37. Ray chooses to let the IRS determine his underpayment penalty. What will the IRS do if the IRS calculates the underpayment penalty for a taxpayer? a) Wait to collect the penalty until the taxpayer files his next tax return b) Deduct the penalty amount from current estimated tax payments c) Deduct the penalty from current withholdings d) Send the taxpayer a bill 38. Greg has a balance due on his current return. He will not owe a penalty if his total tax less withholding is less than which of the following amounts? a) $1,500 b) $1,000 c) Last year's liability d) $2,000 39. Greg's preparer tells him he may be required to pay estimated taxes. Which of the following conditions would cause Greg to be required to pay estimated taxes? a) He expects to owe more than $1,000. b) He expects to owe Federal income taxes. c) He expects to owe at least $1,000. d) Only if he is receives a Form 1099. Copyright 2015, The Income Tax School, Inc. All Rights Reserved Comp Mod 1 FE Instructor - 8 40. Wayne's employer provides meals and lodging on business trips. Which of the following is listed incorrectly as a condition that must be met for the taxpayer to avoid reporting the value of meals and lodging as income? a) The meals are: Furnished on the business premises of the employer for the convenience of the employer b) Lodging is: Furnished on the business premises of the employer for the convenience of the employer c) A condition of employment (the taxpayer must accept it in order to be able to properly perform his duties) d) The cost of the meals must not exceed the federal per diem rate. 41. Riley received benefits from an accident or health insurance plan through his employer. Under what circumstances are these benefits not taxable to Riley the employee? a) If the employer paid the plan premiums b) If the amount of the premiums were included in the employee's income c) If the amount of the premiums were not included in the employee's income d) Only if the employer decides the benefits are not taxable 42. Connie's employer provided her with a company vehicle that she is allowed to drive home. Connie is allowed to use the vehicle for personal use. What portion of the vehicle usage is taxable to Connie? a) Connie's business and personal use of the vehicle are taxable. b) None of the vehicle usage is taxable to Connie. c) Only the personal use portion that is not commuting to and from work is taxable. d) Connie's personal use of the vehicle is taxable. 43. Teresa's employer sold her a new car at a discount. To prevent Teresa from paying taxes on the discount she received, which of the following statements must be true? a) The discount Teresa received must be the same discount offered to customers in the ordinary course of business in which Teresa works. b) The employer must decide prior to the sale if he is going to report the discount as a taxable fringe benefit. c) Teresa must pay cash for the car. d) Teresa's employer must offer the same discount plus 20% to all customers. 44. Becky is a flight attendant for a company that owns both an airline and a hotel chain. Her employer allows her to take personal flights, only if there is an unoccupied seat. He also allows her to stay in any one of their hotels, only if there is an unoccupied room, at no cost. What value will Becky report as income? a) Becky will not be required to report any value as income. b) Becky will report the value of the flight as income. c) Becky will report both the value of the flight and the hotel stay as income. d) Becky will report only the value of the hotel stay as income. Copyright 2015, The Income Tax School, Inc. All Rights Reserved Comp Mod 1 FE Instructor - 9 45. Sam's employer provides transportation benefits. Which of the following is unacceptable as a qualified transportation benefit? a) A transit pass b) Reimbursement for tolls c) Qualified parking d) Transportation in a commuter highway vehicle between the taxpayer's home and work place 46. Sam's employer also provides his employees with small benefits that it would be unreasonable to account for. These benefits are called de minimis benefits. Which of the following would not be a de minimis benefit? a) Company picnics b) Cab fare home when working overtime c) A bonus d) Discounts at the company cafeteria 47. The Smiths are separated and unsure how to report community income. Which of the following is listed incorrectly as a condition under which a taxpayer is not responsible for tax relating to an item of community income? a) He does not file a joint return for the tax year. b) He does not include an item of community income in gross income on his separate return. c) He established that he did not know of, and had no reason to know of, that community income. d) He treats the item as if only he is entitled to the income. 48. Troy needed to have the transmission in his car rebuilt. Gene, Troy's best friend, offered to rebuild the transmission in exchange for an old pickup truck belonging to Troy. Troy agreed and gave the truck to Gene. The value of the service Gene provided is $950. The value of the pickup is $750. How much bartering income must Troy report on his tax return? a) $ 950 b) $ 750 c) $ 0 d) $1,700 49. Sam started a new job and was told his employer offers a cafeteria plan. Sam is unsure what a cafeteria plan is. Which of the following defines a cafeteria plan? a) A plan allowing an employer to have an onsite facility for employee meals b) A corporate citizen plan to furnish meals to low income residents c) An arrangement whereby an employer offers a choice of nontaxable fringe benefits from which to select d) A plan awarding the employee with a variety of stock options 50. Last year John received a refund or reimbursement of items he previously had used as deductions on his tax return. Which of the following is not a recovery of an item previously deducted? a) A refund of a medical expense deducted in a prior year b) Reimbursement of an employee business expense deducted in a prior year c) Mortgage interest refund d) Self-employment tax Copyright 2015, The Income Tax School, Inc. All Rights Reserved Comp Mod 1 FE Instructor - 10 51. John is unsure how to report recoveries on his tax return. How should a recovery of an item previously deducted be reported? a) A credit b) A deduction c) Income d) An exemption 52. Thomas received the following payments during the year and does not know if these items should be reported on his tax return. Identify the taxable item for Thomas. a) Cash rebates b) Recoveries of items that did not produce tax benefits in previous years c) Accidental health insurance proceeds (Employee paid premiums) d) Vacation pay 53. Chad works as a server at a local restaurant. He is one of the more popular servers and receives substantial tips from the customers. What are the tips Chad receives considered to be? a) Income that is not subject to taxation b) Income that is not subject to reporting to the employer c) Income that is subject to federal income taxation d) Income only if the tips are received in cash 54. Sue and her husband divorced last year and Sue received alimony. She is uncertain if she has to report the alimony on her tax return and if she does where it should be reported. Where must the recipient of alimony report the income? a) Form 1040, line 11 b) Form 1040, line 31a c) Form 1040, line 21 d) Is not required to report alimony received 55. What form must Sue's payment from her husband be in order to be considered alimony? a) Transfer of services or property b) Execution of a debt instrument by the payer c) Cash payments (checks or money orders) d) The use of property 56. The divorce decree also awarded child support to Sue. Which of the following would Sue's child support payments be? a) Alimony b) Taxable c) Nontaxable d) Voluntary 57. Tony has new clients who have farm income and needs to COMPLETE return for them. Farm income is reported on which of the following forms? a) Schedule C b) Schedule F c) Schedule C, and then Form 1040 d) Schedule F, and then Form 1040 Copyright 2015, The Income Tax School, Inc. All Rights Reserved Comp Mod 1 FE Instructor - 11 58. Walt invests heavily in mutual funds. Which of the following is a type of mutual fund? a) Money market fund b) Money market certificates c) Original Issue Discount d) Insurance dividends 59. Geoffrey received ordinary dividends from the following sources: Acme Corp. $ 59 CDR, Inc. $ 172 VTEC $1,642 BETA, Inc. $ 128 Geoffrey is single with no dependents. His taxable income for the tax year is $102,383. What form(s) must Geoffrey use to complete his return? (Use the least complicated form.) a) Form 1040EZ b) Form 1040A c) Form 1040A, Schedule B d) Form 1040, Schedule B 60. Marilyn received ordinary dividends from the following sources: TTS, Inc. $ 968 PFS, Corp. $1,869 She received a nontaxable distribution from: ABC, Inc. $ 847 Marilyn is single with no dependents. Her taxable income (derived from interest income and W-2 income) for the tax year is $31,004. What form(s) must Marilyn use to complete her return? (Use the least complicated form.) a) Form 1040EZ b) Form 1040 c) Form 1040A, Schedule B d) Form 1040, Schedule B 61. Wendy received the following dividend income: Capital, Inc. (ordinary dividends) $ 68 ERC (ordinary dividends) $757 Maapco (ordinary) $814 Maapco (reinvested) $858 Federal Credit Union $910 What is the amount to be reported on line 6, Schedule B? a) $1,639 b) $2,497 c) $ 858 (not required to use Schedule B) d) $1,768 Copyright 2015, The Income Tax School, Inc. All Rights Reserved Comp Mod 1 FE Instructor - 12 62. Mark and Alice had the following income: Dividends from the credit union $ 974 Interest from National Bank $ 875 Conco ordinary dividends $ 658 Duval Fund (ordinary dividends) $ 169 Municipal bond interest $ 205 Series EE bond interest (education expenses) $ 547 Media Corp (liquidating dividends) $ 245 Interest received on a personal loan $1,458 What amount should be on Schedule B, Part I, line 2? a) $3,854 b) $2,333 c) $3,307 d) $3,512 63. Mark and Alice had the following income: Dividends from the credit union $ 974 Interest from National Bank $ 875 Conco ordinary dividends $ 658 Duval Fund (ordinary dividends) $ 169 Municipal bond interest $ 205 Series EE bond interest (education expenses) $ 547 Media Corp (liquidating dividends) $ 245 Interest received on a personal loan $1,458 What is the amount of income to be reported on line 6, Part II, Schedule B? a) $1,072 b) $2,046 c) $ 827 d) $1,801 64. Mark and Alice had the following income: Dividends from the credit union $ 974 Interest from National Bank $ 875 Conco ordinary dividends $ 658 Duval Fund (ordinary dividends) $ 169 Municipal bond interest $ 205 Series EE bond interest (education expenses) $ 547 Media Corp (liquidating dividends) $ 245 Interest received on a personal loan $1,458 What is the amount of income to be reported on line 4, Part I, Schedule B? a) $4,059 b) $2,333 c) $3,307 d) $3,854 Copyright 2015, The Income Tax School, Inc. All Rights Reserved Comp Mod 1 FE Instructor - 13 65. Tony is a new tax preparer. The office manager at the location where he works cautions Tony about common interview mistakes. Which of the following is a common mistake tax preparers make when interviewing clients or potential clients? a) Using Head of Household status for taxpayers who do not qualify b) Asking questions to determine if spouses have lived together during the last six months of the year c) Using Qualifying Widow(er) status for a taxpayer who is a widow(er) and also has a qualifying child d) Preparing a tax return with a 1099R with a determinable taxable amount 66. In 2014 Josephine found an error in her 2012 return. She amended her return and found that the IRS owed her an additional refund. She received her refund with interest on September 30, 2014. In what tax year should Josephine report the interest income? a) 2013 b) 2012 c) 2014 d) Not taxable 67. Don is a single parent. His son is 19 (not a student) and his daughter is 17 (still a student). Don claimed EIC on his tax return for both children. He later received a letter from the Internal Revenue Service which disallowed EIC for his son. The letter also stated that Don's claim was an error due to reckless or intentional disregard of the EIC rules. For how many years will Don be denied EIC? a) 10 years b) 5 years c) 2 years d) 1 year 68. Last year Rick fraudulently claimed his cousin's children as dependents on his return in order to receive earned income credit. The IRS discovered this when Rick's cousin also claimed the children. Rick's cousin was able to prove he had the right to claim his children and the EIC was denied on Rick's return. How long will EIC be prohibited if a taxpayer is denied EIC due to fraud? a) 10 years b) 5 years c) 2 years d) 1 year 69. Walt was the preparer who neglected to complete Form 8867 or otherwise record information needed for the return Rick fraudulently claimed the children for EIC purposes. After the IRS was able to prove Rick had committed fraud it was shown that Walt failed to exercise due diligence. What penalty will a tax preparer face if it is determined that he has failed to exercise due diligence? a) $100 per year b) $500 per return c) $500 per year d) $100 per return Copyright 2015, The Income Tax School, Inc. All Rights Reserved Comp Mod 1 FE Instructor - 14 70. Jack received a notice from the IRS about his 2012 tax return. He called the IRS and the agent asked him to verify the adjusted gross income (AGI) on the return. On which form and line is AGI found? a) Line 21 of Form 1040 b) Line 6 of Form 1040EZ c) Line 37 of Form 1040 d) Line 15 of Form 1040A 71. In which of the following scenarios does the taxpayer fail to meet the residency test for EIC purposes? a) A taxpayer whose child lived with him for 5 months and 29 days b) A taxpayer whose eligible foster child lived with him all year c) A taxpayer whose child lived with him all year. He and his spouse separated on May 29 d) A taxpayer who is 64 years old and lives alone 72. Trudy lives alone with her two children (ages 16 and 12) and her filing status is Head of Household. Trudy's earned income and AGI was $31,000. Is Trudy eligible for EIC? a) Yes b) No, the taxpayer's earned income is not within the range to receive EIC c) No, the taxpayer's children do not meet the age test to be a qualifying child d) No, the taxpayer is not eligible due to her filing status 73. Jill prepares returns for many clients who are able to claim earned income credit. To be certain she is practicing due diligence pertaining to the earned income credit, which of the following forms must Jill prepare for these clients? a) Form 1040 b) Form W-5 c) Form 8862 d) Form 8867 74. Lionel has heard many of his friends talk about getting a larger refund because they receive earned income credit. Lionel is uncertain what makes a taxpayer eligible for EIC. Which of the following is listed incorrectly as a condition of eligibility for purposes of earned income credit? a) The taxpayer must have earned income b) The taxpayer must meet residency requirements c) The taxpayer must meet the age requirement if he does not have a qualifying child d) The taxpayer must have at least one qualifying child 75. Danika is a single mother with three children, ages 3, 7, and 9. Danika's tax return shows an AGI of $32,765 which includes earned income of $32,700 and interest income of $65. She meets the requirements for filing status Head of Household and supports her family without any additional help from other sources. Which of the following statements is true? a) Danika's EIC will be based on her earned income alone without considering her AGI b) Danika's EIC will be the smaller of the two EIC amounts based on her AGI or her earned income c) Danika's EIC will be based on her AGI without considering