Question 1

A transaction for which there is no legitimate business purpose is automatically assessed a 50% penalty.

Accepted Answer

A) True 
 B)False

Question 2

A closed-fact situation means that

Accepted Answer

A) all of the client's transactions have occurred and the research focuses on finding support for the action already taken. 
B) all of the client's transactions have not yet occurred so the events may be carefully planned. 
C) the client's tax return has not yet been filed. 
D) the client is requesting tax planning advice for a future transaction. 
A) all of the client's transactions have occurred and the research focuses on finding support for the action already taken. 
B) all of the client's transactions have not yet occurred so the events may be carefully planned. 
C) the client's tax return has not yet been filed. 
D) the client is requesting tax planning advice for a future transaction.

Question 3

The business purpose doctrine requires a transaction to have an economic purpose other than one based solely on tax avoidance.

Accepted Answer

A) True 
 B)False

Question 4

The document that provides the application of the law to a particular set of facts is a

Accepted Answer

A) Regulation 
B) Revenue Ruling 
C) Revenue Procedure 
D) Information Release 
A) Regulation 
B) Revenue Ruling 
C) Revenue Procedure 
D) Information Release

Question 5

A proposed regulation can be relied on when planning a transaction.

Accepted Answer

A) True 
 B)False

Question 6

Circular 230 is issued by the AICPA to provide guidance on tax return preparation by CPAs.

Accepted Answer

A) True 
 B)False

Question 7

Tax avoidance is the minimization of the tax burden by using acceptable, legal alternatives.

Accepted Answer

A) True 
 B)False

Question 8

A six-year statute of limitations applies if the taxpayer

Accepted Answer

A) understates adjusted gross income by 25% 
B) understates taxable income by 25% 
C) understates gross income by 25% 
D) overstates deduction by 25% 
A) understates adjusted gross income by 25% 
B) understates taxable income by 25% 
C) understates gross income by 25% 
D) overstates deduction by 25%

Question 9

A high DIF score indicates which of the following?

Accepted Answer

A) The taxpayer is likely to get a refund 
B) The taxpayer's chances of audit are substantially less than 2% 
C) IRS will automatically grant an extension of time to appeal 
D) The taxpayer's chances of audit are fairly high 
A) The taxpayer is likely to get a refund 
B) The taxpayer's chances of audit are substantially less than 2% 
C) IRS will automatically grant an extension of time to appeal 
D) The taxpayer's chances of audit are fairly high

Question 10

Legal income shifting includes shifting income among relatives and between a business and its owner/employee.

Accepted Answer

A) True 
 B)False

Question 11

A letter ruling can only be relied on by the taxpayer for whom it is written.

Accepted Answer

A) True 
 B)False

Question 12

Changing which of the following factors as indicated would increase the after-tax net cash flow of a project:

Accepted Answer

A) Delaying revenue recognition 
B) Increasing the discount rate 
C) Delaying expense recognition 
D) Increasing the marginal tax rate 
E) None increase cash flows 
A) Delaying revenue recognition 
B) Increasing the discount rate 
C) Delaying expense recognition 
D) Increasing the marginal tax rate 
E) None increase cash flows

Question 13

What effect does an increased discount rate have on project evaluations?

Accepted Answer

A) Increases net cash flow 
B) Decreases net cash flow 
C) Increases the probability that a project will be accepted 
D) It has no effect on project evaluation 
A) Increases net cash flow 
B) Decreases net cash flow 
C) Increases the probability that a project will be accepted 
D) It has no effect on project evaluation

Question 14

If a project results in a loss, the tax effect causes a decrease in cash flow.

Accepted Answer

A) True 
 B)False

Question 15

The statute of limitations for an error overstating expenses by more than 25 percent is 3 years.

Accepted Answer

A) True 
 B)False

Question 16

In 2019, Coral Corporation (a C corporation) sold $100,000 of merchandise for which it paid $40,000.It also paid $35,000 of other expenses.All transactions were in cash.What is Coral Corporation's after-tax net cash inflow?

Accepted Answer

A) $100,000 
B) $60,000 
C) $25,000 
D) $19,750 
A) $100,000 
B) $60,000 
C) $25,000 
D) $19,750

Question 17

Which of the following is not a requirement to qualify for innocent spouse relief?

Accepted Answer

A) The individual electing innocent spouse relief must have been abandoned by her spouse for more than 6 months. 
B) The individual establishes that she did not know and had no reason to know that there was an understatement 
C) It would be inequitable to hold the individual liable for the deficiency attributable to the understatement when all facts and circumstances are considered 
D) The individual elects innocent spouse relief within the time period that the statute of limitation is open for collection activities. 
A) The individual electing innocent spouse relief must have been abandoned by her spouse for more than 6 months. 
B) The individual establishes that she did not know and had no reason to know that there was an understatement 
C) It would be inequitable to hold the individual liable for the deficiency attributable to the understatement when all facts and circumstances are considered 
D) The individual elects innocent spouse relief within the time period that the statute of limitation is open for collection activities.

Question 18

According to the Statements on Standards for Tax Services, if a CPA discovers an error in a prior return prepared by another tax return preparer, the CPA

Accepted Answer

A) is required to notify IRS immediately 
B) should notify the client of the error and request permission to disclose the error to the IRS 
C) must immediately withdraw from the engagement 
D) is required to correct the error on the prior year's return even if it does not affect the current year's tax return 
A) is required to notify IRS immediately 
B) should notify the client of the error and request permission to disclose the error to the IRS 
C) must immediately withdraw from the engagement 
D) is required to correct the error on the prior year's return even if it does not affect the current year's tax return

Question 19

Changing which of the following factors as indicated would decrease the after-tax net cash flow of a project:

Accepted Answer

A) Delaying the years in which inflows occur 
B) Delaying revenue recognition 
C) Increasing the discount rate 
D) All decrease cash flows 
E) None decrease cash flows 
A) Delaying the years in which inflows occur 
B) Delaying revenue recognition 
C) Increasing the discount rate 
D) All decrease cash flows 
E) None decrease cash flows

Question 20

CK Corporation can invest $100,000 in a project.After taxes, the project is expected to generate $40,000 of net income the first year and $75,000 of net income the second year.If the company uses a 10 percent discount rate to evaluate projects, what is the project's net cash flow?

Accepted Answer

A) $15,000 
B) $1,690 
C) ($1,690) 
D) ($1,315) 
A) $15,000 
B) $1,690 
C) ($1,690) 
D) ($1,315)

A transaction for which there is no legitimate business purpose is automatically assessed a 50% penalty.

A closed-fact situation means that

The business purpose doctrine requires a transaction to have an economic purpose other than one based solely on tax avoidance.

The document that provides the application of the law to a particular set of facts is a

A proposed regulation can be relied on when planning a transaction.

Circular 230 is issued by the AICPA to provide guidance on tax return preparation by CPAs.

Tax avoidance is the minimization of the tax burden by using acceptable, legal alternatives.

A six-year statute of limitations applies if the taxpayer

A high DIF score indicates which of the following?

Legal income shifting includes shifting income among relatives and between a business and its owner/employee.

A letter ruling can only be relied on by the taxpayer for whom it is written.

Changing which of the following factors as indicated would increase the after-tax net cash flow of a project:

What effect does an increased discount rate have on project evaluations?

If a project results in a loss, the tax effect causes a decrease in cash flow.

The statute of limitations for an error overstating expenses by more than 25 percent is 3 years.

In 2019, Coral Corporation (a C corporation) sold $100,000 of merchandise for which it paid $40,000.It also paid $35,000 of other expenses.All transactions were in cash.What is Coral Corporation's after-tax net cash inflow?

Which of the following is not a requirement to qualify for innocent spouse relief?

According to the Statements on Standards for Tax Services, if a CPA discovers an error in a prior return prepared by another tax return preparer, the CPA

Changing which of the following factors as indicated would decrease the after-tax net cash flow of a project:

CK Corporation can invest $100,000 in a project.After taxes, the project is expected to generate $40,000 of net income the first year and $75,000 of net income the second year.If the company uses a 10 percent discount rate to evaluate projects, what is the project's net cash flow?

Introduction to Taxation

Determining Gross Income

Employee Compensation

Deductions for Individuals and Tax Determination

Business Expenses

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Tax-Deferred Exchanges

Taxation of Corporations

Sole Proprietorships and Flow-Through Entities

Estates, Gifts, and Trusts

Filters

Exam 2: The Tax Practice Environment

A transaction for which there is no legitimate business purpose is automatically assessed a 50% penalty.

A closed-fact situation means that

The business purpose doctrine requires a transaction to have an economic purpose other than one based solely on tax avoidance.

The document that provides the application of the law to a particular set of facts is a

A proposed regulation can be relied on when planning a transaction.

Circular 230 is issued by the AICPA to provide guidance on tax return preparation by CPAs.

Tax avoidance is the minimization of the tax burden by using acceptable, legal alternatives.

A six-year statute of limitations applies if the taxpayer

A high DIF score indicates which of the following?

Legal income shifting includes shifting income among relatives and between a business and its owner/employee.

A letter ruling can only be relied on by the taxpayer for whom it is written.

Changing which of the following factors as indicated would increase the after-tax net cash flow of a project:

What effect does an increased discount rate have on project evaluations?

If a project results in a loss, the tax effect causes a decrease in cash flow.

The statute of limitations for an error overstating expenses by more than 25 percent is 3 years.

In 2019, Coral Corporation (a C corporation) sold $100,000 of merchandise for which it paid $40,000.It also paid $35,000 of other expenses.All transactions were in cash.What is Coral Corporation's after-tax net cash inflow?

Which of the following is not a requirement to qualify for innocent spouse relief?

According to the Statements on Standards for Tax Services, if a CPA discovers an error in a prior return prepared by another tax return preparer, the CPA

Changing which of the following factors as indicated would decrease the after-tax net cash flow of a project:

CK Corporation can invest $100,000 in a project.After taxes, the project is expected to generate $40,000 of net income the first year and $75,000 of net income the second year.If the company uses a 10 percent discount rate to evaluate projects, what is the project's net cash flow?

Introduction to Taxation

Determining Gross Income

Employee Compensation

Deductions for Individuals and Tax Determination

Business Expenses

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Tax-Deferred Exchanges

Taxation of Corporations

Sole Proprietorships and Flow-Through Entities

Estates, Gifts, and Trusts

Filters