CA Taxation & Regulatory Compliance 5 — Questions and Answers
Question 1: A taxpayer who fails to file a tax return and fails to pay tax owed will face combined monthly penalties that cannot exceed what maximum percentage of the unpaid tax?
- 25%
- 47.5% (Correct answer)
- 5%
- 50%
Correct answer: 47.5%
The failure-to-file penalty (max 25%) and failure-to-pay penalty (max 25%) can combine up to 47.5% of the unpaid tax, per IRS rules coordinating the two penalties.
Question 2: Under IRC Section 1031, which of the following exchanges does NOT qualify for like-kind exchange treatment?
- Apartment building for a commercial warehouse
- Raw land for an improved office building
- Business pickup truck for another business truck
- Investment real estate for a personal vacation home (Correct answer)
Correct answer: Investment real estate for a personal vacation home
A personal vacation home does not qualify as investment or business property, so exchanging it for investment real estate does not meet the Section 1031 like-kind exchange requirements.
Question 3: When a CPA discovers a material error in a previously filed tax return, the CPA's primary obligation under Circular 230 is to:
- Immediately notify the IRS without client consent
- Inform the client of the error and its potential consequences (Correct answer)
- Correct the error unilaterally by filing an amended return
- Withdraw from the engagement without explanation
Correct answer: Inform the client of the error and its potential consequences
Under Treasury Circular 230, the CPA must promptly advise the client of the error and recommend corrective action, but cannot notify the IRS without client consent.
Question 4: For federal estate tax purposes, the marital deduction allows a decedent to transfer what amount to a surviving U.S. citizen spouse?
- Up to the annual gift exclusion amount
- Up to the lifetime exemption equivalent
- An unlimited amount (Correct answer)
- Up to 50% of the gross estate
Correct answer: An unlimited amount
The unlimited marital deduction under IRC Section 2056 allows a decedent to transfer an unlimited amount to a surviving U.S. citizen spouse free of federal estate tax.
Question 5: Which of the following costs must be capitalized under the UNICAP rules of IRC Section 263A?
- Marketing and advertising expenses
- Research and experimental costs under Section 174
- Indirect production costs allocable to inventory (Correct answer)
- Selling expenses related to completed goods
Correct answer: Indirect production costs allocable to inventory
Section 263A (UNICAP) requires capitalization of direct and indirect costs properly allocable to inventory produced or acquired for resale, including overhead.
Question 6: A taxpayer has a net operating loss (NOL) arising in 2023. Under current law (post-TCJA), the NOL carryforward deduction is limited to what percentage of taxable income in the carryforward year?
- 100%
- 90%
- 80% (Correct answer)
- 50%
Correct answer: 80%
Post-TCJA, NOLs arising after December 31, 2017 can be carried forward indefinitely but are limited to 80% of the taxable income in the carryforward year.
Question 7: Which IRS form is filed by a U.S. person who is a shareholder in a Controlled Foreign Corporation (CFC) to report their interest?
- Form 5472
- Form 8865
- Form 5471 (Correct answer)
- Form 8938
Correct answer: Form 5471
Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) is filed by U.S. shareholders with a 10% or more interest in a CFC.
CA Taxation & Regulatory Compliance 5
A taxpayer who fails to file a tax return and fails to pay tax owed will face combined monthly penalties that cannot exceed what maximum percentage of the unpaid tax?