TAX 4001 Exam Questions with Complete Solutions
What are the top three federal revenue sources? - 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? - ANSWER 6%
What percentage of US population was subject to federal income taxes in 1945? - ANSWER 74%
What are the roles of the IRS? - ANSWER Collection of taxes, enforcement of tax laws,
interpretation of statutory tax law
What is the chance of being audited? - ANSWER 1%
What are the three types of audits? - ANSWER Correspondence, office, field
What is a correspondence examination? - ANSWER A limited scope mail audit with usually a
single question
What is an office examination? - ANSWER A local district IRS office exam limited in scope
,What is a field examination? - ANSWER An audit performed where the books are kept
What is tax avoidance? - 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? - 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 - 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. - 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. - ANSWER Evasion
What is the due date for income taxes? - ANSWER 15th day of the 4th month after year-end
What is the general statute of limitations? - 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%? - ANSWER 6
years
, What is the statute of limitations for failing to file? - ANSWER Infinite
What is the statute of limitations for filing a fraudulent return? - 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? - 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? - 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? - ANSWER 6 years
What is the failure to pay penalty? - ANSWER 0.5% per month
What is the failure to file penalty? What is the maximum? - 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? - 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? - ANSWER 250 in income taxes and 50 in negligence
What is the interest rate for tax due? - ANSWER Federal short-term + 3%
What are the top three federal revenue sources? - 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? - ANSWER 6%
What percentage of US population was subject to federal income taxes in 1945? - ANSWER 74%
What are the roles of the IRS? - ANSWER Collection of taxes, enforcement of tax laws,
interpretation of statutory tax law
What is the chance of being audited? - ANSWER 1%
What are the three types of audits? - ANSWER Correspondence, office, field
What is a correspondence examination? - ANSWER A limited scope mail audit with usually a
single question
What is an office examination? - ANSWER A local district IRS office exam limited in scope
,What is a field examination? - ANSWER An audit performed where the books are kept
What is tax avoidance? - 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? - 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 - 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. - 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. - ANSWER Evasion
What is the due date for income taxes? - ANSWER 15th day of the 4th month after year-end
What is the general statute of limitations? - 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%? - ANSWER 6
years
, What is the statute of limitations for failing to file? - ANSWER Infinite
What is the statute of limitations for filing a fraudulent return? - 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? - 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? - 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? - ANSWER 6 years
What is the failure to pay penalty? - ANSWER 0.5% per month
What is the failure to file penalty? What is the maximum? - 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? - 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? - ANSWER 250 in income taxes and 50 in negligence
What is the interest rate for tax due? - ANSWER Federal short-term + 3%
