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Chapter 1
79. How long does a taxpayer have to file a petition with the U.S. Tax Court after receiving a Statutory Notice of
Deficiency?
a.
10 days
b.
30 days
c.
90 days
d.
120 days
e.
180 days
80. Christy's 2014 tax return was audited during November 2015. The auditor proposed additional tax due of $1,500.
Christy disagreed. What should Christy do next?
I.
Within 30 days, she must file a protest.
II.
She must respond with a written protest letter.
III.
She may respond with an oral protest.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Only statement III is correct.
d.
Statements I and III are correct.
e.
Statements I and II are correct.
81. The income tax formula for individual taxpayers is unique in that deductions are broken into classes.
I.
This dichotomy of deductions results in an intermediate income number called adjusted
gross income (AGI).
II.
One class of deductions is called exclusions from income.
III.
One class of deductions is called deductions for adjusted gross income.
IV.
Expenses qualifying as deductions for adjusted gross income are not limited by the
income of the taxpayer.
a.
Statements III and IV are correct.
b.
Statements II and III are correct.
c.
Statements I, III and IV are correct.
d.
Only statement IV is correct.
e.
Statements I, II, III, and IV are correct.
82. The calculation of an individual's income tax includes certain deductions for adjusted gross income. The following are
examples of this class of deductions:
I.
Trade or business expenses
II.
Rental expenses
III.
Interest on student loans
IV.
Investment interest
a.
Statements I and II are correct.
b.
Statements I, II, and III are correct.
c.
Only statement I is correct.
Chapter 1
d.
Only statement III is correct.
e.
Statements I, II, III, and IV are correct.
83. Which of the following statements is/are correct?
I.
There is a minimum allowable standard deduction from adjusted gross income of
individuals.
II.
Corporations are allowed deductions from adjusted gross income.
III.
Corporations are allowed a standard deduction.
IV.
Personal exemptions of individuals are deductible for adjusted gross income.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Statements II and IV are correct.
d.
Statements I and IV are correct.
e.
Statements I and III are correct.
84. Adjusted gross income (AGI)
I.
is used to provide limitations on certain deductions from AGI.
II.
is unique to the individual income tax formula.
III.
is the result before subtracting certain allowable personal expenditures from gross
income.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Only statement III is correct.
d.
Statements I and II are correct.
e.
Statements I, II, and III are correct.
85. Exemption amounts and itemized deductions are two types of reductions used to calculate taxable income. Which of
the following are characteristics of these types of deductions?
I.
Taxpayers deduct the larger of itemized deductions or the standard deduction.
II.
Exemption amounts are dependent on amounts of expenditures for dependents.
III.
Deductions for adjusted gross income are limited to those incurred in a trade or
business, incurred in the earning of income, and certain specifically allowed personal
expenses of individuals.
a.
Only statement III is correct.
b.
Statements I and II are correct.
c.
Statements I and III are correct.
d.
Statements II and III are correct.
e.
Statements I, II, and III are correct.
86. Carolyn and Craig are married. They have two children (8 years old and 13 years old) living with them. How many
dependency exemptions are claimed on Carolyn and Craig's 2015 tax return?
a.
0
Chapter 1
b.
1
c.
2
d.
3
e.
4
87. For 2015, Nigel and Lola, married taxpayers without children, calculated their total allowable itemized deductions to
be $17,100. Accordingly, Nigel and Lola file jointly and should deduct from adjusted gross income
I.
the standard deduction amount of $12,600
II.
total itemized deductions equal to $17,100.
III.
one personal and one dependency exemption amount.
IV.
exemption amounts totaling $8,000.
a.
Only statement I is correct.
b.
Statements I and IV are correct.
c.
Statements I, III, and IV are correct.
d.
Statements II and IV are correct.
e.
Statements I, II, III, and IV are correct.
88. Which of the following is/are categorized as itemized deduction(s)?
I.
Trade or business expenses.
II.
Rental expenses.
III.
Property taxes on personal residence.
IV.
Investment interest expense.
a.
Only statement I is correct.
b.
Only statement IV is correct.
c.
Statements I and III are correct.
d.
Statements III and IV are correct.
e.
Statements I, II, and IV are correct.
89. Based on the following information, what is the 2015 taxable income for a married couple with two children?
Total income
$120,000
Excludable income
2,000
Deductions for AGI
5,000
Allowable itemized deductions
8,000
a.
$84,400
b.
$85,200
c.
$86,700
d.
$89,800
e.
$90,900
90. Sonya owes a deductible expense that she can pay either (and deduct) this year or next year. She is in the 25%
marginal tax rate bracket. Which of the following statements about this payment is/are correct?
Chapter 1
I.
Deductions should always be taken as soon as possible. Sonya should pay the expense
this year.
II.
If Sonya expects to be in the 28% marginal tax rate bracket next year, she should pay
the expense this year.
III.
If Sonya expects to be in the 15% marginal tax rate bracket next year, she should pay
the expense this year.
IV.
If Sonya expects to be in the 25% marginal tax rate bracket next year, she should pay
the expense this year.
a.
Only statement II is correct.
b.
Only statement IV is correct.
c.
Statements I and III are correct.
d.
Statements I and IV are correct.
e.
Statements III and IV are correct.
91. Sarah owes a deductible expense that she can either pay (and deduct) this year or next year. She is in the 25%
marginal tax rate bracket. Which of the following statements about this payment is/are correct?
I.
Deductions should always be taken in the current year. Sarah should pay the expense
this year.
II.
If Sarah expects to be in the 28% marginal tax rate bracket next year, she should pay the
expense next year.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
92. Trang is in the 15% marginal tax bracket in the current year. She owes a $10,000 bill for business expenses. Since she
reports taxable income on a cash basis, she can deduct the $10,000 in either this year or next year, depending on when she
makes the payment. She can pay the bill at any time before January 31 of next year, without incurring the normal 12%
interest charge. She expects to be in the 25% marginal bracket next year. Without considering the time value of money,
what are her tax savings if she pays the bill after January 1?
a.
Current year $1,000.
b.
Current year $1,500.
c.
Next year $1,000.
d.
Next year $2,500.
e.
Next year $1,500.
93. Tax planning involves the timing of income and deductions. General rules of thumb to follow when planning include
I.
putting income into the year with the lowest marginal tax rate.
II.
deferring recognition of income.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
Chapter 1
94. Tax planning involves the timing of income and deductions. General rules of thumb to follow when planning include
I.
putting income into the year with the lowest marginal tax rate.
II.
deferring deductions.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
95. Tax planning involves the timing of income and deductions. General rules of thumb to follow when planning include
I.
deferring recognition of income.
II.
putting deductions into the year with highest marginal tax rate.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
96. Which of the following is an example of tax evasion?
a.
Beth invests money in tax exempt municipal bonds instead of corporate bonds.
b.
Bryan uses the cafeteria plan offered by his employer to fund pension plan contributions for his retirement.
c.
Bauregard, a very wealthy 87-year-old individual, gives bonds to each of his grandchildren so that the interest
income on them would be taxed at a lower tax rate.
d.
Bertha won $500 cash in an amateur mud-wrestling contest but doesn't report it on her tax return.
e.
All of the above are examples of tax evasion.
97. Tax evasion usually involves certain elements. Which of the following are elements necessary for tax evasion to
occur?
I.
Nondisclosure of the relevant facts on the taxpayer’s tax return.
II.
Underpayment of tax.
III.
Avoiding detection by the IRS.
IV.
Willfulness on the part of the taxpayer.
V.
An affirmative act by the taxpayer to misrepresent.
a.
Statements I, II, and III are correct.
b.
Statements I, II, IV, and V are correct.
c.
Statements I and III are correct.
d.
Only statement IV is correct.
e.
All of the five listed elements are correct.
98. Glenna put money in savings accounts in 50 different banks. She knows a bank is not required to report to the IRS any
interest it pays her that totals less than $10. Because the banks do not report the payments to the IRS, Glenna does not
Chapter 1
report the interest received as taxable income. Which of the following is (are) true?
I.
Glenna's actions are tax evasion because she intentionally misrepresented facts on a tax
return to avoid paying tax.
II.
Glenna's actions are tax avoidance because the IRS will never know about the interest
income.
III.
Glenna's actions are tax evasion because she took steps to conceal the income.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Statements I and III are correct.
d.
Statements II and III are correct.
e.
Statements I, II, and III are correct.
99. Alice is a plumber and collector of rare stamps. Instead of always receiving cash payments for her work, she
occasionally has her customers send their payments to a stamp broker. The broker then makes stamp purchases on Alice's
behalf and mails the stamps to her. Alice never reports the value of the stamps received as income on her tax return.
I.
Alice's actions are a form of tax evasion.
II.
Alice's actions are subject to payment of tax, interest, and penalty if detected by the IRS.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
100. Betty hires Sam to prepare her federal income tax return. In preparing the return, Sam erroneously decided to exclude
consulting fees because he estimated that Betty's expenses should have exceeded the income she received. If the IRS
detects Betty's underpayment of tax, what is the likely result?
I.
Betty is not subject to the negligence penalty since she relied on a professional tax
preparer and reported her income in good faith.
II.
Betty is liable for payment of the tax due plus interest and a negligence penalty.
III.
Sam is liable for payment of Betty's tax due plus interest and negligence penalty.
IV.
Sam is liable for payment of Betty's negligence penalty. Betty is liable for the payment
of the tax due plus interest.
a.
Only I is correct.
b.
Only II is correct.
c.
Only III is correct.
d.
I and III are correct.
e.
I and IV are correct.
101. Betty hires Sam to prepare her federal income tax return. In preparing the return, Sam erroneously decided to exclude
consulting fees because he estimated that Betty's expenses should have exceeded the income she received. If the IRS
detects Betty's underpayment of tax, what is the likely result?
I.
Betty is not subject to the negligence penalty since she relied on a professional tax
preparer and reported her income in good faith.
II.
Sam is liable for payment of Betty's tax due plus interest and negligence penalty.
Chapter 1
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct
d.
Neither statement is correct
102. Betty hires Sam to prepare her federal income tax return. In preparing the return, Sam erroneously decided to exclude
consulting fees because he estimated that Betty's expenses should have exceeded the income she received. If the IRS
detects Betty's underpayment of tax, what is the likely result?
I.
Betty is liable for payment of the tax due plus interest and a negligence penalty.
II.
Sam is liable for payment of Betty's negligence penalty. Betty is liable for the payment
of the tax due plus interest.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct
d.
Neither statement is correct
103. Which of the following taxpayers used tax evasion tactics when filing their 2015 tax return?
I.
Fern, a cash basis accountant intentionally billed clients for services on December 31,
2015, to avoid receiving cash payments from clients until 2016.
II.
Samual made a mathematical mistake on a schedule in his tax return that resulted in a
$2,000 underpayment of tax. The IRS does not detect the mistake..
III.
Beverly accidentally underreported $800 of income she earned providing childcare in
her home.
IV.
Bo, a cattle rancher, deducted the cost of raising 7 steers that were used by his family
and relatives for food during 2015.
a.
Statements I and III are correct.
b.
Only statement II is correct.
c.
Statements II and III are correct.
d.
Statemenst III and IV are correct.
e.
Only statement IV is correct.
104. All tax practitioners who prepare tax returns for a fee are subject to which of the following?
I.
IRS Circular 230
II.
AICPA Code of Professional Conduct
III.
Statements on Standards for Tax Services
IV.
American Bar Association Code of Professional Conduct
a.
Only statement I is correct.
b.
Statements I, II, and III are correct.
c.
Statements II and III are correct.
d.
Statements II and IV are correct.
e.
Statements I, II, III, and IV are correct.
105. The Statements on Standards for Tax Services (SSTS) have common concepts running through most of them. Which
of the following statements are parts of the SSTSs?
I.
The preparer may in good faith rely upon, without verification, information furnished
by the client.
II.
There is confidentiality of the CPA-client relationship.
III.
Taxpayer supplied estimates may be used to prepare returns if it is impractical to obtain
exact data and the estimates are reasonable.
IV.
The preparer must never disclose to the IRS any facts about the client's tax return
information -- unless the client approves disclosure, or the preparer is required to do so
by law.
a.
Only statement II is correct.
b.
Statements I, II, and IV are correct.
c.
Statements II and III are correct.
d.
Statements I, II, and III are correct.
e.
Statements I, II, III, and IV are correct.
106. What type of tax rate structure is indicated in the following example? Explain.
When income equals
Total tax equals
$10,000
$300
$75,000
$4,500
$100,000
$8,000
107. On January 4, 2015, Owen died and left ranch land with a value of $300,000 to his brother, Victor. This transfer was
purely donative with no expectation of anything in return. Victor transferred all of this land to his corporation, Circle C
Ranch, Inc. Victor is the president and an active employee of the corporation. Victor’s salary from the corporation is
$40,000 per year. The ranch land is located in Torrent County, Texas. The Torrent Appraisal District appraises the
property.
From the above facts name six different types of federal, state, or local taxes that might have to be paid and name the
entity that is liable to pay them.
108. On December 28, 2015, Doris and Dan are considering one last financial decision for 2015, a contribution of $1,000
Chapter 1
to the American Diabetes Association. If they make the $1,000 contribution, it will be fully deductible on their 2015
income tax return. Their filing status is married filing jointly. Their 2015 taxable income before this contribution is
$150,000. If they make this contribution, what is its after-tax cost?
109. Nora and Nathan work for Cozener Construction Company. Nora is a foreman with an annual salary of $120,000.
Nathan is a carpenter who earned total wages of $52,000 during the current year.
a.
How much Social Security tax will Nora and Nathan have to pay?
b.
According to the definitions in Chapter 1, is the social security tax regressive,
proportional, or progressive? Explain.
110. Raquel is a recent law school graduate. She is upset by an IRS Revenue Agent's Report on her income tax return that
she must pay an additional $2,000 in tax on last year's income. Raquel tells you that she "... will take her case all the way
to the Supreme Court.” What is the probability Raquel will be able to take her case to the Supreme Court.
111. Winfield Corporation recently purchased equipment that qualifies for a new tax incentive. The new incentive allows
Winfield to either expense $100,000 of the cost of the equipment or claim a tax credit of 15% of the cost of the
equipment. The cost of the equipment is $200,000. If the credit is elected, the first year depreciation will be $34,000. If
Winfield chooses to expense $100,000 of the cost, the first year depreciation will be $20,000 on the remaining cost.
Winfield’s tax rate is either 34% or 39%. Under what conditions should Winfield elect to take the tax credit? Explain and
show any calculations to support your answer.
112. Mo is a single taxpayer reporting $95,000 of gross income. In addition, Mo receives $5,000 of tax-exempt interest.
Required: Compute the following:
a. Mo's taxable income is ___________________.
b. Mo's tax liability is ____________________.
c. Mo's marginal tax rate is ____________________.
d. Mo's average tax rate is ____________________.
e. Mo's effective tax rate is ____________________.
113. Julia is single and earns a salary of $65,000. Her allowable deductions for adjusted gross income total $1,200 and she
has $4,200 of allowable itemized deductions. What is Julia’s taxable income and income tax liability for 2015?
114. Harriet and Harry are married and have total gross income of $65,000. Their allowable deductions for adjusted gross
income total $1,500 and they have $4,400 of allowable itemized deductions. What are Harriet and Harry's taxable income
and income tax liability for 2015?
115. Barry has prepared the following 2015 income tax estimate for his sister, Sylvia. Sylvia is single, age 32, and has no
children. Sylvia is an employee of General Motors and rents an apartment. Her only investment is a savings bank account.
Salary
$37,200
Bank interest
750
Taxable income
$37,950
Tax on first $37,450
$5,156.25
Tax on next $500
125.00
Income tax liability
$5,281.25
Withheld income tax
4,800.00
Balance due
$481.75
Identify the errors, if any, in Barry’s income tax estimate. Additional calculations are not required.
116. Rosemary is single and works for Big B Corporation. Her only income consists of her Big B salary and interest on a
savings account. During the year, she has $400 withheld from her salary for state income taxes and $7,800 for federal
income taxes. Her brother provides her with the following calculation of her taxable income and income tax liability:
Salary
$36,000
Interest income
3,100
Less: State tax withheld
(400)
Equals: Gross income
$38,700
Less: Deductions for adjusted gross income
Standard deduction
(6,200)
Equals: Taxable income
$32,500
Income tax liability ($32,500 × 25%)
$8,125
Less: Federal withholding
(7,800)
Equals: Tax due
$325
Explain the errors that Rosemary 's brother has made in calculating her taxable income and/or her income tax liability. A
recalculation is not necessary, but you must adequately explain the errors that were made.
117. In December 2015, Arnold is considering one last financial decision for 2015. He has $5,000 that he would like to
spend before the end of the year. His options include donating the money to a qualified charity (and receiving an itemized
deduction) or using the money as a down payment on the purchase of $30,000 of equipment for his business. If he
purchases the equipment, he will receive an 8% tax credit for the entire purchase price. He does not need the equipment
until early next year, so the purchase at this time is not critical. Assume that Arnold is in the 33% marginal tax rate
bracket in 2015 and itemizes his deductions. Which option will provide him with the greatest tax benefit? Explain and
show any calculations that support your answer.
118. Dana is considering investing $20,000 in one of two investments. The income from Investment A is $2,300. The
income from Investment B is $3,000. The income from Investment A would be received at the end of the current year and
would be excluded from tax. The income from Investment B would also be received at the end of the current year, but
would be subject to tax in 3 years under a special deferral provision. How would you advise Dana? Discuss the factors
that are necessary to determine which of the two investments provides the greater after-tax yield.
119. Pedro, a cash basis taxpayer, would like to sell ordinary income property that will result in an increase in his taxable
income of $20,000. Pedro also owes $12,000 of property taxes that are deductible. He is flexible and can properly report
either or both of the items on his 2015 or 2016 tax return. Pedro expects his marginal tax rate to be 25% for 2015 and 28%
for 2016. If the applicable interest rate is 9% (.917 present value factor), when should Pedro report each item? Show your
calculations and explain.
120. Ed travels from one construction site to another pursuing his work as an insulator. Because of family problems and
being on the road so much, Ed overlooked filing his 2010 tax return. Ed hasn't filed any returns since 2010 because he is
afraid the IRS will find the missed returns and put him in jail and he won't be able to support his family. Ed carefully
makes sure that his employers withhold more income tax than is necessary. Ed knows for certain that if he filed the late
returns he would get a tax refund for each of the years. Has Ed evaded the income tax? Explain.
121. Joe Bob operates a gas station/grocery store outside the main entrance to a state park. Joe Bob is very independent
and dislikes government interference in his business. He pays all his suppliers in cash as they make deliveries. He deposits
Chapter 1
customer checks to his bank account but retains cash received in the business to pay his expenses. Inventories are material
to determining income but he "estimates" his inventory. He keeps a log of daily sales, purchases, and other pay-outs.
When preparing his income tax return, his tax preparer carefully compares his gross profit ratio and net profit to sales ratio
to other clients operating similar businesses. The accountant then adjusts Joe Bob's income so that the ratios are greater
than those reported by comparable businesses. In addition, the tax preparer "adds a guess, usually $20,000 to $50,000, of
undisclosed cash sales" that is disclosed on the face of Joe Bob's tax return. Thus, his net profit is increased by the same
amount. Joe Bob has never objected to the amount of added income. Has Joe Bob evaded the income tax? Explain.
122. Madeline operates a janitorial service. The business is organized as a corporation. She has a crew of 100 employees
that clean offices and commercial buildings on a set schedule. Madeline also runs a maid service. Since persons paying for
the maid services are individuals, the amounts paid to Madeline are not reported to the IRS. Madeline has developed a tax
plan. She will deposit the maid service fees to her personal bank account. As a result, she can draw a smaller salary from
the janitorial service. She will pay the maids for their services through the corporation. Since she is not deducting her
salary from the corporation to the extent she keeps the maid fees, she does not report income from the maid fees. Has
Madeline evaded the income tax? Explain.
123. Amy hired Carey, a CPA, to prepare her 2015 federal income tax return. Amy had prepared her own 2014 return. In
reviewing her records, Carey discovered that Amy had recorded $5,000 of consulting income she received by check in
December 2014 as though it had been received in 2015. What should Carey do about this situation?
124. Barrett and Betina are planning to be married on December 26, 2015. Barrett's salary for 2015 is $42,000 and
Betina's is $40,000. Barrett pays mortgage interest of $7,200 and property taxes of $1,800; Betina has $400 of charitable
contributions. Barrett earns interest of $1,450 on a savings account and makes a deductible for AGI contribution to his
IRA of $2,000. Betina makes a $1,000 deductible contribution to her IRA. Amounts withheld for State taxes are $1,900
for Barrett and $1,800 for Betina. Based on the above information, answer the following questions to help Barrett and
Betina prepare their 2015 tax return (they will file jointly and have no other dependents):
a.
What is their Adjusted Gross Income (AGI) for 2015?
b.
What is their taxable income and tax liability?
c.
If Barrett and Betina don't get married until January 2016, what is Barrett's taxable
income and tax liability?
d.
If Barrett and Betina don't get married until January 2016, what is Betina's taxable
income and tax liability?
e.
From a purely tax standpoint, should Barrett and Betina get married in December or
January?
125. Monty is a licensed Certified Public Accountant. Last year he prepared an individual income tax return for Apple
Bakeries, Inc. This year Apple Bakeries switched to a different tax return preparer. This year he is preparing income tax
returns for a completely separate business, Cinnamon Roll Bakery, Inc. The owner of Cinnamon Roll asked Monty to give
him the tax return data from Apple Bakeries, to help estimate the tax liability of Cinnamon Roll Bakery, Inc.
Chapter 1
Is there a professional responsibility issue for Monty to consider in satisfying Cinnamon Roll’s request? If so, what is the
issue?
126. A tax rate that increases as the tax base increases.
127. A tax rate that decreases as the tax base increases.
128. Fraudulent methods are used to reduce the actual tax liability.
129. A tax rate that remains the same at all levels of the tax base.
130. Tax planning using legal methods to minimize the tax liability.
131. The tax rate that will apply to the next dollar of taxable income.
132. The tax rate obtained by dividing total tax liability by taxable income.
133. The tax rate obtained by dividing total tax liability by economic income.
134. The result when two similarly situated taxpayers are taxed the same.
135. The result when two differently situated taxpayers are taxed differently but fairly.
Chapter 1
136. Any asset that is not real estate.
137. Based on a quantity of a product sold.
138. Based on the value of the property being taxed.
139. The value or amount that is subject to taxation.
140. The excess of an asset’s tax basis over its selling price.
141. Land and any structures permanently attached to the land.
142. The excess of the selling price of an asset over its tax basis.
143. Used by persons who do not itemize deductions on their return.
144. Subtractions from gross income specifically allowed by the tax law.
145. Current period expenditure incurred in order to earn income.
146. The payment of tax throughout the year as income is earned.
147. The common, customary, recurring type of income earned by taxpayers.
148. A taxpayer is responsible for determining his/her tax liability and timely paying the tax due.
149. Direct reduction in the income tax liability often created by Congress to further a public purpose.
150. The period of time during which a taxpayer and/or the IRS can correct a taxpayer’s taxable income.
151. Increases in wealth and recoveries of capital that Congress has decided should not be subject to income tax.
