2023 EA QUIZ ANSWERS AND EXPLANATIONS

Question 1 – Rental Property – (Part 2)
 
Question: Carl’s father deeded him 400 acres of land. The fair market value (FMV) on the date of the transfer was $350,000. His father had paid $40,000 for the land. No gift tax was paid on the transfer. When Carl’s father died six months later, the fair market value was $400,000. What is Carl’s basis in the 400 acres?
 
A $400,000
B $350,000
C* $40,000
D $260,000
 
Explanation:: When looking for the basis of gifted property, first thing to do is to determine
– donor’s adjusted basis right before the gift was made
– fair market value (FMV) at the time the gift was made, and
– gift tax paid, if any.
 
The next step is to ask:
Is the FMV less than the adjusted basis? OR
Is the FMV equal or greater than adjusted basis?
 
In this case the FMV is greater than the adjusted basis. So, the basis for the new owner is the adjusted basis of the donor plus all or part of the gift tax paid, depending on the date of the gift. As no gift tax was paid, the basis for Carl is the $40,000 adjusted basis of his father right before the gift was made.
 
If the FMV had been less than the adjusted basis, Carl’s basis would depend on whether he has a gain or loss when he disposes of the property.
 
Practice note: Always consult with an estate attorney and check tax implications of a possible step-up basis when time of gifting property and time of death are close to each other.
Question 2 – Practice Before the IRS (Part 3)
 
Question: Identify the item below that is not considered practice before the IRS:
A Corresponding with the Internal Revenue Service on behalf of a client.
B* Preparing a tax return for an individual.
C Representing a client at an audit.
D Calling the IRS to discuss a letter received by a client
 
Explanation: Preparing a tax return for an individual does not constitute practice before the IRS. According to Circular 230, § 10.24, Practice before the Internal Revenue Service comprehends all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities under the laws or regulations administered by the Internal Revenue Service.
 
Such presentations include, but are not limited to:
• Preparing documents;
• Filing documents;
• Corresponding and communicating with the Internal Revenue Service;
• Rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and
• Representing a client at conferences, hearings, and meetings.

Reference::

Circular 230, § 10.2: https://www.irs.gov/pub/irs-pdf/pcir230.pdf#page=6

Circular 230, § 10.8: https://www.irs.gov/pub/irs-pdf/pcir230.pdf#page=17

Publication 947, Practice Before the IRS and Power of Attorney: https://www.irs.gov/pub/irs-pdf/p947.pdf#page=3

31 CFR § 10.8: https://www.law.cornell.edu/cfr/text/31/10.8

Question 3 – Business Expenses, Deductions, Credits (Part 2)
 
Question:  Bob Bold was a full-time long-haul trucker. He bought a used high-end rig this year for $110,000. The gross weight was 80,000 pounds. What form does he use to report the highway use taxes on this rig to the IRS?
A Form 8300
B* Form 2290
C Form 4562
D Form 4797
 
Explanation: Form 2290, Heavy Highway Vehicle Use Tax Return. When a vehicle used on the road weighs 55,000 pounds or more, the annual highway excise tax must be paid. Form 2290 is used to report and pay this tax. Note that this is a Form for periods beginning July 1st to June 30th of each year.
 
Form 8300, Report of Cash Payments Over $10,000 Received In a Trade or Business – must be filed by a business anytime they receive $10,000 in cash from any one customer – even if they split that cash over several weeks.
 
Form 4797 – Sales of Business Property – this would be used when the truck, or any property used in business is sold.
 
Form 4562 –  Depreciation and Amortization   – this would be used to report the depreciation on the truck and any other asset used in business.
 
Reference:

Form 2290, Heavy Highway Vehicle Use Tax Return: https://www.irs.gov/forms-pubs/about-form-2290

Form 8300, Report of Cash Payments Over $10,000 Received In a Trade or Business: https://www.irs.gov/forms-pubs/about-form-8300

Form 4797, Sales of Business Property: https://www.irs.gov/forms-pubs/about-form-4797

Form 4562, Depreciation and Amortization (Including Information on Listed Property): https://www.irs.gov/forms-pubs/about-form-4562

Question 4 – Retirement – IRAs Prohibited Transactions (Part 1)
 
Question: In the current year, Nick’s van broke down and needed too many repairs to justify the costs. He worked with a local dealership to purchase a new one, because without the van, he could not work. The dealership convinced him to use his IRA as security.  Which of the following situations pertain to Nick (age 38)?
A The transaction is valid because the van is a needed for employment.
B The transaction is considered a withdrawal from the IRA, but Nick will not have to pay taxes.
C The transaction is considered a withdrawal from the IRA, and Nick is subject to early withdrawal taxes.
D* The transaction is a prohibited one and has consequences.
 
Explanation: Oh Nick! This is definitely a prohibited transaction. Why?
 
Per Publication 590-A:
The following are some examples of prohibited transactions with a traditional IRA.
• Borrowing money from it.
• Selling property to it.
• Using it as security for a loan.
• Buying property for personal use (present or future) with IRA funds.
 
Using an IRA as security is a no-no . Because of this,
• the IRA’s retirement fund status will have ended as of January of this year.
• To make matters worse, Nick is considered to have taken a distribution of l ALL the IRA assets at fair market values on January 1st of this year.
• If the total of those values is more than his basis, he’ll have a taxable gain on top of the 10% federal early distribution penalty. (Most traditional IRAs have a basis of zero.)
• In addition, he will face state taxes too.
 
Does his age make a difference in this question?
Not really. But, if he is under age 59 1/2, not only does he have to pay taxes on the entire IRA, but also the early withdrawal penalty.
 
Question 5 – Requirements for Enrolled Agents (Part 3)
 
Question: Mike is an enrolled agent. Widget, Inc. is an accrual basis taxpayer. while preparing Widget’s current year return, Mike discovered that Widget failed to include income that Widget received in the current year, but that should have been included in income last year under the accrual method of accounting. What must Mike do?
A* Advise Widget of the error and the consequences of the error.
B Include the income on the current year tax return.
C Refuse to prepare Widget’s current year tax return until Widget agrees to amend last year’s tax return to include the amounting income.
D Change Widget to the cash method of accounting.
 
Explanation: Mike has an obligation to notify his client of the error and inform him of the consequences of the error. (Ideally, in writing.)
Since income belonged in last year’s tax return, the taxpayer cannot simply include it in the current year return, nor change to the cash method of accounting to fix the error.
 
Whether or not Mike decides to prepare the current year return is not governed under Circular 230. Per Circular 230, § 10.21, a practitioner must advise the client promptly of the fact of noncompliance, error, or omission. But the practitioner is not required to force the taxpayer to take any specific action.
 
Reference:

Knowledge of client’s omission: Circular 230, § 10.21: https://www.irs.gov/pub/irs-pdf/pcir230.pdf#page=19

31 CFR § 10.21: https://www.law.cornell.edu/cfr/text/31/10.21

IRS – Accuracy-Related Penalty: https://www.irs.gov/payments/accuracy-related-penalty

Question 6 – Paid Sick Leave  (Part 2)
 
Question: Vera Roberts worked as a Registered Nurse in a rehabilitation facility.  In June of 2022, Vera contracted COVID-19 and took three weeks off to recover.  During that time, her employer paid her wages.
Her employer will be exempt from paying and withholding a portion of, which of the following payroll taxes relating to her sick time pay?
A Federal Income Tax
B Annual Federal Unemployment (FUTA) Tax
C* There is no exemption
D Federal Insurance Contributions Act (FICA)
 
Explanation: Since Vera was only out for 3 weeks, all wages are subject to all payroll taxes.

In general, sick pay is any amount you pay under a plan to an employee who is unable to work because of sickness or injury. These amounts are sometimes paid by a third party, such as an insurance company or an employees’ trust. In either case, these payments are subject to social security, Medicare, and FUTA taxes.

These taxes don’t apply to sick pay paid more than 6 calendar months after the last calendar month in which the employee worked for the employer. The payments are always subject to federal income tax. See section 6 of Pub. 15-A for more information.

 
Reference:
Question 7 – Representing a taxpayer before appeals (Part 3)
 
Question: Disputes involving what areas of taxation may not be resolved in the United States Tax Court?
A Income tax
B Gift tax
C* Employment tax
D Estate tax
 
Explanation: Employment tax issues cannot be resolved in the US Tax Court; they can only be brought to the US District Court or US Court of Federal Claims.
 
Just in case you think we’re wrong because you happen to have seen the Tax Court petition, and it mentions the word “worker.” That refers to employee status – the dispute about whether a worker is an employee or independent contractor – not employment taxes.
 
Reference:
Pub 556 – Examination of Returns, Appeal Rights, and Claims for Refund: https://www.irs.gov/pub/irs-pdf/p556.pdf#page=12
 
Question 8 – Rental Property – Capitalization  (Part 2)
 
Question: You incurred the following expenditures in connection with your rental property. Which of them should be capitalized?
A New roof.
B Install new cabinets.
C Pave driveway.
D* All of the Explanation choices.
 
Explanation: All are improvements and must be capitalized (i.e., depreciated over time).
The cost of repairs to rental property can be deducted in the current year, while the cost of improvements is recovered by taking depreciation. The problem is distinguishing between the two.
 
A repair keeps property in good operating condition. It does not materially add to the value of property or substantially prolong its life (e. g. repainting, fixing leaks, and replacing broken windows are examples of repairs.)
 
An improvement adds to the value of property, prolongs its useful life, or adapts it to new uses (e. g. finishing a basement room, putting up a fence, putting in new cabinets, and putting on a new roof).
 
If in doubt, choose improvement.
 
Reference: 
Publication 527 – Residential Rental Property: https://www.irs.gov/pub/irs-pdf/p527.pdf#page=5
Question 9 – Form 1041 Due Date  (Part 2)
 
Question: What is the due date for Form 1041?
A* The 15th day of the fourth month following the close of the estate’s tax year (extension is available).
B The 15th day of the fourth month following the close of the estate’s tax year (no extension is available).
C The 15th day of the third month following the close of the estate’s tax year (extension is available).
D The 15th day of the third month following the close of the estate’s tax year (no extension is available).
 
Explanation: The 15th day of the fourth month following the close of the estate’s tax year (extension is available).
 
For calendar year estates and trusts, file Form 1041 and Schedule(s) K-1 by April 15th (or the next business day, if the 15th is on a weekend or holiday).
For fiscal year estates and trusts, file Form 1041 by the 15th day of the 4th month following the close of the tax year.
If more time is needed to file the estate or trust return, use Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, to apply for an automatic 5 and 1/2-month extension.
 
 
Reference:

Form 1041, U.S. Income Tax Return for Estates and Trusts – Instructions: https://www.irs.gov/forms-pubs/about-form-1041

Form 1041 extensions – http://iTaxMama.com/Form1041_Extension

Publication 509, Tax Calendars: https://www.irs.gov/forms-pubs/about-publication-509

Publication 509 for 2021 – the exam year – https://www.irs.gov/pub/irs-prior/p509–2021.pdf

Question 10 – Representing a Taxpayer in the Collection Process (Part 3)
 
Question: Nate, a calendar year taxpayer, filed his federal income tax return, with a refund due, for tax year 2019 on April 1, 2020. The last day to timely file a claim for refund with respect to that return is:
A April 1, 2022.
B April 15, 2022
C April 1, 2023.
D* April 15, 2023.
 
Explanation: A claim for refund must be filed no later than 3 years from the date your return was considered filed or 2 years from the date you paid the tax, whichever is later. In this case the return was filed 4-1-20; but was not due until 4-15-20; therefore the last day Nate can timely file a claim for refund with respect to that return is 4-15-2023.
 
Reference:

Pub 556 – Examination of Returns, Appeal Rights, and Claims for Refund: https://www.irs.gov/pub/irs-pdf/p556.pdf#page=13

26 U.S. Code §6511: https://www.law.cornell.edu/uscode/text/26/6511

Question 11 – Business Expenses, Deductions, Credits (Part 2)
 
Question: Oahu Industries, an up and coming business, is trying to determine whether or not they would qualify for the Small Business Health Care Tax Credit. There are currently 30 full time employees working there. There are no part-timers. The average employee salary is $40,000. Additionally, Oahu Industries offers to pay 60% of the premium costs for their offered health care, which comes from the SHOP marketplace. With the information known, would Oahu industries qualify for this credit?
A Yes, they meet all of the conditions to qualify.
B No, they do not meet the employee salary condition.
C No, they do not meet the premium cost contribution condition.
D* No, they do not meet the Full time Equivalent condition.
 
Explanation: In order to qualify, they would have to have fewer than 25 full-time equivalent (FTE) employees for the tax year.
 
It is also important to note that even if they had fewer than 25 full-time employees, they could still go over this limit by employing part-time employees for enough hours to be included in the computation of 25 full-timers or more.
 
Add all part-time hours and divide by 2,080 per year, to get the full-time equivalent (FTE) number of employees.
 
 
Reference:

Form 8941, Credit for Small Employer Health Insurance Premiums – Instructions:  https://www.irs.gov/pub/irs-pdf/i8941.pdf

Full-Time Equivalent worksheet – https://www.irs.gov/pub/irs-pdf/i8941.pdf#page=7

 
Question 12 – Sanctionable Acts  (Part 3)
 
 
Question: A practitioner who is suspended for 2 years may seek reinstatement after:
A 5 years from the date of suspension
B 3 years after the suspension period expires
C 2 years after the suspension period expires
D* 2 years from the date of suspension
 
Explanation: The following practitioners may petition the IRS for reinstatement:
• A practitioner who is suspended for less than five years – immediately following the expiration of the suspension period
• A practitioner who is disbarred – after the expiration of five years following the disbarment
 
The IRS will not grant reinstatement unless it is satisfied that the practitioner is no longer likely to engage in conduct violating Circular 230, and that granting such reinstatement would not be contrary to the public interest.
 
Reference:

31 CFR § 10.81 – Petition for reinstatement: https://www.law.cornell.edu/cfr/text/31/10.81

Circular 230 § 10.81 – Petition for reinstatement: https://www.irs.gov/pub/irs-pdf/pcir230.pdf#page=41

 
Question 13 – Above-the-line Charitable (Part 1)
 
Question: Mr. Kotter, a married teacher, has the following income and expenses in 2022:
$45,000 Salary
$500 Educator expenses
$1,500 Student loan interest paid
$500 Cash charitable contributions
 
What is their Adjusted Gross Income (AGI) if Mrs. Kotter had no income or expenses?
A  $42,700
B  $42,500
C  $45,000
D* $43,200
 
Explanation:

Not all expenses are above-the-line adjustments to income. 

For 2022 Charitable contributions may only be claimed on Schedule A.

The educator expense is limited to $300 since Mr. Kotter is the only spouse who is a teacher. 

Incorrect are A, B, and C. 

  • A includes only $300 of the educator expenses (his) and the charitable contribution deductions
  • B includes all of the educator and charitable expenses.
  • C does not take any of the deductions

D included the student loan interest and $300 of his educator expenses.

 

Here is the calculation:

          $45,000    Salary
               (250)   Educator expenses
            (1,500)  Student loan interest paid
          $43,200                

Reference:
 
Question 14 – Advising the Taxpayer  (Part 1)
 
Question: Angeline designs high-end jewelry. Joe, her favorite client ordered a custom diamond-platinum tiara for his wife’s birthday. Angeline told him it would cost him $78,000. Joe didn’t bat an eye and brought her the briefcase full of cash the very next day. When Angeline receives this much cash, what is her immediate responsibility to the IRS?
A Since it’s cash, she doesn’t have to report the income
B Record the sale on her business books
C* File Form 8300 with the IRS by the 15th day after the date the cash was received.
D File Form 8300 with the IRS at the end of the year
 
Explanation: Form 8300 must be filed by the 15th day after the date the cash was received. If that date falls on a Saturday, Sunday, or legal holiday, file the form on the next business day
 
Multiple payments. If you receive more than one cash payment for a single transaction or for related transactions, you must report the multiple payments any time you receive a total amount that exceeds $10,000 within any 12-month period. Submit the report within 15 days of the date you receive the payment that causes the total amount to exceed $10,000. If more than one report is required within 15 days, you may file a combined report. File the combined report no later than the date the earliest report, if filed separately, would have to be filed.
 
Reference:

Form 8300, Report of Cash Payments Over $10,000 Received In a Trade or Business and when to file https://www.irs.gov/forms-pubs/about-form-8300

High-end tiaras – photos and costs:

https://www.royalfinejewelers.com/our-blog/2018/Sep/17/33-carat-diamond-and-platinum-tiara-ties-spanish-r/

 
Question 15 – Estate filing requirements (Part 1)
 
Question: The Portability of Deceased Spousal Unused Exclusion (DSUE) provides a way for estates to elect to transfer any unused exclusion to the surviving spouse. IF elected, a Form 706 must be filed, even if the estate is below the basic unified exclusion amount in the year of death (currently, well over $10 million dollars).
All the scenarios below would disqualify a DSUE election, except:
A* The surviving spouse remarried.
B The surviving spouse is a nonresident, non-citizen of the United States and resides in a country that does not have a treaty with the U.S.
C Form 706 was filed 16 months after the decedent’s date of death.
D The executor files an amendment to include the portability election, after the due date (including an extension).
 
Explanation: The surviving spouse remarried.  Remarriage does not affect the designation of the last deceased spouse and does not prevent the surviving spouse from applying the DSUE amount to taxable transfers.
If the surviving spouse does not reside in the U.S. and is not a citizen, they must live in a country that has a treaty with the U.S.
 
• An executor can only elect to transfer the DSUE amount to the surviving spouse if the Form 706 is filed timely; that is, within 9 months of the decedent’s date of death or, if you have received an extension of time to file, before the 6-month extension period ends.
• An automatic six-month extension of time to file the return is available to all estates, including those filing solely to elect portability, by filing Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, on or before the due date of the estate tax return.
• If the executor files an amendment to include the portability election, after the due date (including an extension), the portability election is not valid.
 
Reference:

Form 706 and Instructions  United States Estate (and Generation-Skipping Transfer) Tax Return, and Instructions: https://www.irs.gov/forms-pubs/about-form-706

Form 4768 – Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes:    https://www.irs.gov/forms-pubs/about-form-4768

Amending Form 706 to include DSUE: https://www.irs.gov/pub/irs-pdf/i706.pdf#page=37

IRC 2010: https://www.law.cornell.edu/uscode/text/26/2010

IRC 2505: https://www.law.cornell.edu/uscode/text/26/2505