Regulatory compliance — CPA REG practice questions

Circular 230 requires written tax advice to meet which standard?

1. Absolute certainty regarding the tax outcome asserted in writing
2. Reasonable and competent advice considering all relevant facts
3. More-likely-than-not confidence level for every reportable position
4. Substantial authority for every listed transaction discussed

Answer: B — Reasonable and competent advice considering all relevant facts

A) Absolute certainty is not required; reasonable diligence is. B) Correct — §10.37 requires reasonable, competent advice grounded in the relevant facts and law. C) MLTN applies to tax shelters, not all written advice. D) Substantial authority is a return-position standard, not advice.

Which schedule reports self-employment business income?

1. Schedule A — itemized personal deductions
2. Schedule B — interest and dividend income
3. Schedule C — profit or loss from business
4. Schedule D — capital gains and losses

Answer: C — Schedule C — profit or loss from business

A) Schedule A reports itemized deductions like SALT, mortgage, charity. B) Schedule B reports interest and dividends over $1,500. C) Correct — Schedule C reports sole-proprietor SE income; SE tax on Schedule SE. D) Schedule D reports capital gain/loss transactions.

Bipartisan Budget Act (BBA) 2015 partnership audits:

1. Audit conducted at each partner's individual level
2. Audit at partnership level; partnership pays tax
3. Audits suspended for large partnerships entirely
4. TEFRA rules continue to govern all partnership audits

Answer: B — Audit at partnership level; partnership pays tax

A) Old TEFRA/partner-level approach. B) Correct — BBA regime audits at partnership level; partnership pays imputed underpayment by default; push-out election shifts to partners; small partnerships can elect out. C) BBA covers all except electing-out small partnerships. D) BBA replaced TEFRA for tax years beginning after 2017.

Which of the following contract rights is generally assignable without the obligor's consent?

1. A right to receive personal services from a specific individual
2. A right to receive payment of a fixed sum of money
3. A right where assignment would materially increase the obligor's risk or burden
4. A right expressly made non-assignable by contract terms

Answer: B — A right to receive payment of a fixed sum of money

A) Rights tied to a specific person's personal services are generally non-assignable due to their personal nature. B) Correct — a right to receive a fixed sum of money is a classic example of a freely assignable contract right. C) Rights that would materially increase the obligor's risk or burden are treated as non-assignable. D) An express anti-assignment clause generally bars assignment (subject to certain UCC limitations on money claims).

An employer who misclassifies an employee as an independent contractor is generally liable for:

1. Back employment taxes (FICA/FUTA withholding) plus penalties and interest
2. Only civil damages to the misclassified worker
3. Nothing, if the worker signed an independent contractor agreement
4. Criminal tax evasion charges in all cases

Answer: A — Back employment taxes (FICA/FUTA withholding) plus penalties and interest

A) Correct — misclassification exposes the employer to unpaid employer and employee FICA shares, FUTA, and income tax withholding failures, plus penalties and interest. B) Civil damages to the worker may also arise, but the tax exposure is the core tested consequence. C) A signed label does not override the substance-over-form control test. D) Criminal charges require willfulness and are not automatic in every misclassification.

An individual is eligible to make deductible contributions to a health savings account (HSA) only if the individual is:

1. Covered under any employer health plan with a deductible above $500
2. Covered under a qualifying high-deductible health plan (HDHP), has no disqualifying other coverage, is not enrolled in Medicare, and is not another taxpayer's dependent
3. At least 65 years old and enrolled in Medicare Part A
4. Self-employed with no health insurance at all

Answer: B — Covered under a qualifying high-deductible health plan (HDHP), has no disqualifying other coverage, is not enrolled in Medicare, and is not another taxpayer's dependent

A) A generic deductible threshold does not define HDHP status; HDHP minimum deductible and out-of-pocket limits are specifically defined and indexed annually, and other disqualifying coverage still matters. B) correct — HSA eligibility requires HDHP coverage, the absence of other disqualifying non-HDHP coverage, no Medicare enrollment, and not being another taxpayer's dependent. C) Medicare enrollment disqualifies an individual from making new HSA contributions; it does not create eligibility. D) Having no insurance at all does not create HSA eligibility; HDHP coverage is required.

Unused foreign tax credits that exceed the §904 limitation in the current year may be:

1. Carried back 1 year and carried forward 10 years
2. Carried forward indefinitely with no carryback
3. Carried back 3 years and forward 5 years
4. Carried forward only 5 years with no carryback

Answer: A — Carried back 1 year and carried forward 10 years

A) Correct — excess foreign tax credits are carried back 1 year and, if not used, carried forward up to 10 years. B) There is a carryback available, so 'no carryback' misstates the rule. C) The 3-year-back/5-year-forward pattern does not match the current FTC carryover rule. D) A forward-only 5-year rule understates the 10-year carryforward and omits the 1-year carryback.

The 2024 Section 179 expensing limit is approximately:

1. $500,000 with $2.0M phase-out threshold
2. Unlimited expensing with no phase-out cap
3. $1.08M with $2.7M phase-out threshold
4. $1.16M with $2.89M phase-out threshold

Answer: D — $1.16M with $2.89M phase-out threshold

A) $500,000 was the pre-TCJA limit. B) §179 always has an annual limit and phase-out.C) Those were the 2022 figures. D) Correct — 2024 §179 allows up to $1.16M with $2.89M phase-out.

The Accumulated Adjustments Account (AAA) of an S corporation primarily tracks:

1. The cumulative undistributed income taxed to shareholders since the S election
2. The corporation's accumulated earnings and profits from C-corporation years
3. The par value of the corporation's outstanding stock
4. A shareholder's outside basis in the S corporation stock

Answer: A — The cumulative undistributed income taxed to shareholders since the S election

A) Correct — AAA is a corporate-level account tracking cumulative post-S-election income already taxed to shareholders but not yet distributed. B) Accumulated E&P is a distinct account that exists only from prior C-corporation years; AAA is a separate S-corp-era concept. C) Stock par value has no relationship to AAA. D) Shareholder stock basis is tracked separately and is affected by, but not identical to, AAA.

An S corporation's AAA can be reduced below zero by:

1. Distributions in any amount regardless of the AAA balance
2. Nondeductible expenses only, never by losses
3. Both distributions and current losses simultaneously without limit
4. Losses and nondeductible expenses, but distributions cannot reduce AAA below zero

Answer: D — Losses and nondeductible expenses, but distributions cannot reduce AAA below zero

A) Distributions are limited to the existing AAA balance and cannot push it negative. B) Both losses and nondeductible expenses (not just nondeductible expenses alone) can drive AAA negative. C) Distributions specifically cannot create or deepen a negative AAA balance, unlike losses. D) Correct — losses and nondeductible expenses may reduce AAA below zero, but distributions are capped at the existing AAA balance and cannot themselves push it negative.

Guaranteed payment — timing of partner's income inclusion?

The recipient partner reports the guaranteed payment for the partner's tax year within which the partnership's tax year (for which the amount is deductible) ends, regardless of the partner's own accounting method or receipt of cash.

DNI — computation starting point?

DNI begins with the trust's taxable income, adds back the distribution deduction and tax-exempt interest (net of allocable expenses), and generally excludes capital gains allocated to corpus.

Gift tax valuation — minority interest discount rationale?

A noncontrolling interest cannot direct distributions, force a sale or liquidation, or control entity decisions, making it worth less to a hypothetical buyer than a pro rata share of a controlling interest.

§751(b) — disproportionate distribution rule?

If a distribution shifts a partner's proportionate share of hot assets relative to other property, the shift is treated as a deemed sale or exchange between the partner and the partnership to the extent of that shift.