R2-4 Flashcards
Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income tax return for Year 8. By December 31, Year 8, Krete’s employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, Year 9, Krete timely filed an extension request to file her individual tax return and paid $300 of additional taxes. Krete’s Year 8 income tax liability was $16,500 when she timely filed her return on April 30, Year 9, and paid the remaining income tax liability balance.
What amount would be subject to the penalty for the underpayment of estimated taxes?
a.
$16,500
b.
$200
c.
$500
d.
$0
Choice “d” is correct. Provided the taxes due after withholdings were not over $1,000, there is no penalty for underpayment of estimated taxes. Note that there would be a failure to pay penalty on the $200 that was not paid until April 30, but this is a separate penalty.
Choice “b” is incorrect. This $200 would be subject to a failure to pay penalty, but if the balance due after withholdings is not over $1,000, there is no penalty for underpayment of estimated taxes.
Choice “c” is incorrect. If the balance of tax due after withholdings is not over $1,000, there is no penalty for underpayment of estimated taxes.
Choice “a” is incorrect. The penalty for underpayment of estimated taxes is not assessed on the full amount of the income tax liability, only the unpaid amount after withholdings to the extent it exceeds $1,000.
Chris Baker’s adjusted gross income on her current year tax return was $160,000. The amount covered a 12-month period. For the next tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of:
I.
90% of the tax on the return for the current year paid in four equal installments.
II.
110% of prior year’s tax liability paid in four equal installments.
a.
I only.
b.
Both I and II.
c.
II only.
d.
Neither I nor II.
Choice “b” is correct. Both.
I.
Payment of 90% of the tax on the return for the current year avoids the penalty for underpayment of estimated tax.
II.
Generally, payment of 110% of the prior year’s tax liability avoids the penalty for underpayment of estimated tax when the taxpayer’s AGI from the prior year exceeds $150,000.
Note: Payment of the lesser of the two above will provide “safe harbor” to the taxpayer.
A claim for refund of erroneously paid income taxes, filed by an individual before the statute of limitations expires, must be submitted on Form:
a.
1040X
b.
843
c.
1045
d.
1139
Choice “a” is correct. An individual submits a claim for refund of erroneously paid income taxes on Form 1040X.
Choice “d” is incorrect. Form 1139 is used for refund of corporate, not individual, income taxes.
Choice “c” is incorrect. Form 1045 is used for a quick refund of individual income taxes due to the carry back of a net operating loss, not for refund of erroneously paid income tax.
Choice “b” is incorrect. Form 843 is used to request a refund of taxes other than income tax.
A calendar-year taxpayer files an individual tax return for Year 2 on March 20, Year 3. The taxpayer neither committed fraud nor omitted amounts in excess of 25% of gross income on the tax return. What is the latest date that the Internal Revenue Service can assess tax and assert a notice of deficiency?
a.
March 20, Year 5.
b.
April 15, Year 5.
c.
March 20, Year 6.
d.
April 15, Year 6.
Choice “d” is correct. When the return is filed early, the latest date the IRS can assess tax is 3 years from the date the return is due (April 15, Year 6 in this case).
A CPA’s adjusted gross income (AGI) for the preceding 12-month tax year exceeds $150,000. Which of the following methods is (are) available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty?
I.
The annualization method.
II.
The seasonal method.
a.
I only.
b.
Neither I nor II.
c.
Both I and II.
d.
II only.
Choice “a” is correct. In computing the amount of estimated payments due, an individual taxpayer may choose between the annualized method (90% of current year’s tax), or the prior year method (100% of last year’s tax) unless the taxpayer’s adjusted gross income exceeds $150,000 then they must use 110% of last year’s tax. Therefore, the taxpayer in this example can use the annualized method. The seasonal method is not permitted.
Choices “d”, “c”, and “b” are incorrect, per the above explanation.
Martinsen, a calendar-year individual, files a year 1 tax return on March 31, Year 2. Martinsen reports $20,000 of gross income. Martinsen inadvertently omits $500 interest income. The IRS may assess additional tax up until which of the following dates?
a.
March 31, Year 5.
b.
April 15, Year 5.
c.
April 15, Year 8.
d.
March 31, Year 8.
Choice “b” is correct. Generally, the statute of limitations on assessments is three years from the later of the due date of the return or the date the return was filed (including amended returns). The IRS has up to six years to assess additional tax if the misstatement is an understatement of 25% or more of gross income originally reported. In this case, the misstatement is $500 on $20,000 of gross income, or 2.5%. Therefore, the statute of limitations for Martinsen is the general rule. In this case, the due date of the return was April 15, Year 2. Martinson filed on March 31, Year 2. Under the general rule, the IRS has until three years from April 15, Year 2 (or, April 15, Year 5) to assess additional tax.
Choice “a” is incorrect. In this case, the statute of limitations on assessments is three years from the later of the due date of the return or the date the return was filed (including amended returns). March 31 is the earlier of the two dates.
Choice “d” is incorrect. Please refer to the discussion for the correct choice “b”. This answer choice is incorrect because it uses the earlier of the two dates and the improper number of six years as the statute of limitations.
Choice “c” is incorrect. Please refer to the discussion for the correct choice “b”. This answer choice is incorrect because it uses the improper number of six years as the statute of limitations.
Martin filed a timely return on April 15. Martin inadvertently omitted income that amounted to 30% of his gross income stated on the return. The statute of limitations for Martin’s return would end after how many years?
a.
6 years.
b.
3 years.
c.
Unlimited.
d.
7 years.
Choice “a” is correct. For a 30% understatement of gross income (anything over 25%), the statute of limitations is 6 years.
Choice “b” is incorrect. For a 25% (or less) understatement of gross income, the statute of limitations is 3 years.
Choice “d” is incorrect. There is no 7-year statute of limitations for an understatement of gross income.
Choice “c” is incorrect. The statute of limitations is unlimited for fraud and filing false returns, but not for understatements of income. There is no fraud in this question because the omission was inadvertent.
Dawn White’s adjusted gross income on her Year 1 tax return was $100,000. The amount covered a 12-month period. For the Year 2 tax year, the minimum payments required from White to avoid the penalty for the underpayment of estimated tax is:
a.
110% of the prior year’s tax liability paid in four equal installments only.
b.
100% of the prior year’s tax liability paid in four equal installments only.
c.
90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year’s tax liability paid in four equal installments.
d.
90% of the current tax on the return for the current year paid in four equal installments or 110% of the prior year’s tax liability paid in four equal installments.
Choice “c” is correct. The requirement is 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year’s tax liability paid in four equal installments.
Choice “d” is incorrect. 110% of the prior year’s tax liability is only required if AGI is in excess of $150,000.
Choices “a” and “b” are incorrect. There is always an option to pay 90% of the current year’s tax.
A calendar-year individual filed an income tax return on April 1. This return can be amended no later than:
a.
Ten months and 15 days after the end of the calendar year.
b.
Four months and 15 days after the end of the calendar year.
c.
Three years, three months, and 15 days after the end of the calendar year.
d.
Three years after the return was filed.
Rule: An individual may file an amended tax return (Form 1040X) within three (3) years of the date the original return was filed or within two (2) years of the date the tax was paid, whichever is later. An original return filed early is considered filed on the due date of the return.
Choice “c” is correct. In this question, the return was filed early (April 1), so the return is considered filed as of the due date, on April 15. There is no information on when the tax was paid, but it can be reasonably assumed that the tax was properly paid on April 1 with the return. So the latter of the two dates is three years. The question that arises is “three years from when,” and here the question falls somewhat short.
Three of the answers to this question are worded in terms of “the” calendar year. These answers have to mean the prior calendar year. Three years from April 15 (when the return was considered to be filed) would be three years, three months, and 15 days from the end of the prior calendar year.
Choice “b” is incorrect. The date is not four months and 15 days after the end of the (prior) calendar year. This answer ignores the three years. It appears to be trying to trick candidates into thinking that April is four months. However, that would mean that the last day that an amended return could be filed was the date of the filing of the original return.
Choice “a” is incorrect. The date is not ten months and 15 days after the end of the (prior) calendar year.
Choice “d” is incorrect. The date is not three years after the (original) return was filed. This answer looks good at first glance, but note that the return was actually filed on April 1. The Rule above considers an original return filed early to be filed on the due date of the return. However, the answer says “after the return was filed” and not “after the return was considered to be filed.”
Sam’s year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of year 3 estimated tax payments that Sam can make?
a.
$45,000
b.
$50,000
c.
$30,000
d.
$33,000
Choice “d” is correct. To avoid penalties, if a taxpayer owes $1,000 or more in tax payments beyond withholdings, such taxpayer will need to have paid in for taxes the lesser of:
90% of the current year’s tax ($50,000 x 90%) = $45,000, or
100% of the previous year’s tax ($30,000 x 100%) = $30,000
However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year, 110% of the prior year’s tax liability is used to compute the safe harbor for estimated payments. (Previous year’s tax $30,000 x 110% = $33,000).
Choice “c” is incorrect. $30,000 is 100% of last year’s tax. This would be sufficient if the previous year’s income were $150,000 or less.
Choice “a” is incorrect. $45,000 is 90% of this year’s tax, which is sufficient, but we are looking for the minimum amount.
Choice “b” is incorrect. $50,000 is 100% of the current year’s tax, which is sufficient, but more than required.
An individual taxpayer agreed to a finding of fraud on an income tax return filed two years ago. What is the maximum time limitation, if any, after which the IRS maynot assess any additional taxes against the taxpayer for this tax return?
a.
There is no time limitation.
b.
Three years.
c.
Two years.
d.
One year.
Choice “a” is correct. There is no statute of limitations for fraud or filing false tax returns.
Choice “d” is incorrect. There is no one year statute of limitations for assessment of tax.
Choice “c” is incorrect. There is no two year statute of limitations for assessment of tax.
Choice “b” is incorrect. The three year statute of limitations will apply to good faith mistakes with an understatement of income of less than 25%.
Keen, a calendar-year taxpayer, reported a gross income of $100,000 on his 20X1 income tax return. Inadvertently omitted from gross income was a $20,000 commission that should have been included in 20X1. Keen filed his 20X1 return on March 15, 20X2. To collect the tax on the $20,000 omission, the Internal Revenue Service must assert a notice of deficiency no later than:
a.
April 15, 20X8.
b.
March 15, 20X8.
c.
April 15, 20X5.
d.
March 15, 20X5.
Choice “c” is correct. April 15, 20X5.
Rule: Ordinarily, a tax must be assessed within three years after a return is filed. The assessment period begins from the due date of the return if the return is filed prior to the due date or “filing date” if the return is filed later (e.g., with an extension). The assessment period is extended to six years for returns that omit more than 25% of the gross income originally reported. That is not the case here ($20,000 ÷ $100,000 = 20%).
Choice “d” is incorrect. The return was filed prior to its April 15 deadline.
Choice “b” is incorrect. The return was filed prior to its April 15 deadline and the omission of gross income was not more than 25%.
Choice “a” is incorrect. The omission from gross income was not more than 25%.
If an individual paid income tax in the current year but did not file a current year return because his income was insufficient to require the filing of a return, the deadline for filing a refund claim is:
a.
Three years from the date the tax was paid.
b.
Three years from the date a return would have been due.
c.
Two years from the date the tax was paid.
d.
Two years from the date a return would have been due.
Choice “c” is correct. Two years from the date the tax was paid.
Rule: A taxpayer may file a claim for refund within three years from the time the return was filed, or two years from the time the tax was paid, whichever is later. Since no return has been filed, the refund claim must be filed within two years from the time the tax was paid.
Choices “d”, “a”, and “b” are incorrect, per the above rule.
On April 15, Year 2, a married couple filed their joint Year 1 calendar-year return showing gross income of $120,000. Their return had been prepared by a professional tax preparer who mistakenly omitted $45,000 of income, which the preparer in good faith considered to be nontaxable. No information with regard to this omitted income was disclosed on the return or attached statements. By what date must the lnternal Revenue Service assert a notice of deficiency before the statute of limitations expires?
a.
April 15, Year 5.
b.
December 31, Year 7.
c.
December 31, Year 4.
d.
April 15, Year 8.
Choice “d” is correct. April 15, Year 8 is the last day for IRS to assert a notice of deficiency before the statute of limitations expires, six years after due date because gross income was underreported by more than 25% (45,000 ÷ 120,000).
Rule: Ordinarily, a tax must be assessed within three years after a return is filed. The assessment period begins from the due date of the return if the return is filed prior to the due date or “filing date” if the return is filed later, e.g., with an extension. The assessment period is extended to six years for returns that omit more than 25% of the gross income originally reported.
Choices “b” and “c” are incorrect. Required IRS assessment is 3 or 6 years after due date―not end of tax year.
Choice “a” is incorrect. Not 3 years after due date because omission was more than 25% of gross income reported.
Ms. Marsh filed her 20X0 individual income tax return on February 15, 20X1. All her tax was paid during the year through withholding. The return was due on April 15, 20X1. During January 20X2, she discovered that she had not taken a properly substantiated charitable contribution that would have reduced her total tax by $250 on her 20X0 tax return. By what date must she file her amended return to claim a refund of the tax paid?
a.
December 31, 20X3.
b.
April 15, 20X4.
c.
February 15, 20X4.
d.
December 31, 20X2.
Choice “b” is correct. A taxpayer can file a claim for refund by the later of three years from the time the return was filed, 3 years from the original due date of the return, or two years from the time the tax was paid (if not when the return was filed). Three years from the time the return was filed is February 15, 20X4, 3 years from the original due date of the return is April 15, 20X4, and two years from the time the tax was paid would be December 31, 20X2 (all withholding is deemed paid ratably over the year so the last dollars would be deemed paid December 31, 20X0). The later date is April 15, 20X4.
Choice “c” is incorrect. This date is earlier than three years from the date the 20X0 tax return was due.
Choice “a” is incorrect. This date is three years from the date the last tax was paid.
Choice “d” is incorrect. This is two years from the date the last tax was paid but the claim must be filed by the later of this date, three years from the date the return was filed, or 3 years from the original due date of the return.
