Question 1

The distributions made to a taxpayer from a traditional IRA are less than the required minimum distribution for the year. The amount of excise tax that the taxpayer may have to pay on the amount not distributed is

Accepted Answer

A)  75%
B)  50%
C)  25%
D)  10% B

Question 2

What does an auditor aim for when auditing financial statements?

Accepted Answer

A)  Reasonable assurance
B)  Absolute assurance
C)  Exclusive assurance
D)  Inclusive assurance A

Question 3

A taxpayer paid mortgage interest of $15,827 on another person's home in which the taxpayer had no ownership interest. How much of the interest may the taxpayer deduct?

Accepted Answer

A)  $0
B)  $5,000
C)  $10,000
D)  $15,827 A

Question 4

A taxpayer can make an adjustment to income on Form 1040 for which of the following?

Accepted Answer

A)  Deductible part of self-employment tax from Schedule SE
B)  Medical expenses
C)  Excess social security and tier 1 Railroad Retirement Tax
D)  Prior year federal income tax paid

Question 5

A taxpayer goes to a casino and wins $10,000. The casino withholds $500 for Federal income taxes. What is the proper tax treatment by the taxpayer?

Accepted Answer

A)  The taxpayer must report the winnings and can claim the amount of Federal income tax withheld on Form 1040
B)  The taxpayer does not have to report the winnings because the taxpayer did not receive a Form 1099G from the casino
C)  The taxpayer is not required to report the winnings on the taxpayer's Form 1040 unless the taxpayer wants to claim the withholding on the Form 1040
D)  The taxpayer must report the winnings on the taxpayer's Form 1040, but the taxpayer may not claim the amount of Federal income tax withheld unless the taxpayer itemizes deductions

Question 6

Why are internal auditors of a company barred from auditing the financial statements?

Accepted Answer

A)  To accommodate external auditors
B)  To prevent internal auditors from auditing financial information he/she prepared
C)  Internal auditors can be unreliable
D)  It is cost-effective

Question 7

The IRS rejected a taxpayer's return when the taxpayer attempted to e-file the return. When resubmitting the rejected return as a paper return, the taxpayer must file the return

Accepted Answer

A)  by the due date for filing the return or 20 calendar days after the return was rejected
B)  by the due date for filing the return or 5 calendar days after the return was rejected
C)  by the due date for filing the return or 10 calendar days after the return was rejected
D)  by the due date for filing the return or 30 calendar days after the return was rejected

Question 8

An unmarried taxpayer provides all of the support necessary for an elderly parent to live independently in a separate home. The taxpayer is claiming the parent as a dependent. Which of the following filing statuses is the taxpayer allowed to use when filing and generally will be the most advantageous for the taxpayer to use?

Accepted Answer

A)  Single
B)  Head of household
C)  Qualifying widow
D)  Married filing separately

Question 9

The declaration of representative accompanying a power of attorney must be signed under penalties of perjury with the representative declaring that

Accepted Answer

A)  the taxpayer is aware of the Circular 230 regulations.
B)  the representative has never been under suspension or disbarment from practice before the Internal Revenue Service
C)  the representative is authorized to represent the taxpayer identified in the power of attorney for the matters specified therein
D)  the taxpayer is unable to represent himself or herself.

Question 10

A taxpayer should itemize deductions if the taxpayer's total itemized deductions are...

Accepted Answer

A)  less than the taxpayer's interest income
B)  more than the taxpayer's standard deduction
C)  equal to the taxpayer's self employment tax
D)  double the taxpayer's unemployment compensation

Question 11

Which of the following information does an external auditor rely on?

Accepted Answer

A)  Financial statements
B)  Grapevine communication
C)  Discussions with senior management
D)  Discussions with every member of staff
E)  All of the above

Question 12

Form 8453 must be submitted to the IRS after acceptance of an e-filed return when:

Accepted Answer

A)  An agent possessing a Form 2848 electronically signs the return
B)  The taxpayer's signatures are inconsistent
C)  The charitable deductions claimed on the return exceed $1,000.00
D)  None of the above

Question 13

What is the difference between an internal and external auditor?

Accepted Answer

A)  Internal auditor prepares the set of financial statements, whereas external auditor does not do so
B)  Internal auditor focuses on fraud, external auditor evaluates misstatements
C)  Internal auditor is employed by the entity, whereas, external auditor is independent
D)  No difference, change in nomenclature based on the type of audit performed

Question 14

Self-employment tax applies to which of the following?

Accepted Answer

A)  Individuals who report only interest and dividend income
B)  Corporations that report less than $50,000 in gross receipts
C)  Independent contractors reporting net earnings from self-employment of $100
D)  Independent Contractors reporting net earnings from self-employment of $400 or more

Question 15

For purposes of the Earned Income Credit, a qualifying child is a child who...

Accepted Answer

A)  is over age 24 at the end of 2010 and not permanently and totally disabled
B)  has lived with you in the United States for at least 12 months
C)  is filing a joint return
D)  meets the relationship test

Question 16

In the current year, the taxpayer paid $5,000 in mortgage interest on a primary residence, $1,500 mortgage interest on a vacation home, and $2,000 in loan interest on a recreational vehicle with sleeping, cooking, and toilet facilities. What is the taxpayer's maximum mortgage interest deduction?

Accepted Answer

A)  $5,000
B)  $6,500
C)  $7,000
D)  $8,500

Question 17

Which of the following statements regarding tip income is true?

Accepted Answer

A)  If you are an indirectly tipped employee (for example, a busser or bartender)  you are not required to report tips to your employer.
B)  Any tips you reported to your employer are to be included in the wages in box 1 (Wages, tips, other compensation)  of your Form W-2.
C)  If the only tips you receive in a month are charged tips (for example, credit and debit card charges)  distributed to you by your employer, you are not required to report these tips to your employer.
D)  You must report the value of any noncash tips, such as tickets and passes, to your employer.

Question 18

Which of the following payments are generally taxable?

Accepted Answer

A)  Qualified disaster relief payments
B)  VA benefits
C)  Unemployment compensation
D)  Payments from a government welfare fund based on need

Question 19

When the IRS rejects a return that an Electronic Return Originator (ERO) attempted to e-file for a taxpayer, the ERO must advise the taxpayer of the rejection and provide the taxpayer with the

Accepted Answer

A)  IRS Customer Service phone number for assistance
B)  Declaration Control Number
C)  IRS code section
D)  Rejected code, accompanied by an explanation

Exam 3: Taxation and Auditing: Understanding Income Taxes and Financial Audits