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 the collection of taxes and reducing the need for later tax adjustments.

Question 18

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 for clients to correct errors on their past returns, a practitioner is not required to refuse to prepare future returns for them if they do not comply. However, the practitioner should inform the client of the potential consequences of not correcting the error and document the communication in their records.

Question 19

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

This statement is true. The tax law allows individuals and businesses to carry forward excess charitable contributions to future tax years to mitigate the effect of the annual accounting period concept. This allows taxpayers to maximize their charitable contributions without being constrained by the limits of a single tax year.

Question 20

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 and is allowed as a deduction on the U.S. tax return to avoid double taxation.

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