Deck 2: The Tax Practice Environment

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

The Golsen rule requires the Tax Court to follow all other Federal District Court decisions in the same Circuit.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

The higher a firm's marginal tax rate used for project evaluation, the greater the net cash flow from the project.

Question 10

The Internal Revenue Service is part of the Justice Department.

Question 11

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

Question 12

The statute of limitations for an error overstating expenses by more than 25 percent is 3 years.

Question 13

15 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 14

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

Question 15

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.

Question 16

If a CPA finds an error on a previously filed tax return of a client, he or she should advise the client to file an amended return to correct the error.

Question 17

Acquiescence by the Internal Revenue Service's Commissioner means that the IRS will follow the decision in the future.

Question 18

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

Question 19

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

Question 20

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 21

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

A)Correspondence audit
B)Office audit
C)Noncompliance audit
D)Field audit

Question 22

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 23

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

Question 24

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)C Corporations
C)Individuals
D)Trusts

Question 25

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

A)30 days
B)60 days
C)90 days
D)6 months

Question 26

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 27

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 28

Eduardo filed his 2018 tax return on March 15, 2019.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 2018 tax return?

A)March 15, 2022
B)March 15, 2025
C)April 15, 2022
D)April 15, 2025

Question 29

Which penalty can equal 75 percent of the tax underpayment?

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

Question 30

If the due date for a tax return is extended for a taxpayer who has a $2,000 balance due, the taxpayer

A)must pay the tax due by the original due date to avoid interest
B)has 30 days following the original due date to pay the $2,000 due without interest
C)has 60 days following the original due date to pay the $2,000 due without interest
D)has 6 months following the original due date to pay the $2,000 due without interest

Question 31

Charley Careless had not read much about the preparer penalties that could be assessed for failure to have substantial authority for certain tax positions taken on his client's returns.He prepared a return for one of his clients with an issue that was clearly a problem.If he was paid $4,000 for the tax return preparation, how much would his potential fine be under the following circumstances:

A)Charley should have known that the position did not have a reasonable possibility of success but had failed to do any research.
B)Charley knew the position was "iffy" but disclosed the problem.
C)Charley knew the position could not be supported but the client expected Charley to get him a large refund.

Question 32

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 33

The IRS must pay interest on

A)tax refunds paid later than 30 days after the due date.
B)tax refunds paid later than 45 days after the due date.
C)all tax refunds.
D)The IRS never pays interest on tax refunds.

Question 34

An offer in compromise is initiated by

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

Question 35

A taxpayer will receive a 30-day letter

A)only if the taxpayer is more than 30 days late in filing the tax return.
B)to provide notification that the taxpayer's return has been selected for audit.
C)after a 90-day notice of deficiency notifying the taxpayer there is only a 30-day period to file a protest in court
D)as the first notice of a proposed deficiency

Question 36

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 37

What is the penalty for taxpayers who fail to pay their tax liability with a timely filed tax return for the taxes owing?

A)5% per month
B)2% per month
C)0.5% per month
D)$100 per month

Question 38

Walter did not file his 2018 tax return that was due April 15, 2019 until June 2, 2019.

A)When does the statute of limitations expire for this return assuming he did not file for an automatic extension?
B)When does the statute of limitations expire if Walter forgot to report a land sale that occurred on January 10, 2018? He had a $20,000 gain on the transaction and he reported gross income for 2018 of $75,000?
C)When does the statute of limitations expire if Walter deliberately omitted the $20,000 gain on the land sale?

Question 39

Ryan filed his tax return 40 days after the due date and included a check for the $1,800 balance due with the return.Ryan's failure-to-file penalty is

A)25%
B)20% per month (or partial month)
C)5% per month (or partial month) up to a maximum of 25%
D)0.5% per month (or partial month) up to a maximum of 25%

Question 40

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 $210, whichever is less
D)4.5% of the amount owed on the return.

Question 41

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 42

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 43

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 32 percent marginal tax bracket for individuals.

A)$5,100
B)$4,500
C)$3,000
D)$2,250

Question 44

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 45

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

Question 46

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 47

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

A)is required to notify IRS immediately
B)should notify the client of the error and request permission to disclose the error to the IRS
C)must immediately withdraw from the engagement
D)is required to correct the error on the prior year's return even if it does not affect the current year's tax return

Question 48

A six-year statute of limitations applies if the taxpayer

A)understates adjusted gross income by 25%
B)understates taxable income by 25%
C)understates gross income by 25%
D)overstates deduction by 25%

Question 49

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 50

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 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

In 2019, 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)$19,750

Question 53

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 54

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 21 percent in all years?

A)$53,116
B)$120,000
C)$253,116
D)$320,400

Question 55

How much tax can be saved if John shifts $2,000 of income to his 18 year old dependent son? John is in the 22 percent tax bracket and his son has no other income that is taxable in 2019.

A)$1,000
B)$500
C)$345
D)$100

Question 56

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

A)a $100,000 fine
B)prison
C)Both a and b
D)Neither a nor b

Question 57

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 58

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 59

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 60

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 21 percent in all years.Which project(s) should Peanut Co.invest in?

A)Project X only
B)Project Y only
C)Both projects
D)Neither project

Question 61

The Golsen Rule

A)requires the Tax Court to follow the decisions of the District Courts
B)can result in opposite holdings on identical facts in the Tax Court
C)requires the Supreme Court to hear cases in which the holdings of the Appellate Courts differ
D)applies to the US Federal District Court only

Question 62

The principal reason a researcher uses a tax service is to

A)provide explanations of relevant case law
B)provide discussions of key issued related to specific Code sections
C)provide citations to primary sources of authority
D)provide answers to specific issues

Question 63

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 64

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

A)Supreme Court
B)Regular Tax Court
C)Federal District Court
D)There is no appeal.

Question 65

The number appearing immediately to the right of the decimal in a regulation citation indicates

A)subsection of the Code section being interpreted
B)the sequential number of the regulation
C)the Code section being interpreted
D)the part of Title 26 of the Code of Federal Regulations in which the section will be found.

Question 66

The document that provides the application of the law to a particular set of facts is a

A)Regulation
B)Revenue Ruling
C)Revenue Procedure
D)Information Release

Question 67

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

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

Question 68

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 69

If the Supreme Court decides to hear an appeal of a tax case, it will grant a

A)writ of habeas corpus
B)writ of stare decisis
C)writ of appeal remanding
D)writ of certiorari

Question 70

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 71

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 72

The term "on all fours" is generally interpreted to mean

A)the client's situation has been heard in four circuits
B)the client's situation is factually similar in its relevant issues
C)there are four issues that must be addressed
D)four similar cases have been identified and consulted

Question 73

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 74

An open-fact situation means that

A)all of the client's transactions have occurred and the research focuses on finding support for the action already taken.
B)all of the client's transactions have not yet occurred so the events may be carefully planned.
C)the client's tax return has not yet been filed.
D)the client is requesting assistance regarding a previously filed tax return.

Question 75

Which of the following is the highest authority for tax research?

A)Internal Revenue Code
B)Treasury Regulations
C)Revenue Procedures
D)Revenue Rulings

Question 76

Jury trials are only available in

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

Question 77

A closed-fact situation means that

A)all of the client's transactions have occurred and the research focuses on finding support for the action already taken.
B)all of the client's transactions have not yet occurred so the events may be carefully planned.
C)the client's tax return has not yet been filed.
D)the client is requesting tax planning advice for a future transaction.

Question 78

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 79

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 80

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 Court decisions
E)All are primary sources of the tax law