IRS Special Enrollment Examination (SEE) — Enrolled Agent — Questions and Answers

Question 1: What is the tax treatment of municipal bond interest received by a US taxpayer?

Taxable as ordinary income at all levels
Taxable as a capital gain
Exempt from federal income tax but may be subject to state tax (Correct answer)
Subject to the alternative minimum tax only

Correct answer: Exempt from federal income tax but may be subject to state tax

Interest on most state and local (municipal) bonds is excluded from federal gross income under IRC §103, though it may be taxable by the issuing state.

Question 2: What does the IRS's 'Agent Mentoring Program' pair experienced Revenue Agents with new agents to accomplish?

To formally evaluate new agents for potential termination
To reduce the IRS audit workload by delegating cases to trainees
To train experienced agents on new software platforms
To accelerate new agents' development through guided case work, knowledge transfer, and professional coaching (Correct answer)

Correct answer: To accelerate new agents' development through guided case work, knowledge transfer, and professional coaching

The mentoring program pairs new Revenue Agents with seasoned professionals who guide them through complex cases and help them develop the skills needed for independent work.

Question 3: The IRS Office of Professional Responsibility (OPR) has jurisdiction over which of the following?

Attorneys, CPAs, enrolled agents, and enrolled retirement plan agents practicing before the IRS (Correct answer)
Only practitioners who appear in Tax Court
All tax return preparers regardless of credential
Only enrolled agents

Correct answer: Attorneys, CPAs, enrolled agents, and enrolled retirement plan agents practicing before the IRS

OPR enforces Circular 230 standards for all practitioners who practice before the IRS, including attorneys, CPAs, enrolled agents, and enrolled retirement plan agents.

Question 4: Which of the following is NOT a recognized category of individuals who may practice before the IRS under Circular 230?

Enrolled agents
Financial advisors holding the CFP designation (Correct answer)
Enrolled retirement plan agents (for retirement plan matters)
Enrolled actuaries (for actuarial matters)

Correct answer: Financial advisors holding the CFP designation

CFP (Certified Financial Planner) is not a recognized credential under Circular 230 that grants IRS practice rights; only enrolled agents, CPAs, attorneys, enrolled actuaries, and enrolled retirement plan agents are listed.

Question 5: Which of the following is an 'above-the-line' deduction (adjustment to income) that reduces AGI?

Student loan interest paid on qualified education loans (Correct answer)
Unreimbursed employee business expenses
Mortgage interest on a primary residence
Charitable contributions to qualified organizations

Correct answer: Student loan interest paid on qualified education loans

Student loan interest is an above-the-line deduction taken on Schedule 1 that reduces AGI, available to taxpayers who do not itemize.

Question 6: Under the uniform capitalization rules (UNICAP) of IRC §263A, which businesses are generally required to capitalize direct and indirect costs into inventory?

All businesses regardless of size
Only publicly traded corporations
Resellers with average annual gross receipts exceeding $29 million and all producers (Correct answer)
Businesses that use the cash method of accounting

Correct answer: Resellers with average annual gross receipts exceeding $29 million and all producers

IRC §263A generally requires producers of real or personal property and resellers with gross receipts exceeding the small business threshold to capitalize costs into inventory.

Question 7: A client wants their enrolled agent to represent them in U.S. Tax Court. The enrolled agent who is not an attorney may:

Represent the client in all Tax Court proceedings without restriction as an EA
Not represent any client in Tax Court under any circumstances
Represent the client in Tax Court only if admitted to practice before that court
Represent the client only in small tax cases (S cases) under Tax Court Rule 501 (Correct answer)

Correct answer: Represent the client only in small tax cases (S cases) under Tax Court Rule 501

Non-attorney enrolled agents may represent clients in Tax Court small tax cases (S cases, under $50,000) under Tax Court Rule 501, but general Tax Court practice requires admission.

Question 8: What is the purpose of the IRS Simulation Training used in Criminal Investigation (CI) agent development?

To rehearse taxpayer interviews in a controlled, realistic scenario environment (Correct answer)
To simulate database searches for unreported income
To model economic conditions for tax gap projections
To practice preparing complex tax returns under time pressure

Correct answer: To rehearse taxpayer interviews in a controlled, realistic scenario environment

CI simulation training places agents in realistic interview and investigative scenarios so they can practice skills safely before encountering real cases.

Question 9: What is the minimum payout requirement for a private foundation each year to avoid the excise tax on failure to distribute income?

5% of the fair market value of net investment assets (Correct answer)
3% of net assets
10% of gross income
All net investment income earned that year

Correct answer: 5% of the fair market value of net investment assets

Private foundations must distribute at least 5% of the fair market value of their net investment assets annually as qualifying distributions.

Question 10: An enrolled agent who has been convicted of a felony involving dishonesty will be subject to:

Additional CE requirements only
A written reprimand but may continue to practice
A 90-day voluntary suspension
Automatic immediate suspension pending a final disciplinary proceeding (Correct answer)

Correct answer: Automatic immediate suspension pending a final disciplinary proceeding

Circular 230 §10.82 authorizes the IRS to immediately suspend a practitioner upon conviction of a felony involving dishonesty, pending final resolution of the disciplinary matter.

Question 11: A practitioner discloses confidential client information to a third party without consent. Under Circular 230, this is permissible only when:

The practitioner believes disclosure is in the client's best interest
The IRS requests the information in writing
The information is already publicly available
Required by law or the client provides written consent (Correct answer)

Correct answer: Required by law or the client provides written consent

Circular 230 §10.20 requires practitioners to keep client information confidential unless disclosure is required by law or authorized by the client.

Question 12: Which tool in the IRS e-Services suite is used specifically to verify taxpayer identities and prevent fraudulent refunds?

Secure Access Digital Identity (SADI)
EFTPS Verification Tool
Identity Protection PIN (IP PIN) system (Correct answer)
CAF Number Registry

Correct answer: Identity Protection PIN (IP PIN) system

The IP PIN system assigns a unique six-digit number to taxpayers to prevent identity thieves from filing fraudulent returns using their SSN.

Question 13: An employer provides an employee with a company car for both business and personal use. How is the personal use value treated?

Included in the employee's gross income as a taxable fringe benefit (Correct answer)
Deductible by the employee on Schedule A
Excluded if the car is used more than 50% for business
Excluded from income as a working condition fringe benefit

Correct answer: Included in the employee's gross income as a taxable fringe benefit

The fair market value of personal use of an employer-provided vehicle must be included in the employee's gross income as a taxable fringe benefit.

Question 14: Which of the following is NOT a qualifying expense for the Section 179 deduction?

Office furniture
Computer equipment
Inventory held for sale (Correct answer)
Machinery used in manufacturing

Correct answer: Inventory held for sale

Inventory held for sale is specifically excluded from Section 179 expensing, which applies to depreciable business property.

Question 15: Which of the following describes 'willful neglect' as used in Circular 230 penalty provisions?

A conscious, intentional failure or reckless indifference to a known duty (Correct answer)
Any error that results in an underpayment of tax
An honest mistake made without fraudulent intent
Negligence caused by an unusually heavy workload

Correct answer: A conscious, intentional failure or reckless indifference to a known duty

Willful neglect means a conscious, intentional failure to comply with a legal duty or reckless indifference to it, which is a higher standard than ordinary negligence.

Question 16: An enrolled agent's client refuses to correct a known error on a previously filed return that resulted in an underpayment of tax. Under Circular 230, the enrolled agent:

May continue the representation after advising the client of the consequences of non-correction (Correct answer)
Must withdraw from representation immediately
Must immediately report the error to the IRS
Must file an amended return on the client's behalf without client consent

Correct answer: May continue the representation after advising the client of the consequences of non-correction

After advising the client of the error and its consequences, the practitioner may continue representing the client for other matters but cannot use the erroneous information going forward.

Question 17: Which of the following assets is classified as a capital asset under IRC §1221?

Inventory held for sale to customers
Depreciable business equipment used in a trade
Stock held in a personal investment account (Correct answer)
Accounts receivable from business services

Correct answer: Stock held in a personal investment account

Investment stock held by a taxpayer is a capital asset; inventory, receivables from services, and depreciable business property are explicitly excluded from the definition.

Question 18: A taxpayer wants to authorize their Certified Public Accountant (CPA) to receive and inspect their confidential tax information from the IRS. However, the taxpayer does not want the CPA to have the authority to represent them in meetings, sign agreements, or otherwise act on their behalf. Which form should the taxpayer file?

Form 9465, Installment Agreement Request
Form 4506-T, Request for Transcript of Tax Return
Form 2848, Power of Attorney and Declaration of Representative
Form 8821, Tax Information Authorization (Correct answer)

Correct answer: Form 8821, Tax Information Authorization

Form 8821, Tax Information Authorization, allows a designee to inspect and/or receive a taxpayer's confidential information. It does not grant the designee the authority to represent the taxpayer before the IRS. Form 2848 grants full representative authority, which is more than the taxpayer in this scenario wants to provide.

Question 19: Which of the following actions by a preparer constitutes an 'unreasonable position' under IRC §6694(a)?

A position supported by one out of five tax treatises
A position that has at least a 5% chance of being sustained if challenged
A position the preparer personally disagrees with but that the client insists upon
A position with no substantial authority and no adequate disclosure on the return (Correct answer)

Correct answer: A position with no substantial authority and no adequate disclosure on the return

Under IRC §6694(a), an unreasonable position is one lacking substantial authority unless the position is disclosed and there is a reasonable basis for it.

Question 20: The Modified Accelerated Cost Recovery System (MACRS) is the required depreciation method for most tangible business property placed in service after 1986. Which of the following is a key characteristic of MACRS?

Salvage value must be subtracted from the asset's basis before calculating depreciation.
It allows for larger depreciation deductions in the earlier years of an asset's life. (Correct answer)
It always uses the actual market value of the asset at the end of each year.
It requires the use of the straight-line method for all asset classes.

Correct answer: It allows for larger depreciation deductions in the earlier years of an asset's life.

MACRS is an accelerated depreciation system, meaning it allows businesses to take larger tax deductions in the early years of an asset's life and smaller ones in later years. It does not require the straight-line method for all assets and specifically prescribes depreciation periods and methods. Unlike other methods, salvage value is not considered under MACRS.

Question 21: Which of the following individuals is NOT eligible to represent a taxpayer before the IRS as an enrolled agent?

An individual who passed all three parts of the Special Enrollment Examination
A CPA licensed in all 50 states
An attorney admitted to practice before the U.S. Tax Court only (Correct answer)
A former IRS employee granted enrollment based on technical experience

Correct answer: An attorney admitted to practice before the U.S. Tax Court only

An attorney admitted only to practice before the U.S. Tax Court does not automatically have unlimited representation rights before the IRS without being admitted to a state bar and in good standing.

Question 22: A self-employed taxpayer pays health insurance premiums of $9,600 for themselves and their family. Their net self-employment income before this deduction is $40,000. What is the maximum above-the-line deduction for self-employed health insurance?

$9,600, limited to net self-employment income (Correct answer)
$7,200 (75% of premiums)
$9,600 with no limitation
$4,800 (50% of premiums)

Correct answer: $9,600, limited to net self-employment income

Self-employed individuals may deduct 100% of health insurance premiums as an above-the-line deduction, but the deduction cannot exceed the taxpayer's net self-employment income.

Question 23: Under Circular 230, a practitioner who is the subject of a disciplinary proceeding has the right to:

Have the proceeding resolved within 30 days
Appeal directly to the U.S. Tax Court
Receive a written complaint, respond in writing, and request a hearing (Correct answer)
Demand that the OPR director personally conduct the hearing

Correct answer: Receive a written complaint, respond in writing, and request a hearing

Due process in Circular 230 disciplinary proceedings requires written notice of charges, an opportunity to respond, and the right to a hearing before an administrative law judge.

Question 24: Which of the following best describes 'practice before the IRS' under Circular 230?

Only preparing and signing tax returns for compensation
Only appearing in person at an IRS office on behalf of a taxpayer
All matters connected with a presentation to the IRS relating to a taxpayer's rights, privileges, or liabilities (Correct answer)
Only representing taxpayers in U.S. Tax Court proceedings

Correct answer: All matters connected with a presentation to the IRS relating to a taxpayer's rights, privileges, or liabilities

Practice before the IRS includes all matters connected with presentation to the IRS, including preparing documents, filing them, and communicating with the IRS on behalf of a taxpayer.

Question 25: What is the self-employment tax rate applied to net self-employment income up to the Social Security wage base?

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

Correct answer: 15.3%

The self-employment tax rate is 15.3% (12.4% for Social Security + 2.9% for Medicare) on net self-employment income up to the Social Security wage base.

Question 26: What restriction applies to a 501(c)(3) organization’s political activities?

They are prohibited from engaging in partisan political activities. (Correct answer)
They can endorse political candidates.
They must participate in all federal elections.
They are required to donate to political campaigns.

Correct answer: They are prohibited from engaging in partisan political activities.

A strict restriction for 501(c)(3) organizations is the absolute prohibition against participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for public office. This includes endorsing candidates, making political contributions, or publishing statements that favor or oppose a candidate. This ensures their non-partisan nature and focus on their exempt purpose.

Question 27: A practitioner subject to a Circular 230 proceeding receives a complaint from the OPR. What is the practitioner's right in this situation?

The practitioner is entitled to a conference and the opportunity to present a defense (Correct answer)
The practitioner must accept the OPR's determination without appeal
The practitioner must immediately cease all IRS representation
The practitioner may only respond through an attorney

Correct answer: The practitioner is entitled to a conference and the opportunity to present a defense

Under Circular 230, a practitioner accused of misconduct is entitled to notice of the charges, a conference with the OPR, and an opportunity to present a defense before any sanction is imposed.

Question 28: What is the primary purpose of an IRS CP2000 notice?

To propose changes to a return based on information received from third parties (Correct answer)
To notify a taxpayer of a balance due from a previous audit
To request the taxpayer appear for an in-person interview
To inform a taxpayer their return was accepted as filed

Correct answer: To propose changes to a return based on information received from third parties

A CP2000 notice proposes changes to a return when information from employers, banks, or other payers does not match what the taxpayer reported.

Question 29: Which IRS tool is used by software developers and transmitters to test their products against IRS MeF schemas before the filing season?

e-File Pilot Program Portal
IRS Assurance Testing System (ATS) (Correct answer)
MeF Sandbox Environment
OSPC Test Lab

Correct answer: IRS Assurance Testing System (ATS)

The IRS Assurance Testing System (ATS) is the testing environment where software developers validate their products against IRS e-file specifications before live filing.

Question 30: Which credit directly reduces the tax owed dollar-for-dollar, rather than reducing taxable income?

IRA contribution deduction
Child and Dependent Care Credit (Correct answer)
State income tax deduction
Student loan interest deduction

Correct answer: Child and Dependent Care Credit

Tax credits like the Child and Dependent Care Credit reduce tax liability dollar-for-dollar, unlike deductions which reduce taxable income.

Question 31: The Saver's Credit (Retirement Savings Contributions Credit) provides a credit rate of up to what percentage?

20%
10%
50% (Correct answer)
75%

Correct answer: 50%

The Saver's Credit provides a credit of 10%, 20%, or 50% of qualifying retirement contributions based on AGI.

Question 32: Which of the following would constitute 'disreputable conduct' under Circular 230 §10.51?

Filing a return one day late due to a postal error
Charging a higher fee than the client expected
Declining to represent a client whose case is too complex
Willfully assisting a client in evading federal tax (Correct answer)

Correct answer: Willfully assisting a client in evading federal tax

Willfully assisting, counseling, or encouraging tax evasion is explicitly listed as disreputable conduct under Circular 230 §10.51(a)(4).

Question 33: An enrolled agent is asked to provide tax representation for a married couple who filed a joint return. During the initial consultation, the agent learns that the IRS is asserting a penalty against one spouse for an action the other spouse was unaware of, creating a potential conflict of interest. According to Circular 230, what must the agent do to proceed with the joint representation?

Inform the clients that joint representation is impossible and they must seek separate counsel.
Reasonably believe they can provide competent representation to both, fully disclose the conflict, and obtain informed consent confirmed in writing from each spouse. (Correct answer)
Proceed with the representation but only discuss the penalty with the spouse to whom it applies.
File two separate Forms 2848 and let the IRS determine if the conflict is too significant.

Correct answer: Reasonably believe they can provide competent representation to both, fully disclose the conflict, and obtain informed consent confirmed in writing from each spouse.

Circular 230, Section 10.29, allows for representation despite a conflict of interest if three conditions are met: (1) the practitioner reasonably believes they can provide competent and diligent representation to each client, (2) the representation is not prohibited by law, and (3) each affected client waives the conflict and gives informed consent, confirmed in writing.

Question 34: A taxpayer's spouse died in 2022. They have a dependent child living with them. What is their filing status for tax year 2024?

Head of Household (Correct answer)
Married Filing Jointly
Single
Qualifying Surviving Spouse

Correct answer: Head of Household

Qualifying Surviving Spouse status is only available for the two tax years after the year of a spouse's death (2023 and 2024 would be eligible if death was in 2022—wait, death in 2022, so 2023 and 2024 qualify), so 2024 is the second year and QSS applies.

Question 35: Which depreciation method generally produces the largest deduction in the first year for 5-year MACRS property?

200% declining balance (Correct answer)
150% declining balance
Straight-line
Units of production

Correct answer: 200% declining balance

The 200% declining balance method (double declining balance) produces the highest first-year depreciation for MACRS 5-year property before switching to straight-line.

Question 36: A practitioner may NOT use the title 'enrolled agent' in an advertisement unless:

The advertisement is approved by the OPR in advance
The practitioner also holds a CPA license
The practitioner has at least five years of IRS experience
The practitioner is currently enrolled to practice before the IRS (Correct answer)

Correct answer: The practitioner is currently enrolled to practice before the IRS

Only practitioners who are currently enrolled to practice before the IRS may use the 'enrolled agent' designation; using it after enrollment lapses is prohibited.

Question 37: A partnership purchases land for $200,000. The land is distributed to a partner when its FMV is $250,000. What is the partner's basis in the land?

$200,000 (partnership's original cost)
The partnership's adjusted basis in the land at time of distribution (Correct answer)
$250,000 (FMV at distribution)
$0, as distributed property takes a zero basis

Correct answer: The partnership's adjusted basis in the land at time of distribution

Under IRC §732, a partner's basis in distributed property equals the partnership's adjusted basis in that property, not its fair market value.

Question 38: When a shareholder's S corporation stock basis is reduced to zero by losses, what happens to any additional losses?

They convert to capital losses deductible against capital gains
They are carried back two years and forward 20 years at the corporate level
They are permanently disallowed
They reduce the shareholder's basis in any loans made to the S corporation (Correct answer)

Correct answer: They reduce the shareholder's basis in any loans made to the S corporation

After stock basis is reduced to zero, additional S corporation losses reduce the shareholder's basis in any direct loans made to the corporation, but not below zero.

Question 39: What is the tax treatment of organizational costs (e.g., legal fees to incorporate) under IRC §248?

Deduct up to $5,000 in the first year; amortize the remainder over 180 months (Correct answer)
Deduct all costs immediately in the year incurred
Capitalize permanently with no deduction allowed
Deduct over the life of the corporation as determined by management

Correct answer: Deduct up to $5,000 in the first year; amortize the remainder over 180 months

Under IRC §248, corporations may immediately deduct up to $5,000 of organizational costs (phased out dollar-for-dollar over $50,000), with remaining costs amortized over 180 months.

Question 40: A charitable organization receives a bequest of $2,000,000 under a will. What written acknowledgment requirement applies to this gift?

The organization must send a Form 1099 to the estate
No written acknowledgment is required because the gift was made at death (Correct answer)
A contemporaneous written acknowledgment is required as with any gift over $250
The estate must file Form 8283 with the charity's signature

Correct answer: No written acknowledgment is required because the gift was made at death

Charitable bequests transferred at death do not require the recipient organization to provide a contemporaneous written acknowledgment, as the deduction is taken on the estate tax return.

Question 41: What is the minimum educational requirement to become an Enrolled Agent (EA)?

A master’s degree in finance
A high school diploma or equivalent
A bachelor’s degree in accounting
No specific educational requirement (Correct answer)

Correct answer: No specific educational requirement

To become an Enrolled Agent (EA), candidates must pass a comprehensive three-part Special Enrollment Examination (SEE) covering all aspects of taxation. The IRS does not mandate any specific educational degrees or college coursework as a prerequisite for taking the SEE. While a strong understanding of tax law is essential, it can be acquired through various means.

Question 42: Which of the following best describes the 'enrolled retirement plan agent' (ERPA) designation?

An IRS employee authorized to audit retirement plans
An agent licensed to practice in all areas before the IRS
A practitioner enrolled specifically to practice before the IRS regarding retirement plan matters (Correct answer)
A CPA who has completed additional tax court training

Correct answer: A practitioner enrolled specifically to practice before the IRS regarding retirement plan matters

ERPAs are practitioners who have passed the ERPA Special Enrollment Examination and are authorized to represent clients before the IRS on retirement-plan-related matters.

Question 43: A taxpayer contributes appreciated stock worth $50,000 (basis $10,000) to a public charity. What is the maximum deduction allowed (assuming 30% AGI limit applies and AGI is $100,000)?

$30,000 (30% of AGI) (Correct answer)
$40,000 (excess basis carry forward)
$10,000 (basis only)
$50,000 (fair market value)

Correct answer: $30,000 (30% of AGI)

Contributions of long-term appreciated capital gain property to public charities are deductible at FMV but limited to 30% of AGI ($30,000); excess carries forward 5 years.

Question 44: A taxpayer revokes a power of attorney on file with the IRS. What is the proper way to notify the IRS of this revocation?

File Form 8821 to replace the power of attorney
File a new Form 2848 with 'REVOKE' written across the top, or send a written statement of revocation (Correct answer)
The revocation is automatic when a new representative is appointed
Call the IRS 1-800 number and provide the authorization number

Correct answer: File a new Form 2848 with 'REVOKE' written across the top, or send a written statement of revocation

To revoke a POA, the taxpayer must send the IRS a copy of the previously executed Form 2848 with 'REVOKE' written across the top, or a written statement of revocation signed and dated by the taxpayer.

Question 45: What penalty applies when a taxpayer files a return more than 60 days late?

20% of the underpayment
The lesser of $485 or 100% of unpaid tax (Correct answer)
5% per month up to 25%
0.5% per month up to 25%

Correct answer: The lesser of $485 or 100% of unpaid tax

When a return is filed more than 60 days after the due date, the minimum penalty is the lesser of $485 (adjusted for inflation) or 100% of the tax due.

Question 46: What is the corporate tax rate for C corporations under current law?

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

Correct answer: 21%

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

Question 47: Under what circumstances may an unenrolled return preparer represent a taxpayer before the IRS?

Before examination officers for returns the preparer prepared and signed, for tax years after December 31, 2015, if in the Annual Filing Season Program (Correct answer)
In any IRS proceeding if the taxpayer provides a signed statement
For any examination as long as the taxpayer is present
Only before the Taxpayer Advocate Service for any issue

Correct answer: Before examination officers for returns the preparer prepared and signed, for tax years after December 31, 2015, if in the Annual Filing Season Program

Unenrolled return preparers who hold an Annual Filing Season Program (AFSP) record of completion may represent taxpayers before revenue agents and customer service representatives for returns they prepared and signed.

Question 48: A taxpayer receives stock options from their employer and exercises nonqualified stock options (NQSOs) this year. When is ordinary income recognized?

When the underlying stock is sold
When the options are exercised (Correct answer)
When the options are granted
When the vesting period ends

Correct answer: When the options are exercised

For NQSOs, ordinary income equal to the spread (FMV minus exercise price) is recognized at the time of exercise.

Question 49: A CPA who is not enrolled to practice before the IRS wants to represent a client in an audit. Under Circular 230, which of the following is permitted?

Represent the client in all audit proceedings without restriction
Represent the client in Tax Court proceedings only
Represent the client in Collections but not Examination
Represent the client only before the IRS Examination Division where the CPA prepared the return (Correct answer)

Correct answer: Represent the client only before the IRS Examination Division where the CPA prepared the return

CPAs may represent clients before any IRS division or office, including Examination, Collections, and Appeals, as they are practitioners under Circular 230.

Question 50: Which of the following is an above-the-line deduction (adjustment to income)?

Mortgage interest
State income taxes
Charitable contributions
Alimony paid under pre-2019 divorce decrees (Correct answer)

Correct answer: Alimony paid under pre-2019 divorce decrees

Alimony paid under divorce or separation agreements executed before January 1, 2019 is deductible above the line.

Question 51: Which of the following triggers ordinary income recognition under IRC §1245 depreciation recapture?

Casualty loss on business inventory
Sale of depreciable personal property at a gain to the extent of depreciation previously taken (Correct answer)
Sale of land used in a business
Sale of a capital asset not used in a business

Correct answer: Sale of depreciable personal property at a gain to the extent of depreciation previously taken

IRC §1245 recaptures depreciation previously deducted on personal property as ordinary income to the extent of the gain, overriding the more favorable §1231 treatment.

Question 52: A corporation uses the accrual method of accounting. When can it deduct a business expense?

When the expense is approved by management
When the expense is paid in cash
When the check is written
When all events have occurred that fix the liability and the amount can be determined with reasonable accuracy (Correct answer)

Correct answer: When all events have occurred that fix the liability and the amount can be determined with reasonable accuracy

Under the accrual method, a deduction is allowable when the all-events test is met and economic performance has occurred.

Question 53: Under Circular 230, which of the following practitioners has UNLIMITED representation rights before the IRS?

An enrolled agent for all tax matters (Correct answer)
An unenrolled preparer who prepared the return at issue
An Annual Filing Season Program participant
An enrolled actuary for all tax matters

Correct answer: An enrolled agent for all tax matters

Enrolled agents have unlimited representation rights before the IRS for all tax matters, including audits, collections, and appeals, for any taxpayer.

Question 54: Under Circular 230, a practitioner who discovers that a client made an error on a prior year return must:

Immediately notify the IRS of the error without client consent
File an amended return on behalf of the client without further discussion
Withdraw from representation if the client refuses to correct the error
Promptly advise the client of the error and the potential consequences (Correct answer)

Correct answer: Promptly advise the client of the error and the potential consequences

Circular 230 §10.21 requires the practitioner to promptly advise the client of the noncompliance, error, or omission and the consequences, but does not require the practitioner to notify the IRS.

Question 55: How many hours of continuing education are required to complete the IRS Annual Filing Season Program (AFSP)?

18 hours (Correct answer)
72 hours
24 hours
12 hours

Correct answer: 18 hours

To complete the IRS Annual Filing Season Program (AFSP), non-credentialed tax preparers are required to complete 18 hours of continuing education annually. These hours must include a 6-hour Annual Federal Tax Refresher (AFTR) course with an exam, 10 hours of federal tax law topics, and 2 hours of ethics. This ensures participants maintain up-to-date knowledge and ethical standards.

Question 56: Under the passive activity rules, which type of income CAN offset passive activity losses?

W-2 wages from an employer
Passive activity income from other activities (Correct answer)
Active business income from a sole proprietorship
Portfolio income (dividends and interest)

Correct answer: Passive activity income from other activities

Passive activity losses can only offset passive activity income; they cannot offset active income (wages, self-employment) or portfolio income (dividends, interest).

Question 57: Under Circular 230, which of the following is a practitioner required to do when a client provides information the practitioner knows to be false?

Refuse to use the information and advise the client accordingly (Correct answer)
Submit the information but attach a disclosure statement
Correct the information without notifying the client
Withdraw from the engagement after notifying the client of the conflict

Correct answer: Refuse to use the information and advise the client accordingly

A practitioner must not submit documents containing information the practitioner knows to be false, and must advise the client that the information cannot be used as presented.

Question 58: The term 'practice before the IRS' as defined in Circular 230 includes all of the following EXCEPT:

Preparing and filing a power of attorney on behalf of a client
Representing a client in an IRS examination
Communicating with IRS on behalf of a taxpayer
Preparing a tax return without signing it as paid preparer (Correct answer)

Correct answer: Preparing a tax return without signing it as paid preparer

Merely preparing a tax return without representing the taxpayer before the IRS does not constitute 'practice before the IRS' under Circular 230 §10.2.

Question 59: Which of the following business expenses is generally only 50% deductible for tax purposes?

Meals with clients and for employees during travel (Correct answer)
Business-related travel expenses, such as airfare
Salaries and wages paid to employees
Premiums for employee health insurance

Correct answer: Meals with clients and for employees during travel

Under current IRS rules, the deduction for business-related meals is generally limited to 50% of the actual cost. This applies to meals with clients and meals consumed by employees while traveling for business. Employee salaries, health insurance premiums, and travel costs like airfare are typically 100% deductible.

Question 60: A practitioner who is a former IRS employee must comply with which of the following restrictions?

The practitioner must disclose former IRS employment on all IRS filings for 10 years
The practitioner may never represent any taxpayer before the IRS
The practitioner may not represent a taxpayer in a matter the practitioner participated personally and substantially while at the IRS (Correct answer)
The practitioner must wait five years before representing any taxpayer in any matter

Correct answer: The practitioner may not represent a taxpayer in a matter the practitioner participated personally and substantially while at the IRS

Under Circular 230, former government employees are subject to 'revolving door' restrictions that prohibit representing parties in specific matters they personally and substantially participated in while employed by the IRS.

Question 61: Under Circular 230, a practitioner who has a conflict of interest may still represent multiple clients if:

The IRS approves the representation in advance
The conflict is minor and the practitioner believes they can provide competent representation
The clients sign a mutual waiver of confidentiality
All affected clients give informed written consent and the representation is not prohibited by law (Correct answer)

Correct answer: All affected clients give informed written consent and the representation is not prohibited by law

Circular 230 §10.29 allows representation despite conflicts if all affected clients give informed written consent and the law does not prohibit it.

Question 62: A partnership makes a guaranteed payment to a partner for services rendered. How is this payment treated by the receiving partner?

As a tax-free return of capital
As a capital gain
As a dividend taxed at preferential rates
As ordinary income subject to self-employment tax (Correct answer)

Correct answer: As ordinary income subject to self-employment tax

Guaranteed payments to partners for services are treated as ordinary income to the recipient and are generally subject to self-employment tax.

Question 63: An unenrolled return preparer, who holds a valid Annual Filing Season Program Record of Completion, has limited practice rights. This preparer may represent a taxpayer for a return they prepared and signed before which of the following?

An Appeals Officer regarding a disputed liability.
A Revenue Agent during an examination of the return. (Correct answer)
An attorney in the Office of Chief Counsel.
A Revenue Officer concerning collection activities.

Correct answer: A Revenue Agent during an examination of the return.

An unenrolled return preparer with limited practice rights can only represent taxpayers before revenue agents, customer service representatives, and similar IRS employees during an examination of the return they prepared. They are not permitted to represent clients before Appeals, Collections (Revenue Officers), or Counsel.

Question 64: What is the purpose of a Schedule K-1 issued by an S corporation?

To report employee wages paid by the S corporation
To report each shareholder's pro-rata share of income, deductions, and credits (Correct answer)
To calculate the corporation's estimated tax payments
To report the corporation's total tax liability

Correct answer: To report each shareholder's pro-rata share of income, deductions, and credits

Schedule K-1 (Form 1120-S) is provided to each shareholder and reports their allocable share of the S corporation's income, losses, deductions, and credits.

Question 65: What quality review process does the IRS require VITA sites to perform on completed tax returns?

Random sampling by the site's partner organization
IRS district manager approval for each return
Supervisory sign-off by a licensed CPA
Peer review by another certified volunteer before the return is filed (Correct answer)

Correct answer: Peer review by another certified volunteer before the return is filed

VITA sites must have a second certified volunteer review each completed return for accuracy before it is filed or given to the taxpayer.

Question 66: Under Circular 230, a practitioner must, at a minimum, exercise which of the following standards when providing written tax advice?

Realistic possibility of success standard
Reasonable practitioner standard, considering all relevant facts and law (Correct answer)
More likely than not standard for all tax positions
Substantial authority standard in all cases

Correct answer: Reasonable practitioner standard, considering all relevant facts and law

For written tax advice under Circular 230 §10.37, a practitioner must apply a reasonable practitioner standard, basing the advice on a reasonable analysis of the relevant facts and applicable law.

Question 67: When must a Power of Attorney (Form 2848) be filed with the IRS to authorize a representative?

Only for appeals before the IRS Office of Appeals
Only for criminal tax matters before the Department of Justice
Whenever a practitioner wants to represent a taxpayer before the IRS beyond simply preparing and signing a return (Correct answer)
Only when the taxpayer is unable to appear in person

Correct answer: Whenever a practitioner wants to represent a taxpayer before the IRS beyond simply preparing and signing a return

Form 2848 is required to authorize a practitioner to represent a taxpayer in any IRS matter beyond preparing and signing the return itself.

Question 68: A small business with 15 full-time employees wants to hire a new employee who is a qualified veteran. Which tax credit is specifically designed to incentivize hiring individuals from targeted groups, including certain veterans?

Work Opportunity Tax Credit (WOTC) (Correct answer)
New Markets Tax Credit (NMTC)
Research and Development (R&D) Credit
Small Business Health Care Tax Credit

Correct answer: Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers for hiring and employing individuals from certain targeted groups who have consistently faced significant barriers to employment, including specific categories of veterans. The other credits listed target different business activities, such as innovation (R&D), providing health insurance, or investing in low-income communities.

Question 69: A taxpayer with no filing obligation wants to receive a refund of withheld federal taxes. What must they do?

Request a refund directly from the IRS via Form 843
File a tax return, because filing is the only way to claim a refund (Correct answer)
Contact their employer to issue a corrected W-2
File Form 4868 requesting a refund

Correct answer: File a tax return, because filing is the only way to claim a refund

Even if not required to file, a taxpayer must file a tax return to claim a refund of overwithheld federal income taxes.

Question 70: Sarah's husband passed away in 2023. They had one dependent child living at home. Sarah has not remarried. For the 2025 tax year, which filing status offers her the most beneficial tax treatment?

Head of Household
Married Filing Separately
Qualifying Surviving Spouse (Correct answer)
Single

Correct answer: Qualifying Surviving Spouse

A surviving spouse who has not remarried and has a dependent child can use the Qualifying Surviving Spouse (formerly Qualifying Widow(er)) filing status for the two years following the year of the spouse's death. This status allows the use of the married filing jointly tax rates and standard deduction, which is generally more favorable than Head of Household or Single.

Question 71: An enrolled agent is representing a client whose case has been assigned to the IRS Independent Office of Appeals. What is a key advantage of the Appeals process?

Appeals provides an informal forum to resolve disputes without litigation, considering hazards of litigation (Correct answer)
Appeals must resolve the case within 90 days
The taxpayer waives the right to Tax Court by entering Appeals
Appeals officers can only reduce penalties, not tax owed

Correct answer: Appeals provides an informal forum to resolve disputes without litigation, considering hazards of litigation

The IRS Appeals Office provides an independent review forum where cases can be settled based on the hazards of litigation, often avoiding costly and time-consuming court proceedings.

Question 72: A business owner drives 12,000 business miles and 3,000 personal miles in their vehicle. Using the standard mileage rate, which miles are deductible?

Only the 12,000 business miles (Correct answer)
All 15,000 miles
Only the 3,000 personal miles
The miles must be prorated based on total vehicle cost

Correct answer: Only the 12,000 business miles

Only the 12,000 business miles are deductible using the standard mileage rate; personal use miles are never deductible.

Question 73: Under what circumstance is rental income from real property NOT subject to UBIT for a tax-exempt organization?

When rent is below fair market value
When the tenant is also a nonprofit organization
When the property is not debt-financed and no personal services are provided to tenants (Correct answer)
When the rental term is less than one year

Correct answer: When the property is not debt-financed and no personal services are provided to tenants

Rental income from real property is excluded from UBIT when the property is not debt-financed and the organization does not provide substantial services to tenants.

Question 74: A corporation's tax year ends June 30. When must it file its Form 1120 (without extension)?

September 15 (Correct answer)
July 15
October 15
August 15

Correct answer: September 15

A corporation with a June 30 fiscal year-end must file Form 1120 by the 15th day of the 3rd month after the year-end closes, which is September 15.

Question 75: Under IRC §1231, when a business sells depreciable property used in a trade or business held more than one year at a gain, how is the gain generally treated?

As short-term capital gain
As long-term capital gain (subject to depreciation recapture rules) (Correct answer)
As a tax-free exchange
As ordinary income

Correct answer: As long-term capital gain (subject to depreciation recapture rules)

Section 1231 gains are generally treated as long-term capital gains, but depreciation recapture under §1245 or §1250 may convert some or all of the gain to ordinary income.

Question 76: A C Corporation's primary disadvantage regarding taxation is which of the following?

The requirement to file Form 1120-S annually
Pass-through taxation of profits and losses
Double taxation of corporate profits and shareholder dividends (Correct answer)
Limitations on the number and type of shareholders

Correct answer: Double taxation of corporate profits and shareholder dividends

C Corporations are subject to double taxation. The corporation pays income tax on its profits (Form 1120), and then shareholders pay income tax on the dividends they receive from those after-tax profits. S Corporations, not C Corporations, have pass-through taxation and limitations on shareholders. Form 1120-S is filed by S Corporations.

Question 77: An organization applies for 501(c)(3) status but the IRS issues a proposed adverse determination. What is the organization's first option for appeal?

File a petition in U.S. Tax Court immediately
Submit Form 1040X to correct the application
Request a conference with the IRS Office of Appeals (Correct answer)
Appeal directly to the U.S. Supreme Court

Correct answer: Request a conference with the IRS Office of Appeals

Upon receiving a proposed adverse determination, an organization may first request a conference with the IRS Appeals Office to contest the finding.

Question 78: A business pays $50,000 for a 5-year covenant not to compete when acquiring another business. How is this amount treated for tax purposes?

Non-deductible as a capital expenditure with no recovery
Capitalized and amortized over 5 years matching the covenant term
Capitalized and amortized over 15 years under IRC §197 (Correct answer)
Deducted immediately as a business expense

Correct answer: Capitalized and amortized over 15 years under IRC §197

A covenant not to compete acquired in connection with a business acquisition is an IRC §197 intangible and must be amortized over 15 years, regardless of the covenant's actual term.

Question 79: Which disciplinary sanction under Circular 230 allows a practitioner to continue practicing before the IRS while under corrective measures?

Criminal referral
Disbarment
Suspension
Censure (Correct answer)

Correct answer: Censure

Censure is a public reprimand that does not restrict the practitioner's right to practice before the IRS, unlike suspension or disbarment.

Question 80: Under the at-risk rules, a partner can only deduct losses up to the amount the partner has at risk. Which of the following increases a partner's at-risk amount?

The partner's share of nonrecourse liabilities secured by real property
The partner's share of partnership liabilities for which no partner bears economic risk of loss
Cash contributions to the partnership (Correct answer)
Distributions received from the partnership

Correct answer: Cash contributions to the partnership

Cash contributions increase a partner's at-risk amount, while certain nonrecourse liabilities and distributions decrease or do not increase it.

Question 81: A taxpayer received a Form 1099-NEC showing $800 in nonemployee compensation. Do they have a filing obligation?

Yes, because net self-employment earnings exceed the $400 threshold (Correct answer)
No, because 1099-NEC is not considered self-employment
Only if they also have W-2 wages
No, 1099-NEC income under $1,000 is exempt

Correct answer: Yes, because net self-employment earnings exceed the $400 threshold

Nonemployee compensation reported on Form 1099-NEC is generally self-employment income, and net earnings of $400 or more require filing.

Question 82: An S corporation has a net loss for the year. How is this loss treated by a shareholder?

It is automatically deductible against the shareholder's W-2 wages
It passes through to shareholders and is deductible up to their basis in stock and debt (Correct answer)
It is carried forward at the corporate level only
It is permanently lost and cannot be deducted

Correct answer: It passes through to shareholders and is deductible up to their basis in stock and debt

S corporation losses pass through to shareholders but are limited to each shareholder's adjusted basis in stock and any debt owed by the corporation to the shareholder.

Question 83: Which of the following acts requires SPECIFIC authorization on Form 2848 and is NOT automatically granted?

Receiving copies of IRS notices and communications
Signing a protest letter to the Appeals Office
Substituting or adding another representative (Correct answer)
Requesting transcripts of the taxpayer's account

Correct answer: Substituting or adding another representative

The authority to substitute or add another representative must be specifically granted in the acts authorized section of Form 2848 and is not automatically included.

Question 84: Under Circular 230, a practitioner is generally prohibited from charging a contingent fee for:

Representing a client in an IRS examination
Preparing an original federal tax return (Correct answer)
Representing a client before the Tax Court
Preparing a refund claim for an amended return

Correct answer: Preparing an original federal tax return

Circular 230 §10.27 prohibits contingent fees for preparing an original tax return; contingent fees are permitted in limited circumstances such as representation in examination or refund claims.

Question 85: During an IRS collection action, an enrolled agent representing the taxpayer learns that the revenue officer plans to levy the client's bank account. What is the EA's most immediate option to protect the client?

File a Tax Court petition to automatically stop the levy
Request a Collection Due Process (CDP) hearing if the client has not already had one (Correct answer)
Contact the IRS Commissioner's office directly
File for bankruptcy on behalf of the client

Correct answer: Request a Collection Due Process (CDP) hearing if the client has not already had one

Filing a timely request for a Collection Due Process hearing under IRC §6330 will suspend the levy while the case is reviewed by the IRS Appeals Office.

Question 86: Under the claim of right doctrine, when must income be reported if received under a claim of right?

When the right to retain it becomes certain
In the year received, even if it may have to be repaid (Correct answer)
Only after any obligation to repay has expired
When the dispute is resolved by a court

Correct answer: In the year received, even if it may have to be repaid

Under the claim of right doctrine, income is taxable in the year received if the taxpayer has unrestricted use of it, even if repayment is later required.

Question 87: Which IRS e-Services feature allows a tax professional to obtain a client's income verification for mortgage or lending purposes?

Income Verification Express Service (IVES) (Correct answer)
Wage and Income Transcript via TDS
Form 4506-C automated processing
Lender Authorization Module

Correct answer: Income Verification Express Service (IVES)

IVES (Income Verification Express Service) is an IRS program that allows lenders and other authorized parties to quickly receive tax transcripts for income verification.

Question 88: A Form 2848 is generally valid until:

The taxpayer or representative revokes it, or it expires by its own terms (Correct answer)
The IRS revokes it
December 31 of the year it was signed
Three years from the date of filing

Correct answer: The taxpayer or representative revokes it, or it expires by its own terms

A Form 2848 remains valid until it is revoked by the taxpayer, the representative withdraws, or the authorization expires according to its own stated terms.

Question 89: Which of the following is a practitioner required to do under Circular 230 regarding fees?

Charge no more than the IRS-published fee schedule
Obtain client approval for any fee above $1,000
Provide a written fee agreement for all engagements exceeding $500
Not charge contingent fees for original tax returns (Correct answer)

Correct answer: Not charge contingent fees for original tax returns

Circular 230 prohibits practitioners from charging contingent fees for preparing original tax returns or amended returns when there is no pending IRS examination.

Question 90: A C corporation donates appreciated stock (basis $5,000, FMV $15,000) to a qualified charity. What is the maximum deduction?

$5,000 (basis only)
$15,000 but limited to 10% of taxable income (Correct answer)
$15,000 (fair market value)
$10,000 (the appreciation amount)

Correct answer: $15,000 but limited to 10% of taxable income

C corporations may generally deduct the fair market value of appreciated capital gain property donated to charity, but the deduction is limited to 10% of corporate taxable income.

Question 91: Which schedule of Form 990 must hospitals complete to report community benefit activities?

Schedule B
Schedule H (Correct answer)
Schedule L
Schedule A

Correct answer: Schedule H

Schedule H is required for hospitals to report community benefit, community building activities, and billing/collection practices.

Question 92: What form does a partnership use to report its income, deductions, and credits to the IRS?

Form 1065 (Correct answer)
Form 1120-S
Form 1120
Schedule C of Form 1040

Correct answer: Form 1065

Partnerships file Form 1065 (U.S. Return of Partnership Income) as an information return, with each partner receiving a Schedule K-1.

Question 93: What is the deadline for a new organization (other than a church) to file Form 1023 to be recognized as a 501(c)(3) from its date of formation?

18 months
36 months
27 months (Correct answer)
12 months

Correct answer: 27 months

Organizations must file Form 1023 within 27 months of formation to have their tax-exempt status recognized retroactively to the date of formation.

Question 94: A sole proprietor reports business income and expenses on which schedule attached to Form 1040?

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

Correct answer: Schedule C

Sole proprietors report business profit or loss on Schedule C (Profit or Loss from Business), which is attached to their individual Form 1040.

Question 95: When a taxpayer omits more than 25% of gross income from their return, what is the statute of limitations for IRS assessment?

6 years (Correct answer)
3 years
10 years
4 years

Correct answer: 6 years

When gross income is understated by more than 25%, the IRS has 6 years to assess additional tax under IRC Section 6501(e).

Question 96: Under what authority may the IRS disbar a practitioner from practice before the IRS?

Only through a criminal conviction in federal court
Only with approval from the U.S. Tax Court
With approval from the relevant state licensing board
Under Circular 230, through an administrative proceeding initiated by the OPR (Correct answer)

Correct answer: Under Circular 230, through an administrative proceeding initiated by the OPR

The IRS has independent authority under Circular 230 (31 CFR Part 10) to disbar or suspend practitioners through an administrative proceeding without requiring court action.

Question 97: Which of the following entities is subject to the accumulated earnings tax?

Partnerships
S corporations
Sole proprietorships
C corporations that accumulate earnings beyond reasonable business needs (Correct answer)

Correct answer: C corporations that accumulate earnings beyond reasonable business needs

The accumulated earnings tax applies to C corporations that retain earnings in excess of reasonable business needs to avoid shareholder-level dividend taxation.

Question 98: Which business entity provides limited liability to all owners AND avoids double taxation without making an S corporation election?

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

Correct answer: Limited liability company (LLC) taxed as a partnership

A multi-member LLC taxed as a partnership provides all members with limited liability protection while income passes through to members, avoiding entity-level tax.

Question 99: A 501(c)(3) organization that provides more than what percentage of its services to private interests risks losing its tax-exempt status due to private benefit?

More than 20%
More than 5% (Correct answer)
More than 10%
More than 15%

Correct answer: More than 5%

Private benefit beyond an insubstantial amount (generally more than 5%) can jeopardize a 501(c)(3) organization's tax-exempt status.

Question 100: A calendar-year C corporation must file its annual tax return by which deadline (without extension)?

April 15 (3½ months after year-end) (Correct answer)
March 15
April 15
March 15 (2½ months after year-end)

Correct answer: April 15 (3½ months after year-end)

C corporations with a December 31 year-end must file Form 1120 by April 15 (the 15th day of the 4th month after the tax year ends).

IRS Special Enrollment Examination (SEE) — Enrolled Agent

The IRS Special Enrollment Examination (SEE) tests mastery of individual and business taxation, deductions, credits, filing requirements, and representation before the IRS. Passing all three parts earns the Enrolled Agent (EA) designation, the highest credential awarded by the IRS to tax professionals.

100

Questions

210 min

Time Limit

72%

To Pass

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