Question 1

Adam Smith identified efficient, certainty, convenience, and economy as the four basic requirements for a good tax system.

Accepted Answer

Adam Smith identified equity, certainty, convenience, and economy as the four basic requirements for a good tax system, not efficiency.

Question 2

Employers are required to pay a Federal Unemployment Tax of 6.2% of the first $10,000 in wages to each employee less a credit of up to 5.4% of state unemployment taxes paid.

Accepted Answer

The Federal Unemployment Tax Act (FUTA) tax rate is 6.0%, not 6.2%, on the first $7,000 of each employee's wages, and employers can receive a credit of up to 5.4% for state unemployment taxes paid.

Question 3

The marginal tax rate is the rate of tax that will be paid on the next dollar of income or the rate of tax that will be saved by the next dollar of deduction.

Accepted Answer

The definition provided in the statement is correct, making option A the correct answer.

Question 4

An annual loss results from an excess of allowable deductions for a tax year over the reported income.

Accepted Answer

An annual loss occurs when allowable deductions for a tax year exceed the reported income, resulting in a negative taxable income and a loss that can be carried forward to future tax years.

Question 5

A CPA may prepare tax returns using estimates provided by the taxpayer if it is impracticable to obtain exact data and the estimates are reasonable.

Accepted Answer

According to the American Institute of Certified Public Accountants' (AICPA) Code of Professional Conduct, a CPA may use estimates provided by the taxpayer if obtaining exact data is impracticable, but the estimates must be reasonable based on the information available. However, the CPA still has a responsibility to exercise due professional care and maintain professional skepticism when relying on estimates provided by the taxpayer.

Question 6

A deferral is like an exclusion in that it does not have a current tax effect, but it differs in that an exclusion is never subject to taxation, whereas a deferral will be subject to tax at some point of time in the future.

Accepted Answer

A deferral allows for a delay in paying taxes, but eventually the deferred amount will be subject to taxation in the future. In contrast, an exclusion is not taxed at any point in time.

Question 7

Horizontal equity exists when two similarly situated taxpayers are taxed the same.

Accepted Answer

Horizontal equity in taxation is the principle that taxpayers who are in similar economic and personal circumstances should have the same tax burden. Therefore, two similarly situated taxpayers should be taxed the same.

Question 8

According to the IRS definition, which of the following is not a characteristic of a tax?

Accepted Answer

According to the IRS definition, a tax is characterized by the payment being required by law, pursuant to the government's legislative power to tax, and with the purpose of providing revenue for public or governmental purposes. The receipt of a specific benefit is not a required characteristic of a tax, making choice B incorrect.

Question 9

Self-employed people are required to make quarterly payments of their estimated tax liability.

Accepted Answer

Self-employed individuals are required to make quarterly payments of their estimated tax liability to avoid penalties and interest on any taxes owed at the end of the year.

Question 10

Which of the following payments would not be considered a tax?

Accepted Answer

A local assessment for new sewers based on the amount of water used is more akin to a fee for services rather than a tax. Taxes are typically levied without direct reference to specific benefits received, whereas fees are charged in exchange for particular goods or services.

Question 11

All tax practitioners are governed by the AICPA's Code of Professional Conduct.

Accepted Answer

Tax practitioners are governed by the Internal Revenue Code and the regulations issued by the IRS, not by the AICPA's Code of Professional Conduct. However, if the tax practitioner is also a member of the AICPA, they would be bound by the AICPA's Code of Professional Conduct in addition to the tax regulations.

Question 12

A regressive tax rate structure is defined as a tax in which the average tax rate decreases as the tax base increases.

Accepted Answer

A regressive tax rate structure indeed means that the average tax rate (the percentage of income paid in taxes) decreases as the income or tax base of the taxpayer increases, placing a relatively higher burden on lower-income earners.

Question 13

Congress is required to insure that the tax law has the following characteristics: equality, certainty, convenience, and economy.

Accepted Answer

Congress is not legally required to ensure these characteristics in tax law, though they are often considered principles of a good tax system.

Question 14

Gifts to qualified charitable organizations may be deducted as a contribution, but not to exceed 60% of an individual taxpayer's adjusted gross income.

Accepted Answer

This statement is true. According to the IRS, donations to qualified charitable organizations are tax-deductible, but the deduction cannot exceed 60% of an individual's adjusted gross income.

Question 15

A tax is an enforced contribution used to finance the functions of government.

Accepted Answer

This is the definition of a tax, as it is a mandatory payment imposed by the government to fund its various activities and programs.

Question 16

The statute of limitations is three years, six years if the taxpayer omits gross income in excess of 25%, and there is no statute of limitations if the taxpayer willfully defrauds the government.

Accepted Answer

This is correct according to United States tax law.

Question 17

Which of the following payments meets the IRS definition of a tax?

Accepted Answer

A tax is a mandatory financial charge imposed by a government on individuals or entities. The fee on the value of property transferred by gift is a gift tax, which is a type of tax.

Question 18

Based on the definition given in Chapter 1 of the text, which of the following is a tax?
I.A registration fee paid to the state to get a car license plate.
II.2% special sales tax for funding public education.
III.A special property tax assessment for installing sidewalks in the taxpayer's neighborhood.
IV.An income tax imposed by Chicago on persons living or working within the city limits.

Accepted Answer

Statements II and IV are correct because they both represent compulsory payments to the government without direct benefit to the payer, fitting the general definition of a tax.

Question 19

Tax avoidance occurs when a taxpayer uses fraudulent methods or deceptive behavior to hide actual tax liability.

Accepted Answer

Tax avoidance is legal and involves using legal means to minimize tax liability, such as taking advantage of tax deductions, credits, and loopholes. Tax evasion, on the other hand, involves using illegal methods to conceal or underreport income to avoid paying taxes.

Question 20

Which of the following payments is a tax?
I.Artis paid the IRS a penalty of $475 (above his $11,184 income tax balance due) because he had significantly underpaid his estimated income tax.
II.Lindsey paid $135 to the State of Indiana to renew her CPA license.
III.Carrie paid a $3.50 toll to cross the Mississippi River.
IV.Darnell paid $950 to the County Treasurer's Office for an assessment on his business equipment.

Accepted Answer

A tax is a mandatory payment to the government, usually based on income, property, or goods and services. Only statement IV is a tax because it is an assessment on business equipment, which is a form of property. Statements I, II, and III are not taxes because they are penalties, licensing fees, and tolls, respectively.

Quiz 1: Federal Income Taxation-An Overview