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  An Introduction to Taxation 1­1

CHAPTER 1

AN INTRODUCTION TO TAXATION
AND UNDERSTANDING THE FEDERAL TAX LAW

EXAMINATION QUESTIONS

____ 1. Lawrence buys a parsonage from a local church which he converts into a rental property.
This change should increase the amount of ad valorem property taxes levied on the
property.

____ 2. If a state imposes a general sales tax, it will have a use tax.

3. Kellan and Alaina are husband and wife and have two married children and four minor
grandchildren. If they elect to split the gifts, how much can they give their family
(including sons and daughters-in-law) during 2013 without making a taxable gift?
a. $14,000.
b. $28,000.
c. $112,000.
d. $224,000.
e. None of the above.

4. The Federal income tax applicable to corporations:
a. Allows a deduction for the standard deduction.
b. Requires the determination of adjusted gross income.
c. Requires the determination of taxable income.
d. Allows a deduction for personal exemptions.
e. All of the above.

5. Income taxation at the State level can be characterized by all of the following except:
a. Same due date as the Federal return for most states.
b. Withholding procedures are not required.
c. Taxation of income in most states.
d. Most states do not allow a deduction for Federal income taxes paid.
e. All of the above.

6. A characteristic of FICA is that:
a. It is imposed only on an employee.
b. A 16-year-old son who works for his parents is not covered.
c. Over the years both the base amount and the applicable rates have remained
constant.
d. It has two components made up of FICA and Medicade.
e. None of the above.

Disregarding the interest element.000. c.1-2 2014 Individual Edition 7. The IRS may audit the same taxpayer more than once in a three year period. . Taylor files his tax return 85 days after the due date. e. e. Along with the return. b. One of the factors that leads to an audit is the information provided by informants. 10. Taylor remits a check for $40. None of the above. The IRS can pay up to 50% of any tax deficiency collected as a result of information provided by an informer. Deduction for research and experimental expenditures. $5. d. 9. The tax treatment of prepaid subscription revenue. $6. The installment sales rules. A field audit takes place at the office of the IRS. IRS special agents are typically involved when fraud is suspected. Economic considerations can be used to justify: a. b. An office audit takes place at the office of the taxpayer. 8. $6. e. Every income tax return has a 1% chance of being audited by the IRS. All of the above.000 which is the balance of the tax owed. The exclusion for accident and health plans. None of the above. None of the above. Which of the following is not characteristic of the IRS audit procedure? The percentage of individual income tax returns that the IRS audits has significantly increased over the last five years. c. Which of the following is characteristic of the IRS audit process? a. Taylor’s total failure to file and to pay penalties are: $600.400.600. d.

   The IRS may pay an informer a fee not to exceed 30% of any deficiency collected (choice b.000 (Kellan’s annual exclusion) + $14. and requires the determination of adjusted gross income (choice b. p. Over the years.).). 1-15 and 1-16 6.  A field audit takes place at the office of the taxpayer (choice c.000. p. Most states do have the same filing date as for the Federal return (choice a. The tax applicable to both individuals and corporations requires the determination of taxable income (choice c.). The participation of a special agent occurs when fraud is suspected-the type of audit involved is immaterial (choice d). 1-13 and Example 10 4.). There are no states with only a sales tax. the standard deduction (choice a. This conversion should bring about higher ad valorem taxes. p. It has two components. b The number of returns audited by the IRS has significantly increased recently (choice a. d The   audit   rate   is   about   1%   but   certain   groups   of   taxpayers   are   audited   more frequently than others (choice a. FICA is imposed on both employer and employee (option a. b A child under 18 who works for his or her parents is not covered (option b.).).). c Following the procedure set forth in Example 21. p.). FICA and Medicare (option d. 1­21 and 1­22 8.400 Total penalties $6.). both the base amounts and the rates have increased (option c. 1-7 2. d [$14.000 X 3 (three months violation)] $6. T Every state that has a general sales tax also has a use tax.). 1-10 3.). pp. pp.000 X 3 (three months $600 violation)] Plus: Failure to file penalty [5% X $40.). 1-18 7. 1-21 and 1-22 9. b Income is subject to tax in all but seven states (choice c.).  The IRS may audit a taxpayer again if past audits were fruitful (choice d.). Most states do require some form of withholding procedure (choice b. An office audit takes place at the office of the IRS (choice b. c The Federal income tax applicable to individuals allows the deduction for personal exemptions (choice d.000 Example 21 .). 1-14 and 1-15 5.).  pp.).). T The parsonage was probably exempt from tax since it was owned by a church. Most states do not allow a deduction for Federal income taxes paid (choice d.000 Less: Failure to pay penalty (600) 5. pp.000 (Alaina’s annual exclusion)] X 8 donees X 1 year = $224. the penalty is determined as follows: Failure to pay penalty [1/2% X $40.  An Introduction to Taxation 1­3 SOLUTIONS TO EXAMINATION QUESTIONS 1.

1-4 2014 Individual Edition 10. pp. c The exclusion for accident and health plans are social considerations (options a. The deduction of research and experimental expenditures is based on economic considerations (option c. The tax treatment of prepaid subscription revenue is a political consideration (option d).).). The installment sales rules are an equity consideration (option b. 1-27 to 1-33 .).