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Unformatted text preview: Becker Professional Education Registered to: Question CPA-01518 Kopel was engaged to prepare Raff's Year 4 federal income tax return. During the tax preparation interview, Raft told Kopel that he paid $3,000 in property taxes in Year 4. Actually, Raff's property taxes amounted to only $600. Based on Raff's word, Kopel deducted the $3,000 on Raff's return, resulting in an understatement of Raff's tax liability. Kopel had no reason to believe that the information was incorrect. Kopel did not request underlying documentation and was reasonably satisfied by Raff's representation that Raft had adequate records to support the deduction. Which of the following statements is correct? a. To avoid the preparer penalty for willful understatement of tax liability, Kopel was obligated to examine the underlying documentation for the deduction. b. To avoid the preparer penalty for willful understatement of tax liability, Kopel would be required to obtain Raff's representation in writing. c. Kopel is not subject to the preparer penalty for willful understatement of tax liability because the deduction that was claimed was more than 25% of the actual amount that should have been deducted. d. Kopel is not subject to the preparer penalty for willful understatement of tax liability because Kopel was justified in relying on Raff's representation. Explanation Choice "d" is correct. In preparing or signing a return, a CPA may in good faith rely without verification upon information furnished by the client or by third parties. Choice "a" is incorrect. A tax preparer need not examine all underlying documents to assure that the client is properly representing expenses. Choice "b" is incorrect. A tax preparer need not obtain a client's representation regarding deductions in writing. Choice "c" is incorrect. A tax preparer's liability for misrepresentations does not depend on the percentage difference between actual expenses and claimed expenses, but rather on whether the preparer willfully misrepresented the deduction. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01519 Which of the following acts by a CPA will not result in a CPA incurring an IRS penalty? a. b. c. d. Failing, without reasonable cause, to provide the client with a copy of an income tax return. Failing, without reasonable cause, to sign a client's tax return as preparer. Understating a client's tax liability as a result of an error in calculation. Negotiating a client's tax refund check when the CPA prepared the tax return. Explanation Choice "c" is correct. The IRS does not impose a penalty on a CPA for making an error in calculating a tax return. Choice "a" is incorrect. A CPA must give his or her client a copy of the client's tax return or face imposition of a penalty. Choice "b" is incorrect. A CPA must sign tax returns that the CPA prepares. Willful violation of this rule can result in imposition of a penalty. Choice "d" is incorrect. A CPA is prohibited from negotiating a client's refund check. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01522 Clark, a professional tax return preparer, prepared and signed a client's federal income tax return that resulted in a $600 refund. Which one of the following statements is correct with regard to an Internal Revenue Code penalty Clark may be subject to for endorsing and cashing the client's refund check? a. Clark will be subject to the penalty if Clark endorses and cashes the check. b. Clark may endorse and cash the check, without penalty, if Clark is enrolled to practice before the Internal Revenue Service. c. Clark may not endorse and cash the check, without penalty, because the check is for more than $500. d. Clark may endorse and cash the check, without penalty, if the amount does not exceed Clark's fee for preparation of the return. Explanation Choice "a" is correct. A tax preparer may not endorse and cash a client's tax refund check. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01525 Starr, CPA, prepared and signed Cox's Year 1 federal income tax return. Cox informed Starr that Cox had paid doctors' bills of $20,000 although Cox actually had paid only $7,000 in doctors' bills during Year 1. Based on Cox's representations, Starr computed the medical expense deduction that resulted in an understatement of tax liability. Starr had no reason to doubt the accuracy of Cox's figures and Starr did not ask Cox to submit documentation of the expenses claimed. Cox orally assured Starr that sufficient evidence of the expenses existed. In connection with the preparation of Cox's Year 1 return, Starr is: a. b. c. d. Liable to Cox for interest on the underpayment of tax. Liable to the IRS for negligently preparing the return. Not liable to the IRS for any penalty or interest. Not liable to the IRS for any penalty, but is liable to the IRS for interest on the underpayment of tax. Explanation Choice "c" is correct. A CPA is entitled to rely on the client's representations that adequate documentation exists to support the expenses that the client claims. As long as the CPA asks the client whether the client has documentation, the CPA will not be liable for either a penalty or interest because of the client's misrepresentation. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01613 Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting? a. b. c. d. The SEC. The AICPA. A state CPA society. A state board of accountancy. Explanation Choice "d" is correct. Only a state board of accountancy has the authority to suspend or revoke a CPA'S license to practice public accounting. Choice "a" is incorrect. The SEC may only suspend or revoke a CPA'S authority to practice before the SEC with respect to public companies. Choices "b" and "c" are incorrect. The AICPA and a state society may only suspend or revoke a CPA'S membership in the AICPA or the state society, respectively. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01622 Which of the following statements concerning an accountant's disclosure of confidential client data is generally correct? a. b. c. d. Disclosure may be made to any state agency without subpoena. Disclosure may be made to any party on consent of the client. Disclosure may be made to comply with an SEC audit request. Disclosure may be made to comply with Generally Accepted Accounting Principles. Explanation Choice "b" is correct. An accountant may disclose confidential client information to any party if the client specifically consents to the release of information. Choice "a" is incorrect. Generally, confidential client information should not be disclosed to a court unless it is subpoenaed or the client consents. Choice "c" is incorrect. Generally, confidential client information should not be disclosed to the SEC unless it is subpoenaed or the client consents. Choice "d" is incorrect. Compliance with GAAP does not require disclosure of client confidences. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01625 Which, if any, of the following could result in penalties against an income tax return preparer? I. Knowing or reckless disclosure or use of tax information obtained in preparing a return. II. A willful attempt to understate any client's tax liability on a return or claim for refund. a. b. c. d. Neither I nor II. I only. II only. Both I and II. Explanation Choice "d" is correct. Both I and II. Knowing or reckless disclosure or use of tax information obtained in preparing a return, and a willful attempt to understate any clients tax liability on a return or claim for refund could both result in penalties against an income tax return preparer. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01628 A tax return preparer may disclose or use tax return information without the taxpayer's consent to: a. Facilitate a supplier's or lender's credit evaluation of the taxpayer. b. Accommodate the request of a financial institution that needs to determine the amount of taxpayer's debt to it, to be forgiven. c. Be evaluated by a quality or peer review. d. Solicit additional nontax business. Explanation Choice "c" is correct. A tax return preparer may disclose or use tax return information without the taxpayer's consent to be evaluated by a quality or peer review. Choices "a", "b", and "d" are incorrect; they would all require the taxpayer's consent. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01678 A CPA is permitted to disclose confidential client information without the consent of the client to: I. Another CPA who has purchased the CPA's tax practice. II. Another CPA firm if the information concerns suspected tax return irregularities. III. A state CPA society voluntary quality control review board. a. b. c. d. I and III only. II and III only. II only. III only. Explanation Choice "d" is correct. The CPA generally cannot give out a client's confidential information to anyone without the client's consent. However, exceptions are generally made for court subpoenas and state CPA society quality control panels. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01695 Thompson's basis in Starlight Partnership was $60,000 at the beginning of the year. Thompson materially participates in the partnership's business. Thompson received $20,000 in cash distributions during the year. Thompson's share of Starlight's current operations was a $65,000 ordinary loss and a $15,000 net long-term capital gain. What is the amount of Thompson's deductible loss for the period? a. b. c. d. $15,000 $40,000 $55,000 $65,000 Explanation Choice "c" is correct. A partner's deductible loss is limited to his basis plus any amounts that he is personally liable for ("at risk" provision). Thompson's basis would be calculated as follows: Beginning basis Plus: Net LT capital gain Less: Cash distribution Basis for determining allowable loss deduction $ 60,000 15,000 (20,000) $ 55,000 Thompson would be allowed to take a loss deduction for $55,000 of the $65,000 ordinary loss passed through to him from the partnership. The remaining $10,000 would be carried forward until additional basis became available. Choice "a" is incorrect. This choice assumes a partner can take a loss to the extent of capital gain income. Choice "b" is incorrect. This choice does not take into account the additional basis Thompson receives for the pass through income (net long-term capital gain). Choice "d" is incorrect. Thompson's loss is limited to his basis plus any liabilities that he is personally liable for. His basis is calculated as above for this determination and the question does not indicate he should receive any additional basis for any liabilities. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01696 Stone and Frazier decided to terminate the Woodwest Partnership as of December 31. On that date, Woodwest's balance sheet was as follows: Cash Equipment (adjusted basis) Capital - Stone Capital - Frazier $2,000 2,000 $3,000 1,000 The fair market value of the equipment was $3,000. Frazier's outside basis in the partnership was $1,200. Upon liquidation, Frazier received $1,500 in cash. What gain should Frazier recognize? a. b. c. d. $0 $250 $300 $500 Explanation Choice "c" is correct. In a complete liquidation of a partnership, the partner's basis in property received is the same as the adjusted basis of his partnership interest reduced for any monies actually received and is generally a nontaxable event. However, if a partner receives only money that exceeds his basis in the partnership, gain or loss is recognized. In this instance, Frazier's basis in his partnership interest was $1,200. He received $1,500 in cash in the liquidation. Frazier's gain is calculated as follows: Amount realized Basis in partnership interest Gain recognized $1,500 (1,200) $ 300 Note: Don't be confused by the term "outside basis." The term outside basis merely refers to the differences that may exist between the partner's share of the basis of the assets in the hands of the partnership (inside basis) and his basis in his partnership interest. Choice "a" is incorrect. If Frazier had received property other than cash, gain would not have been recognized. Choice "b" is incorrect. This choice appears to utilize Frazier's book capital of $1,000 (which is wrong) and 50% of the fair market value of the equipment to calculate gain of $500. However, use of that capital balance as his basis and the fact that the question does not indicate that Frazier received anything other than the cash as a distribution make this choice incorrect. Choice "d" is incorrect. This choice erroneously uses Frazier's capital on the partnership's balance sheet as his basis in his partnership. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01700 Peters has a one-third interest in the Spano Partnership. During 20X1, Peters received a $16,000 guaranteed payment, which was deductible by the partnership, for services rendered to Spano. Spano reported a 20X1 operating loss of $70,000 before the guaranteed payment. What is(are) the net effect(s) of the guaranteed payment? I. The guaranteed payment increases Peters' tax basis in Spano by $16,000. II. The guaranteed payment increases Peters' ordinary income by $16,000. a. b. c. d. I only. II only. Both I and II. Neither I nor II. Explanation Choice "b" is correct. The guaranteed payment increases Peters' ordinary income by $16,000 but does not affect Peters' tax basis because guaranteed payments are not undistributed earnings (they are distributed to the partner). The answer is "II only." Rule: Guaranteed payments are reasonable compensation paid to a partner for services rendered without regard to the partner's ratio of income. They are allowable tax deductions to the partnership and ordinary income to the partner receiving them. Note: A guaranteed payment will not increase a partner's basis in the partnership because the payment has been distributed to the partner. Choices "a", "c", and "d" are incorrect, per the above rule and note. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01704 Under which of the following circumstances is a partnership that is not an electing large partnership considered terminated for income tax purposes? I. Fifty-five percent of the total interest in partnership capital and profits is sold within a 12-month period. II. The partnership's business and financial operations are discontinued. a. b. c. d. I only. II only. Both I and II. Neither I nor II. Explanation Choice "c" is correct. Such a partnership will be terminated for income tax purposes when either fifty percent or more of the total interest in capital and profits is sold within a 12-month period or the partnership's business and financial operations are discontinued. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01705 Jones and Curry formed Major Partnership as equal partners by contributing the assets below: Jones Curry Asset Cash Land Adjusted basis $45,000 30,000 Fair market value $45,000 57,000 The land was held by Curry as a capital asset, subject to a $12,000 mortgage, that was assumed by Major. What was Curry's initial basis in the partnership interest? a. b. c. d. $45,000 $30,000 $24,000 $18,000 Explanation Choice "c" is correct. Curry's initial basis in the partnership is Curry's adjusted basis in the property contributed ($30,000) less the mortgage assumed by the other partner (50% × $12,000), or $30,000 − $6,000 = $24,000. Choice "a" is incorrect. Curry contributed land with a mortgage, not cash. Curry's basis is the adjusted basis of property contributed by Curry, less any mortgage assumed by other partners. Choice "b" is incorrect. The mortgage on the land contributed by Curry and assumed by the other partner must also be taken into consideration. Choice "d" is incorrect. Only the percentage of the mortgage assumed by the other partner, not the entire mortgage, will reduce Curry's initial basis. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01708 Jones and Curry formed Major Partnership as equal partners by contributing the assets below: Jones Curry Asset Cash Land Adjusted basis $45,000 30,000 Fair market value $45,000 57,000 The land was held by Curry as a capital asset, subject to a $12,000 mortgage, that was assumed by Major. What was Jones' initial basis in the partnership interest? a. b. c. d. $51,000 $45,000 $39,000 $33,000 Explanation Choice "a" is correct. Jones' initial basis is the basis of the cash contributed ($45,000) plus the percentage of the mortgage on Curry's land that was assumed by Jones (50% × $12,000), or $45,000 + $6,000 = $51,000. Choice "b" is incorrect. The mortgage on the land contributed by Curry and assumed by Jones must also be taken into consideration. Choice "c" is incorrect. The assumption of 50% of the mortgage on the land contributed by Curry will increase, not decrease, Jones' initial basis. Choice "d" is incorrect. Only the percentage of the mortgage assumed by Jones, not the entire mortgage, will increase Jones' initial basis. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01710 Basic Partnership, a cash-basis calendar year entity, began business on February 1, Year 1. Basic incurred and paid the following in Year 1: Filing fees incident to the creation of the partnership Accounting fees to prepare the representations in offering materials $ 3,600 12,000 Basic elected to amortize costs. What was the maximum amount that Basic could deduct on the Year 1 partnership return? a. b. c. d. $11,000 $3,600 $2,860 $220 Explanation Choice "b" is correct. Only the filing fees incident to the creation of the ...
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