Deck 2: The Tax Practice Environment

Question 1

_____ 5.Legal income shifting includes shifting income among relatives and between a business and its owner/employee.

Answer 1

True

Question 2

_____ 10.A proposed regulation can be relied on when planning a transaction.

Answer 2

False

Question 3

_____ 11.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 3

True

Question 4

_____ 2.If a firm's discount rate is higher than another firm's,the present value of its future cash flows will be higher.

Question 5

_____ 9.A letter ruling can only be relied on by the taxpayer for whom it is written.

Question 6

_____ 12.A memo to file for a client should be more detailed than the client letter.

Question 7

_____ 6.Tax avoidance is the minimization of the tax burden by using acceptable,legal alternatives.

Question 8

The Internal Revenue Service is part of:

A)The Office of Budget and Management
B)The Justice Department
C)The Treasury Department
D)Congress

Question 9

_____ 16.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.

Question 10

_____ 1.The Internal Revenue Service is part of the Justice Department.

Question 11

_____ 4.If a project results in a loss,the tax effect causes a decrease in cash flow.

Question 12

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 13

_____ 14.The statute of limitations for a fraudulent return is 6 years.

Question 14

_____ 13.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 15

______ 7.A transaction for which there is no legitimate business purpose is automatically assessed a 50% penalty.

Question 16

_____ 15.Circular 230 is issued by the AICPA to provide guidance on tax return preparation by CPAs.

Question 17

_____ 3.The business purpose doctrine requires a transaction to have an economic purpose other than one based solely on tax avoidance.

Question 18

_____ 8.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 19

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 Courts Decisions
E)All are primary sources of the tax law

Question 20

_____ 17.Only CPAs,Enrolled Agents,and Attorneys who prepare tax returns for pay must obtain preparer tax identification numbers.

Question 21

Jacko Corporation has two projects in which it can invest.Project A has a $500,000 initial cost and will return $700,000 after tax in 4 years.Project B has a $300,000 initial cost and its after-tax returns will be $150,000 in year 1 and $200,000 in year 2.Using a 7 percent discount rate for evaluation,which project(s)should Jacko invest in?

A)Project A
B)Project B
C)Both projects
D)Neither project

Question 22

CK Corporation can invest $100,000 in a project.After taxes,the project is expected to generate $40,000 of net income the first year and $75,000 of net income the second year.If the company uses a 10 percent discount rate to evaluate projects,what is the project's net cash flow?

A)$15,000
B)$1,690
C)($1,690)
D)($1,315)

Question 23

Carl is unsure of which rate he should use as a discount rate for project evaluations,7 percent or 10 percent.If he can invest $30,000 in a project that will return $40,000 after-tax in four years,what is the result?

A)He will always reject the project
B)He will reject the project if he uses 10%
C)He will reject the project if he uses 7%
D)He will reject neither project

Question 24

Peanut Co.has 2 projects in which it can invest.Project X has a $300,000 initial cost and will return $600,000 before tax in year 2.Project Y has $600,000 initial cost and will return $1,000,000 before tax in year 4.The company uses an 8 percent discount rate for project evaluation and its marginal tax rate is expected to be 34 percent in all years.Which project(s)should Peanut Co.invest in?
a.Project X
b.Project Y
c.Both projects
d.Neither project

Question 25

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 26

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 27

How much tax can be saved if John shifts $2,000 of income to his 18 year old dependent son? John is in the 25 percent tax bracket and his son has no other taxable income in 2013.

A)$1,000
B)$500
C)$400
D)$100

Question 28

A decision in the small case division of the Tax Court can be appealed only to

A)Court of Appeals
B)Supreme Court
C)Regular Tax Court
D)Federal District Court
E)None of the above

Question 29

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?

A)3rd year
B)4th year
C)5th year
D)6th year

Question 30

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?

A)5%
B)6%
C)7%
D)8%

Question 31

The primary source of tax authority that provides explanations,definitions,and examples of tax laws is the

A)Code
B)Revenue rulings
C)Regulations
D)Letter rulings

Question 32

Crispen Corporation can invest in a project that costs $400,000.The project is expected to have an after-tax return of $250,000 in each of years 1 and 2.Crispen normally uses a 10 percent discount rate to evaluate projects but feels it should use 12 percent to compensate for inflation.How much difference does the rate make in the after-tax net present value of the project?

A)$50,000
B)$22,500
C)$20,000
D)$11,250

Question 33

Merced Company has invested $200,000 in a project.It had before tax net income of $100,000 in year 1,$150,000 in year 2,and $125,000 in year 3.What is the net present value of this project's after-tax net cash flow if Merced's discount rate is 8 percent and its marginal tax rate is 34 percent in all years?

A)$11,464
B)$120,000
C)$211,464
D)$320,400

Question 34

How much tax can Charles save if he holds stock on which he has a $30,000 short-term gain until he can use the applicable 15 percent long-term capital gains tax rate? He is in the 25 marginal tax rate for individuals.

A)$6,000
B)$4,500
C)$3,000
D)$2,250

Question 35

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

Question 36

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?

A)$100,000
B)$60,000
C)$25,000
D)$21,250

Question 37

Which of the following has the least weight of authority when deciding a tax issue?

A)Code
B)Committee Reports
C)Regulations
D)Letter ruling

Question 38

The Internal Revenue Code is divided into

A)Chapters and sections only
B)Titles and subtitles only
C)Subtitles,chapters,subchapters and sections
D)Titles,chapters and sections

Question 39

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 40

Which of the following committees is not involved in the tax writing process?

A)Ways and Means
B)Joint Conference
C)Judiciary
D)Senate Finance

Question 41

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 42

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

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

Question 43

The statute of limitations for a return that inadvertently overstates expenses by 30 percent of gross revenues is

A)3 years
B)6 years
C)10 years
D)Unlimited

Question 44

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 45

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 46

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 47

An offer in compromise is initiated by

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

Question 48

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 49

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 50

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 51

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 52

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 53

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 54

The Internal Revenue Service program that is designed to uncover easily identified errors or problems is

A)The DIF score
B)Manual return examination
C)Mathematical/clerical error program
D)Field audit

Question 55

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 56

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 57

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 58

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 59

Eduardo filed his 2013 tax return on March 15,2014.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 2013 tax return?

A)March 15,2017
B)March 15,2020
C)April 15,2017
D)April 15,2020

Question 60

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