A landlord leases property upon which the tenant makes improvements. The improvements are significant and are not made in lieu of rent. At the end of the lease, the value of the improvements are not income to the landlord. This rule is an example of:

A landlord leases property upon which the tenant makes improvements. The improvements are significant and are not made in lieu of rent. At the end of the lease, the value of the improvements are not income to the landlord. This rule is an example of:

a. A clear reflection of income result.
b. The tax benefit rule.
c. The arm's length concept.
d. The wherewithal to pay concept.
e. None of these.

Answer: D

Which, if any, of the following provisions of the tax law cannot be justified as promoting administrative feasibility (simplifying the task of the IRS)?

Which, if any, of the following provisions of the tax law cannot be justified as promoting administrative feasibility (simplifying the task of the IRS)?

a. Penalties are imposed for failure to file a return or pay a tax on time.
b. Prepaid income is taxed in the year received and not in the year earned.
c. Annual adjustments for indexation increases the amount of the standard deduction allowed.
d. Casualty losses must exceed 10% of AGI to be deductible.
e. A deduction is allowed for charitable contributions.

Answer: E

Which, if any, of the following provisions cannot be justified as mitigating the effect of the annual accounting period concept?

Which, if any, of the following provisions cannot be justified as mitigating the effect of the annual accounting period concept?

a. Nonrecognition of gain allowed for involuntary conversions.
b. Net operating loss carryback and carryover provisions.
c. Carry over of excess charitable contributions.
d. Use of the installment method to recognize gain.
e. Carry over of excess capital losses.

Answer: A

Provisions in the tax law that promote energy conservation and more use of alternative (non-fossil) fuels can be justified by:

Provisions in the tax law that promote energy conservation and more use of alternative (non-fossil) fuels can be justified by:

a. Political considerations.
b. Economic and social considerations.
c. Promoting administrative feasibility.
d. Encouragement of small business.
e. None of these.

Answer: B

Allowing a domestic production activities deduction for certain manufacturing income can be justified:

Allowing a domestic production activities deduction for certain manufacturing income can be justified:

a. As mitigating the effect of the annual accounting period concept.
b. As promoting administrative feasibility.
c. By economic considerations.
d. Based on the wherewithal to pay concept.
e. None of these.

Answer: C

Social considerations can be used to justify:

Social considerations can be used to justify:

a. Allowance of a credit for child care expenses.
b. Allowing excess capital losses to be carried over to other years.
c. Allowing accelerated amortization for the cost of installing pollution control facilities.
d. Allowing a Federal income tax deduction for state and local sales taxes.
e. None of these.

Answer: A

Both economic and social considerations can be used to justify:

Both economic and social considerations can be used to justify:

a. Favorable tax treatment for accident and health plans provided for employees and financed by employers.
b. Disallowance of any deduction for expenditures deemed to be contrary to public policy (e.g., fines, penalties, illegal kickbacks, bribes to government officials).
c. Various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education.
d. Allowance of a deduction for state and local income taxes paid.
e. None of these.

Answer: C

Regarding proper ethical guidelines, which (if any) of the following is correct?

Regarding proper ethical guidelines, which (if any) of the following is correct?

a. The use of client estimates in preparing a return may be acceptable.
b. Under no circumstances should a question on a tax return be left unanswered.
c. If a client has made a mistake in a prior year's return and refuses to correct it, you should withdraw from the engagement.
d. If the exact amount of a deduction is not certain (e.g., around mid-$600s), it should be recorded as an odd amount (i.e., $649) so as to increase the appearance of greater certainty.
e. None of these.

Answer: A

A characteristic of the fraud penalties is:

A characteristic of the fraud penalties is:

a. When negligence and civil fraud apply to a deficiency, the negligence penalty predominates.
b. Criminal fraud can result in a fine and a prison sentence.
c. The criminal fraud penalty is 75% of the deficiency attributable to the fraud.
d. The IRS has the same burden of proof in the case of criminal fraud than with civil fraud.
e. None of these.

Answer: B

David files his tax return 45 days after the due date. Along with the return, David remits a check for $40,000 which is the balance of the tax owed. Disregarding the interest element, David's total failure to file and to pay penalties are:

David files his tax return 45 days after the due date. Along with the return, David remits a check for $40,000 which is the balance of the tax owed. Disregarding the interest element, David's total failure to file and to pay penalties are:

a. $400.
b. $3,600.
c. $4,000.
d. $4,400.
e. None of these.

Answer: C

Which of the following is a characteristic of the audit process?

Which of the following is a characteristic of the audit process?

a. Most taxpayer audits involve "special" agents.
b. Self-employed taxpayers are less likely to be selected for audit than employed taxpayers.
c. Less important issues are handled by means of a correspondence audit.
d. If a taxpayer disagrees with the IRS auditor's finding, the only resort is to the courts.
e. None of these.

Answer: C

In terms of probability, which of the following taxpayers would be least likely to be audited by the IRS?

In terms of probability, which of the following taxpayers would be least likely to be audited by the IRS?

a. Taxpayer owns and operates a check-cashing service.
b. Taxpayer is an employed electrician.
c. Taxpayer just received a $3 million personal injury award as a result of a lawsuit.
d. Taxpayer just won a $1 million slot machine jackpot at a Las Vegas casino.
e. Taxpayer has been audited several times before.

Answer: B

Characteristics of the "Fair Tax" (i.e., national sales tax) include which, if any, of the following:

Characteristics of the "Fair Tax" (i.e., national sales tax) include which, if any, of the following:

a. Abolition of the Federal individual (but not the corporate) income tax.
b. Abolition of all Federal income taxes but retention of payroll taxes (including the self-employment tax).
c. Abolition of all Federal income taxes and payroll taxes but retention of the Federal estate and gift taxes.
d. Abolition of all Federal income and payroll taxes as well as the Federal estate and gift taxes.
e. None of these.

Answer: D

A VAT (value added tax):

A VAT (value added tax):

a. Is regressive in its effect.
b. Has not proved popular outside of the U.S.
c. Is not a tax on consumption.
d. Is used exclusively by third world (less developed) countries.
e. None of these.

Answer: A

The proposed flat tax:

The proposed flat tax:

a. Would eliminate the income tax.
b. Would simplify the income tax.
c. Would tax the increment in value as goods move through the production and manufacturing stages to the marketplace.
d. Is a tax on consumption.
e. None of these.

Answer: B

The U.S. (either Federal, state, or local) does not impose:

The U.S. (either Federal, state, or local) does not impose:

a. Franchise taxes.
b. Severance taxes.
c. Occupational fees.
d. Custom duties.
e. Export duties.

Answer: E

A characteristic of FUTA is that:

A characteristic of FUTA is that:

a. It is imposed on both employer and employee.
b. It is imposed solely on the employee.
c. Compliance requires following guidelines issued by both state and Federal regulatory authorities.
d. It is applicable to spouses of employees but not to any children under age 18.
e. None of these.

Answer: C

A characteristic of FICA is that:

A characteristic of FICA is that:

a. It does not apply when one spouse works for the other spouse.
b. It is imposed only on the employer.
c. It provides a modest source of income in the event of loss of employment.
d. It is administered by both state and Federal governments.
e. None of these.

Answer: E

State income taxes generally can be characterized by:

State income taxes generally can be characterized by:

a. The same date for filing as the Federal income tax.
b. No provision for withholding procedures.
c. Allowance of a deduction for Federal income taxes paid.
d. Applying only to individuals and not applying to corporations.
e. None of these.

Answer: A

Indicate which, if any, statement is incorrect. State income taxes:

Indicate which, if any, statement is incorrect. State income taxes:

a. Can piggyback to the Federal version.
b. Cannot apply to visiting nonresidents.
c. Can decouple from the Federal version.
d. Can provide occasional amnesty programs.
e. None of these.

Answer: B