Part I: INTRODUCTION AND BASIC TAX MODEL
1. An Introduction to Taxation and Understanding the Federal Tax Law.
True or false. and Answers are present at the end of every chapter
Indicate whether the statement is true or false.
1. A CPA firm in California sends many of its less complex tax returns to be prepared by a group of accountants in
India. If certain procedures are followed, this outsourcing of tax return preparation is proper.
a. True
b. False
2. On transfers by death, the Federal government relies on an estate tax, while states may impose an estate tax, an
inheritance tax, both taxes, or neither tax.
a. True
b. False
3. Stealth taxes have the effect of generating additional taxes from all taxpayers.
a. True
b. False
4. Sales made over the internet are not exempt from the application of a general sales (or use) tax.
a. True
b. False
5. Various tax provisions encourage the creation of certain types of retirement plans. Such provisions can be
justified on both economic and social grounds.
a. True
b. False
6. A safe and easy way for a taxpayer to avoid local and state sales taxes is to make the purchase in a state that
levies no such taxes.
a. True
b. False
7. To lessen or eliminate the effect of multiple taxation, a taxpayer who is subject to both foreign and U.S. income
taxes on the same income is allowed either a deduction or a credit for the foreign tax paid.
a. True
b. False
8. In preparing a tax return, all questions on the return must be answered.
a. True
b. False
9. In preparing an income tax return, the use of a client’s estimates is not permitted.
a. True
b. False
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,10. A calendar year taxpayer files his 2022 Federal income tax return on March 4, 2023. The return reflects an
overpayment of $6,000, and the taxpayer requests a refund of this amount. The refund is paid on May 16, 2023.
The refund need not include interest.
a. True
b. False
11. The amount of a taxpayer’s itemized deductions will increase the chance of being audited by the IRS.
a. True
b. False
12. Currently, the Federal corporate income tax is less progressive than the individual income tax.
a. True
b. False
13. Even though a client refuses to correct an error on a past return, it may be possible for a practitioner to continue
to prepare returns for the client.
a. True
b. False
14. When interest is charged on a deficiency, any part of a month counts as a full month.
a. True
b. False
15. Upon audit by the IRS, Faith is assessed a deficiency of $40,000 of which $25,000 is attributable to negligence.
The 20% negligence penalty will apply to $25,000.
a. True
b. False
16. There is a Federal excise tax on hotel occupancy.
a. True
b. False
17. The IRS is required to redetermine the interest rate on underpayments and overpayments once a year.
a. True
b. False
18. For state income tax purposes, some states allow a credit for dependents rather than a deduction.
a. True
b. False
19. Julius, a married taxpayer, makes gifts to each of his six children. A maximum of twelve annual exclusions could
be allowed as to these gifts.
a. True
b. False
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,20. Ultimately, most taxes are paid by individuals.
a. True
b. False
21. If a tax deficiency is attributable to fraud, the negligence penalty will not be imposed.
a. True
b. False
22. Because it is consistent with the wherewithal to pay concept, the tax law requires a seller to recognize a gain in
the year the installment sale occurs.
a. True
b. False
23. A fixture will be subject to the ad valorem tax on personalty rather than the ad valorem tax on realty.
a. True
b. False
24. For Federal income tax purposes, there never has been a general amnesty period.
a. True
b. False
25. When a state decouples from a Federal tax provision, it means that this provision will not apply for state income
tax purposes.
a. True
b. False
26. The formula for the Federal income tax on corporations is the same as that applicable to individuals.
a. True
b. False
27. Not all of the states that impose a general sales tax also have a use tax.
a. True
b. False
28. The civil fraud penalty can entail large fines and possible incarceration.
a. True
b. False
29. No state may offer an income tax amnesty program more than once.
a. True
b. False
30. States impose either a state income tax or a general sales tax, but not both types of taxes.
a. True
b. False
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, 31. Mona inherits her mother’s personal residence, which she converts to a furnished rental house. These changes
should affect the amount of ad valorem property taxes levied on the properties.
a. True
b. False
32. Because the law is complicated, most individual taxpayers are not able to complete their Federal income tax
returns without outside assistance.
a. True
b. False
33. On occasion, Congress has to enact legislation that clarifies the tax law in order to change a result reached by
the U.S. Supreme Court.
a. True
b. False
34. The annual exclusion, currently $17,000, is available for gift and estate tax purposes.
a. True
b. False
35. When Congress enacts a tax cut that is phased in over a period of years, revenue neutrality is achieved.
a. True
b. False
36. For the negligence penalty to apply, the underpayment must be caused by intentional disregard of rules and
regulations without intent to defraud.
a. True
b. False
37. If fraud is involved, there is no time limit on the assessment of a deficiency by the IRS.
a. True
b. False
38. The Federal estate and gift taxes are examples of progressive rate taxes.
a. True
b. False
39. A major advantage of a flat tax type of income tax is its simplicity.
a. True
b. False
40. If more IRS audits are producing a higher number of no change results, this indicates increased compliance on
the part of taxpayers.
a. True
b. False
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