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

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Question 71

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On his 2011 income tax return,James omitted income and overstated deductions to the extent that his income tax was understated by $300,000.Disregarding any interest element,what is James' penalty if the understatement was due to:

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Question 72

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A fixture will be subject to the ad valorem tax on personalty rather than the ad valorem tax on realty.

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Question 73

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A characteristic of FUTA is that:

Your client,Connie,won $12,000 in a football office pool.She sees no reason to include it in her income for several reasons.First,the amount won will not be reported to the IRS.Second,as an average income employee,she is unlikely to be audited by the IRS.Third,she feels that she has probably lost this much in other past office pools.How do you respond?

A characteristic of FICA is that:

Melinda has been referred to you by one of your clients.In the past,she has prepared her own income tax returns,but she has become overwhelmed by the increased complexity of the tax law.Consequently,Melinda wants you to prepare her return for calendar year 2011.In reviewing her 2010 return,you note that she has claimed as a deduction the entire cost of a business building that should have been capitalized and depreciated.What course of action should you follow?

State and local governments are sometimes forced to find ways to generate additional revenue.Comment on the pros and cons of the following procedures:

The IRS is required to redetermine the interest rate on underpayments and overpayments once a year.

As it is consistent with the wherewithal to pay concept,the tax law requires a seller to recognize gain in the year the installment sale took place.

Like the Federal counterpart,the amount of the state excise taxes on gasoline do not vary from state to state.

Various tax provisions encourage the creation of certain types of retirement plans.Such provisions can be justified on both economic and equity grounds.

Several years ago,Ted purchased extra grazing land for his ranch at a cost of $40,000.In 2011,the land is condemned by the state for development as a highway maintenance depot.Under the condemnation award,Ted receives $100,000 for the land.Within the same year,he replaces the property with other grazing land.What is Ted's tax situation if the replacement land cost:

For Federal income tax purposes,there never has been a general amnesty period.

In terms of Adam Smith's canons of taxation,how does the Federal income tax fare as far as economy is concerned?

What are the pros and cons of the following state and local tax provisions?

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?

The amount of a taxpayer's itemized deductions will increase the chance of being audited by the IRS.

The tax law contains various tax credits,deductions,and exclusions that are designed to encourage taxpayers to obtain additional education.On what grounds can these provisions be justified?

In preparing a tax return,all questions on the return must be answered.

If a taxpayer files early (i.e.,before the due date of the return),the statute of limitations on assessments begins on the date the return is filed.