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Flashcards in Module 8 Deck (31)
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1

Which of the following are the sources of federal tax law?

A. Treasury Regulations
B. Tax Newsletters
C. The mainstream media
D. Private Letter Rulings

A.

The Internal Revenue Code and Treasury regulations are the primary sources of all tax law.

2

What weight should be given to Treasury decisions?

A. Regulations are only for auditors and tax geeks.
B. Treasury regulations have the full force of law.
C. Regulations are a form of formal guidance, but are not binding.
D. Regulations must be followed unless they are superseded by state laws.

B.

Treasury regulations have the full force of law.

3

What weight should be given to revenue rulings and revenue procedures?

A. Revenue rulings and procedures must be adhered to strictly by taxpayers and the IRS alike.
B. Revenue rulings may be followed on a case-by-case basis.
C. They may be cited as precedents, but not as law.
D. Rules are made to be broken.

C.

They do not have the force and effect of Treasury Department regulations, but they may be cited as precedents. A revenue ruling is the administrative interpretation of the statutory tax law that is generally related to specific factual circumstances, whereas a revenue procedure is generally related to compliance matters.

4

What are secondary sources of authority and what purpose do they serve?

A. Secondary sources are just as good as primary sources.
B. Secondary sources are more useful than tertiary sources and can be used in an audit.
C. Secondary sources provide the basis for tax law.
D. Secondary sources are useful for research but are unofficial interpretations with no legal authority.

D.

Secondary sources of tax information consist mainly of books, periodicals, articles, newsletters, and editorial judgments published by tax services. They are very useful as a starting point in tax research, but realize that the secondary sources are unofficial interpretations which have no legal authority.

5

Why is it important for a financial planner to understand the objectives of federal taxation?

A. Clients want to know the mission statement of the IRS.
B. It aids the planner in anticipating changes and allows him or her to plan ahead.
C. These objectives incentivize corporations to move their tax domicile overseas.
D. It is not important for a planner to understand the objectives of tax legislation.

B.

It aids the planner in anticipating changes in a given area and allows him or her to plan ahead.

6

How does the federal tax system promote price stability?

A. Raising or lowering taxes has the effect of slowing or stimulating the private sector.
B. Price stability is of no concern to policy makers.
C. Price stability is the responsibility of the Federal Reserve alone.
D. Tax increases stimulate economic growth.

A.

Price stability is promoted through the tax law by raising or lowering taxes to decrease or increase spending in the private sector. Tax increases typically slow economic growth.

7

Last year, Mario itemized his income tax deductions and deducted $4,000 in state income taxes withheld from his paycheck last year. In the current year, Mario received a refund of $800 from the state as a refund of an overpayment of last year’s state income taxes. What does this mean for Mario?

A. Mario must include $800 in his gross income this year.
B. Mario need not take any action because refunds are not income.
C. The $4,000 deducted last year must be included in income in the current year.
D. The $800 need not be reported because that would result in double taxation.

A.

Mario must reduce the amount he deducts for state income taxes in the current year by the $800 refund

8

All of the following are recognized taxpayer representatives before the IRS except

A. a Certified Public Accountant.
B. a CFP® certificant.
C. an Enrolled Actuary.
D. an Enrolled Agent.

B.

A CFP® certificant, without additional credentials, is not permitted to represent a taxpayer-client before the IRS in any type of audit.

9

What amounts of estimated tax payments and withholding must be paid in order for an individual taxpayer to avoid the imposition of a penalty for underpayment of estimated tax?

A. 75% of the current year
B. 110% of the current year
C. The lesser of 90% of the current year or 100% of the previous year
D. The lesser of 10% of AGI or $150,000

C.

Total withholding and estimated tax payments generally must total at least the lesser of 90% of the taxpayer’s current year tax liability, or 100% of the individual’s tax for the prior year, as long as a return showing a tax liability was filed for the prior year and the prior year was a period of 12 months. (If the prior year AGI exceeded $150,000, the 100% is replaced by 110%.)

10

All of the following are determining factors in establishing filing requirements for taxpayers except

A. gross income.
B. filing status.
C. whether they itemize or use the standard deduction.
D. age of the taxpayer.

C.

A U.S. citizen or resident uses the following three factors in determining whether an income tax return is required to be filed for the year:

- Gross income
- Filing status
- Age

11

Chet files a timely tax return but is later required to pay an additional $15,000 in tax. Of this amount, $6,000 is attributable to the taxpayer’s negligence. The negligence penalty will be

A. $500, because there is a maximum penalty of $500.
B. $1,200, because a 20% penalty is applied to the $6,000 underpayment.
C. $1,800, because a 30% penalty is applied to the $6,000 underpayment.
D. $3,000, because a 20% penalty is applied to all tax due.

B.

A 20% penalty applies to the negligence component; therefore, the total amount of penalty imposed on Chet is $1,200 ($6,000 × 0.20).

12

Jerry is a long-term client of Ted, a CFP® professional. Jerry wants Ted to prepare his tax returns. Ted has learned that Jerry has had several large, taxable transactions during the year but Jerry has not given Ted any documentation on them for income tax purposes. Jerry told Ted the transactions were “off the table” and that he has given Ted everything he needs to file income tax returns. Jerry is a very good client and has referred several new clients to Ted over the years. Jerry is insistent that the information not be on the tax return and has said he will take his business elsewhere if Ted will not comply with his request. What should Ted do next?

A. If Jerry continues to refuse to provide the documentation for the transactions in question, Ted should terminate the client-planner relationship with Jerry.
B. Ted should prepare an income tax return with the documentation given.
C. In order to keep Jerry as a client, Ted prepares the tax return but counsels him about what effect not reporting the taxable transactions could have when discovered by the IRS.
D. Ted should refer Jerry to a tax preparer who will comply with his wishes.

A.

Jerry is asking Ted to file an income tax return Ted knows is fraudulent. Ted would be in violation of CFP Board’s Code of Ethics and Standards of Conduct if he aided his client in filing a fraudulent return. Ted should terminate the client-planner relationship with Jerry.

13

A father formally gifts his rental property income to his daughter because she is in a lower tax bracket. The concept that income is taxed to “the tree that grows the fruit” describes

A. substance over form.
B. assignment of income.
C. reallocation of income.
D. a sham transaction.

B.

Income is taxed to the tree that grows the fruit, even though it may be assigned to another person. In the example provided, the father will still be taxed on the rental income regardless of how much he gives to his daughter.

14

Jim's 2020 income tax return, which was for a full year, showed an AGI of $185,000 and a tax liability of $35,000. He estimates his 2021 tax to be $40,000 and his total wage withholding to be $10,000. What minimum amount, if any, of estimated tax payments must Jim pay (in equal quarterly installments) for 2021?

A) $0
B) $28,500
C) $26,000
D) $36,000

C.

The safe harbor for avoiding the underpayment penalty is the lesser of 90% of the current year tax liability or 110% of the prior-year tax liability if the prior year's AGI is over $150,000. 90% of the current year tax liability is $36,000; 110% of the prior-year tax liability is $38,500. The smaller of these numbers, reduced by the $10,000 withholding, equals $26,000.

15

Which one of the following summarizes code sections in layman's terms, but have only short-term value?

A) Technical Advice Memoranda
B) Announcements
C) Notices
D) Private Letter Rulings

B.

Announcements often summarize code sections in layman's terms or notify taxpayers of impending deadlines; they have only short-term value. Technical Advice Memoranda normally take place during an audit or during the appeals process of the audit; they give both the taxpayer and the revenue agent an opportunity to resolve a dispute over a technical question. Private Letter Rulings are taxpayer guidance from the IRS that apply only to the particular taxpayer(s) asking for the ruling; they are not applicable to all taxpayers. A Notice is a public pronouncement that contains official guidance about regulations or interpretations of the Code.

16

Which of the following sources of authority on a tax issue may be relied upon in tax research?

I. Treasury Regulation
II. Tax Court opinion
III. United States Supreme Court opinion

I, II, & III

Congress has authorized the Secretary of the Treasury to prescribe and issue all rules and regulations needed for enforcement of the Code. Regulations can be classified into three groups: (1) legislative (Treasury Regulation), (2) interpretive (Tax Court opinion), and (3) procedural (United States Supreme Court opinion).

17

Margo files her tax return 39 days after the due date. Along with the return, she remits a check for $6,000 (the balance of the tax owed). Disregarding any interest element, her combined failure-to-file and failure-to-pay penalties are

A) $660.
B) $440.
C) $600.
D) $400.

C.

The failure-to-file penalty is netted against the failure-to-pay penalty: $60 + ($600 − $60) = $600.

18

Which one of the following are IRS statements reflecting the internal management practices of the IRS that affect the rights and duties of taxpayers?

A) Revenue Rulings
B) Regulations
C) Revenue Procedures
D) Private Letter Rulings

C.

Revenue Procedures are statements reflecting the internal management practices of the IRS that affect the rights and duties of taxpayers. Private Letter Rulings are taxpayer guidance from the IRS that apply only to the particular taxpayer(s) asking for the ruling; they are not applicable to all taxpayers. The primary purpose of the regulations is to explain and interpret particular IRS Code sections.

19

How much is the penalty for filing a federal income tax return that the IRS deems as frivolous?

A) 75% of the underpayment of the tax liability
B) $500
C) $50
D) $5,000

D.

The penalty is $5,000 for each frivolous return filed.

20

Mary reported an income tax liability of $50,000 (on AGI of $300,000) on her tax return for 2021. This year, Mary expects to have an income tax liability of $60,000. She also has estimated that the amount of income tax withheld from her wages will total $35,000. What minimum amount of estimated tax payments must Mary pay (in equal quarterly installments) for 2021?

A) $20,000
B) $19,000
C) $0
D) $15,000

B.

The required annual payment (since the prior-year AGI is greater than $150,000) is the lesser of:

-90% of the current year tax ($60,000 x .90 = $54,000), OR
-110% of the tax shown in the preceding year ($50,000 x 1.10 = $55,000)
reduced by the withholding of $35,000.

Thus, $54,000 reduced by the withholding of $35,000 equals $19,000.

21

A revenue ruling is

A) a judicial interpretation of specific circumstances related to a taxpayer.
B) an administrative interpretation of statutory tax law that is generally related to specific circumstances of fact.
C) a judicial interpretation of an Internal Revenue Code provision or a Treasury regulation.
D) a court's general administrative interpretation of the Internal Revenue Code and regulations.

B.

A revenue ruling is an administrative interpretation of statutory tax law that is generally related to specific circumstances of fact.

22

Which one of the following statements regarding common tax traps is NOT accurate?

A) Tax traps are of particular concern to owners of closely held businesses.
B) A transaction must be based on economic reality as well as economic form.
C) A transaction is based solely on its economic form.
D) Tax traps may result in the unexpected recognition of income.

C.

A transaction cannot be based solely on form; it must also be based on "economic reality."

23

Which is the best source for obtaining information about the intent of a very recent change in the tax law?

A) Congressional Committee Reports
B) Treasury Regulations
C) Tax Court Reports
D) RIA Federal Tax Coordinator

A.

Congressional Committee Reports indicate the intent of Congress when the law was passed. They may not be cited as precedent, but are especially useful if Regulations are not available.

24

Which one of the following is a publication of specific taxpayer guidance from the IRS?

A) Regulations
B) Revenue Procedures
C) Private Letter Rulings
D) Revenue Rulings

C.

Private Letter Rulings are taxpayer guidance from the IRS that apply only to the particular taxpayer(s) asking for the ruling; they are not applicable to all taxpayers. The primary purpose of the regulations is to explain and interpret particular IRS Code sections.

25

Which one of the following is an application of the administrative powers of the Internal Revenue Service and not of the powers of Congress?

I. Regulations
II. Revenue Rulings

II only

Regulations are a direct extension of the lawmaking powers of Congress, whereas revenue rulings are an application of the administrative powers of the Internal Revenue Service.

26

Which of the following is a public pronouncement that contains official guidance about regulations or interpretations of the Internal Revenue Code (IRC)?

A) Notice
B) Private Letter Ruling
C) Revenue Ruling
D) Revenue Procedure

A.

A notice is a public pronouncement that contains official guidance about regulations or interpretations of the Code. The guidance is often substantial but again, ultimately it only points to higher regulations. Notices in and of themselves do not carry the weight of law.

27

Which one of the following is advice from the National Office of the IRS requests that can give both the taxpayer and a revenue agent an opportunity to resolve a dispute?

A) Announcement
B) Private Letter Rulings
C) Notice
D) Technical Advice Memoranda

D.

Technical Advice Memoranda normally take place during an audit or during the appeals process of the audit; they give both the taxpayer and the revenue agent an opportunity to resolve a dispute over a technical question. Private Letter Rulings are taxpayer guidance from the IRS that apply only to the particular taxpayer(s) asking for the ruling; they are not applicable to all taxpayers. A Notice is a public pronouncement that contains official guidance about regulations or interpretations of the Code. Announcements often summarize code sections in layman's terms, or notify taxpayers of impending deadlines; they have only short-term value.

28

Which one of the following is a tax return preparer failure that would initiate a tax penalty from the IRS?

A) Failure to keep a copy of all returns prepared for at least the last 10 years
B) Failure to maintain a list of all returns prepared for the past five years
C) Failure to provide a taxpayer with a receipt for their services
D) Failure to sign a return as preparer and give their tax identification number on the return

D.

The following actions would constitute a tax return preparer's failure subject to a tax penalty: failure to provide a taxpayer with a copy of their return, failure to keep a copy of all returns prepared for at least the last three years or to maintain a list of returns prepared, and failure to sign a return as preparer and give their tax identification number on the return.

29

Which one of the following types of audits is conducted on a random basis?

A) Document Matching Program audit
B) Discriminant Functions System Program audit
C) Targeted Program audit
D) National Research Program audit

D.

The National Research Program audit is the only random audit that the IRS conducts. The NRP is, in effect, the replacement for the old Taxpayer Compliance Measurement Program audit. The Discriminant Functions System Program (DIF) compares the information on each return to a set of norms, weighs each item, and ranks the return for audit-worthiness. The Document Matching Program allows the IRS to detect discrepancies between the amounts reported on a tax return and the amounts shown on information documents (e.g., W–2 forms, 1099 forms). Under the Targeted Program Audit, the IRS "targets" particular taxpayers in particular situations.

30

Bill's 2020 income tax return, which was for a full year, showed an AGI of $140,000 and an income tax liability of $32,100. He estimates his 2021 income tax to be $38,000 and his total wage withholding to be $5,000. What minimum amount of estimated tax payments must Bill pay (in equal quarterly installments) for 2021?

A) $41,800
B) $32,100
C) $27,100
D) $34,200

C.

The safe harbor for avoiding the underpayment penalty is the lesser of 90% of the current year tax liability or 100% of the prior year tax liability (110% if the prior year's AGI was over $150,000). 100% of the prior year tax liability is $32,100. 90% of the current year tax liability of $38,000 is $34,200. The smaller of these numbers, reduced by the $5,000 withholding, equals $27,100.