CFP Exam Income Tax-96 Questions with Complete Solutions

CFP Exam Income Tax-96 Questions with Complete Solutions What is the primary source of all tax law? - CORRECT ANSWER IRS Step transaction - CORRECT ANSWER Ignore the individual transactions and instead tax the ultimate transaction Sham transaction - CORRECT ANSWER Lacks a business purpose ex: A sale by XYZ to ABC when XYZ and ABC are owned by the same company Is income from a hobby reportable? - CORRECT ANSWER Yes Are expenses for hobbies deductible? - CORRECT ANSWER No A hobby is considered a business if? - CORRECT ANSWER It has profits 3 of the last 5 years How many years do horses have to be profitable to be considered a business? - CORRECT ANSWER 2 of the last 7 An individual is required to file if their net earnings from self employment are at least how much? - CORRECT ANSWER $400 Who can represent a tax payer at an IRS audit? Attorney CPA Enrolled agen Enrolled Actuary Any Permissible designee - CORRECT ANSWER All of the above Penalty for frivolous return? - CORRECT ANSWER $5000 Penalty for negligence? - CORRECT ANSWER 20% of the underpayment due to negligence **does not have the intent to defraud Penalty for fraud? - CORRECT ANSWER 75% of the portion of the tax underpayment attributable to fraud **Fraud is the intent to cheat Failure to pay penalty - CORRECT ANSWER .5% per month with a maximum of 25% Failure to file penalty - CORRECT ANSWER 5% per month with a maximum of 25% Is the fraud penalty on the tax deficiency, the interest deficiency or both? - CORRECT ANSWER Both