1. This question will test your ability to research a tax issue and reach a conclusion. Jill, Daniel, and Elana are co-owners of Accurate Accounting, Inc., which is organized as a professional services corporation (PSC). The company has fifteen employees and uses an outside payroll service, Best Payroll, Inc., to handle its federal tax obligations. Each month Best Payroll would notify Jill the amount of payroll taxes due and Jill would immediately transfer the funds to Best Payroll to make the required payments to the IRS. Accurate Accounting received notice from the IRS that it had underpaid its payroll taxes in 2020 and 2021. Upon investigation, Jill learned that the owner of Best Payroll had embezzled all the tax payments received from Jill. The IRS assesses a $20,000 failure-to-pay penalty on Accurate Accounting. Will the company have to pay the penalty?

a. No, because just using an outside payroll service is considered reasonable cause to avoid the penalty.

b. No, because embezzlement of funds by an outside payroll service is considered reasonable cause to avoid the penalty.

c. Yes, based on the case law in the area.

d. Yes, UNLESS Accurate Accounting can establish it exercised prudence in selecting and monitoring the outside service.

2. This question will test your ability to research a tax issue and reach a conclusion. You are employed as a senior manager at a CPA firm. Your employer, Paul, knows you have been having financial difficulties because your five-year old daughter, Emma, has serious health problems, which have been very costly for your family. At the firms holiday party, Paul hand you a check for $10,000 and says, Please consider this a gift from the company to help out with your expenses. Will you have to pay taxes on the $10,000.

a. No, because gifts are never taxable to the recipient regardless of who the gift is from.

b. No, because gifts from employers are only taxable if they relate to job performance.

c. Yes, because gifts the form of cash (or checks) are generally always taxable to the employee.

d. It depends on whether Pauls intent in making the gift was related to his business interest or not.

3. This question will test your ability to research a tax issue and reach a conclusion. Jasper recently purchased a farm and intends to breed hogs. Jasper asks you if he will be able to depreciate his hogs, and if so, what recovery period will apply for tax purposes. You tell Jasper: a. No, livestock is never depreciable. b. Yes, you can depreciate hogs used for breeding over a 20-year period. c. Yes, you can depreciate hogs used for breeding over a 3-year period. d. No, hogs are only depreciable if they are considered inventory to the taxpayer.

4. This question will test your ability to research a tax issue and reach a conclusion. Sandra, a hairdresser, loaned her friend Martin $5,000 to start a new business. At the time the made was made, Sandra reasonably believed that Martin would repay the loan since had always repaid loans in the past. Unfortunately, shortly after receiving the loan, Martin dies in a car accident. The executor of Martins estate informs Sandra that the loan will never be repaid because Martin died penniless Can Sandra deduct any of her $5,000 loss? a. No, none of the loan is deductible because Sandra is not in the business of making loans b. No, none of the loan is deductible because loss deductions are never allowed for loans made between friends. c. Yes, the loan is deductible as a short-term capital loss in the year it because worthless. d. Yes, the loan is deductible as an ordinary loss in the year it becomes worthless.