Bcom Bachelor of Commerce Bachelor of Commerce: Income Tax Laws 5 — Questions and Answers
Question 1: What is the statute of limitations for the IRS to assess additional federal income tax in a standard case?
- 1 year from the due date of the return
- 3 years from the later of the return's due date or filing date (Correct answer)
- 5 years from the date the tax was paid
- 6 years from the date of the audit notice
Correct answer: 3 years from the later of the return's due date or filing date
Generally, the IRS has 3 years from the later of the return's due date or the actual filing date to assess additional tax; this period extends to 6 years if income is omitted by more than 25%.
Question 2: Which method of accounting generally results in the most accurate matching of income and expenses for a business?
- Cash basis
- Accrual basis (Correct answer)
- Installment method
- Hybrid method
Correct answer: Accrual basis
Accrual basis accounting recognizes income when earned and expenses when incurred, providing better matching of revenues and costs regardless of cash flow timing.
Question 3: A taxpayer who fails to file a tax return by the due date (without an extension) faces which IRS penalty?
- Failure-to-pay penalty of 0.5% per month
- Failure-to-file penalty of 5% per month up to 25% (Correct answer)
- Accuracy-related penalty of 20% of underpayment
- Negligence penalty of 10% flat
Correct answer: Failure-to-file penalty of 5% per month up to 25%
The failure-to-file penalty is 5% of unpaid tax per month (or fraction thereof), capped at 25% of unpaid tax, which is typically much larger than the failure-to-pay penalty.
Question 4: Under the MACRS system, which recovery period applies to residential rental real property?
- 15 years
- 27.5 years (Correct answer)
- 39 years
- 40 years
Correct answer: 27.5 years
Residential rental real property is depreciated over 27.5 years using the straight-line method under MACRS, while nonresidential real property uses a 39-year period.
Question 5: Which of the following income items is generally excluded from a taxpayer's gross income under the IRC?
- Gambling winnings
- Forgiveness of a personal loan by a friend
- Proceeds from a life insurance policy paid upon the insured's death (Correct answer)
- Lottery prize paid as an annuity
Correct answer: Proceeds from a life insurance policy paid upon the insured's death
Under IRC §101, life insurance proceeds paid by reason of the insured's death are generally excluded from the beneficiary's gross income.
Question 6: What is the 'kiddie tax' and to whom does it apply?
- A reduced tax rate on unearned income for children to encourage saving
- A tax that subjects a child's net unearned income above a threshold to the parent's marginal tax rate (Correct answer)
- A penalty imposed on parents who claim children as dependents incorrectly
- A special tax credit available to families with dependent children under age 13
Correct answer: A tax that subjects a child's net unearned income above a threshold to the parent's marginal tax rate
The kiddie tax (IRC §1(g)) taxes a child's net unearned income above a threshold at the parent's marginal rate, preventing income-shifting strategies to lower-bracket children.
Question 7: In a partnership, how are profits and losses generally allocated to partners for tax purposes?
- Equally among all partners regardless of ownership percentage
- According to the partnership agreement, or pro-rata by ownership interest if no agreement specifies (Correct answer)
- Solely based on capital contributions made during the tax year
- Determined by the IRS based on industry-standard formulas
Correct answer: According to the partnership agreement, or pro-rata by ownership interest if no agreement specifies
Partnerships have broad flexibility to allocate income and losses per the partnership agreement; if the agreement lacks a provision, allocations follow each partner's proportionate ownership interest.
Bcom Bachelor of Commerce Bachelor of Commerce: Income Tax Laws 5
What is the statute of limitations for the IRS to assess additional federal income tax in a standard case?