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IRS Special Agent practice questions

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Question 1Tax Law and Accounting Fundamentals

A single taxpayer with no dependents has a filing requirement for the current tax year primarily because of which threshold rule?

  1. Total itemized deductions exceed the standard deduction
  2. Gross income exceeds the standard deduction plus additional amounts for age and blindness Correct answer.
  3. Net worth exceeds a fixed statutory ceiling
  4. Gross receipts from self-employment exceed the standard deduction

Explanation

The general filing requirement for an individual turns on gross income exceeding the sum of the standard deduction and any additional standard deduction amounts for age and blindness. Net worth and itemized deduction totals do not create a filing obligation. Self-employment income triggers filing through a separate, much lower threshold.

Question 2Tax Law and Accounting Fundamentals

An individual who cannot be claimed as a dependent and is 68 years old files single. Which amount is added to the basic standard deduction?

  1. An additional amount for self-employment tax
  2. An additional amount for dependents
  3. An additional amount for itemized deductions
  4. An additional amount for age Correct answer.

Explanation

Taxpayers who are 65 or older, or blind, receive an additional standard deduction on top of the basic amount. The addition depends on age and blindness, not on dependents or self-employment. Itemized deductions are an alternative to the standard deduction, not an add-on.

Question 3Tax Law and Accounting Fundamentals

A cash-basis sole proprietor receives a $5,000 check from a client on December 30 but does not deposit it until January 5. When is the income recognized?

  1. In the year the check was deposited
  2. When the bank clears the funds
  3. In the year the client mailed the check
  4. In the year the check was received Correct answer.

Explanation

Under the cash method, income is recognized when it is actually or constructively received. Receipt of a check counts as constructive receipt even if the taxpayer delays depositing it. The deposit date and clearing date do not control.

Question 4Tax Law and Accounting Fundamentals

Which taxpayer must use the accrual method for the business?

  1. A sole proprietor with no inventory and modest receipts
  2. A business carrying inventory whose average annual gross receipts exceed the applicable threshold Correct answer.
  3. A service provider with no inventory and low receipts
  4. A farmer using the cash method historically

Explanation

Businesses with inventory generally must use the accrual method unless they qualify for a small-business exception based on average annual gross receipts. Service businesses without inventory and qualifying small businesses may use the cash method. Farmers have separate rules allowing the cash method.

Question 5Tax Law and Accounting Fundamentals

A calendar-year taxpayer mails a timely return on April 10 that the IRS receives April 18. The return is treated as filed on which date?

  1. April 15, the due date
  2. April 18, the receipt date
  3. The date the return is processed
  4. April 10, the mailing date Correct answer.

Explanation

Under the timely-mailing-as-timely-filing rule, a return postmarked on or before the due date is treated as filed on the mailing date. Physical receipt by the IRS is not controlling when the mailing rule is satisfied. Processing date is never the filing date.

Question 6Tax Law and Accounting Fundamentals

A taxpayer sells stock held 14 months for a gain. How is the gain characterized?

  1. Long-term capital gain Correct answer.
  2. Section 1231 gain
  3. Ordinary income
  4. Short-term capital gain

Explanation

Capital assets held more than one year produce long-term capital gain or loss. A holding period of 14 months exceeds the one-year threshold. Short-term treatment applies only to assets held one year or less, and stock is not Section 1231 property.

Question 7Tax Law and Accounting Fundamentals

An individual has $20,000 of long-term capital gain and $30,000 of long-term capital loss. What is the net result for the year?

  1. $3,000 capital loss deduction with $7,000 carried forward Correct answer.
  2. $10,000 ordinary loss deduction
  3. No deduction and no carryforward
  4. $10,000 capital loss deduction

Explanation

Long-term gains and losses are netted, producing a $10,000 net long-term capital loss. An individual may deduct capital losses against ordinary income only up to $3,000 per year, with the excess carried forward. The carryforward preserves the long-term character.

Question 8Tax Law and Accounting Fundamentals

Which item is excluded from gross income?

  1. Rental income from a duplex
  2. Interest earned on a savings account
  3. Wages received for part-time work
  4. Qualified employer contributions to a health savings account Correct answer.

Explanation

Qualified employer contributions to a health savings account are excluded from an employee's gross income. Interest, wages, and rental income are all includible in gross income. Exclusion requires a specific statutory provision.

Question 9Tax Law and Accounting Fundamentals

A taxpayer receives a $10,000 state income tax refund in the current year after deducting state income taxes in the prior year. Under what condition is the refund includible in gross income?

  1. Only if the refund exceeds $10,000
  2. Only if the taxpayer used the standard deduction
  3. Only if the refund is reinvested
  4. To the extent the prior-year deduction reduced federal tax Correct answer.

Explanation

The tax benefit rule requires inclusion of a recovered amount only to the extent the earlier deduction produced a federal tax benefit. A taxpayer who took the standard deduction in the prior year received no benefit from the state tax deduction. The inclusion is limited to the benefit received.

Question 10Tax Law and Accounting Fundamentals

A self-employed taxpayer reports net earnings of $80,000. What is the base for computing self-employment tax?

  1. Net earnings minus the standard deduction
  2. 92.35% of net earnings Correct answer.
  3. 50% of net earnings
  4. 100% of net earnings

Explanation

Self-employment tax is computed on net earnings from self-employment multiplied by 92.35%, which approximates the employee share of payroll tax. The standard deduction is not subtracted in this calculation. Half of the resulting tax is later deductible for income tax purposes.

Question 11Tax Law and Accounting Fundamentals

An employee receives employer-provided group term life insurance coverage with a face amount of $75,000. What amount of coverage generates imputed income?

  1. $50,000
  2. $0
  3. $75,000
  4. $25,000 Correct answer.

Explanation

Employer-provided group term life insurance is excluded from income up to $50,000 of coverage. Coverage above that amount generates imputed income based on the IRS table cost. Here the excess is $25,000.

Question 12Tax Law and Accounting Fundamentals

A taxpayer pays $4,000 of qualified student loan interest and has modified AGI below the phase-out. How is the amount treated?

  1. Deductible only as an itemized deduction
  2. Excluded entirely from consideration
  3. Deductible as an adjustment to income, subject to the annual limit Correct answer.
  4. A nonrefundable credit against tax

Explanation

Qualified student loan interest is an above-the-line deduction, taken as an adjustment to income, subject to an annual dollar cap and an income phase-out. It is not an itemized deduction or a credit. The deduction reduces AGI.

Question 13Tax Law and Accounting Fundamentals

A taxpayer claims the earned income tax credit. Which characteristic applies to this credit?

  1. It is available only to itemizers
  2. It applies only to investment income
  3. It is refundable Correct answer.
  4. It is nonrefundable

Explanation

The earned income tax credit is a refundable credit, meaning it can produce a payment even when tax liability is zero. It is based on earned income and family size, with investment income limits. Filing status and itemizing are not eligibility conditions.

Question 14Tax Law and Accounting Fundamentals

A taxpayer's itemized deductions total $12,000 and the applicable standard deduction is $14,600. What amount may the taxpayer deduct?

  1. $14,600 Correct answer.
  2. $12,000
  3. $2,600
  4. $26,600

Explanation

A taxpayer may claim either the standard deduction or itemized deductions, whichever is greater. Because $14,600 exceeds $12,000, the standard deduction is used. The two amounts are never combined.

Question 15Tax Law and Accounting Fundamentals

A taxpayer sells a rental building for a gain. Which Code provision governs the recapture of depreciation previously claimed?

  1. Section 1231 loss treatment
  2. Section 1031 deferral
  3. Section 1250 unrecaptured gain taxed at up to 25% Correct answer.
  4. Section 121 exclusion

Explanation

Depreciation on real property is recaptured under Section 1250, with unrecaptured Section 1250 gain taxed at a maximum rate of 25%. Section 1231 governs the character of the remaining gain or loss. Section 121 applies to a principal residence, and Section 1031 requires a like-kind exchange.

Question 16Tax Law and Accounting Fundamentals

A taxpayer donates appreciated stock held 3 years to a qualified public charity and claims a charitable deduction. What is the general rule for the deduction amount?

  1. Fair market value, subject to the 50% of AGI limit
  2. Basis, subject to the 50% of AGI limit
  3. Fair market value, subject to the 30% of AGI limit for capital gain property Correct answer.
  4. Basis, with no AGI limit

Explanation

A gift of long-term capital gain property to a public charity generally yields a deduction at fair market value. The deduction is limited to 30% of AGI for capital gain property, with a five-year carryforward for excess. Basis is used for ordinary income property or short-term holdings.

Question 17Tax Law and Accounting Fundamentals

Which accounting method matches expenses to the period in which the related revenue is recognized?

  1. Accrual method Correct answer.
  2. Modified cash method
  3. Hybrid method
  4. Cash method

Explanation

The accrual method recognizes revenue when earned and expenses when incurred, matching costs to the related revenue period. The cash method recognizes items when paid or received. Hybrid methods combine elements but do not define the matching principle itself.

Question 18Tax Law and Accounting Fundamentals

A business receives a $12,000 advance payment in December for services to be performed evenly over the following 12 months. Under the accrual method with no applicable deferral election, how much is recognized in December?

  1. $0, because the services are not yet performed Correct answer.
  2. $12,000 in December
  3. $6,000 in December
  4. $1,000 in December

Explanation

Under accrual accounting, revenue is recognized when earned, which occurs as services are performed. An advance payment creates a liability until the earnings process is satisfied. With no deferral election applicable, no revenue is recognized in December.

Question 19Tax Law and Accounting Fundamentals

Which document typically substantiates a claimed business expense for travel and entertainment purposes?

  1. A contemporaneous record showing amount, time, place, and business purpose Correct answer.
  2. A verbal statement by the taxpayer
  3. A year-end estimate of total spending
  4. A bank statement alone

Explanation

Substantiation for travel and certain business expenses requires records showing amount, time, place, and business purpose, generally made at or near the time of the expense. Estimates and unsupported statements are insufficient. A bank statement shows payment but not business purpose.

Question 20Tax Law and Accounting Fundamentals

A taxpayer operates a business from home and uses a 200-square-foot room exclusively and regularly for business in a 2,000-square-foot home. What percentage of home expenses may be allocated to the business?

  1. 10% Correct answer.
  2. 5%
  3. 50%
  4. 20%

Explanation

The home office deduction allocates expenses based on the business-use percentage of the home. Here 200 divided by 2,000 equals 10%. Exclusive and regular use is a prerequisite for any allocation.

Question 21Tax Law and Accounting Fundamentals

Which entity is generally treated as a pass-through for federal income tax purposes?

  1. A business trust taxed as a corporation
  2. A C corporation
  3. A publicly traded partnership taxed as a corporation
  4. An S corporation Correct answer.

Explanation

An S corporation is generally a pass-through entity, with income and losses flowing to shareholders and reported on Schedule K-1. C corporations are separate taxable entities subject to entity-level tax. Entities taxed as corporations do not pass through income.

Question 22Tax Law and Accounting Fundamentals

A taxpayer sells equipment used in the business for $30,000. Original cost was $50,000 and accumulated depreciation is $25,000. What is the amount and character of gain?

  1. $5,000 long-term capital gain
  2. $5,000 ordinary income from depreciation recapture Correct answer.
  3. $25,000 capital gain
  4. $30,000 ordinary income

Explanation

Adjusted basis is $50,000 minus $25,000, or $25,000. The $5,000 realized gain is ordinary income because it represents recapture of depreciation previously claimed. Section 1231 or capital treatment applies only to gain above the recaptured amount.

Question 23Tax Law and Accounting Fundamentals

A taxpayer fails to file a return and owes $10,000 in tax. Which penalty may apply in addition to the failure-to-file penalty?

  1. Criminal penalty for negligence
  2. Penalty for underpayment of estimated tax only
  3. Fraud penalty without proof of intent
  4. Failure-to-pay penalty Correct answer.

Explanation

A taxpayer who files late and pays late may face both the failure-to-file penalty and the failure-to-pay penalty. The failure-to-pay penalty accrues on unpaid tax from the due date. Fraud penalties require a showing of intent, and criminal penalties require willfulness.

Question 24Tax Law and Accounting Fundamentals

An individual receives $15,000 of Social Security benefits and has modest other income below the base amount. How are the benefits treated?

  1. Taxed as self-employment income
  2. Fully taxable as ordinary income
  3. Excluded from gross income Correct answer.
  4. Taxed as capital gain

Explanation

Social Security benefits are excluded from gross income when the taxpayer's provisional income falls below the statutory base amount. Above that level, a portion becomes taxable according to tiered thresholds. Benefits are never treated as capital gain or self-employment income.

Question 25Tax Law and Accounting Fundamentals

A taxpayer's employer reimburses documented business mileage under an accountable plan. How is the reimbursement treated?

  1. Deductible as a charitable contribution
  2. Reported as self-employment income
  3. Included in wages as taxable compensation
  4. Excluded from wages Correct answer.

Explanation

Reimbursements under an accountable plan, with adequate accounting and return of excess advances, are excluded from wages. The exclusion applies because the amounts are treated as paid under a reimbursement arrangement. Nonaccountable plan reimbursements are included in wages.

Question 26Tax Law and Accounting Fundamentals

A taxpayer files a return on April 15 but does not pay the $8,000 balance due until June 14. Which charge applies to the unpaid balance for that period?

  1. No charge, because the return was filed by the due date
  2. The estimated tax underpayment penalty alone
  3. The failure-to-pay penalty plus interest on the unpaid tax Correct answer.
  4. The failure-to-file penalty plus interest on the unpaid tax

Explanation

Filing on time does not discharge the obligation to pay. The failure-to-pay penalty under section 6651(a)(2) accrues on the unpaid tax, and interest under section 6601 runs from the original due date. The failure-to-file penalty does not apply because the return was timely filed.

Question 27Tax Law and Accounting Fundamentals

An individual taxpayer keeps no formal books and has no inventory. Which accounting method may that taxpayer use for reporting income?

  1. A method that defers income until collection is certain
  2. The completed-contract method
  3. Cash receipts and disbursements method Correct answer.
  4. Accrual method only

Explanation

Section 446 permits the cash receipts and disbursements method for taxpayers who do not maintain inventories and are not otherwise required to use an accrual method. A cash-basis taxpayer reports income when actually or constructively received and deducts expenses when paid.

Question 28Tax Law and Accounting Fundamentals

A taxpayer's adjusted gross income is $60,000 and the applicable standard deduction is $14,600. The taxpayer has no dependents and no other deductions or credits. What is taxable income?

  1. $14,600
  2. $45,400 Correct answer.
  3. $74,600
  4. $60,000

Explanation

Taxable income for an individual equals adjusted gross income minus the standard deduction (or itemized deductions if greater) and minus qualified business income and other deductions. Here $60,000 minus $14,600 yields $45,400.

Question 29Tax Law and Accounting Fundamentals

A calendar-year taxpayer realizes a $9,000 long-term capital loss and has no capital gains. What is the maximum capital loss the taxpayer may deduct against ordinary income for the year?

  1. $1,500
  2. $0
  3. $3,000 Correct answer.
  4. $9,000

Explanation

Under section 1211(b), a noncorporate taxpayer may deduct net capital losses against ordinary income only up to $3,000 per year. The unused $6,000 carries forward to later years.

Question 30Tax Law and Accounting Fundamentals

Which of the following is a refundable federal tax credit?

  1. The lifetime learning credit
  2. The foreign tax credit
  3. The additional child tax credit Correct answer.
  4. The credit for child and dependent care expenses

Explanation

The additional child tax credit is refundable to the extent the child tax credit exceeds the taxpayer's tax liability, subject to the earned income formula. The other credits listed are nonrefundable and can only reduce tax to zero.

Question 31Tax Law and Accounting Fundamentals

A taxpayer's employer provides a qualified pension plan contribution on the taxpayer's behalf. How is the employer contribution treated to the employee in the year made?

  1. Excluded from the employee's gross income within statutory limits Correct answer.
  2. Included in gross income but not subject to Social Security tax
  3. Reported as a taxable fringe benefit on the employee's return
  4. Reported as wages subject to income tax withholding

Explanation

Employer contributions to a qualified retirement plan are excluded from the employee's gross income under section 402(a), subject to the annual limits of sections 415 and 401(a)(17). The employee is taxed later when distributions are received.

Question 32Tax Law and Accounting Fundamentals

A taxpayer's principal residence is destroyed by fire and the insurance proceeds exceed the adjusted basis. Which tax treatment generally applies if the taxpayer reinvests the proceeds in replacement property within the required period?

  1. Gain is treated as ordinary income subject to self-employment tax
  2. Gain is recognized only if the taxpayer is under age 55
  3. Gain is deferred to the extent the proceeds are reinvested in a replacement residence Correct answer.
  4. Gain is recognized in full in the year of the fire

Explanation

Under section 1033, gain from an involuntary conversion is deferred if the taxpayer purchases replacement property within the applicable replacement period. The replacement period for a principal residence is generally two years after the close of the first tax year in which gain is realized.

Question 33Tax Law and Accounting Fundamentals

A taxpayer operates a sole proprietorship and reports net profit of $50,000. Which form is used to report the business income and expenses?

  1. Form 1065
  2. Schedule C attached to Form 1040 Correct answer.
  3. Schedule B attached to Form 1040
  4. Form 1120

Explanation

A sole proprietor reports business income and deductions on Schedule C, Profit or Loss from Business, which is filed with Form 1040. The resulting net profit flows to Schedule 1 and is also the base for self-employment tax on Schedule SE.

Question 34Tax Law and Accounting Fundamentals

A taxpayer sells a principal residence owned and used for six of the last eight years and realizes a $200,000 gain. The taxpayer is single and has not excluded gain on another residence within the prior two years. What amount of gain may be excluded?

  1. $0
  2. $200,000 Correct answer.
  3. $250,000
  4. $100,000

Explanation

Section 121 allows a single taxpayer to exclude up to $250,000 of gain on a principal residence if the ownership and use tests are met. Because the realized gain of $200,000 is below the ceiling, the entire gain is excluded.

Question 35Tax Law and Accounting Fundamentals

A taxpayer receives a distribution from a traditional IRA at age 60. The taxpayer made only deductible contributions and has no basis in the IRA. How is the distribution taxed?

  1. As long-term capital gain
  2. Entirely as tax-free return of basis
  3. Entirely as ordinary income Correct answer.
  4. As a nontaxable distribution because the taxpayer is over age 59½

Explanation

Distributions from a traditional IRA with no nondeductible contributions are fully includible in gross income as ordinary income. The age 59½ threshold only removes the 10 percent additional tax on early distributions; it does not make the distribution tax-free.

Question 36Tax Law and Accounting Fundamentals

A self-employed taxpayer pays $6,000 in health insurance premiums for coverage of the taxpayer's family and has $40,000 of net self-employment earnings. Where is the deduction claimed?

  1. As a nonrefundable credit on Schedule 3
  2. As an adjustment to gross income on Schedule 1 of Form 1040 Correct answer.
  3. As an itemized deduction on Schedule A
  4. As a business expense on Schedule C that reduces self-employment tax

Explanation

Section 162(l) allows a self-employed taxpayer to deduct health insurance premiums for the taxpayer and family as an above-the-line deduction, taken on Schedule 1. The deduction reduces income tax but does not reduce net earnings for self-employment tax purposes.

Question 37Tax Law and Accounting Fundamentals

A cash-basis taxpayer pays $2,400 in January for a 12-month insurance policy covering February through the following January. How much may the taxpayer deduct in the year of payment under the general cash-basis rule for a service period not extending beyond the earlier of 12 months or the end of the next tax year?

  1. $1,200 in the year of payment and $1,200 in the following year
  2. $0 until the policy period ends
  3. $200 per month only as coverage is consumed
  4. $2,400 in the year of payment Correct answer.

Explanation

Under the 12-month rule of Reg. section 1.263(a)-4(f), a cash-basis taxpayer may deduct a prepaid expense if the benefit period does not exceed 12 months and does not extend beyond the end of the next tax year. The payment is therefore deductible in the year made.

Question 38Tax Law and Accounting Fundamentals

A taxpayer receives $5,000 of interest from a municipal bond issued by the taxpayer's state and $3,000 of interest from a corporate bond. What amount is included in gross income?

  1. $5,000
  2. $0
  3. $8,000
  4. $3,000 Correct answer.

Explanation

Interest on state and local bonds is excluded from gross income under section 103, while corporate bond interest is taxable. Only the $3,000 corporate bond interest is included.

Question 39Tax Law and Accounting Fundamentals

A taxpayer trades in a business truck with an adjusted basis of $8,000 for a new truck and pays $20,000 cash. The new truck has a fair market value of $30,000 and the exchange qualifies for nonrecognition. What is the basis of the new truck?

  1. $8,000
  2. $30,000
  3. $28,000 Correct answer.
  4. $20,000

Explanation

In a like-kind exchange, the basis of the replacement property equals the adjusted basis of the property given up plus any additional cash paid. Here $8,000 plus $20,000 equals $28,000, which carries over the deferred gain.

Question 40Tax Law and Accounting Fundamentals

A taxpayer has $10,000 of net self-employment earnings from a Schedule C business. Which amount is subject to self-employment tax before applying the Social Security wage base limitation?

  1. 100 percent of the net earnings
  2. Net earnings reduced by the standard deduction
  3. 92.35 percent of the net earnings Correct answer.
  4. 50 percent of the net earnings

Explanation

Section 1402(a) applies the self-employment tax to net earnings from self-employment multiplied by 92.35 percent, which approximates the employee share of payroll tax. The standard deduction does not enter this computation.

Question 41Tax Law and Accounting Fundamentals

A taxpayer receives an inheritance of $100,000 in cash from a deceased relative's estate. How is the inheritance treated for federal income tax purposes?

  1. Included in gross income as ordinary income
  2. Taxable as long-term capital gain
  3. Included in gross income to the extent it exceeds the annual exclusion
  4. Excluded from gross income as a gift, bequest, or inheritance Correct answer.

Explanation

Section 102 excludes the value of property acquired by gift, bequest, devise, or inheritance from gross income. The exclusion does not extend to income the inherited property later produces, which remains taxable.

Question 42Tax Law and Accounting Fundamentals

A taxpayer's employer reimburses actual substantiated lodging costs under an accountable plan during a business trip. How is the reimbursement treated?

  1. Included in gross income as a taxable fringe benefit
  2. Reported as self-employment income
  3. Included in gross income but deductible as an itemized deduction
  4. Excluded from the employee's gross income and not reported as wages Correct answer.

Explanation

Reimbursements under an accountable plan for substantiated business expenses are excluded from the employee's gross income and are not reported on Form W-2 as wages. The employer deducts the expense as a business cost.

Question 43Tax Law and Accounting Fundamentals

A taxpayer receives a $3,000 state income tax refund attributable to state taxes deducted as an itemized deduction in the prior year. What amount is included in gross income this year?

  1. $0
  2. $3,000 Correct answer.
  3. The full refund plus interest
  4. $1,500

Explanation

Under the tax benefit rule of section 111, a refund of an itemized deduction is included in income to the extent the prior deduction reduced the taxpayer's tax. Because the state tax was deducted and provided a benefit, the $3,000 refund is includible.

Question 44Tax Law and Accounting Fundamentals

A taxpayer's business equipment has an adjusted basis of $12,000 and is sold for $15,000. The equipment had originally cost $20,000 and $8,000 of depreciation was claimed. What is the character of the $3,000 gain?

  1. Nontaxable return of capital
  2. Long-term capital gain
  3. Short-term capital gain
  4. Ordinary income under section 1245 recapture Correct answer.

Explanation

Section 1245 requires gain on the sale of depreciable business property to be treated as ordinary income to the extent of depreciation claimed. Because $3,000 of the gain is less than the $8,000 depreciation taken, the entire gain is ordinary income.

Question 45Tax Law and Accounting Fundamentals

A taxpayer claims a deduction for a charitable contribution of used clothing to a qualified charity. Which requirement best supports the deduction?

  1. The taxpayer claims the deduction only if the clothing cost more than $500
  2. The taxpayer estimates the value without documentation
  3. The taxpayer obtains a written acknowledgment from the charity describing the property Correct answer.
  4. The taxpayer claims the deduction as a business expense

Explanation

Section 170(f)(8) requires a contemporaneous written acknowledgment from the donee for charitable contributions of $250 or more. For noncash gifts, the acknowledgment must describe the property, and Form 8283 may also be required.

Question 46Tax Law and Accounting Fundamentals

A taxpayer omits gross income exceeding 25 percent of the gross income reported on the return. Which assessment period generally applies?

  1. Three years from the date the return was filed
  2. Six years from the date the return was filed Correct answer.
  3. No limitation period applies
  4. Two years from the date the return was filed

Explanation

Section 6501(e) extends the assessment period to six years when the taxpayer omits gross income exceeding 25 percent of the amount reported. The ordinary three-year period applies when no substantial omission occurs.

Question 47Tax Law and Accounting Fundamentals

A taxpayer's employer pays $400,000 of group term life insurance premiums for $2 million of coverage on the employee. How is the excess coverage valued for the employee's income?

  1. Using the employee's age and the face amount without regard to the $50,000 exclusion
  2. Using the IRS Table I rates for coverage exceeding $50,000 Correct answer.
  3. Using the employer's actual cost for the entire $2 million
  4. No amount is included because group term life insurance is always excluded

Explanation

Section 79 excludes the cost of the first $50,000 of group term life insurance coverage. Coverage above that amount is included in the employee's income, valued using the uniform Table I rates based on the employee's age.

Question 48Tax Law and Accounting Fundamentals

A taxpayer disposes of property to a related party at a loss. Which rule governs the loss?

  1. The loss is deductible only if the sale price exceeds fair market value
  2. The loss is disallowed, and the related party may reduce gain on a later sale by the disallowed amount Correct answer.
  3. The loss is fully deductible in the year of sale
  4. The loss is converted into a capital gain for the seller

Explanation

Section 267 disallows losses on sales between related parties. The disallowed loss is preserved so that the purchasing related party may offset it against gain on a subsequent sale of the property.

Question 49Tax Law and Accounting Fundamentals

A corporation distributes appreciated property to a shareholder in a nonliquidating distribution. What is the tax consequence to the distributing corporation?

  1. The corporation recognizes no gain and reduces earnings and profits by basis only
  2. The corporation recognizes gain only if the shareholder is an individual
  3. The corporation defers gain until the shareholder sells the property
  4. The corporation recognizes gain as if the property were sold at fair market value Correct answer.

Explanation

Section 311(b) requires a corporation to recognize gain on a nonliquidating distribution of appreciated property as if it had sold the property at fair market value. The shareholder then reports dividend income to the extent of earnings and profits.

Question 50Tax Law and Accounting Fundamentals

A taxpayer signs a Form 870 waiver agreeing to an immediate assessment of a proposed deficiency. What effect does this have on the taxpayer's right to litigate the deficiency in Tax Court?

  1. The taxpayer must first pay the tax and then sue for refund in district court
  2. The taxpayer generally gives up the right to contest the deficiency in Tax Court Correct answer.
  3. The taxpayer retains the full right to petition the Tax Court within 90 days
  4. The taxpayer may contest the deficiency only if the amount exceeds $50,000

Explanation

A Form 870 waiver is a consent to immediate assessment that generally waives the taxpayer's right to petition the Tax Court for redetermination. The taxpayer may still pursue a refund claim after payment in another forum.