Certified Tax Advisor (CTA) — Questions and Answers

Question 1: A shareholder-employee of an S corporation must receive a:

Reasonable salary subject to payroll taxes (Correct answer)
Guaranteed payment similar to a partnership
No compensation, only distributions
Distribution equal to all S corp earnings

Correct answer: Reasonable salary subject to payroll taxes

IRS rules require S corporation shareholder-employees who perform services to receive a reasonable salary subject to employment taxes.

Question 2: Which IRS collection tool allows the IRS to seize a taxpayer's wages, bank accounts, or other financial assets to satisfy a tax debt?

Certificate of Discharge
Federal Tax Lien
Tax Levy (Correct answer)
Notice of Intent to Levy

Correct answer: Tax Levy

A tax levy under IRC Section 6331 is the IRS's legal seizure of a taxpayer's property — including wages, bank accounts, and assets — to satisfy an unpaid tax liability.

Question 3: Which strategy is used to convert a traditional IRA to a Roth IRA, paying taxes now to receive tax-free distributions later?

Roth conversion (Correct answer)
Direct transfer
Stretch IRA
Rollover

Correct answer: Roth conversion

A Roth conversion involves transferring funds from a traditional IRA to a Roth IRA and including the converted amount in current taxable income.

Question 4: Which tax form reports interest income received from a bank or financial institution?

Form 1099-B
Form 1099-DIV
Form 1099-MISC
Form 1099-INT (Correct answer)

Correct answer: Form 1099-INT

Form 1099-INT reports interest income paid by financial institutions.

Question 5: Which tax form does a C corporation use to file its federal income tax return?

Form 1041
Form 1065
Form 1120 (Correct answer)
Form 1120S

Correct answer: Form 1120

C corporations file their federal income tax return using Form 1120.

Question 6: What is the corporate alternative minimum tax (CAMT) rate introduced by the Inflation Reduction Act?

10%
12%
20%
15% (Correct answer)

Correct answer: 15%

The Inflation Reduction Act of 2022 established a 15% corporate alternative minimum tax on adjusted financial statement income for large corporations.

Question 7: A special use valuation election under IRC Section 2032A allows an estate to value farm or business real property at:

A flat discount of 40% from fair market value
Zero if the heirs continue farming
Fair market value for highest and best use
Its actual use value rather than its highest and best use value (Correct answer)

Correct answer: Its actual use value rather than its highest and best use value

Section 2032A allows qualifying farm and business real property to be valued based on its actual use rather than its fair market value, potentially reducing estate taxes significantly.

Question 8: What is the civil fraud penalty percentage under IRC Section 6663?

20% of the fraudulent underpayment
75% of the fraudulent underpayment (Correct answer)
100% of the fraudulent underpayment
50% of the fraudulent underpayment

Correct answer: 75% of the fraudulent underpayment

The civil fraud penalty under IRC Section 6663 is 75% of the portion of the underpayment attributable to fraud, reflecting the serious nature of intentional tax evasion.

Question 9: The Premium Tax Credit (PTC) assists eligible individuals with purchasing health insurance through:

Employer-sponsored health plans
VA healthcare benefits
Medicare supplemental coverage
Health insurance marketplaces established under the ACA (Correct answer)

Correct answer: Health insurance marketplaces established under the ACA

The Premium Tax Credit subsidizes health insurance premiums for eligible individuals and families purchasing coverage through ACA marketplaces.

Question 10: A tax preparer who recklessly or intentionally disregards IRS rules and regulations on a return may face a preparer penalty of:

$5,000 per return
$250 per return
Equal to the tax understatement
$1,000 per return or 75% of income from the return, whichever is greater (Correct answer)

Correct answer: $1,000 per return or 75% of income from the return, whichever is greater

Under IRC Section 6694(b), willful or reckless disregard of tax rules carries a penalty of $5,000 or 75% of preparer income from the return, whichever is greater.

Question 11: Tax evasion is best defined as:

Taking an aggressive position on a tax return
Illegal concealment of income or fraudulent deductions to avoid paying taxes (Correct answer)
Claiming deductions that are later disallowed by the IRS
Legal use of tax strategies to minimize tax liability

Correct answer: Illegal concealment of income or fraudulent deductions to avoid paying taxes

Tax evasion is the illegal, intentional non-payment or underpayment of taxes through concealment or fraud, as opposed to legal tax avoidance.

Question 12: Which of the following is subject to the accumulated earnings tax?

LLCs taxed as disregarded entities
Partnerships retaining profits
S corporations retaining earnings
C corporations accumulating earnings beyond reasonable business needs (Correct answer)

Correct answer: C corporations accumulating earnings beyond reasonable business needs

The accumulated earnings tax applies to C corporations that retain earnings beyond the reasonable needs of the business to avoid shareholder-level tax.

Question 13: Which type of depreciation recapture applies to gains from selling depreciable real property attributable to prior Section 1250 depreciation?

AMT depreciation adjustment
Section 1245 recapture taxed as ordinary income
Unrecaptured Section 1250 gain taxed at a maximum 25% rate (Correct answer)
Section 1231 gain taxed at long-term capital gain rates

Correct answer: Unrecaptured Section 1250 gain taxed at a maximum 25% rate

Unrecaptured Section 1250 gain from selling depreciable real property is taxed at a maximum rate of 25%, not the standard 15%/20% long-term capital gains rates.

Question 14: A Qualified Personal Residence Trust (QPRT) allows the grantor to:

Deduct mortgage interest at an enhanced rate
Avoid property taxes on a primary residence
Transfer a home out of the estate at a discounted gift tax value while retaining use for a term of years (Correct answer)
Convert the home's equity into tax-free income

Correct answer: Transfer a home out of the estate at a discounted gift tax value while retaining use for a term of years

A QPRT transfers a residence to heirs at a reduced gift tax value by retaining the right to live in the home for a specified term, leveraging the Section 7520 rate.

Question 15: An enrolled agent (EA) obtains their license to practice before the IRS by:

Completing a 40-hour tax preparation course
Obtaining a CPA license in any US state
Graduating from an accredited accounting program
Passing the Special Enrollment Examination (SEE) or working for the IRS for at least 5 years (Correct answer)

Correct answer: Passing the Special Enrollment Examination (SEE) or working for the IRS for at least 5 years

Enrolled agent status is obtained by passing the three-part Special Enrollment Examination or by virtue of working for the IRS in certain technical positions for at least five years.

Question 16: What is the accuracy-related penalty percentage imposed under IRC Section 6662 for a substantial understatement of income tax or negligence?

75% of the underpayment attributable to the violation
10% of the underpayment attributable to the violation
25% of the underpayment attributable to the violation
20% of the underpayment attributable to the violation (Correct answer)

Correct answer: 20% of the underpayment attributable to the violation

IRC Section 6662 imposes an accuracy-related penalty of 20% of the portion of the underpayment attributable to negligence, disregard of rules, or a substantial understatement of income tax.

Question 17: Which federal form is used to file the estate tax return?

Form 706 (Correct answer)
Form 990
Form 1041
Form 709

Correct answer: Form 706

Form 706 (United States Estate Tax Return) is filed by the executor of a decedent's estate when the gross estate exceeds the filing threshold.

Question 18: What is the purpose of a like-kind exchange under IRC Section 1031?

To avoid paying any capital gains tax permanently
To defer capital gains recognition when exchanging business or investment real property (Correct answer)
To convert ordinary income to capital gains
To accelerate depreciation deductions

Correct answer: To defer capital gains recognition when exchanging business or investment real property

A Section 1031 like-kind exchange allows taxpayers to defer capital gains taxes by reinvesting proceeds from the sale of real property into similar real property.

Question 19: The Low-Income Housing Tax Credit (LIHTC) under Section 42 incentivizes:

Investment in affordable rental housing development (Correct answer)
Personal home purchases by low-income buyers
Construction of owner-occupied affordable homes
Renovation of historic buildings

Correct answer: Investment in affordable rental housing development

The LIHTC provides tax credits to investors in qualifying low-income housing projects, incentivizing the development and preservation of affordable rental housing.

Question 20: Under Circular 230, a tax practitioner must NOT knowingly:

Represent a client in an audit without written authorization
Charge a contingent fee for preparing an original tax return
Submit false or misleading documents or information to the IRS (Correct answer)
Request an extension of time for a client

Correct answer: Submit false or misleading documents or information to the IRS

Circular 230 explicitly prohibits practitioners from knowingly submitting false or misleading documents or information to the IRS.

Question 21: Which IRS program allows taxpayers to voluntarily disclose previously unreported foreign financial accounts and assets?

IRS Voluntary Disclosure Program (Correct answer)
Currently Not Collectible status
Installment Agreement program
Offer in Compromise program

Correct answer: IRS Voluntary Disclosure Program

The IRS Voluntary Disclosure Program allows taxpayers with unreported foreign accounts or income to come forward voluntarily, typically receiving reduced penalties.

Question 22: Which of the following expenses is generally NOT deductible for a C corporation?

Employee salaries
Business-related travel
Ordinary business expenses
Dividends paid to shareholders (Correct answer)

Correct answer: Dividends paid to shareholders

Dividends paid to shareholders are not deductible by a C corporation and represent the core of double taxation.

Question 23: Which trust strategy is designed to last multiple generations and benefit descendants indefinitely, often avoiding estate taxes at each generation?

Testamentary trust
Qualified terminable interest property (QTIP) trust
Dynasty trust (perpetual trust) (Correct answer)
Revocable living trust

Correct answer: Dynasty trust (perpetual trust)

A dynasty trust is designed to hold assets for multiple generations, avoiding estate taxes at each generational level by using GST tax exemption.

Question 24: Which of the following IRS documents provides a legally binding ruling on how the tax law applies to a specific taxpayer's transaction?

Revenue ruling
Technical advice memorandum
Private letter ruling (PLR) (Correct answer)
IRS publication

Correct answer: Private letter ruling (PLR)

A Private Letter Ruling is issued by the IRS to a specific taxpayer and is legally binding on the IRS with respect to that taxpayer's transaction.

Question 25: What is the standard deduction for a single filer for tax year 2024?

$12,950
$13,850
$14,600 (Correct answer)
$15,000

Correct answer: $14,600

For tax year 2024, the standard deduction for single filers is $14,600.

Question 26: Qualified education loan interest is deductible up to what maximum amount per year?

$2,000
$3,000
$2,500 (Correct answer)
$1,500

Correct answer: $2,500

Taxpayers may deduct up to $2,500 of qualified student loan interest per year, subject to income phase-out limits.

Question 27: The step-up in basis at death allows heirs to:

Transfer assets tax-free using the annual exclusion
Avoid paying any capital gains on inherited property forever
Receive inherited assets with a cost basis equal to fair market value at date of death (Correct answer)
Deduct the decedent's unrealized losses

Correct answer: Receive inherited assets with a cost basis equal to fair market value at date of death

Assets inherited from a decedent receive a new cost basis equal to fair market value at the date of death, potentially eliminating built-in capital gains.

Question 28: A partnership files which informational return with the IRS?

Form 1065 (Correct answer)
Form 990
Form 1120
Form 1041

Correct answer: Form 1065

Partnerships file Form 1065, an informational return that reports income, deductions, and each partner's distributive share.

Question 29: The taxpayer penalty for substantial understatement of income tax is:

75% of the underpayment if fraud is involved
20% of the portion of the underpayment attributable to the substantial understatement (Correct answer)
25% of the total tax due
5% of the underpayment per month

Correct answer: 20% of the portion of the underpayment attributable to the substantial understatement

The accuracy-related penalty for substantial understatement of income tax is 20% of the understatement attributable to the substantial understatement.

Question 30: The self-employment tax rate for net self-employment earnings is:

2.9%
7.65%
12.4%
15.3% (Correct answer)

Correct answer: 15.3%

The self-employment tax rate is 15.3%, covering 12.4% for Social Security and 2.9% for Medicare.

Question 31: Which type of trust is used to reduce estate taxes by making an irrevocable gift of appreciating assets while retaining an income stream?

Special needs trust
Charitable remainder trust
Revocable living trust
Grantor retained annuity trust (GRAT) (Correct answer)

Correct answer: Grantor retained annuity trust (GRAT)

A GRAT allows a grantor to transfer appreciating assets to heirs estate-tax-free if the assets outperform the IRS Section 7520 rate.

Question 32: What is the purpose of Schedule K-1 in partnership taxation?

To allocate each partner's distributive share of income, deductions, and credits (Correct answer)
To report payroll tax deposits
To report the partnership's total gross receipts
To calculate the partnership's self-employment tax

Correct answer: To allocate each partner's distributive share of income, deductions, and credits

Schedule K-1 is issued by partnerships to each partner showing their allocated share of income, losses, deductions, and credits for use on their individual returns.

Question 33: Which deduction allows self-employed individuals to deduct health insurance premiums?

Self-employed health insurance deduction (above-the-line) (Correct answer)
Business expense on Schedule C only
Medical expense deduction subject to 7.5% AGI floor
Schedule A itemized deduction only

Correct answer: Self-employed health insurance deduction (above-the-line)

Self-employed individuals may deduct 100% of health insurance premiums as an above-the-line deduction under IRC Section 162(l).

Question 34: What is the federal estate tax exemption (unified credit) for 2024?

$13,610,000 (Correct answer)
$5,490,000
$12,920,000
$11,700,000

Correct answer: $13,610,000

The federal estate and gift tax exemption is $13,610,000 per individual in 2024.

Question 35: The 'bunching' strategy for charitable contributions involves:

Concentrating multiple years' donations into one year to exceed the standard deduction (Correct answer)
Making charitable contributions through a business entity
Donating to multiple charities simultaneously
Donating appreciated property instead of cash

Correct answer: Concentrating multiple years' donations into one year to exceed the standard deduction

Bunching accelerates charitable contributions into a single year so total itemized deductions exceed the standard deduction, then taking the standard deduction in other years.

Question 36: Alimony received under a divorce agreement finalized after December 31, 2018 is treated how for federal income tax purposes?

Taxed as capital gains
Tax-exempt (Correct answer)
Taxable as ordinary income
Subject to self-employment tax

Correct answer: Tax-exempt

Under the Tax Cuts and Jobs Act, alimony received under post-2018 agreements is no longer includable in the recipient's gross income.

Question 37: Which of the following is a valid valuation discount used in estate planning for transferred business interests?

Appreciation discount for growth assets
Premium for undivided interest in real estate
Lack of marketability and minority interest discounts (Correct answer)
Income acceleration discount

Correct answer: Lack of marketability and minority interest discounts

Minority interest discounts and lack-of-marketability discounts can reduce the gift or estate tax value of transferred business interests.

Question 38: What is the net investment income tax (NIIT) rate imposed by the ACA on high-income individuals?

0.9%
2.9%
3.8% (Correct answer)
5.0%

Correct answer: 3.8%

The Net Investment Income Tax is 3.8% on the lesser of net investment income or the excess of MAGI over the threshold amount.

Question 39: Home mortgage interest is deductible on a taxpayer's primary and secondary residence on debt up to what limit (post-2017)?

$1,000,000
$1,500,000
$500,000
$750,000 (Correct answer)

Correct answer: $750,000

Under the TCJA, mortgage interest deductibility is limited to acquisition debt of up to $750,000 for loans taken after December 15, 2017.

Question 40: When does the IRS's 10-year collection statute of limitations (CSED) generally begin?

The date the tax was assessed (Correct answer)
The date the IRS issued a Notice of Deficiency
The date the tax return was filed
The date the IRS filed a Notice of Federal Tax Lien

Correct answer: The date the tax was assessed

Under IRC Section 6502, the IRS has 10 years from the date of tax assessment (not filing) to collect a tax liability, after which the debt generally becomes uncollectible.

Question 41: The alternative minimum tax (AMT) was designed primarily to ensure that:

High-income taxpayers cannot use too many deductions to eliminate their tax liability (Correct answer)
All taxpayers pay at least a minimum amount of tax
Corporations pay the same rate as individuals
Self-employed taxpayers pay Social Security taxes

Correct answer: High-income taxpayers cannot use too many deductions to eliminate their tax liability

The AMT was enacted to prevent high-income taxpayers from using deductions and credits to avoid paying federal income tax.

Question 42: Which of the following Social Security benefits are potentially taxable?

Benefits are never taxable
Up to 85% of benefits if combined income exceeds thresholds (Correct answer)
Benefits only if AGI exceeds $100,000
All Social Security benefits regardless of income

Correct answer: Up to 85% of benefits if combined income exceeds thresholds

Up to 85% of Social Security benefits may be taxable if the taxpayer's combined income exceeds the applicable threshold.

Question 43: Under the qualified business income (QBI) deduction, eligible pass-through businesses may deduct up to what percentage of QBI?

10%
15%
25%
20% (Correct answer)

Correct answer: 20%

IRC Section 199A allows eligible taxpayers a deduction of up to 20% of qualified business income from pass-through entities.

Question 44: Which of the following is NOT included in gross income under IRC Section 61?

Rental income
Gambling winnings
Child support received (Correct answer)
Royalties

Correct answer: Child support received

Child support payments are not included in the recipient's gross income under federal tax law.

Question 45: Which of the following is a non-refundable tax credit?

Additional Child Tax Credit
Child Tax Credit (refundable portion)
Foreign Tax Credit (Correct answer)
Earned Income Tax Credit

Correct answer: Foreign Tax Credit

The Foreign Tax Credit is non-refundable and can only offset US tax liability, not generate a refund, though excess may be carried forward.

Question 46: The generation-skipping transfer (GST) tax applies to transfers to:

Grandchildren and other skip persons (Correct answer)
Children of the decedent
Charities receiving bequests
Spouses of the decedent's children

Correct answer: Grandchildren and other skip persons

The GST tax applies to transfers to skip persons, which are individuals who are two or more generations below the transferor, such as grandchildren.

Question 47: What is the penalty for a preparer who understates a taxpayer's liability due to an 'unreasonable position' under IRC Section 6694(a)?

The greater of $1,000 or 25% of the income derived by the preparer from preparation of the return
A flat penalty of $500 per return
The greater of $5,000 or 75% of the income derived by the preparer from preparation of the return
The greater of $1,000 or 50% of the income derived by the preparer from preparation of the return (Correct answer)

Correct answer: The greater of $1,000 or 50% of the income derived by the preparer from preparation of the return

Under IRC Section 6694(a), the preparer penalty for an understatement due to an unreasonable position is the greater of $1,000 or 50% of the income the preparer earned for preparing that return.

Question 48: Which of the following is a key characteristic of an S corporation?

Subject to double taxation
Can have an unlimited number of shareholders
Income passes through to shareholders' personal returns (Correct answer)
Can have both US and foreign shareholders

Correct answer: Income passes through to shareholders' personal returns

S corporations are pass-through entities where income and losses flow through to shareholders' individual tax returns.

Question 49: Which planning strategy is used by high-income taxpayers to shift business income to a lower-bracket child through employment in a family business?

Kiddie tax strategy
Passive activity shifting
Family employment strategy (Correct answer)
Income assignment strategy

Correct answer: Family employment strategy

Paying a child a reasonable wage for actual services rendered in a family business shifts earned income to the child's lower tax bracket.

Question 50: What is the minimum penalty for failure to file a tax return that is more than 60 days late (for returns due after 2015)?

The lesser of $100 or the amount of tax owed
The lesser of $5,000 or 25% of the tax owed
The lesser of $485 (indexed for inflation) or 100% of the tax owed (Correct answer)
The lesser of $1,000 or 5% of the tax owed

Correct answer: The lesser of $485 (indexed for inflation) or 100% of the tax owed

Under IRC Section 6651, if a return is more than 60 days late, the minimum failure-to-file penalty is the lesser of the indexed minimum amount (approximately $485 for 2024) or 100% of the unpaid tax.

Question 51: Which filing status generally results in the lowest tax liability for an eligible taxpayer?

Head of Household
Married Filing Separately
Single
Married Filing Jointly (Correct answer)

Correct answer: Married Filing Jointly

Married Filing Jointly typically provides the lowest tax liability due to wider tax brackets and higher standard deductions.

Question 52: Tax-loss harvesting is a strategy that involves:

Accelerating deductions into the current year
Selling securities at a loss to offset capital gains (Correct answer)
Selling appreciated assets to pay off debt
Converting traditional IRA to Roth IRA

Correct answer: Selling securities at a loss to offset capital gains

Tax-loss harvesting involves deliberately selling investments at a loss to offset realized capital gains and reduce taxable income.

Question 53: What is the annual gift tax exclusion per recipient for 2024?

$16,000
$18,000 (Correct answer)
$15,000
$17,000

Correct answer: $18,000

The annual gift tax exclusion is $18,000 per recipient in 2024, allowing tax-free gifts without reducing the lifetime exemption.

Question 54: Which of the following credits directly reduces the tax liability dollar-for-dollar?

Tax credit (Correct answer)
Tax deferral
Tax exclusion
Tax deduction

Correct answer: Tax credit

A tax credit reduces the actual tax liability dollar-for-dollar, making it more valuable than a deduction of the same amount.

Question 55: Which of the following is considered ordinary income for federal tax purposes?

Wages and salaries (Correct answer)
Long-term capital gains
Tax-exempt bond interest
Qualified dividends

Correct answer: Wages and salaries

Wages and salaries are taxed as ordinary income at regular marginal tax rates.

Question 56: What is the marital deduction in estate tax law?

An unlimited deduction for assets passing to a US citizen surviving spouse (Correct answer)
A credit equal to 50% of the estate value
A flat $5 million exemption for married couples
A deduction for assets left to children

Correct answer: An unlimited deduction for assets passing to a US citizen surviving spouse

The unlimited marital deduction allows estates to transfer an unlimited amount of assets to a surviving US citizen spouse free of estate tax.

Question 57: The alternate valuation date under IRC Section 2032 allows an estate to value assets as of:

Six months after the date of death (Correct answer)
One month after the decedent's death
Any date within one year of death
The end of the calendar year of death

Correct answer: Six months after the date of death

Section 2032 permits the executor to elect to value estate assets as of six months after the date of death if doing so reduces both the gross estate and the estate tax.

Question 58: Which IRS notice is typically the first formal notice that a taxpayer's return has been selected for examination?

Letter 525 (Revenue Agent's Report)
CP2000 Notice
Notice of Deficiency (90-day letter)
Letter 566 (Initial Contact Letter) (Correct answer)

Correct answer: Letter 566 (Initial Contact Letter)

Letter 566 is the IRS's initial contact letter informing a taxpayer that their return has been selected for examination and identifying the items under review.

Question 59: Which credit is available to employers who provide qualified family and medical leave to employees?

Disabled Access Credit
Work Opportunity Tax Credit (WOTC)
Employer Credit for Paid Family and Medical Leave (Section 45S) (Correct answer)
Small Employer Health Insurance Credit

Correct answer: Employer Credit for Paid Family and Medical Leave (Section 45S)

IRC Section 45S provides a credit to employers who pay qualifying employees at least 50% of wages during family and medical leave.

Question 60: A QTIP trust (Qualified Terminable Interest Property trust) is commonly used in estate planning to:

Allow the surviving spouse full control over inherited assets
Provide income to a surviving spouse while directing the ultimate disposition of the principal to other heirs (Correct answer)
Avoid the GST tax on transfers to grandchildren
Eliminate estate taxes for all beneficiaries

Correct answer: Provide income to a surviving spouse while directing the ultimate disposition of the principal to other heirs

A QTIP trust provides income to the surviving spouse (qualifying for the marital deduction) while ensuring that the principal ultimately passes to heirs chosen by the first spouse.

Question 61: What is the general statute of limitations for the IRS to assess additional taxes on a filed return?

5 years from the date the return was filed
3 years from the date the return was filed or due, whichever is later (Correct answer)
2 years from the date the return was filed
6 years from the date the return was filed

Correct answer: 3 years from the date the return was filed or due, whichever is later

Under IRC Section 6501, the IRS generally has 3 years from the later of the filing date or the due date of the return to assess additional taxes.

Question 62: A taxpayer who disagrees with an IRS examination decision may request an appeal. What is the typical deadline to file a protest for a large case (over $25,000 in dispute)?

60 days from the date of the examination report
90 days from the date of the examination report
15 days from the date of the examination report
30 days from the date of the examination report (Correct answer)

Correct answer: 30 days from the date of the examination report

For cases involving more than $25,000 in dispute, taxpayers must file a written protest within 30 days of the date of the examination report to request an Appeals conference.

Question 63: A donor-advised fund (DAF) provides which tax planning benefit?

Provides a tax deduction only when grants are distributed to charities
Avoids all capital gains on contributed assets
Allows the donor to receive income from donated assets
Enables an immediate charitable deduction while granting investment control with grants made over time (Correct answer)

Correct answer: Enables an immediate charitable deduction while granting investment control with grants made over time

A DAF allows donors to take an immediate charitable deduction in the year of contribution while recommending grants to charities over future years.

Question 64: What is the purpose of Form 8275 (Disclosure Statement) in tax practice?

To report material advisor tax shelter transactions
To report foreign bank account balances
To disclose positions on a return that may not have adequate authority to avoid accuracy-related penalties (Correct answer)
To request a private letter ruling from the IRS

Correct answer: To disclose positions on a return that may not have adequate authority to avoid accuracy-related penalties

Form 8275 is used to disclose return positions for which there is a reasonable basis but less than substantial authority, to avoid accuracy-related penalties.

Question 65: Which form is used by US taxpayers to file their individual federal income tax return?

Form 1099
Form W-2
Form 1040 (Correct answer)
Form 941

Correct answer: Form 1040

Form 1040 is the standard US individual income tax return form.

Question 66: Accelerating deductions and deferring income is most beneficial when:

Tax rates are expected to decrease in future years
Tax rates are expected to increase in future years (Correct answer)
Income is already at the lowest marginal rate
The taxpayer has large capital loss carryforwards

Correct answer: Tax rates are expected to increase in future years

Accelerating deductions into the current year and deferring income to the future is most effective when future tax rates are anticipated to rise.

Question 67: What is the top marginal federal income tax rate for individuals in 2024?

32%
37% (Correct answer)
35%
39.6%

Correct answer: 37%

The top marginal federal income tax rate for individuals is 37% as of 2024.

Question 68: What is the tax treatment of a Roth IRA qualified distribution?

Tax-free and penalty-free (Correct answer)
Taxed as capital gains
Taxed as ordinary income
Subject to 10% early withdrawal penalty

Correct answer: Tax-free and penalty-free

Qualified Roth IRA distributions are completely tax-free and penalty-free because contributions were made with after-tax dollars.

Question 69: Which tax planning strategy involves shifting income to a family member in a lower tax bracket?

Loss harvesting
Income splitting (Correct answer)
Tax deferral
Income acceleration

Correct answer: Income splitting

Income splitting involves transferring income-producing assets or business income to family members in lower tax brackets to reduce the overall family tax burden.

Question 70: What is the net operating loss (NOL) carryforward rule under the Tax Cuts and Jobs Act?

No carryforward allowed
5-year carryback, 25-year carryforward
No carryback, indefinite carryforward limited to 80% of taxable income (Correct answer)
2-year carryback, 20-year carryforward

Correct answer: No carryback, indefinite carryforward limited to 80% of taxable income

Post-2017 NOLs generally cannot be carried back but may be carried forward indefinitely, limited to 80% of taxable income.

Question 71: The statute of limitations for the IRS to assess additional tax on a return is generally:

3 years from the due date or filing date, whichever is later (Correct answer)
5 years from the filing date
There is no statute of limitations
1 year from the filing date

Correct answer: 3 years from the due date or filing date, whichever is later

The IRS generally has three years from the date a return is filed or its due date (whichever is later) to assess additional taxes.

Question 72: What is the current flat federal corporate income tax rate under the Tax Cuts and Jobs Act?

35%
21% (Correct answer)
25%
28%

Correct answer: 21%

The Tax Cuts and Jobs Act of 2017 established a flat 21% federal corporate income tax rate.

Question 73: Which IRS program allows currently uncollectible taxpayers to delay collection activity while their financial situation is monitored?

Penalty Abatement Program
Offer in Compromise (OIC)
Installment Agreement
Currently Not Collectible (CNC) Status (Correct answer)

Correct answer: Currently Not Collectible (CNC) Status

Currently Not Collectible (CNC) status suspends IRS collection action when a taxpayer demonstrates that paying the tax would prevent them from meeting basic living expenses, though the debt remains and interest continues to accrue.

Question 74: Which of the following is a 'above-the-line' deduction for individual taxpayers?

State income taxes
Charitable contributions
Student loan interest (Correct answer)
Mortgage interest

Correct answer: Student loan interest

Student loan interest is an above-the-line deduction, meaning it reduces adjusted gross income regardless of whether the taxpayer itemizes.

Question 75: The state and local tax (SALT) deduction is currently capped at what amount for most taxpayers?

$15,000
$10,000 (Correct answer)
Unlimited
$5,000

Correct answer: $10,000

The TCJA limited the SALT deduction to $10,000 ($5,000 for married filing separately) through at least 2025.

Question 76: Which tax form reports a self-employed individual's business income and expenses?

Schedule A
Schedule D
Schedule C (Correct answer)
Schedule B

Correct answer: Schedule C

Schedule C (Profit or Loss from Business) is used by sole proprietors to report business income and deductible expenses.

Question 77: Which trust structure allows a grantor to transfer assets while retaining an income stream, with the remainder passing to charity?

Dynasty trust
Irrevocable life insurance trust
Charitable lead trust (CLT)
Charitable remainder trust (CRT) (Correct answer)

Correct answer: Charitable remainder trust (CRT)

A CRT pays an income stream (annuity or unitrust) to the grantor or other beneficiaries for a term, with the remainder going to charity.

Question 78: Which IRS document formally closes an examination at the field level and summarizes proposed adjustments, allowing the taxpayer to agree or disagree?

Letter 11 (Final Notice of Intent to Levy)
CP2000 Notice
Revenue Agent's Report (RAR) / Form 4549 (Correct answer)
Notice of Deficiency

Correct answer: Revenue Agent's Report (RAR) / Form 4549

The Revenue Agent's Report (RAR), presented on Form 4549, summarizes the IRS examiner's proposed adjustments and is provided to the taxpayer at the close of a field examination, giving them the opportunity to agree or request Appeals.

Question 79: Income earned by a trust that is not distributed to beneficiaries is taxed:

At the grantor's individual tax rate
At the trust's compressed tax brackets, which reach the top rate at lower income levels (Correct answer)
Tax-free until distributed
At a flat 21% corporate rate

Correct answer: At the trust's compressed tax brackets, which reach the top rate at lower income levels

Undistributed trust income is taxed within the trust at highly compressed brackets, reaching the 37% top rate at only $15,200 of taxable income in 2024.

Question 80: Portability of the estate tax exemption allows a surviving spouse to:

Use the deceased spouse's unused estate tax exemption in addition to their own (Correct answer)
Transfer unused exemption to children tax-free
Elect to be taxed at the deceased spouse's marginal rate
Avoid estate taxes entirely

Correct answer: Use the deceased spouse's unused estate tax exemption in addition to their own

Portability allows the surviving spouse to elect to use any unused federal estate tax exemption of the predeceased spouse, effectively doubling the combined exemption.

Question 81: Which of the following medical expenses is deductible on Schedule A?

Cosmetic surgery for appearance only
Weight-loss program for general wellness
Prescription medications (Correct answer)
Gym membership for general health

Correct answer: Prescription medications

Prescription medications qualify as deductible medical expenses on Schedule A, subject to the 7.5% AGI floor.

Question 82: Which of the following education benefits is excluded from an employee's gross income?

Employer-provided educational assistance up to $5,250 (Correct answer)
Employer-paid graduate tuition above $5,250
529 plan earnings used for K-12 expenses
Personal education expenses paid by employer

Correct answer: Employer-provided educational assistance up to $5,250

Under IRC Section 127, employer-provided educational assistance up to $5,250 per year is excluded from the employee's gross income.

Question 83: Which gift is considered a 'direct skip' for generation-skipping transfer tax purposes?

A gift to a sibling
A gift to a surviving spouse
A gift to an adult child
A gift transferred directly to a grandchild (Correct answer)

Correct answer: A gift transferred directly to a grandchild

A direct skip is a transfer subject to gift or estate tax made directly to a skip person, such as a grandchild, bypassing the intermediate generation.

Question 84: Which of the following business entities provides limited liability protection to all owners while being taxed as a partnership by default?

C corporation
Limited liability company (LLC) (Correct answer)
Sole proprietorship
General partnership

Correct answer: Limited liability company (LLC)

An LLC with multiple members provides limited liability to all members and is taxed as a partnership by default.

Question 85: Which of the following is a valid strategy to avoid the 10% early withdrawal penalty from a retirement account?

Taking substantially equal periodic payments (SEPP) under Rule 72(t) (Correct answer)
Using funds for a vacation home purchase
Withdrawing for general living expenses
Withdrawing before age 55

Correct answer: Taking substantially equal periodic payments (SEPP) under Rule 72(t)

Rule 72(t) allows penalty-free distributions from IRAs if payments are taken as substantially equal periodic payments based on life expectancy.

Question 86: What is the maximum Child Tax Credit per qualifying child for tax year 2024?

$1,500
$1,000
$2,000 (Correct answer)
$3,000

Correct answer: $2,000

The Child Tax Credit is $2,000 per qualifying child under age 17 for tax year 2024.

Question 87: Confidentiality protections for tax advice given by non-attorney tax practitioners are governed by:

The Circular 230 confidentiality rules
IRC Section 7525, which provides limited privilege for federally authorized tax practitioners (Correct answer)
Full attorney-client privilege under common law
There are no confidentiality protections for non-attorneys

Correct answer: IRC Section 7525, which provides limited privilege for federally authorized tax practitioners

IRC Section 7525 extends a limited privilege to communications between a client and a federally authorized tax practitioner regarding tax advice, comparable to the attorney-client privilege.

Question 88: Under the MACRS system, what is the recovery period for 5-year property (e.g., automobiles, computers)?

5 years (Correct answer)
10 years
7 years
3 years

Correct answer: 5 years

Under MACRS, 5-year property has a 5-year recovery period using the 200% declining balance method.

Question 89: What is the holding period required for a capital gain to be classified as long-term?

More than 6 months
More than 9 months
More than 2 years
More than 1 year (Correct answer)

Correct answer: More than 1 year

An asset must be held for more than one year to qualify for long-term capital gains treatment.

Question 90: Unreimbursed partnership expenses paid by a partner are reported on:

Schedule E, with a notation (Correct answer)
They are not deductible
Schedule C
Form 2106

Correct answer: Schedule E, with a notation

Partners may deduct unreimbursed partnership expenses on Schedule E as a reduction to their distributive share of partnership income.

Question 91: The Earned Income Tax Credit (EITC) is available to taxpayers who:

Have earned income below certain thresholds and meet other eligibility requirements (Correct answer)
Have capital gains from stock sales
Are retired with Social Security income
Have investment income above $10,000

Correct answer: Have earned income below certain thresholds and meet other eligibility requirements

The EITC is a refundable credit available to low-to-moderate income workers with earned income and investment income below specified limits.

Question 92: Which type of trust is included in the grantor's gross estate at death?

Revocable living trust (Correct answer)
Grantor retained annuity trust after the term ends
Charitable remainder trust (CRT)
Irrevocable life insurance trust (ILIT)

Correct answer: Revocable living trust

Assets in a revocable living trust are included in the grantor's taxable estate because the grantor retains the right to revoke or amend the trust.

Question 93: The Child and Dependent Care Credit provides a credit based on what percentage of qualifying expenses?

20-35% depending on AGI (Correct answer)
10-15% depending on income
25% with a phase-out
50% for all taxpayers

Correct answer: 20-35% depending on AGI

The Child and Dependent Care Credit is 20-35% of qualifying expenses up to $3,000 for one qualifying person, with the percentage decreasing as AGI increases.

Question 94: What is the maximum contribution limit to a traditional IRA for taxpayers under age 50 in 2024?

$6,000
$7,500
$5,500
$7,000 (Correct answer)

Correct answer: $7,000

The IRA contribution limit for 2024 is $7,000 for taxpayers under age 50.

Question 95: An irrevocable life insurance trust (ILIT) is used primarily to:

Ensure equal distribution of assets to all heirs
Provide income tax deductions for premium payments
Remove life insurance proceeds from the insured's taxable estate (Correct answer)
Avoid paying income tax on investment earnings

Correct answer: Remove life insurance proceeds from the insured's taxable estate

An ILIT holds a life insurance policy outside the insured's estate, so death benefits pass to beneficiaries free of estate tax.

Question 96: Which depreciation method allows businesses to immediately expense the full cost of qualifying assets in the year of acquisition?

Units of production
MACRS straight-line
Bonus depreciation (Section 168(k)) (Correct answer)
Sum-of-the-years-digits

Correct answer: Bonus depreciation (Section 168(k))

Section 168(k) bonus depreciation allows immediate expensing of the full cost of qualifying property in the placed-in-service year.

Question 97: A taxpayer receives a CP2000 notice from the IRS. What does this notice indicate?

The IRS is initiating a full audit of the taxpayer's return
The IRS has detected a discrepancy between information reported by third parties and the taxpayer's return (Correct answer)
The IRS is proposing to levy the taxpayer's wages
The IRS has accepted the return and is issuing a refund

Correct answer: The IRS has detected a discrepancy between information reported by third parties and the taxpayer's return

A CP2000 notice is an automated underreporter notice indicating that information reported to the IRS by third parties (such as W-2s or 1099s) does not match what the taxpayer reported on their return, proposing an adjustment.

Question 98: Which retirement plan allows the highest annual contribution limit for self-employed individuals in 2024?

SIMPLE IRA
SEP-IRA
Solo 401(k) (Correct answer)
Traditional IRA

Correct answer: Solo 401(k)

A Solo 401(k) allows self-employed individuals to make both employee deferrals ($23,000 in 2024) and employer contributions, for a combined limit of up to $69,000.

Question 99: Qualified Opportunity Zone (QOZ) investments offer which tax benefit?

100% exclusion of all investment income
Deferral and potential reduction of capital gains taxes, plus exclusion of gains from QOZ investment appreciation (Correct answer)
Immediate deduction of investment amount
Unlimited charitable deduction

Correct answer: Deferral and potential reduction of capital gains taxes, plus exclusion of gains from QOZ investment appreciation

QOZ investments allow deferral of existing capital gains, a step-up in basis for long-held investments, and exclusion of gains on QOZ fund appreciation held over 10 years.

Question 100: Which IRC Section allows small businesses to immediately expense the cost of qualifying property rather than depreciate it over time?

Section 280F
Section 168
Section 179 (Correct answer)
Section 197

Correct answer: Section 179

IRC Section 179 allows businesses to immediately deduct the cost of qualifying property up to an annual limit.

Question 101: What is the primary benefit of tax deferral strategies?

Reducing the applicable tax rate immediately
Avoiding state income taxes
Moving taxable income to a later period, allowing current funds to grow (Correct answer)
Eliminating tax permanently

Correct answer: Moving taxable income to a later period, allowing current funds to grow

Tax deferral moves income recognition to a future period, allowing those funds to grow on a pre-tax basis in the interim.

Certified Tax Advisor (CTA)

The Certified Tax Advisor (CTA) designation, issued by the Financial Education Partnership, validates advanced competency in federal taxation across individual, business, and estate/trust areas. Candidates must have 5+ years of tax industry experience and complete 18 hours of CTA course instruction before sitting the written exam.

100

Questions

180 min

Time Limit

75%

To Pass

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