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Exam 1: An Introduction to Taxation and Understanding Federal Tax Law

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Question 1

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Two months after the burglary of his personal residence, Eric is audited by the IRS. Among the items taken in the burglary was a shoe box containing approximately $50,000 in cash. Eric is the owner and operator of a cash-and-carry liquor store. Eric wonders why he was audited. Can you help explain?

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Although Eric's audit by the IRS could b...

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Question 2

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Taxes levied by both states and the Federal government include:

A) General sales tax.
B) Custom duties.
C) Hotel occupancy tax.
D) Franchise tax.
E) None of these.

F) A) and E)
G) A) and D)

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Question 3

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Match the statements that relate to each other. Note: Some choices may be used more than once or not at all. a.Deferral of gains from involuntary conversions b.Carryback and carryforward of net operating losses c."No change" is one possible result d.State income tax applied to visiting nonresident e.IRS special agent f.Undoing the "piggyback" result g.Ideal budget goal as to new tax legislation h.Every state that has a general sales tax has one i.Imposed by all states and the Federal government j.Imposed by some states but not the Federal government k.Imposed only by the Federal government l.No correct match provided -Revenue neutrality

Morgan inherits her father's personal residence including all of the furnishings. She plans to add a swimming pool and sauna to the property and rent it as a furnished house. What are some of the ad valorem property tax problems Morgan can anticipate?

A parent employs his twin daughters, age 17, in his sole proprietorship. The daughters are not subject to FICA coverage.

Using the choices provided below, show the justification for each provision of the tax law listed. a.Economic considerations b.Social considerations c.Equity considerations d.​Both a. and b. -Tax brackets are increased for inflation.

A calendar year taxpayer files his 2016 Federal income tax return on March 4, 2017. The return reflects an overpayment of $6,000, and the taxpayer requests a refund of this amount. The refund is paid on May 16, 2017. The refund need not include interest.

Indicate which, if any, statement is incorrect. State income taxes:

Federal excise taxes that are no longer imposed include:

Without obtaining an extension, Pam files her income tax return 55 days after the due date. With her return, she pays an additional tax of $60,000. Disregarding any interest element, what is Pam's penalty for failure to pay and to file?

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.

Using the choices provided below, show the justification for each provision of the tax law listed. a.Economic considerations b.Social considerations c.Equity considerations d.​Both a. and b. -A Federal deduction for state and local sales taxes paid.

The principal objective of the FUTA tax is to provide some measure of retirement security.

Using the choices provided below, show the justification for each provision of the tax law listed. a.Economic considerations b.Social considerations c.Equity considerations d.​Both a. and b. -A deduction for certain income from manufacturing activities.

Characteristics of the "Fair Tax" (i.e., national sales tax) include which, if any, of the following:

Match the statements that relate to each other. Note: Some choices may be used more than once. a.3 years from date return is filed b.3 years from due date of return c.20% of underpayment d.5% per month (25% limit) e.0.5% per month (25% limit) f.Conducted at IRS office g.Conducted at taxpayer's office h.6 years i.45-day grace period allowed to IRS j.No statute of limitations (period remains open) k.75% of underpayment l.No correct match provided -Late filing and statute limitations (deficiency situations)

On his 2017 income tax return, Andrew omitted income and overstated deductions to the extent that his income tax was understated by $500,000. Disregarding any interest element, what is Andrew's penalty if the understatement was due to: a.Negligence. b.Civil fraud. c.Criminal fraud.

What is the difference between an inheritance tax and an estate tax? Who imposes these taxes?

Using the choices provided below, show the justification for each provision of the tax law listed. a.Economic considerations b.Social considerations c.Equity considerations d.​Both a. and b. -Contributions to charitable organizations are deductible.

Can a taxpayer start the 3-year statute of limitations on additional assessments by the IRS by filing his income tax return early (i.e., before the due date)? Can the period be shortened by filing late (i.e., after the due date)?