TAX4001 Exam 1 Questions With Multiple Choices And Verified Answers.

any decrease in tax due to a new tax law must be offset by an equal increase in a tax imposed on another group - correct answer revenue neutrality a rule that a new law (or new measure) expires at a specific date unless further legislative action is taken to extend the law; if no action is taken, the original law is reinstated - correct answer sunset provision a situation where inflation causes a given level of income into higher income tax brackets; the result is an increase in income taxes but no increase in real purchasing power of the underlying income - correct answer bracket creep a Congressional response to bracket creep whereby tax brackets, standard deductions, personal and dependency exemptions, etc are adjusted for inflation - correct answer indexation What deemed incoe tax unconstitutional? - correct answer Pollock v. Farmers' Loan & Trust (1895) What amendment allowed income taxes? - correct answer 16th Amendment (1913) What is the current tax law named? - correct answer Internal Revenue Code of 1986 Examples of tax laws and their objectives: define gross income broadly - correct answer Raise revenues for the government and avoid loopholes Examples of tax laws and their objectives: progressive tax rates - correct answer Social objectives (tax those who can afford to pay and enable taxpayers) Examples of tax laws and their objectives: charitable contribution deductions - correct answer Social objectives (encourage helping the needy) Examples of tax laws and their objectives: deny deductions of bribes and fines - correct answer Social objectives and discourage certain activites Examples of tax laws and their objectives: accelerated depreciation - correct answer Encourage certain activites and economic objectives What are the four components of Adam Smith's "Canons of Taxation"? - correct answer Equality, certainty, convenience, economy Canons of Taxation: what is equality? - correct answer Fair and equitable What is horizontal equality? - correct answer Taxpayers with the same income pay the same tax What is vertical equality? - correct answer Taxpayers with more income pay more tax Canons of Taxation: what is certainty? - correct answer Clear and predictable What is taxpayer certainty? - correct answer Predictable tax liability and timing of when/where taxes are due What is government certainty? - correct answer Predictable source of revenue Canons of Taxation: what is convenience? - correct answer Easily assessed, collected, and administered What is taxpayer certainty of convenience? - correct answer Taxpayers should not be too burdened with record keeping and compliance costs What is government certainty of convenience? - correct answer US income tax is a voluntary compliance system where taxpayers are requested to volunteer their financial information Canons of Taxation: what is economy? - correct answer Minimal compliance and administrative costs What are the three types of tax rates? - correct answer Flat, progressive, regressive Q: Which tax rate is the most useful for tax planning decisions? - correct answer MTR What are the top three federal revenue sources? - correct answer Individual income taxes (42%), payroll taxes (40%), and corporate income (9%) taxes What percentage of US population was subject to federal income taxes in 1939? - correct answer 6% What percentage of US population was subject to federal income taxes in 1945? - correct answer 74% What are the roles of the IRS? - correct answer Collection of taxes, enforcement of tax laws, interpretation of statutory tax law What is the chance of being audited? - correct answer 1% What are the three types of audits? - correct answer Correspondence, office, field What is a correspondence examination? - correct answer A limited scope mail audit with usually a single question What is an office examination? - correct answer A local district IRS office exam limited in scope What is a field examination? - correct answer An audit performed where the books are kept What is tax avoidance? - correct answer The use of legal methods to modify an individual's financial situation in order to lower the amount of income tax owed What is tax evasion? - correct answer The use of illegal methods to lower the amount of taxable income reported Q: Tax avoidance or evasion: Homeowners pay property taxes based on the value of their home. Jim pays his property taxes in December of Year 1 rather than waiting until January of Year 2 due date. Jim itemizes the property tax on Year 1 tax return - correct answer Avoidance Q: Tax avoidance or evasion: Cash basis taxpayers can claim a deduction for business expenses paid during the year. On December 27, Year 1, Jim writes a check to pay his business' November Year 1 utility bill. He mails the check on January 3, Year 2. He deducts the payment on his Year 1 tax return. - correct answer Evasion Q: Tax avoidance or evasion: Jim invests $20,000 to purchase 1,000 shares of a mutual fund. Near the end of the year, the mutual fund pays a $3 dividend per share. Jim instructed the fund manager to automatically reinvest dividends. Jim reports no dividend income on this year's tax return but likewise keeps his basis in the shares at their original cost so he will recognize the income when he sells his shares. - correct answer Evasion What is the due date for income taxes? - correct answer 15th day of the 4th month after year-end What is the general statute of limitations? - correct answer 3 years after the later of: (1) date filed or (2) due date What is the statute of limitations if gross income is omitted that exceeds 25%? - correct answer 6 years What is the statute of limitations for failing to file? - correct answer Infinite What is the statute of limitations for filing a fraudulent return? - correct answer Infinite Jane files her 2014 income tax return on February 1, 2015. Her brother, Pete, wants to circumvent the three-year statute of limitations. He files his 2014 income tax return on December 31, 2017. Both tax returns were properly signed and mailed to the IRS. When does the statute of limitations for each tax return expire? - correct answer Jane: April 15, 2018 Pete: December 31, 2020 Ted files his federal income tax return two months after year-end. He reports $100,000 of income on his return, but that figure fails to include 30,000 of his income earned from self-employment. Is Ted's statute of limitations three years, six years, or infinite? - correct answer 6 years Ted files his federal income tax return two months after year-end. Ted's gross income is $130,000, but he omits $30,000. What is Ted's statute of limitations? - correct answer 6 years What is the failure to pay penalty? - correct answer 0.5% per month What is the failure to file penalty? What is the maximum? - correct answer 5% per month/4.5% if failure to pay penalty as well; maximum 25% of net amount due What is a negligence-related penalty? - correct answer 20% of the underpayment attributable to negligence A taxpayer forgets to report $1,000 he received for consulting. The taxpayer's MTR is 25%. What is the negligence penalty? - correct answer 250 in income taxes and 50 in negligence What is the interest rate for tax due? - correct answer Federal short-term + 3% What statement: A CPA should not recommend to a client that a position be taken...on a return unless the CPA has a good-faith belief that the position has a realistic possibility of being sustained. A CPA should not prepare or sign a return if the CPA knows that the return takes a position that the CPA could not recommend. A CPA should advise the client as to the potential penalty of the recommended tax return position, and the opportunity, if any, to avoid such penalties through disclosure. - correct answer 1 What statement: In preparing or signing a return, the CPA may in good faith rely without verification upon information furnished by the client or by third parties. The CPA should not ignore the implications of information furnished and should make reasonable inquiries if the information furnished appears incorrect. Where tax law imposes a condition with respect to the tax treatment of an item, the CPA should make appropriate inquiries to determine whether the condition has been met. - correct answer 3 What statement: CPAs may use taxpayer's estimate if it is not practical to obtain exact data and the estimates are reasonable based on the facts and circumstances known by the CPA. Avoid implying greater accuracy than exists. - correct answer 4 What statement: Inform the client promptly upon becoming aware of an error (in a previously filed