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

Question 1: Circular 230 governs the practice of whom before the Internal Revenue Service?

Only attorneys
Attorneys, CPAs, enrolled agents, and other tax professionals authorized to practice before the IRS (Correct answer)
Only enrolled agents
Only licensed CPAs

Correct answer: Attorneys, CPAs, enrolled agents, and other tax professionals authorized to practice before the IRS

Circular 230 establishes ethical and professional standards for all practitioners authorized to represent taxpayers before the IRS, including attorneys, CPAs, enrolled agents, and enrolled retirement plan agents.

Question 2: The R&D Tax Credit under IRC Section 41 incentivizes businesses to do what?

Hire domestic research employees only
Purchase domestic manufacturing equipment
Increase qualified research expenditures for technological development (Correct answer)
Relocate operations to opportunity zones

Correct answer: Increase qualified research expenditures for technological development

The R&D Tax Credit provides a dollar-for-dollar reduction in tax liability for businesses that increase their qualified research expenses to develop new or improved products, processes, or software.

Question 3: Which IRS notice typically initiates an audit by mail for a specific item on a return?

Letter 531
Notice of Deficiency (90-day letter)
CP2000 Notice (Correct answer)
CP501 Notice

Correct answer: CP2000 Notice

A CP2000 notice is sent when information from third parties doesn't match the amounts reported on a return, proposing changes to income, deductions, or credits.

Question 4: A taxpayer paid $4,000 in qualified college tuition. Which education credit might apply?

American Opportunity Tax Credit (Correct answer)
Earned Income Tax Credit
Adoption Credit
Saver's Credit

Correct answer: American Opportunity Tax Credit

The American Opportunity Tax Credit applies to qualified higher education expenses for eligible students.

Question 5: What is the purpose of a PTIN for a paid tax return preparer?

It is a state business license
It identifies the preparer on returns they prepare for compensation (Correct answer)
It replaces the taxpayer's SSN
It authorizes e-filing without an EFIN

Correct answer: It identifies the preparer on returns they prepare for compensation

A Preparer Tax Identification Number must be used by anyone who prepares federal returns for pay.

Question 6: Which tax strategy involves shifting income to a family member in a lower tax bracket through gifts of income-producing property?

Basis shifting
Tax arbitrage
Income splitting (Correct answer)
Tax deferral

Correct answer: Income splitting

Income splitting is a strategy of transferring income-producing assets to family members in lower tax brackets to reduce the family's overall tax burden.

Question 7: The 'more likely than not' standard for tax positions means the position has what probability of being sustained?

Absolute certainty of being upheld
More than 75% chance of being upheld
More than 25% chance of being upheld
More than 50% chance of being upheld (Correct answer)

Correct answer: More than 50% chance of being upheld

The 'more likely than not' standard requires that there be greater than a 50% probability that the tax treatment would be upheld by a court if challenged.

Question 8: What is a Grantor Retained Annuity Trust (GRAT) primarily used for?

Funding education accounts
Avoiding probate on real estate
Transferring asset appreciation to heirs with minimal gift tax (Correct answer)
Providing income to charity

Correct answer: Transferring asset appreciation to heirs with minimal gift tax

A GRAT transfers appreciation above the IRS hurdle rate (Section 7520 rate) to heirs free of gift tax, making it effective when assets are expected to grow substantially.

Question 9: Transfer pricing rules under IRC Section 482 regulate transactions between:

Domestic corporations and their shareholders
Importers and exporters of physical goods only
US companies and foreign governments
Related parties in cross-border transactions to ensure arm's length pricing (Correct answer)

Correct answer: Related parties in cross-border transactions to ensure arm's length pricing

Section 482 gives the IRS authority to reallocate income between related parties whose cross-border transactions are not conducted at arm's length, preventing profit shifting to low-tax jurisdictions.

Question 10: Which of the following is subject to self-employment tax?

Companies reporting gross revenues of less than $50,000
Independent contractors declaring S 100 of self-employment income
Independent contractors declaring $400 or more in net self-employment income (Correct answer)
those who simply disclose their dividend and interest income

Correct answer: Independent contractors declaring $400 or more in net self-employment income

Individuals who are self-employed, such as independent contractors, are generally subject to self-employment tax (which covers Social Security and Medicare taxes). This tax applies if their net earnings from self-employment are $400 or more. This threshold ensures that those with significant self-employment income contribute to these federal social insurance programs.

Question 11: What is the difference between a tax deduction and a tax credit?

No difference
A credit reduces taxable income; a deduction reduces tax owed
A deduction reduces taxable income; a credit reduces tax owed (Correct answer)
Both reduce tax owed equally

Correct answer: A deduction reduces taxable income; a credit reduces tax owed

A deduction lowers the income subject to tax, while a credit directly reduces the tax liability dollar-for-dollar.

Question 12: What does the alternative minimum tax (AMT) primarily target?

Corporations only
High-income taxpayers who use many deductions and preferences (Correct answer)
Low-income wage earners
Tax-exempt organizations

Correct answer: High-income taxpayers who use many deductions and preferences

The AMT ensures high-income taxpayers with substantial deductions still pay a minimum amount of tax.

Question 13: The generation-skipping transfer (GST) tax is designed to prevent:

Trusts from lasting more than one generation
Gift taxes on direct transfers to grandchildren
Double taxation of income
Avoidance of estate taxes by skipping a generation of beneficiaries (Correct answer)

Correct answer: Avoidance of estate taxes by skipping a generation of beneficiaries

The GST tax applies to transfers to skip persons (generally grandchildren or below) to prevent wealthy families from avoiding estate tax at each generational level.

Question 14: What is a 'captive insurance company' and what tax benefit does it provide?

A foreign insurance company for offshore accounts
A group health plan for employees
An insurer owned by the insured to create deductible premiums (Correct answer)
State-required liability insurance for businesses

Correct answer: An insurer owned by the insured to create deductible premiums

A captive insurance company is an insurer controlled by its insured that allows businesses to pay deductible premiums to their own captive for legitimate business risks.

Question 15: A C Corporation's net operating loss (NOL) can generally be carried forward for how many years under current tax law?

5 years
20 years
10 years
Indefinitely (Correct answer)

Correct answer: Indefinitely

Under the Tax Cuts and Jobs Act of 2017, NOLs generated after December 31, 2017 can be carried forward indefinitely, but are limited to 80% of taxable income.

Question 16: Under Circular 230, may a preparer charge a contingent fee for preparing an original tax return?

No, contingent fees are generally prohibited for original returns (Correct answer)
Only for business returns
Yes, if the client agrees in writing
Yes, always

Correct answer: No, contingent fees are generally prohibited for original returns

Circular 230 generally prohibits contingent fees for preparing original returns.

Question 17: What is a 'qualified opportunity zone' investment and what tax benefit does it provide?

A deduction for charitable contributions
An investment allowing deferral and potential exclusion of capital gains (Correct answer)
A municipal bond exempt from federal tax
A retirement account for small business owners

Correct answer: An investment allowing deferral and potential exclusion of capital gains

Qualified Opportunity Zone investments allow taxpayers to defer and potentially reduce capital gains by investing in designated economically distressed communities.

Question 18: Which entity type allows owners to avoid double taxation while providing limited liability protection?

Sole Proprietorship
General Partnership
S Corporation (Correct answer)
C Corporation

Correct answer: S Corporation

An S Corporation passes income and losses through to shareholders, avoiding the double taxation imposed on C Corporations.

Question 19: For the 2025 tax year, what is the standard deduction for a single filer under age 65?

$14,600
$13,850
$27,700
$15,000 (Correct answer)

Correct answer: $15,000

The 2025 standard deduction for single filers is $15,000.

Question 20: Which strategy spreads gain recognition over multiple years when selling property?

Installment sale method (Correct answer)
Cost segregation
Mark-to-market election
Tax-loss harvesting

Correct answer: Installment sale method

An installment sale recognizes gain as payments are received, spreading the tax liability across years.

Question 21: Which of the following is not an appropriate justification for filing a tax amendment?

You entered the incorrect filing status.
You erred mathematically. (Correct answer)
One of your dependents was overlooked.

Correct answer: You erred mathematically.

A tax amendment (Form 1040-X) is filed to correct significant errors on an original tax return, such as an incorrect filing status or overlooked dependents. However, simple mathematical errors are typically identified and corrected by the IRS itself during the processing of the original return. Therefore, a mathematical error alone usually does not require the taxpayer to file an amended return.

Question 22: Which of the subsequent interest payments does a taxpayer's total income not include in their deductions?

Interest on a loan taken out to buy the taxpayer's primary home (Correct answer)
Interest on a loan taken out to buy stock in an employee-owned business
Interest on a loan taken out to buy equipment that must be obtained for use in the taxpayer's business employment
Interest on a loan taken out to buy common shares in a small business

Correct answer: Interest on a loan taken out to buy the taxpayer's primary home

Interest paid on a loan taken out to buy the taxpayer's primary home is generally deductible as qualified home mortgage interest, subject to certain limitations. This deduction reduces the taxpayer's adjusted gross income, thereby lowering their overall taxable income. The question is poorly phrased, but among the options, this is a prominent example of deductible interest.

Question 23: A progressive income tax scheme is what?

A tax structure that taxes higher incomes more heavily and poorer incomes less heavily (Correct answer)
A tax structure that permits investment-related deductions
A progressive tax scheme that improves over time

Correct answer: A tax structure that taxes higher incomes more heavily and poorer incomes less heavily

A progressive income tax scheme is a system where individuals with higher incomes pay a larger percentage of their income in taxes compared to those with lower incomes. As taxable income increases, the tax rate applied to that income also rises. This structure aims to create a more equitable distribution of the tax burden based on an individual's ability to pay.

Question 24: What is the 'three-year rule' relevant to estate taxation of life insurance?

Beneficiary designations made within 3 years of death are invalid
Life insurance purchased within 3 years of death is included in the estate
Premium payments within 3 years of death are taxable gifts
Transfers of life insurance policies within 3 years of death are pulled back into the estate (Correct answer)

Correct answer: Transfers of life insurance policies within 3 years of death are pulled back into the estate

Under IRC Section 2035, if a decedent transferred a life insurance policy within 3 years of death, the policy proceeds are included in the gross estate.

Question 25: Who must generally make quarterly estimated tax payments?

All W-2 employees
Only corporations
Only retirees
Taxpayers with significant income not subject to withholding (Correct answer)

Correct answer: Taxpayers with significant income not subject to withholding

Taxpayers with income not subject to withholding, such as the self-employed, typically owe quarterly estimated payments.

Question 26: Which schedule is used to report itemized deductions on Form 1040?

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

Correct answer: Schedule A

Schedule A is used to itemize deductions such as mortgage interest, state taxes, and charitable gifts.

Question 27: What is the standard of 'independence' required of CPAs when performing an audit engagement, and does this apply to tax consulting services?

Independence is required for all CPA services including tax consulting
Independence in fact and appearance is required for attest (audit/review) services but generally not for tax consulting (Correct answer)
Independence is optional for all private company engagements
Independence rules only apply to government auditors

Correct answer: Independence in fact and appearance is required for attest (audit/review) services but generally not for tax consulting

AICPA rules require independence in fact and appearance for attest services (audits, reviews, compilations with reports), but tax consulting and advisory services do not have the same independence requirements.

Question 28: A client sells a primary residence owned and lived in for 3 of the last 5 years. What exclusion may apply?

Depreciation recapture only
Full taxation of all gain
Section 121 home sale exclusion of up to $250,000 (single) / $500,000 (married) (Correct answer)
Section 1031 exchange

Correct answer: Section 121 home sale exclusion of up to $250,000 (single) / $500,000 (married)

Section 121 excludes up to $250,000 (single) or $500,000 (married) of gain on a qualifying primary residence sale.

Question 29: What is the annual gift tax exclusion amount per recipient for 2024?

$18,000 (Correct answer)
$17,000
$15,000
$10,000

Correct answer: $18,000

The annual gift tax exclusion for 2024 is $18,000 per recipient, allowing donors to give this amount to any number of individuals without using their lifetime exemption.

Question 30: What is the maximum annual contribution catch-up allowed for 401(k) participants age 50 and over in addition to the standard limit (2024 rules)?

$10,000
$7,500 (Correct answer)
$1,000
$3,000

Correct answer: $7,500

Participants age 50+ can contribute an additional $7,500 catch-up to a 401(k) for 2024.

Question 31: What is a dynasty trust and what tax benefit does it serve?

A trust for transferring business interests to employees
A charitable trust lasting 20 years
A long-term irrevocable trust designed to hold assets for multiple generations, utilizing the GST exemption (Correct answer)
A trust that terminates at the grantor's death

Correct answer: A long-term irrevocable trust designed to hold assets for multiple generations, utilizing the GST exemption

A dynasty trust is a long-duration irrevocable trust funded with the grantor's GST exemption, allowing assets to grow and be distributed across multiple generations free of estate and GST tax.

Question 32: Which of the following constitutes a conflict of interest that requires disclosure or withdrawal under professional ethics rules?

Having professional liability insurance
Charging a flat fee rather than hourly
Preparing returns for two unrelated clients in the same industry
Representing both spouses in a joint return when their interests diverge on allocation of liability (Correct answer)

Correct answer: Representing both spouses in a joint return when their interests diverge on allocation of liability

When spouses have conflicting interests—such as disputes over tax liability allocation—representing both creates a conflict that requires disclosure, consent, or in some cases withdrawal.

Question 33: What is 'thin capitalization' in the context of business tax planning?

Distributing capital gains as ordinary dividends
Using excessive debt relative to equity to maximize interest deductions (Correct answer)
A strategy to minimize paid-in capital
Insufficient working capital for operations

Correct answer: Using excessive debt relative to equity to maximize interest deductions

Thin capitalization refers to financing a corporation primarily with debt rather than equity to generate deductible interest expense and reduce taxable income.

Question 34: What is the 'reasonable basis' standard for a tax position under IRC Section 6662?

A more than 50% chance of being upheld on the merits
A less than 5% chance of being sustained
Absolute certainty the position is correct
A roughly 5-10% chance of being sustained if challenged (Correct answer)

Correct answer: A roughly 5-10% chance of being sustained if challenged

A 'reasonable basis' standard is a relatively low bar—approximately a 5-10% chance of being upheld if challenged—sufficient to avoid the negligence penalty but not the substantial understatement penalty.

Question 35: For tax year 2024, what is the Child Tax Credit amount per qualifying child?

$1,000
$3,600
$1,500
$2,000 (Correct answer)

Correct answer: $2,000

The Child Tax Credit is $2,000 per qualifying child under age 17, with up to $1,700 refundable as the Additional Child Tax Credit for 2024.

Question 36: When a business converts from a C Corporation to an S Corporation, what built-in gains tax applies?

A one-time 21% flat tax on all assets
Tax on appreciation that existed at conversion date if sold within the recognition period (Correct answer)
No tax applies if conversion is immediate
Tax on all future gains at C Corp rates

Correct answer: Tax on appreciation that existed at conversion date if sold within the recognition period

The built-in gains tax applies to appreciation that existed on the date of S Corp election if the appreciated assets are disposed of within the 5-year recognition period.

Question 37: The IRS's Office of Professional Responsibility (OPR) can sanction practitioners for Circular 230 violations by:

Revoking CPA licenses directly
Filing criminal charges only
Only issuing written warnings
Imposing monetary penalties, suspension, or disbarment from practice before the IRS (Correct answer)

Correct answer: Imposing monetary penalties, suspension, or disbarment from practice before the IRS

OPR can sanction practitioners through censure (public or private), suspension for a defined period, disbarment from IRS practice, or monetary penalties for Circular 230 violations.

Question 38: The following items are liable for amusement taxes.

Carnival's overall sales
Box office revenue for movie theaters (Correct answer)
Gross revenue for the circus
Professionally played basketball

Correct answer: Box office revenue for movie theaters

Amusement taxes are typically levied on activities that provide entertainment or amusement to the public. Box office revenue from movie theaters directly falls under this category as it represents a charge for entertainment services. This makes it a classic example of an item liable for amusement taxes, unlike broader sales or specific professional events which may have different tax classifications.

Question 39: Under the AICPA Statements on Standards for Tax Services (SSTS), a CPA should advise a client of relevant penalties and the availability of which type of disclosure to avoid certain penalties?

Voluntary disclosure program
Qualified amended return
An advance pricing agreement
Disclosure on the return (e.g., Form 8275) (Correct answer)

Correct answer: Disclosure on the return (e.g., Form 8275)

SSTS No. 1 requires CPAs to advise clients about the potential penalties for a position and the possibility of avoiding penalties through adequate disclosure on Form 8275 or 8275-R.

Question 40: An amended tax return must be filed using which IRS form?

Form 1040-X (Correct answer)
Form 1040-SR
Form 4868
Form 8275

Correct answer: Form 1040-X

Form 1040-X is the Amended U.S. Individual Income Tax Return used to correct a previously filed federal income tax return.

Question 41: Which business structure is most tax-efficient for a highly profitable small business expecting to reinvest most earnings?

C Corporation (taking advantage of 21% flat rate) (Correct answer)
S Corporation
Single-member LLC taxed as disregarded entity
Sole proprietorship

Correct answer: C Corporation (taking advantage of 21% flat rate)

For businesses retaining significant earnings, a C Corporation's flat 21% tax rate may be lower than individual rates that would apply to pass-through income.

Question 42: Self-employment tax covers which programs?

Social Security and Medicare (Correct answer)
Federal income tax only
State disability
Unemployment insurance

Correct answer: Social Security and Medicare

Self-employment tax funds Social Security and Medicare for self-employed individuals.

Question 43: Which strategy lets a taxpayer bunch deductions to exceed the standard deduction in alternating years?

Income averaging
Tax deferral
Asset location
Deduction bunching (Correct answer)

Correct answer: Deduction bunching

Bunching concentrates deductible expenses like charitable gifts into one year to itemize, then takes the standard deduction the next.

Question 44: Which of the following policies uses taxes as a key tool?

Economic Policy
Fiscal policy (Correct answer)
Monetary policy
Trade Policy

Correct answer: Fiscal policy

Fiscal policy refers to the government's use of spending and taxation to influence the economy. By adjusting tax rates or introducing new taxes, governments can stimulate or slow down economic activity, redistribute income, or fund public services. Monetary policy, on the other hand, deals with managing the money supply and interest rates, typically by a central bank, making fiscal policy the correct answer.

Question 45: What is the primary tax advantage of using a Health Savings Account (HSA) for a self-employed tax consultant?

Credits reduce tax dollar for dollar
No contribution limits apply
Triple tax advantage: deductible contributions, tax-free growth, and tax-free qualified withdrawals (Correct answer)
Contributions are matched by the IRS

Correct answer: Triple tax advantage: deductible contributions, tax-free growth, and tax-free qualified withdrawals

HSAs offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.

Question 46: What is the penalty for failing to file a tax return on time, absent reasonable cause?

$1,000 fixed fine per return
0.5% per month on unpaid tax, up to 25%
5% per month on unpaid tax, up to 25% (Correct answer)
10% flat penalty on total tax owed

Correct answer: 5% per month on unpaid tax, up to 25%

The failure-to-file penalty is 5% of the unpaid tax for each month or part of a month the return is late, capped at 25% of the unpaid tax.

Question 47: The marital deduction allows an unlimited transfer of assets between spouses. Which requirement must be met for the receiving spouse?

Must be a US citizen (Correct answer)
Must have independent income
Must be named in a will
Must be over age 21

Correct answer: Must be a US citizen

The unlimited marital deduction requires the recipient spouse to be a US citizen; transfers to non-citizen spouses are subject to annual limits and require a Qualified Domestic Trust (QDOT) for full deferral.

Question 48: What is 'reasonable cause' as a defense to tax penalties?

A letter from the taxpayer's tax preparer
Circumstances beyond the taxpayer's control demonstrating ordinary business care and prudence that resulted in non-compliance (Correct answer)
A formal court filing contesting the penalty
Any excuse offered by the taxpayer

Correct answer: Circumstances beyond the taxpayer's control demonstrating ordinary business care and prudence that resulted in non-compliance

Reasonable cause is a defense to most tax penalties when a taxpayer can show they exercised ordinary business care and prudence but were nonetheless unable to comply with the law.

Question 49: What is the main tax advantage of a Health Savings Account (HSA)?

Withdrawals are always taxed
Triple tax benefit: deductible contributions, tax-free growth, tax-free qualified withdrawals (Correct answer)
Only contributions are deductible
It is taxed like a Roth IRA only

Correct answer: Triple tax benefit: deductible contributions, tax-free growth, tax-free qualified withdrawals

An HSA offers a triple tax benefit when funds are used for qualified medical expenses.

Question 50: An Irrevocable Life Insurance Trust (ILIT) is used primarily to:

Defer capital gains on asset sales
Avoid income taxes on investment returns
Remove life insurance proceeds from the taxable estate (Correct answer)
Provide tax-free income to the grantor

Correct answer: Remove life insurance proceeds from the taxable estate

An ILIT holds a life insurance policy outside the insured's estate, keeping the death benefit from being included in the taxable estate while providing liquidity for heirs.

Question 51: What is the tax treatment of a guaranteed payment made to a partner in a partnership?

Non-taxable distribution
Capital gain to the partner
Ordinary income to the partner, deductible by the partnership (Correct answer)
Subject to corporate tax rates

Correct answer: Ordinary income to the partner, deductible by the partnership

Guaranteed payments are treated as ordinary income to the receiving partner and are generally deductible by the partnership as a business expense.

Question 52: What is the trust fund recovery penalty (TFRP) and who can be held personally liable?

A 25% penalty on all withheld taxes
A fine imposed on banks holding employer trust funds
A penalty equal to 100% of unpaid payroll taxes imposed on responsible persons who willfully fail to pay (Correct answer)
A penalty only applicable to corporations, not individuals

Correct answer: A penalty equal to 100% of unpaid payroll taxes imposed on responsible persons who willfully fail to pay

The TFRP equals 100% of unpaid payroll taxes and can be assessed personally against any responsible person who willfully fails to collect or pay over trust fund taxes.

Question 53: What is a 'covered opinion' under Circular 230, and what is its significance?

A standard engagement letter
Any written legal advice about taxes
A formal written tax opinion on listed transactions or principal-purpose transactions subject to enhanced standards (Correct answer)
An oral opinion rendered during an IRS audit

Correct answer: A formal written tax opinion on listed transactions or principal-purpose transactions subject to enhanced standards

A covered opinion is written advice on listed transactions or principal-purpose transactions that must comply with Circular 230's enhanced requirements for thoroughness, disclosure, and standards of review.

Question 54: A taxpayer who files Form 4868 receives an extension to do what?

Both file and pay later
Pay taxes later
Skip estimated payments
File the return later (Correct answer)

Correct answer: File the return later

Form 4868 extends the time to file, but tax owed is still due by the original deadline.

Question 55: A Qualified Personal Residence Trust (QPRT) is designed to transfer what type of asset at a reduced gift tax value?

A personal residence or vacation home (Correct answer)
Any investment property
Partnership interests
Commercial real estate

Correct answer: A personal residence or vacation home

A QPRT transfers a personal residence or vacation home out of the estate at a discounted gift tax value, as the donor retains the right to live there for a fixed term.

Question 56: What is the maximum Qualified Business Income (QBI) deduction percentage available to eligible pass-through businesses?

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

Correct answer: 20%

The QBI deduction allows eligible sole proprietors, partnerships, S corporations, and some trusts to deduct up to 20% of qualified business income, subject to income and other limitations.

Question 57: Which penalty applies when a tax preparer fails to meet due diligence requirements for the Earned Income Tax Credit?

$600 per credit claimed per return (Correct answer)
$100 per return
$5,000 per return
$50 per return

Correct answer: $600 per credit claimed per return

Tax preparers who fail to meet EITC due diligence requirements face a penalty of $600 per credit (EITC, Child Tax Credit, AOTC, or Head of Household) claimed on the return.

Question 58: Which penalty applies to a taxpayer who substantially understates income tax (generally understating by more than 10% of correct tax or $5,000)?

75% civil fraud penalty
25% civil fraud penalty
20% accuracy-related penalty (Correct answer)
10% accuracy-related penalty

Correct answer: 20% accuracy-related penalty

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

Question 59: Under Circular 230, what is a practitioner's obligation when learning that a client has made an error in a previously filed return that resulted in underpayment?

Do nothing if the statute of limitations has run
Report the error directly to the IRS
Promptly advise the client of the error and the potential consequences (Correct answer)
Immediately file an amended return on the client's behalf

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

Circular 230 requires the practitioner to promptly advise the client of the error and its potential consequences, but the decision to file an amended return belongs to the client.

Question 60: Under Circular 230, a practitioner must NOT do which of the following?

Represent multiple clients with similar but not conflicting interests
Advise clients on aggressive but legal tax positions
Willfully assist in the preparation of a return with a position lacking a reasonable basis (Correct answer)
Charge a reasonable contingent fee for audit representation

Correct answer: Willfully assist in the preparation of a return with a position lacking a reasonable basis

Circular 230 prohibits practitioners from willfully preparing or signing returns with positions that lack a reasonable basis, as this facilitates improper tax reporting.

Question 61: Which expense category was suspended as a miscellaneous itemized deduction by the Tax Cuts and Jobs Act of 2017?

Mortgage interest on a primary residence
Unreimbursed employee business expenses (Correct answer)
Charitable contributions
State and local taxes paid

Correct answer: Unreimbursed employee business expenses

The TCJA suspended the deduction for unreimbursed employee business expenses (previously subject to the 2% AGI floor) through 2025.

Question 62: A taxpayer paid $15,827 in mortgage interest on a house that belonged to someone else and in which the taxpayer had no ownership stake. What percentage of interest may the taxpayer deduct?

$1000
$18,833
$1
$0 (Correct answer)

Correct answer: $0

To deduct mortgage interest, the taxpayer must be legally obligated to the debt and have an ownership interest in the home. Since the taxpayer paid interest on a house belonging to someone else and had no ownership stake, they do not meet the IRS requirements for deducting mortgage interest. Therefore, none of the $15,827 can be deducted.

Question 63: Qualified Small Business Stock (QSBS) under IRC Section 1202 can provide an exclusion of up to what percentage of gain for eligible shareholders?

50%
25%
100% (Correct answer)
75%

Correct answer: 100%

For QSBS acquired after September 27, 2010, non-corporate shareholders who hold the stock for more than 5 years may exclude 100% of the gain from federal income tax.

Question 64: What is the federal estate tax rate on amounts exceeding the applicable exemption?

37%
40% (Correct answer)
21%
55%

Correct answer: 40%

The top federal estate tax rate is 40% on the taxable estate value exceeding the applicable exemption amount.

Question 65: Which form reports nonemployee compensation paid to an independent contractor?

Form 1099-INT
Form 1099-MISC
Form W-2
Form 1099-NEC (Correct answer)

Correct answer: Form 1099-NEC

Form 1099-NEC reports nonemployee compensation of $600 or more to contractors.

Question 66: Which credit is refundable, meaning it can produce a refund larger than taxes paid?

Child and Dependent Care Credit
Earned Income Tax Credit (Correct answer)
Foreign Tax Credit
Lifetime Learning Credit

Correct answer: Earned Income Tax Credit

The Earned Income Tax Credit is fully refundable and can generate a refund exceeding tax liability.

Question 67: What is 'portability' in the context of estate taxes?

Carrying forward unused charitable deductions
The right to move retirement accounts without tax
The ability to transfer assets across state lines tax-free
A deceased spouse's unused estate tax exemption can be transferred to the surviving spouse (Correct answer)

Correct answer: A deceased spouse's unused estate tax exemption can be transferred to the surviving spouse

Portability allows the executor of a deceased spouse's estate to elect to transfer any unused estate tax exemption to the surviving spouse, effectively doubling the couple's total exemption.

Question 68: Which of the following is not a method for reducing the amount of capital gains taxes you must pay?

Using short-term investments rather than long-term ones (Correct answer)
Using long-term investments rather than short-term ones
Subtracting investment losses from capital gains

Correct answer: Using short-term investments rather than long-term ones

Short-term capital gains, which result from selling assets held for one year or less, are typically taxed at ordinary income tax rates, which are often higher than long-term capital gains rates. Therefore, using short-term investments would generally increase, not decrease, the amount of capital gains taxes paid. Strategies like using long-term investments or offsetting gains with losses are more effective for reducing capital gains tax.

Question 69: The Foreign Tax Credit (FTC) is designed to prevent:

Tax evasion through foreign bank accounts
Double taxation of foreign income by allowing a credit for taxes paid to foreign governments (Correct answer)
US citizens from earning income abroad
Taxation of foreign corporations in the US

Correct answer: Double taxation of foreign income by allowing a credit for taxes paid to foreign governments

The Foreign Tax Credit allows US taxpayers to credit taxes paid to foreign governments against their US tax liability on the same income, preventing the same income from being taxed twice.

Question 70: Which form does a preparer use to report self-employment income and expenses for a sole proprietor?

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

Correct answer: Schedule C

Schedule C reports profit or loss from a sole proprietorship business.

Question 71: Under IRC Section 7216, what is generally prohibited for tax return preparers regarding client tax return information?

Disclosing or using client tax return information for any purpose other than preparing the return without written consent (Correct answer)
Using client information to prepare their tax return
Retaining copies of client returns
Discussing the return with the client

Correct answer: Disclosing or using client tax return information for any purpose other than preparing the return without written consent

Section 7216 prohibits preparers from disclosing or using client tax return information for any purpose other than preparing the return without the client's written consent, with criminal penalties for violations.

Question 72: Under the qualified business income (QBI) deduction, eligible pass-through business owners may deduct up to what percentage of their qualified business income?

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

Correct answer: 20%

The QBI deduction under IRC Section 199A allows eligible taxpayers to deduct up to 20% of their qualified business income from pass-through entities.

Question 73: Which type of retirement plan allows self-employed individuals to contribute both as employee and employer, maximizing contribution limits?

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

Correct answer: Solo 401(k)

A Solo 401(k) allows self-employed individuals to contribute as both employee (up to the elective deferral limit) and employer (profit-sharing contributions), resulting in higher total contribution limits.

Question 74: How long should taxpayers generally keep records supporting an item on a return?

10 years
1 year
At least 3 years (Correct answer)
Forever

Correct answer: At least 3 years

The IRS generally recommends keeping records for at least three years, matching the standard audit window.

Question 75: What is the preparer tax identification number (PTIN) requirement for paid tax preparers?

Required for all paid preparers who prepare or substantially assist in preparing any US federal tax return or claim for refund (Correct answer)
Optional for preparers with fewer than 10 clients
Required only for CPAs and attorneys
Required only for preparers who sign returns

Correct answer: Required for all paid preparers who prepare or substantially assist in preparing any US federal tax return or claim for refund

All individuals who are paid to prepare or substantially assist in preparing any federal tax return or claim for refund must obtain and use a valid PTIN, regardless of credential level.

Question 76: The federal gift tax return is filed on which form?

Form 1041
Form 706
Schedule D of Form 1040
Form 709 (Correct answer)

Correct answer: Form 709

Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) is filed to report taxable gifts and gifts that reduce the lifetime exemption.

Question 77: Under IRC Section 179, what is the primary benefit for small businesses purchasing equipment?

Immediate expensing of qualifying assets (Correct answer)
Tax credit equal to purchase price
Deferred depreciation
Exclusion from gross income

Correct answer: Immediate expensing of qualifying assets

Section 179 allows businesses to deduct the full cost of qualifying equipment in the year of purchase rather than depreciating it over time.

Question 78: The federal estate tax exemption (unified credit equivalent) for 2024 is approximately:

$7.5 million
$12.92 million
$3.5 million
$13.61 million (Correct answer)

Correct answer: $13.61 million

The federal estate and gift tax exemption is $13.61 million per individual in 2024, meaning estates below this threshold owe no federal estate tax.

Question 79: What is the maximum amount of state and local taxes (SALT) deductible on a federal income tax return under current law?

$7,500
$15,000
$10,000 (Correct answer)
$5,000

Correct answer: $10,000

The Tax Cuts and Jobs Act capped the SALT deduction at $10,000 ($5,000 for married filing separately) for federal income tax purposes.

Question 80: What is the 'step-up in basis' rule for inherited property?

No basis adjustment occurs for inherited assets
Basis is increased by the amount of estate tax paid
Inherited property receives a new basis equal to fair market value at the date of death (Correct answer)
Heirs must use the decedent's original cost basis

Correct answer: Inherited property receives a new basis equal to fair market value at the date of death

Property inherited at death receives a stepped-up basis equal to its fair market value on the date of death, eliminating unrealized capital gains from the decedent's holding period.

Question 81: A client has $3,000 in net capital losses for the year. How much can offset ordinary income?

Up to $3,000, with any excess carried forward (Correct answer)
Capital losses cannot offset ordinary income
The full amount has no limit
Only $1,000

Correct answer: Up to $3,000, with any excess carried forward

Net capital losses can offset up to $3,000 of ordinary income annually, with the rest carried forward.

Question 82: Qualified dividends are taxed at what type of rate?

A flat 15% only
Long-term capital gains rates (Correct answer)
Self-employment rates
Ordinary income rates

Correct answer: Long-term capital gains rates

Qualified dividends are taxed at the preferential long-term capital gains rates.

Question 83: What is a Charitable Remainder Trust (CRT) and what tax benefits does it provide?

A trust providing income to the donor for a term, with remainder to charity, generating a partial charitable deduction (Correct answer)
A trust exempt from all taxes during its term
A trust that donates all income to charity with no tax benefit
A trust allowing tax-free sale of any assets

Correct answer: A trust providing income to the donor for a term, with remainder to charity, generating a partial charitable deduction

A CRT provides income to the donor (or other beneficiaries) for life or a term, with remainder passing to charity, generating an upfront charitable deduction equal to the present value of the remainder interest.

Question 84: Which valuation discount applies when transferring a minority interest in a closely held business?

Minority interest discount (reflecting lack of control)
No discount is allowed for business interests
Discount for lack of marketability only
Both minority interest discount and discount for lack of marketability typically apply (Correct answer)

Correct answer: Both minority interest discount and discount for lack of marketability typically apply

Transfers of minority interests in closely held businesses typically receive both a minority interest discount (lack of control) and a discount for lack of marketability, potentially reducing value by 30-40%.

Question 85: The profit is subject to the following conditions if you sell your old Chevrolet for more than you paid:

Without taxes
Capital gain tax (Correct answer)
Buyer's tax

Correct answer: Capital gain tax

When you sell an asset, such as a car, for more than you originally paid for it, the profit you realize from that sale is considered a capital gain. This gain is subject to capital gains tax, which is a tax levied on the profit from the sale of investments or other non-inventory assets. The amount of tax depends on how long you owned the asset.

Question 86: A taxpayer who owes taxes but cannot pay in full should consider which IRS program to pay over time?

Penalty Abatement
Installment Agreement (Correct answer)
Currently Not Collectible status
Offer in Compromise

Correct answer: Installment Agreement

An Installment Agreement allows taxpayers to pay their tax debt in monthly payments over time when they cannot pay the full amount immediately.

Question 87: Which method of accounting generally provides more tax planning flexibility for a small business by controlling the timing of income and deductions?

Accrual method
Installment method
Percentage of completion method
Cash method (Correct answer)

Correct answer: Cash method

The cash method allows businesses to control the timing of income recognition and deductions by choosing when to receive payments and pay expenses.

Question 88: Which schedule reports capital gains and losses from selling stocks?

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

Correct answer: Schedule D

Schedule D is used to report capital gains and losses from the sale of investments.

Question 89: Under Circular 230, a tax practitioner must generally respond to IRS requests for records or information within:

60 days
30 days
A reasonable time (Correct answer)
5 business days

Correct answer: A reasonable time

Circular 230 requires practitioners to promptly submit records or information requested by the IRS unless the practitioner believes in good faith and on reasonable grounds that they are not required to provide the information.

Question 90: What is the primary difference between a tax credit and a tax deduction?

A tax credit reduces tax owed dollar-for-dollar; a deduction reduces taxable income (Correct answer)
Both reduce taxable income by the same amount
A tax credit applies only to businesses; a deduction applies only to individuals
A tax credit reduces taxable income; a deduction reduces tax owed directly

Correct answer: A tax credit reduces tax owed dollar-for-dollar; a deduction reduces taxable income

A tax credit directly reduces the amount of tax owed dollar-for-dollar, while a deduction reduces taxable income by the deduction amount multiplied by the applicable tax rate.

Question 91: Which form must employers file to reconcile annual federal income tax withholding and FICA taxes?

Form 944
Form 941
Form W-3 (Correct answer)
Form 940

Correct answer: Form W-3

Form W-3 is the Transmittal of Wage and Tax Statements that employers file with the SSA to reconcile and summarize all W-2 forms issued to employees.

Question 92: What is the annual gift tax exclusion per recipient for 2024?

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

Correct answer: $18,000

For 2024, the annual gift tax exclusion is $18,000 per recipient, allowing an individual to give this amount to any number of recipients without reducing their lifetime gift tax exemption.

Question 93: Which of the following credits is available to individual taxpayers but NOT to C corporations?

Earned Income Tax Credit (EITC) (Correct answer)
Research and Development (R&D) Credit
Work Opportunity Tax Credit (WOTC)
Energy Investment Tax Credit

Correct answer: Earned Income Tax Credit (EITC)

The Earned Income Tax Credit is exclusively available to individuals and families with earned income below certain thresholds; it cannot be claimed by any type of corporation.

Question 94: What is the tax treatment of qualified dividends compared to ordinary income?

Subject to self-employment tax
Always tax-free
Taxed at higher rates than wages
Taxed at lower long-term capital gains rates (Correct answer)

Correct answer: Taxed at lower long-term capital gains rates

Qualified dividends are taxed at preferential long-term capital gains rates, lower than ordinary income rates.

Question 95: What is the 'at-risk' limitation under IRC Section 465?

Limits losses to the taxpayer's economic investment in the activity (Correct answer)
Requires all losses to be suspended indefinitely
Caps deductions at 50% of gross income
Applies only to passive activities

Correct answer: Limits losses to the taxpayer's economic investment in the activity

Section 465 limits loss deductions to the amount the taxpayer actually has at risk economically, preventing deductions exceeding the taxpayer's actual investment.

Question 96: A business buys $50,000 of qualifying equipment. Which provision allows immediate expensing rather than multi-year depreciation?

Section 199A deduction
Section 1202 exclusion
Section 121 exclusion
Section 179 deduction (Correct answer)

Correct answer: Section 179 deduction

Section 179 lets a business expense qualifying equipment immediately up to annual limits instead of depreciating it.

Question 97: Which estate planning trust allows a surviving spouse to postpone estate taxes until the second spouse's death?

Irrevocable Life Insurance Trust (ILIT)
Qualified Terminable Interest Property (QTIP) Trust (Correct answer)
Bypass Trust (Credit Shelter Trust)
Grantor Retained Annuity Trust (GRAT)

Correct answer: Qualified Terminable Interest Property (QTIP) Trust

A QTIP Trust qualifies for the unlimited marital deduction, deferring estate taxes until the surviving spouse's death while allowing the first spouse to control ultimate distribution of assets.

Question 98: Under the AICPA Code of Professional Conduct, what is the primary obligation when a CPA discovers a prior year error in a client's tax return?

Inform the client of the error and its implications, and recommend corrective action (Correct answer)
Ignore it if the statute of limitations has expired
Automatically amend the return without client permission
Immediately report the error to the IRS without client consent

Correct answer: Inform the client of the error and its implications, and recommend corrective action

CPAs must promptly inform their client of the error and its potential consequences, recommend remedial action (such as filing an amended return), but cannot unilaterally disclose to the IRS without client consent.

Question 99: Which depreciation method allows a business to take larger deductions in the early years of an asset's life?

Units of production
Sum-of-the-years-digits only
Modified Accelerated Cost Recovery System (MACRS) (Correct answer)
Straight-line depreciation

Correct answer: Modified Accelerated Cost Recovery System (MACRS)

MACRS is the standard depreciation system in the US that accelerates deductions by applying higher percentages in earlier years.

Question 100: Under IRC Section 1031, like-kind exchanges allow deferral of gain on which type of property?

Publicly traded securities
Any property regardless of use
Personal property only
Real property held for business or investment purposes (Correct answer)

Correct answer: Real property held for business or investment purposes

Post-TCJA, Section 1031 like-kind exchanges are limited to real property held for productive use in a trade or business or for investment.

Enrolled Agent Special Enrollment Examination (SEE)

The IRS Special Enrollment Examination (SEE) certifies tax professionals as Enrolled Agents authorized to represent taxpayers before the IRS, covering individual and business income tax, estate and gift tax, tax planning, and professional ethics.

100

Questions

210 min

Time Limit

70%

To Pass

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