104 Test Bank for Concepts in Federal Taxation 2012 19th Edition

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(1)Test Bank for Concepts in Federal Taxation 2012 19th Edition True-False Questions All tax practitioners are governed by the AICPA’s Code of Professional Conduct. 1. True 2. False A regressive tax rate structure as increases. a tax in which the average tax rate decreases as is thedefined tax base 1. True 2. False Self-employed are required to make quarterly payments of their estimated people tax liability. 1. True 2. False The marginal taxorrate the of rate taxwill thatbe will be paid on the dollar of income theisrate taxofthat saved by the nextnext dollar of deduction. 1. True 2. False Employers are required to pay aeach Federal Unemployment Taxofofup 6.2% of the first $10,000 in wages to employee less a credit to 5.4% of state unemployment taxes paid. 1. True 2. False Adam identified efficient,for certainty, as the Smith four basic requirements a good convenience, tax system. and economy 1. True 2. False Congress is required to insure thatconvenience, the tax law has theeconomy. following characteristics: equality, certainty, and 1. True 2. False

(2) The statute of limitations is three years,and six there yearsisif no thestatute taxpayer omits gross income in excess of 25%, limitations if the taxpayer willfully defrauds the government. of 1. True 2. False A deferral like aninexclusion in that it does not subject have a current tax effect, butais itdeferral differs that an exclusion isatnever totime taxation, whereas will be subject to tax some point of in the future. 1. True 2. False Tax avoidance occurs whenactual a taxpayer uses fraudulent methods or deceptive behavior to hide tax liability. 1. True 2. False A tax is an enforced contribution used to finance the functions of government. 1. True 2. False An lossthe results fromincome. an excess of allowable deductions for a tax annual year over reported 1. True 2. False Gifts to qualified charitable organizations may be deducted as a contribution, but not to exceed 50% of an individual taxpayer’s adjusted gross income. 1. True 2. False Horizontal equity exists when two similarly situated taxpayers are taxed the same. 1. True 2. False

(3) 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. 1. True 2. False Multiple Choice Questions-Page 1 Which of the following are included among Adam Smith's criteria for evaluating Economy. a tax? I. Convenience. II. Fairness. III. Neutrality. IV. 1. Statements I and II are correct. 2. Statements I, II, and III are correct. 3. Statements I and IV are correct. 4. Statements II and III are correct. 5. Statements I, II, III, and IV are correct. Adam Smith's structure that isconcept of vertical equity is found in a tax rate 1. Regressive. 2. Proportional. 3. Horizontal. 4. Progressive. 5. Economical. Which of the Adam Smith'sthat requirements for a goodtax taxrate system best supports argument the federal income structure should be progressive? 1. Certainty. 2. Convenience. 3. Equality. 4. Neutrality. 5. Sufficiency. When planning for an investment that will extend over will several years, the ability to predict how the results of the investment be taxed is important. This statement is an example of 1. Certainty.

(4) 2. Transparency 3. Equality. 4. Neutrality. 5. Fairness. Jim and Anna are married and$20,000 have a 2011 taxable income of Their $280,000. They also received of tax-exempt income. effective tax rate is: 1. 22.7% 2. 23.3% 3. 24.9% 4. 33.0% 5. 35.0% Which of the following statement is/are included in Adam Smith’s four requirements for a good tax system? I. Changes in the tax law should be madeII.as needed to raise revenueinand for proper administration. A tax should be imposed proportion to to a pay a taxpayer's ability to pay. III. A taxpayer should be required tax when it is IV. most likely to be convenient for the taxpayer to make the payment. The government must collect taxes equal to it’s expenses. 1. Statements I and II are correct. 2. Statements I and IV are correct. 3. Statements II and III are correct. 4. Statements II and IV are correct. 5. Statements III and IV are correct. Jessica is single and has a 2011 taxable income of $199,800. She also received $15,000 of tax-exempt income. Jessica's marginal tax rate is 1. 22.8% 2. 23.3% 3. 25.0% 4. 28.0% 5. 33.0% Which of the following payments would not be considered a tax? 1. An assessment based on the selling price of the vehicle. 2. A local assessment for new sewers based on the amount of water used.

(5) 3. A local assessment for schools based on the value of the taxpayer's property. 4. A surcharge based upon the amount of income tax already calculated. Which of the following payments meets the IRS definition of a tax? 1. A fee paid on the value of property transferred from one individual to another by gift. 2. A one-time additional property tax assessment to add a sidewalk to the neighborhood. 3. A fee paid on the purchase of aerosol producing products to fund ozone research. 4. A fee for a sticker purchased from a city that must be attached to garbage bags before the city garbage trucks will pick up the bags. 5. All of the above meet the definition of a tax. Based onisthe definition given in Chapter 1 of the text, which ofa the following a tax? I. A registration fee paid to the state to get car III. license plate; II. 2% special sales tax for funding public education; A special property tax assessment for installing sidewalks in the on taxpayer's neighborhood; IV. An income tax imposed by Chicago persons living or working within the city limits. 1. Only statement I is correct. 2. Only statement III is correct. 3. Only statement IV is correct. 4. Statements I and IV are correct. 5. Statements II and IV are correct. Terry is a worker in isthe countryPretoria Pretoria.imposes His salary is $46,000 and his taxable income $52,000. a Worker Tax as If follows: Employers withhold a tax of 20% of all wages and salaries. taxable income as reported on the employee's income tax return is greater than $50,000, an additional 10% tax is withheld on all income. Terry's marginal tax rate is: 1. 0% 2. 10% 3. 20% 4. 30% Andrea is single and has a 2011 taxable income of $199,800 She also received $15,000 of tax-exempt income. Andrea's average tax rate is 1. 22.8% 2. 23.3% 3. 25.4% 4. 28.5%

(6) 5. 33.0% Which ofofthe following payments is aincome tax? I. tax Artisbalance paid thedue) IRS a penalty $475 (above his $11,184 because he had significantly underpaid histoestimated income tax; II. Lindsey paid $135 to the State of Indiana 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. 1. Only statement IV is correct. 2. Only statement III is correct. 3. Statements II and IV are correct. 4. Statements I, II, and III are correct. 5. Statements I, II, III, and IV are correct. Maria is single andofhas a 2011 taxable $200,000. received $15,000 tax-exempt income.income Maria'sofeffective taxShe ratealso is: 1. 22.8% 2. 23.7% 3. 25.0% 4. 28.0% 5. 33.0% If a taxpayer has a choice of receiving income intax therates current year versus the following year, which of the following is important in determining the year in which he should include the income? 1. Average. 2. Effective. 3. Composite. 4. Marginal. Bob and Linda are married and$20,000 have a of 2011 taxable income ofTheir $280,000. They also received tax-exempt income. marginal tax rate is: 1. 23.5% 2. 24.9% 3. 28.0% 4. 33.0% 5. 35.0%

(7) Vertical equity: I. tax means thatpay those taxpayers who have of thethe greatest ability to pay the should the greatest proportion tax.III.II.is means that two similarly situated taxpayers are taxed the same. reflected in the progressive nature of thewith federal income tax system. IV. exists when Avis, a single individual 4 dependent children, and Art,tax a single individual with no dependents, income on equal $26,000 annual salaries. both pay $2,400 1. Statements III and IV are correct. 2. Statements II and III are correct. 3. Statements I and III are correct. 4. Only statement IV is correct. 5. Statements I, II, III, and IV are correct. According to the definition, which of the following is not a characteristic of aIRS tax? 1. The payment to the governmental authority is required by law. 2. The payment relates to the receipt of a specific benefit. 3. The payment is required pursuant to the legislative power to tax. 4. The purpose of requiring the payment is to provide revenue to be used for the public or governmental purposes. Which of the following payments meets the IRS definition of a tax? 1. Sewer fee charged added to a city trash collection bill. 2. A special assessment paid to the county to pave a street. 3. A levy on the value of a deceased taxpayer's estate. 4. Payment of $300 to register an automobile. The $300 consists of a $50 registration fee and $250 based on the weight of the auto. Horizontal equity: I. means that thosepay taxpayers who have the of greatest ability to pay the tax should the greatest proportion the tax.III. II.ismeans thatintwo similarly situated taxpayers are taxed the same. reflected the progressive nature of the federal income tax system. IV. exists whenindividual Avis, a single individual with 4both dependent children, and Art, a single with no dependents, pay $2,400 income tax on equal $26,000 annual salaries. 1. Statements III and IV are correct. 2. Statements II and III are correct. 3. Statements I and III are correct. 4. Only statement IV is correct. 5. Statements I, II, III, and IV are correct.

(8) Pay-as-you-go withholding is consistent with Adam Smith's criteria of 1. Certainty. 2. Convenience. 3. Economy. 4. Fairness. 5. Transparency. Jaun plans to give $5,000 to the His American Diabetes Association. Jaun's marginal tax rate is 28%. average tax rate is 25%. Jaun's after-tax cost of the contribution is 1. $1,250 2. $1,400 3. $3,600 4. $3,750 5. $5,000 Katie pays $10,000 in tax-deductible property taxes. Katie’s marginal tax rate is 25%, average tax rate is 24%, and effective tax rate is 20%. Katie's tax savings from paying the property tax is: 1. $ 1,600 2. $ 2,000 3. $ 2,400 4. $ 2,500 5. $10,000 Frank and Fran are married and have a 2011 taxable income of $280,000. average taxThey ratealso is: received $20,000 of tax-exempt income. Their 1. 23.2% 2. 24.9% 3. 22.3% 4. 33.0% 5. 35.0%

(9) 83 Free Test Bank for Concepts in Federal Taxation 2012 19th Edition by Murphy Multiple Choice Questions-Page 2 Katarina, aforsingle taxpayer, has income total income from allinto sources of $100,000 2011. Her taxable after taking consideration $25,000 in tax deductions and $10,000 in exclusions is $65,000. Katarina’s liability is $12,375. What are Katarina's marginal, average, and effective tax rates? 1. 28% marginal; 19.0% average; 19.0% effective. 2. 25% marginal; 16.5% average; 16.5% effective. 3. 25% marginal; 16.5% average; 19.0% effective. 4. 25% marginal; 19.0% average; 16.5% effective. 5. 28% marginal; 16.5% average; 19.0% effective. Greg pays sales taxtax of $7.20 on the the purchase purchase of of aa similar lamp for $120. Michelle paid sales of $9 on lamp for $150. Greg's taxable income for the current year is $40,000. Michelle's taxable income is $55,000. I. TheII.structure of theofsales tax is progressive if based on taxable income. The structure the sales tax is proportional if based on sales price. 1. Only statement I is correct. 2. Only statement II is correct. 3. Both statements are correct. 4. Neither statement is correct. The term "tax law" as used in your(i.e. textbook includes: I. Treasury regulations. II. College textbooks “Concepts in Federal Income Taxes”). III. Internal Revenue Code of 1986. IV. Tax related decisions of a U.S. Circuit Court of Appeals. 1. Only statement III is correct. 2. Statements I, III, and IV are correct. 3. Statements I and III are correct. 4. Only statement II is correct. 5. All four statements are correct. Heidi and Anastasia are residents of the mythical country of Wetland. Heidi pays $1,500 income tax on taxable income of $6,000. Anastasia pays income tax of $21,000 on taxable income ofIII.$72,000. The income tax structure is I. Progressive. II. Proportional. Regressive. IV. Value-added. V. Marginal. 1. Only statement I is correct. 2. Only statement II is correct. 3. Only statement III is correct. 4. Only statement V is correct.

(10) 5. Statements II and IV are correct. Sally is an electrician. electrician employed by Bogieyear, Company. Sam is is a selfemployed During the current Sally's salary $85,000 and Sam's net self-employment income is $85,000. Which of the following statements about the Social Security and selfemployment taxes paid is/are correct? I. Sam's self-employment tax is greater than the Social Security tax paid on Sally's income. II. Sam and Sally pay the same amount of tax 1. Only statement I is correct. 2. Only statement II is correct 3. Both statements are correct 4. Neither statement is correct Jered and Samantha are married. Their 2011 taxable income isIf the $80,000 before considering their mortgage interest deduction. mortgage $10,000 for 2011, what are the tax savings attributableinterest to theirtotals interest deduction? 1. $ 1,500 2. $ 2,500 3. $ 2,800 4. $ 3,300 5. $10,000 Employment taxes are 1. revenue neutral. 2. regressive . 3. value-added. 4. progressive. 5. proportional. How much additional Social Security tax earnings does Elise pay inyear 2011 on her $10,000 Christmas bonus? Her total for the (before the bonus) are $110,000. 1. $0 2. $ 145 3. $ 620 4. $ 765

(11) How much additional Social Security tax earnings does Betty pay inyear 2011 on her $10,000 Christmas bonus? Her total for the (before the bonus) are $100,000. 1. $145.00 2. $269.20 3. $566.60 4. $641.00 5. $765.00 Taxpayer paystax taxofof$6,600 $3,300on on$20,000. taxable income while taxpayer BApays The taxofis$10,000 a 1. proportional tax. 2. regressive tax. 3. progressive tax. 4. horizontal tax. A tax provision has been discussed thattowould add an additional marginal tax rate of 39% to be applied an individual's taxable law, income in excess of $800,000. If this provision were to become what overall distributional impact would it have on our current income tax system? 1. Proportional. 2. Regressive. 3. Progressive. 4. Disproportional. 5. None of the above. Lee's 2011 taxable is individual. $88,000 before considering charitable contributions. Lee isincome a single Sheinmakes a donation of $10,000 to the American Heart Association December 2011. By how much did Lee's marginal tax rate decline simply because of the donation? 1. 0% 2. 10% 3. 3% 4. 5% 5. 8%

(12) Rayburn is the sole owner of a dance studio. During theiscurrent year, his net self-employment income from the dance studio $50,000. What is Rayburn 's self-employment tax? 1. $3,825.00 2. $5,738.00 3. $6,200.00 4. $7,650.00 When property is transferred, gift and estate taxes are based on the 1. fair market value of the assets on the date of transfer. 2. replacement cost of the transferred property. 3. transferor's original cost of the transferred property. 4. transferor's adjusted basis of the transferred property. 5. fair market value less adjusted basis on the date of the transfer. Oliver pays sales taxtax ofof $7.20 onthe thepurchase purchaseofofaasimilar lamp for $120. Michelle paid sales $9 on lamp for $150. Oliver's taxable income for the current year is $40,000. Michelle's taxable income is $55,000. I. The structure of the sales tax is regressive if based on taxable income. II. The structure of the sales tax is proportional if based ononsales price. III. TheIV. structure of the sales tax is progressive based taxable income. The average sales tax paid on a purchase eq 1. Only statement I is correct. 2. Only statement II is correct. 3. Statements III and IV are correct. 4. Statements II and IV are correct. 5. Statements I, II, and IV are correct. A property tax: I.onispersonal levied onproperty the value of property. II. isthan referred to as ad valorem. III. is more common a tax on real property. IV. is based upon assessed value rather than actual transactions. 1. Only statement I is correct. 2. Statements II and III are correct. 3. Statements I, II, and IV are correct. 4. Statements I, II, III, and IV are correct. Samantha is a self-employed electrician. 2011, selfher net selfemployment is $120,000. What isDuring Samantha's employment income tax? 1. $15,570.00

(13) 2. $15,606.80 3. $16,128.00 4. $16,723.20 5. $18,360.00 Joy receives a used As caraworth $13,000 from her will uncle as $13,000 a graduation present. result of the gift: I. Joy have taxable income. II. Joy’s uncle’s gift will subject him to the gift tax. of 1. Only statement I is correct. 2. Only statement II is correct. 3. Both statements are correct. 4. Neither statement is correct. The Federal income tax is a 1. revenue neutral tax. 2. regressive tax. 3. value-added tax. 4. progressive tax. 5. form of sales tax. Elrod isofan employee of Gomez Inc. During 2011, ElrodGomez receives a salary $120,000 from Gomez. What amount should withhold from Elrod's salary as payment of Elrod's social security and medicare taxes? 1. $7,440.00 2. $7,803.40 3. $8,064.00 4. $8,361.60 5. $9,180.00 Alan is aofsingle taxpayer with a gross income of $88,000, aJosh taxable income $66,000, and an income tax liability of $12,625. also has $8,000 of effective tax-exempt average, and tax interest rates? income. What are Alan's marginal, 1. 25% marginal; 17.1% average; 19.1% effective. 2. 28% marginal; 15.9% average; 21.7% effective. 3. 28% marginal; 17.1% average; 21.7% effective. 4. 25% marginal; 19.1% average; 17.1% effective.

(14) Phyllis is an electricianDuring employed by Bogie Company. Phil is aisselfemployed electrician. the current year, Phyllis's salary $75,000 and Phil's net self-employment income is $75,000. Which of the following statements about the Social Security and selfemployment taxes paid Security is/are correct? I. Phil's self-employment tax is greater than the Social tax paid on Phyllis's income. II. Phil pays more taxsame than Phyllis pays in Social Security tax. III. Philself-employment and Phyllis pay the 1. Only statement I is correct. 2. Only statement I is correct. 3. Only statement IV is correct. 4. Statements I and III are correct. 5. Statements II and IV are correct. Shara's 2011 taxable income isis$42,000 before considering charitable contributions. Shara a single individual. She makes a donation of $5,000 to the American Heart Association in December 2011. By of how did Shara's marginal tax rate decline simply because themuch donation? 1. 0% 2. 7% 3. 3% 4. 5% 5. 10% An excise tax: I.product is levied on the value of property. II.sale is levied on the quantity of the or service. III. differs from an tax, because a sales tax is imposed on the value of property. 1. Only statement I is correct. 2. Only statement II is correct. 3. Statements I and II are correct. 4. Statements II and III are correct. 5. Statements I, II, and III are correct. Sally is an electrician. electrician employed by Bogieyear, Company. Sam is is a selfemployed During the current Sally's salary $85,000 and Sam's net self-employment income is $85,000. Which of the following statements about the Social Security and selfemployment taxes paid is/are correct? I. Sam paystax. more selfemployment tax than Sally pays in Social Security II. Sam's employment tax is equal to the Social Security tax paid on Sally'sselfincome. 1. Only statement I is correct. 2. Only statement II correct. 3. Both statements are correct.

(15) 4. Neither statement is correct. How much additional Social Security tax earnings does Connie payyear in 2011 on her $10,000 Christmas bonus? Her total for the (before the bonus) are $42,000. 1. $0 2. $145.00 3. $620.00 4. $765.00 A sales tax levied on all goods and services sold is an example of state a 1. progressive tax. 2. regressive tax. 3. proportional tax. 4. value added tax. Which of for thedetermining following types of taxes of rely solely on "income" as the tax base the amount tax liability? I. Sales Tax; Property Tax; III. Gift Tax; IV. Social Security Tax; V. Excise Tax II. 1. Statements I, II, III, IV, and V are correct. 2. Statements I, III, and IV are correct. 3. Statements II and IV are correct. 4. Only statement IV is correct. 5. None of the above types of taxes relies on income for its tax base. Marie earns $80,000 sales manager for Household much Social Security as anda medicare tax does Marie haveBooks. to pay?How 1. $ 4,960.00 2. $ 6,120.00 3. $ 6,400.00 4. $12,240.00

(16) 83 Free Test Bank for Concepts in Federal Taxation 2012 19th Edition by Murphy Multiple Choice Questions-Page 3 Betty hiresthe Sam to prepare her federal decided income tax return. In preparing return, Sam erroneously 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 tax subject to the negligence penalty since sheinrelied on a professional preparer and reported her income good faith. II. Sam is liable for payment of Betty's tax due plus interest and negligenc 1. Only statement I is correct. 2. Only statement II is correct. 3. Both statements are correct 4. Neither statement is correct. Trang is$10,000 in the 15% marginal tax expenses. bracket in the current year. She owes a bill for business 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 timeinterest beforecharge. JanuaryShe 31 of next year, without incurring the normal 12% expects to be in the 25% marginal year. Without the time value of money, whatbracket are hernext tax savings if she considering p 1. Current year $1,000. 2. Current year $1,500. 3. Next year $1,000. 4. Next year $2,500. 5. Next year $1,500. Based on the couple following information, what is the 2011 $120,000; taxable income for a married with two children? Total income Excludable income 2,000; Deductions for AGI 5,000; Allowable itemized deductions 8,000 1. $ 79,000 2. $ 86,600 3. $ 87,000 4. $ 90,200 5. $112,000. Tax planning involves the timing of income and I.deductions. General rules of thumb to follow when planning include: putting income the year with the lowest marginal tax rate. II. deferring recognitioninto of income. 1. Only statement I is correct. 2. Only statement II is correct.

(17) 3. Both statements are correct. 4. Neither statement is correct. Tax planning involves the timing of income and I.deductions. General rules of thumb to follow when planning include: deferring recognition income. II. putting deductions into the year with highest marginal taxofrate. 1. Only statement I is correct. 2. Only statement II is correct. 3. Both statements are correct. 4. Neither statement is correct. The incomeare taxbroken formulainto for classes: individualI. taxpayers is unique in that deductions This dichotomy of deductions results in(AGI). an intermediate income number is called adjusted gross income II. One class of deductions called exclusions from income. III. One class of deductions is called deductions for adjusted gross IV. not Expenses as deductions for adjusted gross income. income are limited qualifying by the income of the taxpayer. 1. Statements III and IV are correct. 2. Statements II and III are correct. 3. Statements I, III and IV are correct. 4. Only statement IV is correct. 5. Statements I, II, III, and IV are correct. 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 IV. taxpayer Willfulness the part of the taxpayer. V. An affirmative actIRS. by the to on misrepresent. 1. Statements I, II, and III are correct. 2. Statements I, II, IV, and V are correct. 3. Statements I and III are correct. 4. Only statement IV is correct. 5. All of the five listed elements are correct. Betty hiresthe Sam to prepare her federal decided income tax return. In preparing return, Sam erroneously 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 tax subject to the negligence penalty since she relied on a professional preparer reported income in and gooda faith. II. Betty is liable for payment and of the tax dueher plus interest negligenc 1. Only I is correct. 2. Only II is correct.

(18) 3. Only III is correct. 4. I and III are correct. 5. I and IV are correct. Sonya owes a deductible expense that she can pay either tax (and deduct) this year or next year. She is in the 25% marginal rate bracket. Which of the following statements about this payment is/are correct? I. Deductions should always be taken as soon as possible. Sonya should pay tax the rate expense thisnext year. II. Ifshe Sonya expects to be in the 28% marginal bracket year, should pay the expense thisnext year.year, III. Ifshe Sonya expects to be in the 15% marginal tax rate bracket should pay th 1. Only statement II is correct. 2. Only statement IV is correct. 3. Statements I and III are correct. 4. Statements I and IV are correct. 5. Statements III and IV are correct. For 2011, Nigel and Lola, married taxpayers withouttochildren, calculated their total allowable itemized deductions be $17,100. Accordingly, Nigel and Lola file jointly and should deduct from adjusted gross income: I. the standard deduction amount of $11,600. II. total itemized deductions equal to $17,100. III. one personal and one dependency exemption amount. IV. exemption amounts totaling $7,400. 1. Only statement I is correct. 2. Statements I and IV are correct. 3. Statements I, III, and IV are correct. 4. Statements II and IV are correct. 5. Statements I, II, III, and IV are correct. Which of the following are types of IRS examinations? I. Information matching program. II. Office examination. III. Field examination. IV. Revenue agent report. 1. Statements II and III are correct. 2. Only statement III is correct. 3. Statements I and IV are correct. 4. Statements I, II and III are correct. 5. Only statement II is correct. Tax planning involves the timing of income and I.deductions. General rules of thumb to follow when planning include: putting income into the year with the lowest marginal tax rate. II. deferring deductions. 1. Only statement I is correct.

(19) 2. Only statement II is correct. 3. Both statements are correct. 4. Neither statement is correct. The return selectionofprogram highest probability errors is designed to select returns with the 1. The TCMP. 2. The DIF program. 3. The special audit program. 4. The document perfection program. 5. The information-matching program. Ordinary incomeearn. is: I. the commonnotype of income that under individuals and businesses II. receives special treatment tax laws. III. the character of the gain from the sales of shares of stock. held more than one year 1. Only statement I is correct. 2. Only statement II is correct. 3. Statements I and II are correct. 4. Statements I and III are correct. 5. Statements I, II, and III are correct. All tax of practitioners whoI.prepare tax returns for a fee Code are subject to which the following? IRS Circular 230. II. AICPA of Professional III. Statements Standards Conduct for Tax Services. IV. American Conduct. Bar Association Code of on Professional 1. Only statement I is correct. 2. Statements I, II, and III are correct. 3. Statements II and III are correct. 4. Statements II and IV are correct. 5. Statements I, II, III, and IV are correct. Carolyn and Craig are married. They have twodependency children (8 years old and 13 years old) living with them. How exemptions are claimed on Carolyn and many Craig's 2011 tax return? 1. 0 2. 1 3. 2 4. 3

(20) 5. 4 Which of the following taxpayers usedbasis tax evasion tactics when filing their 2011 tax return? I. Fern, a cash accountant intentionally billed clients for from services on until December 31,Samual 2011, to avoida receiving cash payments clients 2012. II. made mathematical mistake onofa tax. schedule in his taxnot return thatthe resulted in a $2,000 underpayment The IRS does detect mistake. III. Beverlychildcare accidentally underreported providing in her home. IV. Bo,$800 a of income she earned 1. Statements I and III are correct. 2. Only statement II is correct. 3. Statements II and III are correct. 4. Statemenst III and IV are correct. 5. Only statement IV is correct. Alice is a plumber and collector ofwork, rare she stamps. Instead of always receiving cash payments for her occasionally has herthen customers send their payments to a stamp broker. The broker makes stamp purchases on value Alice'sofbehalf and mails the stamps to her. Alice never reports the the stamps received as income on her tax return. I.subject Alice's to actions are of a form of tax evasion. II. Alice's actions are payment tax, interest, and penalty if detected by the IRS. 1. Only statement I is correct. 2. Only statement II is correct. 3. Both statements are correct. 4. Neither statement is correct. Glenna put money inrequired savings to accounts inthe 50 IRS different banks. She knows a bank is not report to any interest itthe pays her that totals less than $10. Because the banks do not report payments to the Which IRS, Glenna does not report the interest received as taxable income. of the following is (are) true? I. Glenna's actions are taxreturn evasion because shetax. intentionally misrepresented facts on a tax to avoid paying II. Glenna's actions are tax avoidance because the IRS will never 1. Only statement I is correct. 2. Only statement II is correct. 3. Statements I and III are correct. 4. Statements II and III are correct. 5. Statements I, II, and III are correct.

(21) The Statements onrunning Standards for Tax Services (SSTS) have common concepts through most of them. Which of themay in following statements are parts of the SSTSs? I. The preparer good faith rely upon, without verification, information furnished III. by the client. II. There is confidentiality of the CPA-client relationship. Taxpayer supplied estimates may bethe used to prepare if it is impractical to obtain exact data and are returns reasonable. IV. The preparer must never disclose to estimates the 1. Only statement II is correct. 2. Statements I, II, and IV are correct. 3. Statements II and III are correct. 4. Statements I, II, and III are correct. 5. Statements I, II, III, and IV are correct. The calculation of an individual's income taxfollowing includesare certain deductions for adjusted gross income. The examples of this class of deductions: I. Trade or business expenses. II. Rental expenses. III. Interest on student loans. IV. Investment interest 1. Statements I and II are correct. 2. Statements I, II, and III are correct. 3. Only statement I is correct. 4. Only statement III is correct. 5. Statements I, II, III, and IV are correct. Christy's 2011 taxadditional return was audited during November 2012. The auditor proposed tax due of $1,500. Christy disagreed. What should Christy do next? with I. Within 30 days, sheletter. mustIII. fileShe a protest. II. She must respond a written protest may respond with an oral protest. 1. Only statement I is correct. 2. Only statement II is correct. 3. Only statement III is correct. 4. Statements I and III are correct. 5. Statements I and II are correct. Which of the following is an example of tax evasion? 1. Beth invests money in tax exempt municipal bonds instead of corporate bonds. 2. Bryan uses the cafeteria plan offered by his employer to fund pension plan contributions for his retirement. 3. 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.

(22) 4. Bertha won $500 cash in an amateur mud-wrestling contest but doesn't report it on her tax return. 5. All of the above are examples of tax evasion. How a taxpayer have to file aof petition with the U.S. Tax Courtlong afterdoes receiving a Statutory Notice Deficiency? 1. 10 days 2. 30 days 3. 90 days 4. 120 days 5. 180 days. Sarah owes a deductible expense that she can either pay tax (andrate deduct) this year or next year. She is in the 25% marginal bracket. Which of the following statements about this current payment is/are correct? I. Deductions should always be taken in the year.. Sarah should pay tax the rate expense thisnext year.year, II. If she Sarah expects to be in the 28% marginal bracket should pay the expense next year. 1. Only statement I is correct. 2. Only statement II is correct. 3. Both statements are correct. 4. Neither statement is correct. Betty hiresthe Sam to prepare her federal decided income tax return. In preparing return, Sam erroneously 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.liable Sam is liable for payment of Betty's negligence penalty. Betty is for the payment of the tax due plus interest. 1. Only statement I is correct. 2. Only statement II is correct. 3. Both statements are correct 4. Neither statement is correct. Which of the following statements is/arefrom correct? I. There is aincome minimum allowable standard deduction adjusted gross 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. 1. Only statement I is correct. 2. Only statement II is correct.

(23) 3. Statements II and IV are correct. 4. Statements I and IV are correct. 5. Statements I and III are correct. Which of business the following is/are categorized as itemized deduction(s)? I. Trade or expenses. II. Rental expenses. III. Property taxes on personal residence. IV. Investment interest expense. 1. Only statement I is correct. 2. Only statement IV is correct. 3. Statements I and III are correct. 4. Statements III and IV are correct. 5. Statements I, II, and IV are correct. Adjusted gross income (AGI): I. is is unique used totoprovide limitations on tax certain deductions from AGI. II. the individual income formula. III. isfrom the result subtracting certain allowable personal expenditures grossbefore income. 1. Only statement I is correct. 2. Only statement II is correct. 3. Only statement III is correct. 4. Statements I and II are correct. 5. Statements I, II, and III are correct. Exemption amounts and itemized deductions are twooftypes of reductions used to calculate taxable income. Which the following are characteristics of these types or of the deductions? I.deduction. Taxpayers deduct the larger of itemized deductions standard 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 e 1. Only statement III is correct. 2. Statements I and II are correct. 3. Statements I and III are correct. 4. Statements II and III are correct. 5. Statements I, II, and III are correct.

(24) Free Text Questions 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 2002 tax return. Ed hasn't filedmissed any returns since 2005 because he is afraid the IRS will find the returns and put him sure in jailthat andhis heemployers won't be able to support his family. Ed carefully makes withhold more income tax thanhe is would necessary. returns get a Ed taxknows refun for certain that if he filed the late Answer Given No. Evasion is the willful concealment of certain facts in order to receive a tax benefit. Ed has not evaded; he has just failed to file a return. He is not receiving a tax benefit. In fact, he probably has over-paid his tax liability. Monty is aan licensed Certified Public Accountant. Last year heInc. This prepared individual income tax return for Apple Bakeries, year Apple Bakeries income switchedtax toreturns a different tax return preparer. This year he is preparing for a completely separate business, Cinnamon Rollthe Bakery, Inc. The owner of Cinnamon Roll asked Monty to give him tax return data from Apple Bakeries, to a help estimate the tax liability of Cinnamon Roll Bakery, Inc. Is there professional responsibility issue for Answer Given AICPA Code of Professional Conduct Rule 301 (confidentiality) would not allow Monty to disclose this information without Apple's consent. SSTS NO. 3 allows a CPA to use information from the tax return of another taxpayer if the information would not violate the confidentiality of the relationship and is relevant to and necessary for the preparation of the return. Monty would violate Apple's confidential relationship. In addition, the information does not appear to be relevant or necessary for the preparation of Cinnamon's return. Nora andwith Nathan work for Cozener Construction Company. Nora is a foreman an annual salary of $110,000. Nathan is a carpenter who earned total wages ofwill $52,000 during the current year. a.b.How much Social Security tax Nora and Nathan have to pay? According the definitions in Chapter 1, Explain. is the social security tax regressive,toproportional, or progressive? Answer Given a. Nathan is under the $106,800 MHI base amount and will pay 7.65% tax on his entire $52,000 of wages, a total of $3,978 ($52,000 ´ 7.65%). Nora is over the MHI base amount and will pay 6.2% on the $106,800 MHI base amount and 1.45% on her entire salary for a total tax of $8,216.60 [($106,800 ´ 6.2%) + ($110,000 ´ 1.45%)]; b. A proportional tax rate structure is defined as a tax for which the average tax rate remains constant as the tax base increases. The Social Security tax is composed of two components - a tax of 6.2% on the first $106,800 of wages and salaries and a tax of 1.45% on all wages and salaries. When viewed as two separate taxes, the Social

(25) Security tax meets the definition of a proportional tax because a constant rate of tax is applied throughout each tax base. However, when the total tax paid is considered, the tax becomes regressive. A regressive tax is defined as a tax in which the average tax rate decreases as the tax base increases. If total wages and salaries are considered the tax base, then the use of the $106,800 maximum tax base for the MHI portion makes the tax regressive. This is illustrated in Nathan and Nora's situation. Nathan's average tax rate is 7.65% on wages of $52,000. Nora's average tax rate is 7.47% ($8,216.60 ÷ $110,000). Thus, the average tax rate decreases as total wages and salaries increase past the $106,800 MHI base. On December 28,for 2011, Doris and Dan are considering one last financial decision 2011, a contribution of $1,000 to the American Diabetes Association. If 2011 they make thetax $1,000 it will be fully deductible on their income return.contribution, Their filing status is married filing jointly. Their 2011 taxable income before this contribution is $150,000. If they make this contribution, what is its after-tax cost? Answer Given The after tax cost is $720: 2011 marginal rate is 28% Amy hired Carey, a CPA, to prepare her 2011 federal incomeher tax return. Amy had prepared her own 2010 return. In reviewing records, Carey discovered that Amy had recorded $5,000 of as consulting income she received by check in December 2010 though it had been received in 2011. What should Carey do about this situation? Answer Given Under SSTS No. 6, Carey should inform Amy of the error and recommend that she correct the error. In this case, Amy should file an Bamended return for 2010 to correct the understatement of income. If Amy will not correct the error, Casey will have to consider whether he should continue to prepare the 2011 return. Raquel is Agent's a recentReport law school graduate. Shereturn is upset byshe an must IRS pay Revenue on her income tax that an additional $2,000 in tax on all lastthe year's income. Raquel tells you that she "... will take her case way to the Supreme Court.” What is the probability Raquel will be able to take her case to the Supreme Court. Answer Given It is very unlikely that Raquel will take her case to the Supreme Court. First, the Supreme Court hears very few tax-related cases - generally those that involve constitutional, jurisdictional, or novel issues. Second, most disputes with the IRS are settled without trial. Third, she must first file her case in Trial Court and appeal it to an appellate court before the Supreme Court would hear the case. She may win at one of

(26) the lower court levels. Even is she loses in the lower courts, litigating is costly and she may decide that the expense isn't worth the $2,000 in tax.

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