ABA Taxation and Compliance 3

Question 1

A taxpayer receives a $10,000 distribution from a traditional IRA at age 45. In addition to income tax, what additional penalty generally applies?

Accepted Answer

10% early withdrawal penalty

Answer

Distributions from a traditional IRA before age 59½ are subject to a 10% early withdrawal penalty, with limited exceptions.

Question 2

Under the passive activity loss rules, which type of income can offset passive losses?

Accepted Answer

Passive income only

Answer

Under IRC §469, passive activity losses may only offset passive activity income; they cannot offset active or portfolio income.

Question 3

Which form does an S corporation use to report each shareholder's share of income, deductions, and credits?

Accepted Answer

Schedule K-1 (Form 1120-S)

Answer

S corporations provide each shareholder with a Schedule K-1 (Form 1120-S) showing their pro-rata share of corporate items.

Question 4

The accumulated earnings tax (AET) is imposed on C corporations that:

Accepted Answer

Retain earnings beyond reasonable business needs to avoid shareholder-level tax

Answer

The AET (IRC §531) targets C corporations that unreasonably accumulate earnings to shield shareholders from dividend taxation.

Question 5

A business accountant discovers a client overstated deductions on a prior-year return. The best immediate action is to:

Accepted Answer

File an amended return (Form 1040-X) and pay any additional tax owed

Answer

Voluntary correction via an amended return minimizes penalties and demonstrates good-faith compliance with tax law.

(ABA) Accredited Business Accountant Practice Test