GAC Tax Planning & Compliance 2 — Questions and Answers
Question 1: A government agency discovers it over-withheld federal income taxes from employees during the prior fiscal year. What is the proper corrective action?
- Issue corrected W-2c forms and refund excess withholding through payroll (Correct answer)
- Carry the over-withholding forward as a credit to next year's payroll taxes
- Reclassify the amount as miscellaneous revenue for the current year
- Notify employees only; the IRS does not require correction filings
Correct answer: Issue corrected W-2c forms and refund excess withholding through payroll
Over-withholding requires corrected W-2c forms and repayment of excess amounts to employees, with corresponding amended filings.
Question 2: Which provision allows governmental entities to exclude interest income on state and local bonds from federal gross income?
- IRC Section 115
- IRC Section 103 (Correct answer)
- IRC Section 501(c)(3)
- IRC Section 148
Correct answer: IRC Section 103
IRC Section 103 excludes interest on state and local government bonds from the gross income of bondholders for federal tax purposes.
Question 3: A county government enters into a lease-purchase agreement for equipment. For tax purposes, this arrangement is most likely classified as:
- An operating lease with no tax consequence
- An installment sale subject to IRC capital asset rules
- A true lease with deductible rental payments
- A tax-exempt financing arrangement under IRC Section 103 (Correct answer)
Correct answer: A tax-exempt financing arrangement under IRC Section 103
Government lease-purchase agreements typically qualify as tax-exempt financing, with interest paid by the government exempt from federal income tax.
Question 4: Under IRS rules, what is the deadline for a governmental employer to deposit payroll taxes withheld from employees if they are a monthly depositor?
- By the 10th of the following month
- By the 15th of the following month (Correct answer)
- Within 3 business days of the payroll date
- By the last day of the following month
Correct answer: By the 15th of the following month
Monthly depositors must remit payroll taxes by the 15th of the month following the month in which wages were paid.
Question 5: A state government sells land it has held for 20 years at a gain. How is this gain treated for federal tax purposes?
- Subject to capital gains tax at the long-term rate
- Excluded from federal taxation under the governmental immunity doctrine codified in IRC Section 115 (Correct answer)
- Treated as ordinary income and taxed at the state's marginal rate
- Reported on Form 990-T as unrelated business income
Correct answer: Excluded from federal taxation under the governmental immunity doctrine codified in IRC Section 115
IRC Section 115 excludes income derived from the exercise of essential governmental functions, including gains on property sales, from federal taxation.
Question 6: What is an 'arbitrage rebate' requirement in connection with tax-exempt municipal bonds?
- The requirement to rebate a portion of bond proceeds to bondholders if interest rates rise
- The obligation to pay the IRS excess earnings above the bond yield earned on invested proceeds (Correct answer)
- A penalty assessed when bonds are refinanced within 5 years of issuance
- The requirement to refund investors if the project funded by bonds is not completed
Correct answer: The obligation to pay the IRS excess earnings above the bond yield earned on invested proceeds
Arbitrage rebate rules under IRC Section 148 require issuers to pay the IRS any investment earnings on bond proceeds that exceed the bond's yield.
Question 7: A city provides free parking to all employees in a government-owned garage. Under IRS rules, this benefit is:
- Fully taxable as a fringe benefit regardless of location
- Excludable up to the monthly limit for qualified parking under IRC Section 132(f) (Correct answer)
- Excludable only if the employee earns below the Social Security wage base
- Taxable only to employees earning above $100,000 annually
Correct answer: Excludable up to the monthly limit for qualified parking under IRC Section 132(f)
Qualified parking provided by an employer is excludable from employee income up to the IRS monthly limit under IRC Section 132(f).
GAC Tax Planning & Compliance 2
A government agency discovers it over-withheld federal income taxes from employees during the prior fiscal year.
What is the proper corrective action?