Advanced Enrolled Agent (EA) Multiple
Choice Questions (MCQs) with Answers and
Explanations for IRS Enrolled Agent
Certification Exam Preparation
1. A self-employed taxpayer uses the cash method of accounting and receives an advance
payment on December 28 for services to be performed in January of the following year.
How should the payment generally be treated for federal income tax purposes?
A. Report the income when the services are completed.
B. Include the advance payment in gross income in the year it is received.
C. Defer recognition until the following tax year regardless of accounting method.
D. Recognize half in the current year and half in the following year.
Explanation: Under the cash method of accounting, income is generally recognized when
actually or constructively received, even if the related services will be performed in a future tax
year.
2. A taxpayer sells business equipment used for several years at a gain exceeding its
adjusted basis. Which factor primarily determines whether the gain is treated as ordinary
income or capital gain?
A. The taxpayer's filing status.
B. The taxpayer's age.
C. Depreciation recapture provisions and the character of the asset.
D. Whether the asset was insured.
Explanation: Gains on depreciable business property may be partially or fully recharacterized
as ordinary income under depreciation recapture rules, depending on the type of property and
prior depreciation deductions.
3. Which taxpayer is generally required to make estimated federal income tax payments?
A. An employee whose withholding fully covers tax liability.
B. A self-employed individual expecting significant tax liability not covered by withholding.
, C. A retiree receiving only Social Security benefits with no taxable income.
D. A dependent with no earned or investment income.
Explanation: Taxpayers expecting to owe significant tax after accounting for withholding are
generally required to make estimated tax payments throughout the year.
4. Which of the following best describes the purpose of an Individual Taxpayer
Identification Number (ITIN)?
A. To replace a Social Security Number for all taxpayers.
B. To authorize employment in the United States.
C. To provide a tax processing number for individuals not eligible for a Social Security
Number.
D. To identify corporations filing federal income tax returns.
Explanation: An ITIN is issued for federal tax administration purposes to individuals who are
not eligible to obtain a Social Security Number.
5. During an IRS examination, which document generally provides the strongest evidence
supporting a business expense deduction?
A. A verbal statement from the taxpayer.
B. A reconstructed estimate prepared after the audit begins.
C. Original receipts, invoices, and contemporaneous business records.
D. A bank's marketing brochure.
Explanation: Contemporaneous documentation such as receipts, invoices, canceled checks, and
accounting records provides the most reliable substantiation of deductible business expenses.
6. Which filing status generally provides the highest standard deduction for an unmarried
taxpayer maintaining a household for a qualifying child?
A. Single
B. Married Filing Separately
C. Head of Household
D. Qualifying Surviving Spouse
Choice Questions (MCQs) with Answers and
Explanations for IRS Enrolled Agent
Certification Exam Preparation
1. A self-employed taxpayer uses the cash method of accounting and receives an advance
payment on December 28 for services to be performed in January of the following year.
How should the payment generally be treated for federal income tax purposes?
A. Report the income when the services are completed.
B. Include the advance payment in gross income in the year it is received.
C. Defer recognition until the following tax year regardless of accounting method.
D. Recognize half in the current year and half in the following year.
Explanation: Under the cash method of accounting, income is generally recognized when
actually or constructively received, even if the related services will be performed in a future tax
year.
2. A taxpayer sells business equipment used for several years at a gain exceeding its
adjusted basis. Which factor primarily determines whether the gain is treated as ordinary
income or capital gain?
A. The taxpayer's filing status.
B. The taxpayer's age.
C. Depreciation recapture provisions and the character of the asset.
D. Whether the asset was insured.
Explanation: Gains on depreciable business property may be partially or fully recharacterized
as ordinary income under depreciation recapture rules, depending on the type of property and
prior depreciation deductions.
3. Which taxpayer is generally required to make estimated federal income tax payments?
A. An employee whose withholding fully covers tax liability.
B. A self-employed individual expecting significant tax liability not covered by withholding.
, C. A retiree receiving only Social Security benefits with no taxable income.
D. A dependent with no earned or investment income.
Explanation: Taxpayers expecting to owe significant tax after accounting for withholding are
generally required to make estimated tax payments throughout the year.
4. Which of the following best describes the purpose of an Individual Taxpayer
Identification Number (ITIN)?
A. To replace a Social Security Number for all taxpayers.
B. To authorize employment in the United States.
C. To provide a tax processing number for individuals not eligible for a Social Security
Number.
D. To identify corporations filing federal income tax returns.
Explanation: An ITIN is issued for federal tax administration purposes to individuals who are
not eligible to obtain a Social Security Number.
5. During an IRS examination, which document generally provides the strongest evidence
supporting a business expense deduction?
A. A verbal statement from the taxpayer.
B. A reconstructed estimate prepared after the audit begins.
C. Original receipts, invoices, and contemporaneous business records.
D. A bank's marketing brochure.
Explanation: Contemporaneous documentation such as receipts, invoices, canceled checks, and
accounting records provides the most reliable substantiation of deductible business expenses.
6. Which filing status generally provides the highest standard deduction for an unmarried
taxpayer maintaining a household for a qualifying child?
A. Single
B. Married Filing Separately
C. Head of Household
D. Qualifying Surviving Spouse
