CPA — Tax Compliance & Planning (TCP) [Discipline] practice questions and exam guide

A practical strategy to reduce future RMD obligations is to:

1. Convert traditional IRA balances to Roth IRA before age 73
2. Delay all Roth IRA contributions until well after retirement age
3. Convert Roth IRA balances into traditional IRA balances after age 73
4. Take Roth IRA distributions annually starting at age 59½

Answer: A — Convert traditional IRA balances to Roth IRA before age 73

A) Correct — Roth conversions reduce future traditional-IRA RMDs. B) Delaying Roth contributions does not affect RMDs. C) Roth-to-traditional conversion is not permitted. D) Roth IRAs have no lifetime RMD in the first place.

The maximum share of Social Security benefits taxable to a high-income retiree is:

1. 85% of the Social Security benefits received during the tax year
2. 50% of the Social Security benefits received during the tax year
3. 100% of the Social Security benefits received during the tax year
4. 0% of the Social Security benefits received during the tax year

Answer: A — 85% of the Social Security benefits received during the tax year

A) Correct — federal cap is 85% for high provisional income. B) 50% is the first-tier maximum. C) 100% is not the statutory cap. D) 0% applies only to low provisional income.

The 529 'superfunding' 5-year election allows a donor to contribute up to:

1. $90,000 per beneficiary in one year (5 × $18,000) without gift tax
2. $45,000 per beneficiary in one year (5 × $9,000) without gift tax
3. $180,000 per beneficiary in one year (10 × $18,000) without gift tax
4. $540,000 per beneficiary in one year (5 × $108,000) without gift tax

Answer: A — $90,000 per beneficiary in one year (5 × $18,000) without gift tax

A) Correct — $90,000 single-donor superfund (2024 exclusion × 5). B) $45,000 uses the wrong multiplier. C) The multiplier is 5 years, not 10. D) $108,000 is not the annual exclusion.

A technology startup incurs $500,000 of qualified research expenses in 2024, including wages for engineers engaged in a process of experimentation to resolve technological uncertainty about a new product design. To claim the §41 research credit, the company must demonstrate that the research satisfies:

1. Only that it increased overall company revenue
2. The four-part test: permitted purpose, technological in nature, elimination of uncertainty, and a process of experimentation
3. A minimum spend of $1 million in qualified research expenses
4. Approval from the SEC prior to claiming the credit

Answer: B — The four-part test: permitted purpose, technological in nature, elimination of uncertainty, and a process of experimentation

A) Incorrect — revenue increase isn't part of the §41 qualification test at all; the credit is about the nature of the research activity itself. B) Correct — the §41 research credit requires research to satisfy the four-part test: it must have a permitted purpose (developing/improving business component function, performance, reliability, or quality), be technological in nature, be intended to eliminate uncertainty, and involve a process of experimentation. C) Incorrect — there's no minimum dollar threshold requirement to qualify for the credit computation itself. D) Incorrect — SEC approval has no relevance to claiming an R&D tax credit.

A single taxpayer earns $220,000 in wages from one employer and has no other income. Her employer withholds Additional Medicare Tax on wages exceeding the $200,000 per-employer threshold. Given her actual single-filer threshold is also $200,000, she should expect that:

1. A significant true-up will be required on her individual return due to a mismatch between withholding and her actual liability
2. Her employer withholding aligns with her actual single-filer threshold in this case, since both are $200,000, so no meaningful true-up is needed from this mismatch (absent other income)
3. Additional Medicare Tax withholding is never performed by employers under any circumstances
4. She owes no Additional Medicare Tax because she has only one source of income

Answer: B — Her employer withholding aligns with her actual single-filer threshold in this case, since both are $200,000, so no meaningful true-up is needed from this mismatch (absent other income)

A) Incorrect — the classic true-up scenario arises when a taxpayer's actual applicable threshold (e.g., MFJ at $250,000, or someone with multiple employers each individually under $200,000 but combined income above the threshold) doesn't match the flat $200,000 per-employer withholding trigger; here, as a single filer with only one employer, both the withholding trigger and her actual threshold are the same $200,000, so no such mismatch-driven true-up need arises from this fact pattern. B) Correct — because she's single (actual threshold $200,000) with only one employer (withholding trigger also $200,000), the employer withholding computation aligns directly with her actual liability calculation in this specific scenario, unlike married or multiple-employer situations where mismatches commonly occur. C) Incorrect — employers ARE required to withhold the Additional Medicare Tax on wages exceeding $200,000 per employer; this is a real, mandatory withholding requirement. D) Incorrect — having only one income source doesn't exempt her from Additional Medicare Tax; the tax applies to wages above the threshold regardless of how many income sources exist.

A high-net-worth client holds shares in a publicly traded REIT and a publicly traded partnership (PTP) generating qualified income. Regarding the §199A 20% QBI deduction on this income, which statement is correct?

1. Both REIT dividends and qualified PTP income are subject to the wage/UBIA limitation at high income levels
2. Neither REIT dividends nor qualified PTP income qualify for any §199A deduction
3. Both REIT dividends and qualified PTP income are eligible for the 20% deduction without regard to the wage/UBIA limitation or SSTB rules
4. Only PTP income qualifies; REIT dividends were excluded from §199A by the SECURE Act

Answer: C — Both REIT dividends and qualified PTP income are eligible for the 20% deduction without regard to the wage/UBIA limitation or SSTB rules

A) Incorrect — this is the treatment for ordinary QBI from a trade or business, not REIT/PTP income, which is specifically carved out from those limitations. B) Incorrect — both categories do qualify for a deduction, just computed as a separate component. C) Correct — combined qualified REIT dividends and qualified PTP income get a 20% deduction regardless of taxable income level, wage/UBIA amounts, or SSTB status, computed as a separate component of the §199A deduction. D) Incorrect — REIT dividends remain eligible; no such SECURE Act exclusion exists.

A backdoor Roth IRA is executed by making a:

1. Direct Roth contribution above the published MAGI phase-out limits
2. Qualified charitable distribution from a Roth IRA to a public charity
3. Rollover from a Roth 401(k) into a traditional IRA account
4. Nondeductible traditional IRA contribution then converting to a Roth

Answer: D — Nondeductible traditional IRA contribution then converting to a Roth

D) Correct — bypasses the Roth MAGI limits via nondeductible-then-convert (watch pro-rata). A) Direct high-income Roth contribution is prohibited. C) That would defeat the Roth's tax treatment. B) QCDs come from traditional IRAs, not Roths.

A pass-through entity tax (PTET) election is primarily used as:

1. A workaround for the federal SALT cap on individual itemized deductions
2. A method of eliminating federal self-employment tax on partnership income
3. A federal deduction for wages paid by partnerships to non-partner employees
4. A federal credit for owners of C-corporations engaged in state tax planning

Answer: A — A workaround for the federal SALT cap on individual itemized deductions

A) Correct — PTET shifts state tax to entity level, sidestepping SALT cap. B) PTET does not affect SE tax. C) Wage deduction is separate. D) C-corps are not the target.

A tax advisor is comparing the step transaction doctrine, the substance-over-form doctrine, and the business purpose doctrine for a client structuring a complex reorganization. The advisor should recognize that these three judicial doctrines:

1. Are entirely unrelated concepts with no overlapping application to the same transaction
2. Are related anti-abuse judicial doctrines that often overlap in application — the step transaction doctrine focuses on collapsing prearranged multi-step transactions, substance-over-form looks past formal legal structure to economic reality generally, and business purpose requires a legitimate non-tax rationale for the transaction (particularly relevant to reorganizations) — and a single transaction can implicate more than one simultaneously
3. Apply exclusively to individual taxpayers and never to corporate transactions
4. Have been entirely superseded and rendered obsolete by the codified economic substance doctrine under §7701(o)

Answer: B — Are related anti-abuse judicial doctrines that often overlap in application — the step transaction doctrine focuses on collapsing prearranged multi-step transactions, substance-over-form looks past formal legal structure to economic reality generally, and business purpose requires a legitimate non-tax rationale for the transaction (particularly relevant to reorganizations) — and a single transaction can implicate more than one simultaneously

A) Incorrect — these doctrines are closely related judicial anti-abuse concepts that frequently overlap when courts analyze the same complex transaction. B) Correct — these three doctrines are related but analytically distinct: the step transaction doctrine specifically addresses collapsing prearranged multi-step transactions into their combined result, substance-over-form is the broader general principle of looking past formal legal structure to economic reality, and the business purpose doctrine specifically requires a legitimate non-tax rationale (especially significant for corporate reorganizations under §368) — and courts often apply more than one of these doctrines together when analyzing the same complex transaction. C) Incorrect — these doctrines are commonly applied to CORPORATE transactions (especially reorganizations), not limited to individual taxpayers. D) Incorrect — while §7701(o) codified the economic substance doctrine specifically, it didn't eliminate or supersede these OTHER related judicial doctrines, which continue to be applied by courts as well.

A grantor sells appreciating stock to an intentionally defective grantor trust (IDGT) in exchange for a 9-year installment note bearing interest at the applicable federal rate. Because the trust is a grantor trust for income tax purposes, this sale:

1. Triggers immediate capital gain recognition to the grantor upon the sale
2. Does not trigger gain recognition to the grantor, since a sale between a grantor and her own grantor trust is disregarded for income tax purposes
3. Requires the trust to immediately distribute the stock back to the grantor
4. Is treated as a taxable gift of the full value of the stock regardless of the note's terms

Answer: B — Does not trigger gain recognition to the grantor, since a sale between a grantor and her own grantor trust is disregarded for income tax purposes

A) Incorrect — this is exactly what the IDGT sale technique avoids; because the trust is a grantor trust, the sale is effectively a transaction with oneself for income tax purposes. B) Correct — because the IDGT is a grantor trust, transactions between the grantor and the trust (including this sale for a note) are disregarded for income tax purposes (the grantor is treated as still owning the assets for income tax, even though the assets are outside her estate for transfer tax purposes) — meaning no gain is recognized on the sale itself, a key advantage of the IDGT sale technique. C) Incorrect — there's no requirement to distribute the stock back; the trust holds the stock and the grantor holds the note going forward. D) Incorrect — a properly structured sale for adequate consideration (the note) is not treated as a gift of the full stock value; the transaction is structured as a bona fide sale, not a gift, assuming the note reflects fair value and adequate interest.

A client provides liquidity to a decentralized exchange (DEX) pool, receiving LP tokens in exchange for depositing two cryptocurrencies. Later, the pool automatically rebalances, swapping a portion of one token for the other within the pool. The MOST defensible position is that:

1. No taxable event occurs until the LP tokens are redeemed
2. The automatic rebalancing inside the pool is a taxable disposition of the swapped token
3. LP tokens are never taxable regardless of subsequent activity
4. Only the exchange's operator recognizes gain, not the liquidity provider

Answer: B — The automatic rebalancing inside the pool is a taxable disposition of the swapped token

A) Incorrect — this defers recognition inappropriately since underlying token swaps within the pool are dispositions. B) Correct — swaps within the pool that change the taxpayer's beneficial holdings are generally treated as taxable dispositions of the swapped property. C) Incorrect — LP tokens and underlying activity can both carry tax consequences. D) Incorrect — the liquidity provider bears the tax consequences of their own beneficial interest.

A taxpayer sells cryptocurrency at a $15,000 loss on December 20, 2024, then repurchases the identical cryptocurrency on December 22, 2024. Under current law, this transaction:

1. Triggers full wash sale disallowance under §1091 since crypto is treated as property
2. Is disallowed only for the portion repurchased within 30 days of the sale
3. Allows the full $15,000 loss to be currently deductible since §1091 applies only to stock or securities
4. Requires a 61-day waiting period analogous to the securities wash sale window

Answer: C — Allows the full $15,000 loss to be currently deductible since §1091 applies only to stock or securities

A) Incorrect — §1091 by its terms applies to 'stock or securities'; crypto is classified as property, not a security. B) Incorrect — there's no partial wash-sale rule for crypto since the rule doesn't apply at all. C) Correct — because crypto isn't a security, the wash sale rule currently doesn't apply, so the loss is deductible even with an immediate repurchase. D) Incorrect — no such waiting period exists in the code for property.

As part of a divorce settlement, a wife receives the marital home (FMV $600,000, husband's original basis $250,000) from her husband. Under §1041, the wife's basis in the home immediately after the transfer is:

1. $600,000, the fair market value at the time of transfer
2. $0, since divorce-related property transfers eliminate all basis
3. $425,000, the average of basis and FMV
4. $250,000, a carryover of the husband's original basis, since no gain or loss is recognized on the §1041 transfer

Answer: D — $250,000, a carryover of the husband's original basis, since no gain or loss is recognized on the §1041 transfer

A) Incorrect — unlike inherited property (which gets a stepped-up basis), §1041 transfers do NOT provide a basis step-up to fair market value. D) Correct — §1041 provides that no gain or loss is recognized on transfers between spouses (or former spouses incident to divorce), and the recipient spouse takes the transferor's basis as a carryover, here $250,000, preserving the built-in gain for future recognition when the wife eventually sells. C) Incorrect — there's no averaging mechanism under §1041. B) Incorrect — the property retains real basis; it doesn't reset to zero.

Under the AMT computation, alternative minimum taxable income (AMTI) equals:

1. Regular gross income multiplied by the flat 28% AMT rate
2. The AMT exemption amount reduced by qualified capital gains
3. The greater of regular tax or the tentative minimum tax computed
4. Regular taxable income plus preferences and adjustments allowed

Answer: D — Regular taxable income plus preferences and adjustments allowed

D) Correct — start with taxable income, add prefs/adjustments, apply the exemption, then the 26/28% rate. A) That is a partial rate calc, not the AMTI base. C) That describes the final AMT liability comparison. B) The exemption reduces AMTI, not the other way around.

A taxpayer facing an IRS audit of a reportable transaction that was NOT properly disclosed on Form 8886, combined with a substantial understatement of tax, should expect exposure to which combination of penalties, assuming no reasonable cause defense is established?

1. Both the §6707A penalty for failure to disclose the reportable transaction and the §6662 accuracy-related penalty for the substantial understatement, since they address different failures
2. Only the §6707A disclosure penalty, since the accuracy-related penalty cannot apply to the same transaction
3. No penalties, since the taxpayer already faces additional tax on the merits
4. Only criminal penalties, since civil penalties never apply to reportable transactions

Answer: A — Both the §6707A penalty for failure to disclose the reportable transaction and the §6662 accuracy-related penalty for the substantial understatement, since they address different failures

B) Incorrect — these are separate penalty regimes addressing separate failures (non-disclosure vs. the understatement itself), and both can apply. A) Correct — §6707A penalizes the failure to disclose a reportable/listed transaction regardless of its merits, while §6662 separately penalizes the substantial understatement of tax; absent reasonable cause or adequate disclosure defenses, both can be assessed together since they target different compliance failures. C) Incorrect — additional tax owed doesn't preclude separate penalty exposure. D) Incorrect — civil penalties like §6707A and §6662 routinely apply to reportable transactions; criminal penalties are a separate, higher-bar matter.

In a divorce settlement, a portion of the husband's 401(k) is awarded to the wife to be transferred to her own IRA. The proper mechanism to accomplish this transfer without triggering current income tax or an early withdrawal penalty is:

1. A simple written agreement between the spouses, without any court-related order
2. Treating the transfer as ordinary alimony income to the wife
3. A direct cash withdrawal by the husband, who then gifts the after-tax proceeds to the wife
4. A Qualified Domestic Relations Order (QDRO), allowing tax-free division and rollover to the alternate payee's own IRA

Answer: D — A Qualified Domestic Relations Order (QDRO), allowing tax-free division and rollover to the alternate payee's own IRA

A) Incorrect — a mere private agreement doesn't satisfy plan administrator and tax requirements; a QDRO is a specific court order meeting statutory requirements recognized by the retirement plan. D) Correct — a QDRO allows tax-free division of qualified plan assets in divorce, letting the alternate payee spouse (the wife) roll her awarded share into her own IRA without current taxation or the 10% early withdrawal penalty. C) Incorrect — a direct withdrawal by the husband followed by a gift would trigger immediate taxation (and potentially the 10% penalty) to the husband, defeating the tax-free transfer goal. B) Incorrect — a QDRO transfer is a division of retirement assets, not alimony, and has entirely different tax characterization and mechanics.

A financially distressed taxpayer wants to settle a $200,000 tax liability for less than the full amount owed, based on their limited realizable equity in assets and future income potential. The appropriate mechanism is:

1. An Offer in Compromise based on Reasonable Collection Potential (RCP), filed with Form 656 and financial disclosures
2. A simple request for penalty abatement only
3. An automatic write-off available once a taxpayer requests it
4. A private negotiation with no formal IRS process required

Answer: A — An Offer in Compromise based on Reasonable Collection Potential (RCP), filed with Form 656 and financial disclosures

A) Correct — an Offer in Compromise settles a liability for less than owed based on Reasonable Collection Potential, calculated from net realizable equity in assets plus a multiple of future income, submitted via Form 656 with supporting Form 433-A/B financial disclosure. B) Incorrect — penalty abatement addresses only penalties, not the broader settlement of the full liability. C) Incorrect — there is no automatic write-off; a formal application and IRS review process is required. D) Incorrect — a formal IRS process (Form 656, financial disclosure, RCP calculation) governs OICs; it isn't an informal private negotiation.

The §7525 tax practitioner–client privilege:

1. Applies broadly to all federal tax matters including criminal cases
2. Applies to all AICPA-member work including financial statement audit
3. Applies to state tax matters and provides the same scope as attorney privilege
4. Applies to federal noncriminal tax matters but not to tax shelters

Answer: D — Applies to federal noncriminal tax matters but not to tax shelters

D) Correct — narrow: federal noncriminal tax, and excludes shelters. A) Criminal matters are outside §7525. C) State matters and full attorney-privilege scope are not covered. B) Audit work is not privileged.

A family has significant unused funds remaining in a 529 plan that has been open for over 15 years, with the named beneficiary having completed her education without using all the funds. Under SECURE 2.0, this family may now be able to:

1. Withdraw the funds entirely tax-free for any purpose whatsoever
2. Roll a limited amount of the unused 529 funds into the beneficiary's own Roth IRA, subject to the annual Roth contribution limit and a $35,000 lifetime cap
3. Only close the account and pay full ordinary income tax plus a 10% penalty on the entire balance with no other option
4. Transfer the funds to any unrelated third party's Roth IRA without any beneficiary restriction

Answer: B — Roll a limited amount of the unused 529 funds into the beneficiary's own Roth IRA, subject to the annual Roth contribution limit and a $35,000 lifetime cap

A) Incorrect — using 529 funds for a non-qualified purpose (unrelated to education or this new rollover provision) would trigger income tax and typically a 10% penalty on the earnings portion; there's no blanket tax-free withdrawal for any purpose. B) Correct — SECURE 2.0 created a new option beginning in 2024 allowing a 529 account open for at least 15 years to roll unused funds into the BENEFICIARY's own Roth IRA, subject to the annual Roth contribution limit for that year and an overall $35,000 lifetime cap on such rollovers — a valuable option for overfunded accounts. C) Incorrect — this ignores the new SECURE 2.0 rollover option, which provides a more tax-efficient alternative to a full nonqualified withdrawal. D) Incorrect — the rollover option is specifically limited to the 529 account's own designated BENEFICIARY's Roth IRA, not transferable to any unrelated third party.

The tax-planning bunching strategy for itemized deductions works by:

1. Spreading charitable gifts evenly over many separate tax years
2. Electing the standard deduction in every year without exception
3. Deferring all deductions until the taxpayer retires from work
4. Concentrating deductions into one year to exceed the standard deduction

Answer: D — Concentrating deductions into one year to exceed the standard deduction

A) Even spreading is what bunching is designed to defeat. D) Correct — bunch into one year, take standard in off years. C) Deferral until retirement is unrelated. B) The whole point is to itemize in the bunch year.

A family's irrevocable trust names an independent trust protector with the power to remove and replace the trustee and to modify certain administrative provisions, but no power over beneficial enjoyment of trust assets. This trust protector role primarily serves to:

1. Add flexibility to an otherwise rigid irrevocable trust structure by allowing certain adjustments over time, generally without causing the grantor to be treated as retaining impermissible control
2. Automatically convert the trust into a revocable trust
3. Eliminate the need for a trustee entirely, with the protector taking over all trustee duties
4. Trigger immediate estate tax inclusion for the grantor due to the mere existence of a trust protector

Answer: A — Add flexibility to an otherwise rigid irrevocable trust structure by allowing certain adjustments over time, generally without causing the grantor to be treated as retaining impermissible control

A) Correct — a trust protector, when granted powers like trustee removal/replacement and limited administrative modification authority (as opposed to powers over beneficial enjoyment or economic benefit), is specifically designed to add flexibility and adaptability to an irrevocable trust over time, generally without the grantor being treated as having retained impermissible control that would jeopardize the trust's irrevocable, estate-tax-excluded status. B) Incorrect — appointing a trust protector doesn't convert an irrevocable trust into a revocable one; the trust retains its irrevocable character. C) Incorrect — a trust protector role is typically distinct from and supplementary to the trustee's role, not a replacement for having a trustee altogether. D) Incorrect — a properly structured trust protector role (limited to administrative matters, not beneficial enjoyment) generally does NOT by itself trigger estate tax inclusion for the grantor.

At-risk rules (§465) vs passive activity loss rules (§469)?

At-risk rules apply FIRST, limiting deductible losses to the taxpayer's actual economic investment at risk (cash + recourse debt, generally not nonrecourse debt); passive activity rules apply AFTER at-risk, further limiting losses to passive income.

Trust decanting?

Distributing assets from an existing irrevocable trust into a new trust with modified terms (different trustee powers, extended term, updated beneficiary provisions), permitted under many states' decanting statutes without needing court approval or beneficiary consent.

DeFi lending/liquidity pool income?

Interest/rewards from lending or providing liquidity generally ordinary income at receipt FMV; token swaps within pools may trigger gain/loss recognition on each swap.

Multi-year Roth conversion laddering strategy?

Converting traditional IRA/401(k) balances to Roth in smaller increments across multiple years (rather than one large conversion) to stay within lower tax brackets each year, minimizing the overall tax cost of the conversion program.

Form 4868 automatic extension?

Grants an automatic 6-month extension of TIME TO FILE an individual return (to October 15) — NOT an extension of time to PAY; any tax due must still be paid by the original April deadline to avoid failure-to-pay penalties and interest.

C corp federal rate (post-TCJA)?

Flat 21% (was tiered up to 35%). State rates additional.