Certified Tax Advisor (CTA) — Questions and Answers

Question 1: Which trust strategy is designed to last multiple generations and benefit descendants indefinitely, often avoiding estate taxes at each generation?

Qualified terminable interest property (QTIP) trust
Dynasty trust (perpetual trust) (Correct answer)
Revocable living trust
Testamentary trust

Correct answer: Dynasty trust (perpetual trust)

A dynasty trust is designed to hold assets for multiple generations, avoiding estate taxes at each generational level by using GST tax exemption.

Question 2: Which retirement plan allows the highest annual contribution limit for self-employed individuals in 2024?

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

Correct answer: Solo 401(k)

A Solo 401(k) allows self-employed individuals to make both employee deferrals ($23,000 in 2024) and employer contributions, for a combined limit of up to $69,000.

Question 3: The economic substance doctrine is used by the IRS to challenge transactions that:

Exceed the passive activity loss limits
Involve related party transactions
Lack business purpose or economic substance beyond tax benefits (Correct answer)
Generate capital gains rather than ordinary income

Correct answer: Lack business purpose or economic substance beyond tax benefits

The economic substance doctrine disallows tax benefits from transactions that have no genuine economic substance or legitimate non-tax business purpose.

Question 4: Tax evasion is best defined as:

Claiming deductions that are later disallowed by the IRS
Illegal concealment of income or fraudulent deductions to avoid paying taxes (Correct answer)
Legal use of tax strategies to minimize tax liability
Taking an aggressive position on a tax return

Correct answer: Illegal concealment of income or fraudulent deductions to avoid paying taxes

Tax evasion is the illegal, intentional non-payment or underpayment of taxes through concealment or fraud, as opposed to legal tax avoidance.

Question 5: The Earned Income Tax Credit (EITC) is available to taxpayers who:

Have investment income above $10,000
Have capital gains from stock sales
Have earned income below certain thresholds and meet other eligibility requirements (Correct answer)
Are retired with Social Security income

Correct answer: Have earned income below certain thresholds and meet other eligibility requirements

The EITC is a refundable credit available to low-to-moderate income workers with earned income and investment income below specified limits.

Question 6: What is the primary benefit of tax deferral strategies?

Moving taxable income to a later period, allowing current funds to grow (Correct answer)
Avoiding state income taxes
Eliminating tax permanently
Reducing the applicable tax rate immediately

Correct answer: Moving taxable income to a later period, allowing current funds to grow

Tax deferral moves income recognition to a future period, allowing those funds to grow on a pre-tax basis in the interim.

Question 7: What is the standard deduction for a single filer for tax year 2024?

$13,850
$15,000
$12,950
$14,600 (Correct answer)

Correct answer: $14,600

For tax year 2024, the standard deduction for single filers is $14,600.

Question 8: Which IRC Section allows small businesses to immediately expense the cost of qualifying property rather than depreciate it over time?

Section 280F
Section 197
Section 168
Section 179 (Correct answer)

Correct answer: Section 179

IRC Section 179 allows businesses to immediately deduct the cost of qualifying property up to an annual limit.

Question 9: Under which circumstance does the IRS statute of limitations extend to 6 years instead of the normal 3 years?

When the taxpayer fails to report foreign income
When the taxpayer omits more than 25% of gross income from the return (Correct answer)
When the taxpayer files a late return
When the taxpayer claims a fraudulent deduction

Correct answer: When the taxpayer omits more than 25% of gross income from the return

Under IRC Section 6501(e), the statute of limitations extends to 6 years when a taxpayer omits more than 25% of gross income from the return.

Question 10: The step-up in basis at death allows heirs to:

Avoid paying any capital gains on inherited property forever
Receive inherited assets with a cost basis equal to fair market value at date of death (Correct answer)
Transfer assets tax-free using the annual exclusion
Deduct the decedent's unrealized losses

Correct answer: Receive inherited assets with a cost basis equal to fair market value at date of death

Assets inherited from a decedent receive a new cost basis equal to fair market value at the date of death, potentially eliminating built-in capital gains.

Question 11: Business meals with clients are deductible at what percentage under current law?

80%
50% (Correct answer)
100%
25%

Correct answer: 50%

Business meals with clients or for business purposes are generally 50% deductible under IRC Section 274.

Question 12: What is the minimum penalty for failure to file a tax return that is more than 60 days late (for returns due after 2015)?

The lesser of $100 or the amount of tax owed
The lesser of $5,000 or 25% of the tax owed
The lesser of $485 (indexed for inflation) or 100% of the tax owed (Correct answer)
The lesser of $1,000 or 5% of the tax owed

Correct answer: The lesser of $485 (indexed for inflation) or 100% of the tax owed

Under IRC Section 6651, if a return is more than 60 days late, the minimum failure-to-file penalty is the lesser of the indexed minimum amount (approximately $485 for 2024) or 100% of the unpaid tax.

Question 13: Which tax planning strategy involves shifting income to a family member in a lower tax bracket?

Tax deferral
Income splitting (Correct answer)
Loss harvesting
Income acceleration

Correct answer: Income splitting

Income splitting involves transferring income-producing assets or business income to family members in lower tax brackets to reduce the overall family tax burden.

Question 14: The Child and Dependent Care Credit provides a credit based on what percentage of qualifying expenses?

50% for all taxpayers
10-15% depending on income
25% with a phase-out
20-35% depending on AGI (Correct answer)

Correct answer: 20-35% depending on AGI

The Child and Dependent Care Credit is 20-35% of qualifying expenses up to $3,000 for one qualifying person, with the percentage decreasing as AGI increases.

Question 15: What is the purpose of a like-kind exchange under IRC Section 1031?

To convert ordinary income to capital gains
To defer capital gains recognition when exchanging business or investment real property (Correct answer)
To avoid paying any capital gains tax permanently
To accelerate depreciation deductions

Correct answer: To defer capital gains recognition when exchanging business or investment real property

A Section 1031 like-kind exchange allows taxpayers to defer capital gains taxes by reinvesting proceeds from the sale of real property into similar real property.

Question 16: The Low-Income Housing Tax Credit (LIHTC) under Section 42 incentivizes:

Renovation of historic buildings
Construction of owner-occupied affordable homes
Investment in affordable rental housing development (Correct answer)
Personal home purchases by low-income buyers

Correct answer: Investment in affordable rental housing development

The LIHTC provides tax credits to investors in qualifying low-income housing projects, incentivizing the development and preservation of affordable rental housing.

Question 17: What is the tax treatment of a Roth IRA qualified distribution?

Subject to 10% early withdrawal penalty
Tax-free and penalty-free (Correct answer)
Taxed as ordinary income
Taxed as capital gains

Correct answer: Tax-free and penalty-free

Qualified Roth IRA distributions are completely tax-free and penalty-free because contributions were made with after-tax dollars.

Question 18: Which trust structure allows a grantor to transfer assets while retaining an income stream, with the remainder passing to charity?

Charitable lead trust (CLT)
Irrevocable life insurance trust
Charitable remainder trust (CRT) (Correct answer)
Dynasty trust

Correct answer: Charitable remainder trust (CRT)

A CRT pays an income stream (annuity or unitrust) to the grantor or other beneficiaries for a term, with the remainder going to charity.

Question 19: Home mortgage interest is deductible on a taxpayer's primary and secondary residence on debt up to what limit (post-2017)?

$750,000 (Correct answer)
$1,000,000
$500,000
$1,500,000

Correct answer: $750,000

Under the TCJA, mortgage interest deductibility is limited to acquisition debt of up to $750,000 for loans taken after December 15, 2017.

Question 20: What is the top marginal federal income tax rate for individuals in 2024?

37% (Correct answer)
39.6%
32%
35%

Correct answer: 37%

The top marginal federal income tax rate for individuals is 37% as of 2024.

Question 21: Which strategy involves gifting assets expected to appreciate significantly to reduce future estate taxes?

Step-up in basis strategy
Income-in-respect-of-decedent planning
NOL carryforward planning
Annual gifting and leveraged gifting techniques (Correct answer)

Correct answer: Annual gifting and leveraged gifting techniques

Transferring appreciating assets out of the estate through annual exclusion gifts and other gifting strategies reduces the taxable estate by removing future appreciation.

Question 22: Alimony received under a divorce agreement finalized after December 31, 2018 is treated how for federal income tax purposes?

Taxable as ordinary income
Tax-exempt (Correct answer)
Taxed as capital gains
Subject to self-employment tax

Correct answer: Tax-exempt

Under the Tax Cuts and Jobs Act, alimony received under post-2018 agreements is no longer includable in the recipient's gross income.

Question 23: A Qualified Personal Residence Trust (QPRT) allows the grantor to:

Avoid property taxes on a primary residence
Transfer a home out of the estate at a discounted gift tax value while retaining use for a term of years (Correct answer)
Deduct mortgage interest at an enhanced rate
Convert the home's equity into tax-free income

Correct answer: Transfer a home out of the estate at a discounted gift tax value while retaining use for a term of years

A QPRT transfers a residence to heirs at a reduced gift tax value by retaining the right to live in the home for a specified term, leveraging the Section 7520 rate.

Question 24: A taxpayer receives a CP2000 notice from the IRS. What does this notice indicate?

The IRS is initiating a full audit of the taxpayer's return
The IRS has accepted the return and is issuing a refund
The IRS has detected a discrepancy between information reported by third parties and the taxpayer's return (Correct answer)
The IRS is proposing to levy the taxpayer's wages

Correct answer: The IRS has detected a discrepancy between information reported by third parties and the taxpayer's return

A CP2000 notice is an automated underreporter notice indicating that information reported to the IRS by third parties (such as W-2s or 1099s) does not match what the taxpayer reported on their return, proposing an adjustment.

Question 25: Which tax form reports a self-employed individual's business income and expenses?

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

Correct answer: Schedule C

Schedule C (Profit or Loss from Business) is used by sole proprietors to report business income and deductible expenses.

Question 26: Charitable contribution deductions for appreciated capital gain property donated to a public charity are generally limited to what percentage of AGI?

30% of AGI (Correct answer)
60% of AGI
20% of AGI
50% of AGI

Correct answer: 30% of AGI

Contributions of appreciated capital gain property to public charities are generally limited to 30% of AGI, with a 5-year carryforward for excess amounts.

Question 27: Which depreciation method allows businesses to immediately expense the full cost of qualifying assets in the year of acquisition?

MACRS straight-line
Sum-of-the-years-digits
Bonus depreciation (Section 168(k)) (Correct answer)
Units of production

Correct answer: Bonus depreciation (Section 168(k))

Section 168(k) bonus depreciation allows immediate expensing of the full cost of qualifying property in the placed-in-service year.

Question 28: Portability of the estate tax exemption allows a surviving spouse to:

Avoid estate taxes entirely
Elect to be taxed at the deceased spouse's marginal rate
Use the deceased spouse's unused estate tax exemption in addition to their own (Correct answer)
Transfer unused exemption to children tax-free

Correct answer: Use the deceased spouse's unused estate tax exemption in addition to their own

Portability allows the surviving spouse to elect to use any unused federal estate tax exemption of the predeceased spouse, effectively doubling the combined exemption.

Question 29: What is the standard for a 'more likely than not' tax position in tax practice?

The position has been upheld by at least one court
The position has been pre-approved by the IRS in a PLR
The position has a 25% or greater chance of being sustained
The position has greater than a 50% chance of being sustained on the merits (Correct answer)

Correct answer: The position has greater than a 50% chance of being sustained on the merits

'More likely than not' means the position has a greater than 50% probability of being sustained upon examination.

Question 30: Which of the following is considered ordinary income for federal tax purposes?

Tax-exempt bond interest
Wages and salaries (Correct answer)
Long-term capital gains
Qualified dividends

Correct answer: Wages and salaries

Wages and salaries are taxed as ordinary income at regular marginal tax rates.

Question 31: Installment sale treatment under IRC Section 453 allows sellers to:

Avoid all capital gains tax on the sale
Spread gain recognition over the payment period as principal is received (Correct answer)
Accelerate depreciation recapture
Convert capital gains to ordinary income

Correct answer: Spread gain recognition over the payment period as principal is received

The installment method allows sellers to recognize gain proportionally as payments are received, spreading the tax liability over the payment period.

Question 32: What is the marital deduction in estate tax law?

A credit equal to 50% of the estate value
A deduction for assets left to children
A flat $5 million exemption for married couples
An unlimited deduction for assets passing to a US citizen surviving spouse (Correct answer)

Correct answer: An unlimited deduction for assets passing to a US citizen surviving spouse

The unlimited marital deduction allows estates to transfer an unlimited amount of assets to a surviving US citizen spouse free of estate tax.

Question 33: Which gift is considered a 'direct skip' for generation-skipping transfer tax purposes?

A gift to a surviving spouse
A gift transferred directly to a grandchild (Correct answer)
A gift to a sibling
A gift to an adult child

Correct answer: A gift transferred directly to a grandchild

A direct skip is a transfer subject to gift or estate tax made directly to a skip person, such as a grandchild, bypassing the intermediate generation.

Question 34: What is the accuracy-related penalty percentage imposed under IRC Section 6662 for a substantial understatement of income tax or negligence?

25% of the underpayment attributable to the violation
20% of the underpayment attributable to the violation (Correct answer)
75% of the underpayment attributable to the violation
10% of the underpayment attributable to the violation

Correct answer: 20% of the underpayment attributable to the violation

IRC Section 6662 imposes an accuracy-related penalty of 20% of the portion of the underpayment attributable to negligence, disregard of rules, or a substantial understatement of income tax.

Question 35: Under Circular 230, a tax practitioner must NOT knowingly:

Represent a client in an audit without written authorization
Submit false or misleading documents or information to the IRS (Correct answer)
Charge a contingent fee for preparing an original tax return
Request an extension of time for a client

Correct answer: Submit false or misleading documents or information to the IRS

Circular 230 explicitly prohibits practitioners from knowingly submitting false or misleading documents or information to the IRS.

Question 36: Which of the following is a key characteristic of an S corporation?

Can have an unlimited number of shareholders
Subject to double taxation
Can have both US and foreign shareholders
Income passes through to shareholders' personal returns (Correct answer)

Correct answer: Income passes through to shareholders' personal returns

S corporations are pass-through entities where income and losses flow through to shareholders' individual tax returns.

Question 37: Which type of trust is used to reduce estate taxes by making an irrevocable gift of appreciating assets while retaining an income stream?

Revocable living trust
Charitable remainder trust
Grantor retained annuity trust (GRAT) (Correct answer)
Special needs trust

Correct answer: Grantor retained annuity trust (GRAT)

A GRAT allows a grantor to transfer appreciating assets to heirs estate-tax-free if the assets outperform the IRS Section 7520 rate.

Question 38: An irrevocable life insurance trust (ILIT) is used primarily to:

Ensure equal distribution of assets to all heirs
Avoid paying income tax on investment earnings
Remove life insurance proceeds from the insured's taxable estate (Correct answer)
Provide income tax deductions for premium payments

Correct answer: Remove life insurance proceeds from the insured's taxable estate

An ILIT holds a life insurance policy outside the insured's estate, so death benefits pass to beneficiaries free of estate tax.

Question 39: The alternate valuation date under IRC Section 2032 allows an estate to value assets as of:

Any date within one year of death
The end of the calendar year of death
One month after the decedent's death
Six months after the date of death (Correct answer)

Correct answer: Six months after the date of death

Section 2032 permits the executor to elect to value estate assets as of six months after the date of death if doing so reduces both the gross estate and the estate tax.

Question 40: Which credit is available to employers who provide qualified family and medical leave to employees?

Employer Credit for Paid Family and Medical Leave (Section 45S) (Correct answer)
Work Opportunity Tax Credit (WOTC)
Small Employer Health Insurance Credit
Disabled Access Credit

Correct answer: Employer Credit for Paid Family and Medical Leave (Section 45S)

IRC Section 45S provides a credit to employers who pay qualifying employees at least 50% of wages during family and medical leave.

Question 41: Which strategy allows high-income taxpayers to contribute to a Roth IRA indirectly by first contributing to a non-deductible traditional IRA?

Roth rollover
Mega Roth conversion
IRA recharacterization
Backdoor Roth IRA (Correct answer)

Correct answer: Backdoor Roth IRA

The backdoor Roth IRA strategy involves making a non-deductible traditional IRA contribution and then immediately converting it to a Roth IRA.

Question 42: What is the corporate alternative minimum tax (CAMT) rate introduced by the Inflation Reduction Act?

15% (Correct answer)
10%
20%
12%

Correct answer: 15%

The Inflation Reduction Act of 2022 established a 15% corporate alternative minimum tax on adjusted financial statement income for large corporations.

Question 43: The AICPA Statements on Standards for Tax Services (SSTS) provide guidance for CPAs on:

Filing requirements for information returns
Professional standards for tax practice, including recommendations and return positions (Correct answer)
How to calculate the alternative minimum tax
Audit procedures for tax-exempt entities

Correct answer: Professional standards for tax practice, including recommendations and return positions

The SSTS provide ethical and professional guidance for CPAs in tax practice, covering areas such as return positions, estimates, and departure from prior-year positions.

Question 44: What is the net investment income tax (NIIT) rate imposed by the ACA on high-income individuals?

0.9%
3.8% (Correct answer)
2.9%
5.0%

Correct answer: 3.8%

The Net Investment Income Tax is 3.8% on the lesser of net investment income or the excess of MAGI over the threshold amount.

Question 45: Which of the following is a valid valuation discount used in estate planning for transferred business interests?

Income acceleration discount
Premium for undivided interest in real estate
Lack of marketability and minority interest discounts (Correct answer)
Appreciation discount for growth assets

Correct answer: Lack of marketability and minority interest discounts

Minority interest discounts and lack-of-marketability discounts can reduce the gift or estate tax value of transferred business interests.

Question 46: Which of the following Social Security benefits are potentially taxable?

Up to 85% of benefits if combined income exceeds thresholds (Correct answer)
Benefits are never taxable
All Social Security benefits regardless of income
Benefits only if AGI exceeds $100,000

Correct answer: Up to 85% of benefits if combined income exceeds thresholds

Up to 85% of Social Security benefits may be taxable if the taxpayer's combined income exceeds the applicable threshold.

Question 47: What is the current flat federal corporate income tax rate under the Tax Cuts and Jobs Act?

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

Correct answer: 21%

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

Question 48: An enrolled agent (EA) obtains their license to practice before the IRS by:

Passing the Special Enrollment Examination (SEE) or working for the IRS for at least 5 years (Correct answer)
Completing a 40-hour tax preparation course
Graduating from an accredited accounting program
Obtaining a CPA license in any US state

Correct answer: Passing the Special Enrollment Examination (SEE) or working for the IRS for at least 5 years

Enrolled agent status is obtained by passing the three-part Special Enrollment Examination or by virtue of working for the IRS in certain technical positions for at least five years.

Question 49: Under the Trust Fund Recovery Penalty (TFRP), which individuals can be held personally liable for a corporation's failure to remit payroll taxes to the IRS?

Only the payroll department employees who processed the paychecks
Any 'responsible person' who willfully failed to collect or pay over the withheld taxes (Correct answer)
Only shareholders who own more than 50% of the corporation
Only the CEO and CFO of the corporation

Correct answer: Any 'responsible person' who willfully failed to collect or pay over the withheld taxes

The TFRP under IRC Section 6672 applies to any 'responsible person' — which can include officers, directors, employees, shareholders, or others with authority over tax payments — who willfully failed to collect or pay over trust fund taxes.

Question 50: A QTIP trust (Qualified Terminable Interest Property trust) is commonly used in estate planning to:

Eliminate estate taxes for all beneficiaries
Allow the surviving spouse full control over inherited assets
Avoid the GST tax on transfers to grandchildren
Provide income to a surviving spouse while directing the ultimate disposition of the principal to other heirs (Correct answer)

Correct answer: Provide income to a surviving spouse while directing the ultimate disposition of the principal to other heirs

A QTIP trust provides income to the surviving spouse (qualifying for the marital deduction) while ensuring that the principal ultimately passes to heirs chosen by the first spouse.

Question 51: Tax-loss harvesting is a strategy that involves:

Accelerating deductions into the current year
Converting traditional IRA to Roth IRA
Selling securities at a loss to offset capital gains (Correct answer)
Selling appreciated assets to pay off debt

Correct answer: Selling securities at a loss to offset capital gains

Tax-loss harvesting involves deliberately selling investments at a loss to offset realized capital gains and reduce taxable income.

Question 52: The statute of limitations for the IRS to assess additional tax on a return is generally:

5 years from the filing date
1 year from the filing date
There is no statute of limitations
3 years from the due date or filing date, whichever is later (Correct answer)

Correct answer: 3 years from the due date or filing date, whichever is later

The IRS generally has three years from the date a return is filed or its due date (whichever is later) to assess additional taxes.

Question 53: Income earned by a trust that is not distributed to beneficiaries is taxed:

At the trust's compressed tax brackets, which reach the top rate at lower income levels (Correct answer)
At the grantor's individual tax rate
At a flat 21% corporate rate
Tax-free until distributed

Correct answer: At the trust's compressed tax brackets, which reach the top rate at lower income levels

Undistributed trust income is taxed within the trust at highly compressed brackets, reaching the 37% top rate at only $15,200 of taxable income in 2024.

Question 54: The taxpayer penalty for substantial understatement of income tax is:

75% of the underpayment if fraud is involved
25% of the total tax due
5% of the underpayment per month
20% of the portion of the underpayment attributable to the substantial understatement (Correct answer)

Correct answer: 20% of the portion of the underpayment attributable to the substantial understatement

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

Question 55: Which of the following is a valid strategy to avoid the 10% early withdrawal penalty from a retirement account?

Taking substantially equal periodic payments (SEPP) under Rule 72(t) (Correct answer)
Withdrawing before age 55
Using funds for a vacation home purchase
Withdrawing for general living expenses

Correct answer: Taking substantially equal periodic payments (SEPP) under Rule 72(t)

Rule 72(t) allows penalty-free distributions from IRAs if payments are taken as substantially equal periodic payments based on life expectancy.

Question 56: Which form is used by US taxpayers to file their individual federal income tax return?

Form 1099
Form 941
Form W-2
Form 1040 (Correct answer)

Correct answer: Form 1040

Form 1040 is the standard US individual income tax return form.

Question 57: What is the maximum contribution limit to a traditional IRA for taxpayers under age 50 in 2024?

$7,500
$7,000 (Correct answer)
$5,500
$6,000

Correct answer: $7,000

The IRA contribution limit for 2024 is $7,000 for taxpayers under age 50.

Question 58: Under the qualified business income (QBI) deduction, eligible pass-through businesses may deduct up to what percentage of QBI?

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

Correct answer: 20%

IRC Section 199A allows eligible taxpayers a deduction of up to 20% of qualified business income from pass-through entities.

Question 59: Which planning strategy is used by high-income taxpayers to shift business income to a lower-bracket child through employment in a family business?

Income assignment strategy
Family employment strategy (Correct answer)
Kiddie tax strategy
Passive activity shifting

Correct answer: Family employment strategy

Paying a child a reasonable wage for actual services rendered in a family business shifts earned income to the child's lower tax bracket.

Question 60: Qualified Opportunity Zone (QOZ) investments offer which tax benefit?

Unlimited charitable deduction
Immediate deduction of investment amount
Deferral and potential reduction of capital gains taxes, plus exclusion of gains from QOZ investment appreciation (Correct answer)
100% exclusion of all investment income

Correct answer: Deferral and potential reduction of capital gains taxes, plus exclusion of gains from QOZ investment appreciation

QOZ investments allow deferral of existing capital gains, a step-up in basis for long-held investments, and exclusion of gains on QOZ fund appreciation held over 10 years.

Question 61: Which of the following expenses is generally NOT deductible for a C corporation?

Employee salaries
Ordinary business expenses
Business-related travel
Dividends paid to shareholders (Correct answer)

Correct answer: Dividends paid to shareholders

Dividends paid to shareholders are not deductible by a C corporation and represent the core of double taxation.

Question 62: Which deduction allows self-employed individuals to deduct health insurance premiums?

Medical expense deduction subject to 7.5% AGI floor
Business expense on Schedule C only
Schedule A itemized deduction only
Self-employed health insurance deduction (above-the-line) (Correct answer)

Correct answer: Self-employed health insurance deduction (above-the-line)

Self-employed individuals may deduct 100% of health insurance premiums as an above-the-line deduction under IRC Section 162(l).

Question 63: Which filing status generally results in the lowest tax liability for an eligible taxpayer?

Married Filing Separately
Married Filing Jointly (Correct answer)
Head of Household
Single

Correct answer: Married Filing Jointly

Married Filing Jointly typically provides the lowest tax liability due to wider tax brackets and higher standard deductions.

Question 64: Which tax form does a C corporation use to file its federal income tax return?

Form 1065
Form 1041
Form 1120S
Form 1120 (Correct answer)

Correct answer: Form 1120

C corporations file their federal income tax return using Form 1120.

Question 65: Which of the following is subject to the accumulated earnings tax?

C corporations accumulating earnings beyond reasonable business needs (Correct answer)
S corporations retaining earnings
Partnerships retaining profits
LLCs taxed as disregarded entities

Correct answer: C corporations accumulating earnings beyond reasonable business needs

The accumulated earnings tax applies to C corporations that retain earnings beyond the reasonable needs of the business to avoid shareholder-level tax.

Question 66: Which deduction allows taxpayers to deduct up to $300 ($600 MFJ) for charitable contributions without itemizing?

Standard deduction add-on for charity
Above-the-line charitable deduction for cash contributions (Correct answer)
Charitable mileage deduction
Schedule A miscellaneous deduction

Correct answer: Above-the-line charitable deduction for cash contributions

A temporary above-the-line deduction allowed non-itemizers to deduct cash charitable contributions, though its permanent status has varied by year.

Question 67: A partnership files which informational return with the IRS?

Form 1041
Form 990
Form 1120
Form 1065 (Correct answer)

Correct answer: Form 1065

Partnerships file Form 1065, an informational return that reports income, deductions, and each partner's distributive share.

Question 68: Which of the following business entities provides limited liability protection to all owners while being taxed as a partnership by default?

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

Correct answer: Limited liability company (LLC)

An LLC with multiple members provides limited liability to all members and is taxed as a partnership by default.

Question 69: Which type of trust is included in the grantor's gross estate at death?

Grantor retained annuity trust after the term ends
Revocable living trust (Correct answer)
Charitable remainder trust (CRT)
Irrevocable life insurance trust (ILIT)

Correct answer: Revocable living trust

Assets in a revocable living trust are included in the grantor's taxable estate because the grantor retains the right to revoke or amend the trust.

Question 70: Which of the following IRS documents provides a legally binding ruling on how the tax law applies to a specific taxpayer's transaction?

Technical advice memorandum
IRS publication
Revenue ruling
Private letter ruling (PLR) (Correct answer)

Correct answer: Private letter ruling (PLR)

A Private Letter Ruling is issued by the IRS to a specific taxpayer and is legally binding on the IRS with respect to that taxpayer's transaction.

Question 71: Which tax form reports interest income received from a bank or financial institution?

Form 1099-INT (Correct answer)
Form 1099-B
Form 1099-DIV
Form 1099-MISC

Correct answer: Form 1099-INT

Form 1099-INT reports interest income paid by financial institutions.

Question 72: The generation-skipping transfer (GST) tax applies to transfers to:

Children of the decedent
Spouses of the decedent's children
Charities receiving bequests
Grandchildren and other skip persons (Correct answer)

Correct answer: Grandchildren and other skip persons

The GST tax applies to transfers to skip persons, which are individuals who are two or more generations below the transferor, such as grandchildren.

Question 73: A 'reportable transaction' that must be disclosed to the IRS on Form 8886 includes which of the following?

Routine tax deductions claimed on Schedule A
Listed transactions and other transactions with defined tax avoidance characteristics (Correct answer)
Any transaction generating a capital gain
All like-kind exchanges under Section 1031

Correct answer: Listed transactions and other transactions with defined tax avoidance characteristics

Reportable transactions include listed transactions and other categories with significant tax avoidance characteristics that the IRS has identified as warranting disclosure.

Question 74: What is the purpose of Schedule K-1 in partnership taxation?

To report payroll tax deposits
To report the partnership's total gross receipts
To allocate each partner's distributive share of income, deductions, and credits (Correct answer)
To calculate the partnership's self-employment tax

Correct answer: To allocate each partner's distributive share of income, deductions, and credits

Schedule K-1 is issued by partnerships to each partner showing their allocated share of income, losses, deductions, and credits for use on their individual returns.

Question 75: What is the federal estate tax exemption (unified credit) for 2024?

$12,920,000
$13,610,000 (Correct answer)
$5,490,000
$11,700,000

Correct answer: $13,610,000

The federal estate and gift tax exemption is $13,610,000 per individual in 2024.

Question 76: What IRS program allows taxpayers to voluntarily disclose previously unreported income to reduce penalties and avoid criminal prosecution?

Offer in Compromise (OIC)
Voluntary Disclosure Program (VDP) (Correct answer)
Installment Agreement Program
Currently Not Collectible (CNC) Status

Correct answer: Voluntary Disclosure Program (VDP)

The IRS Voluntary Disclosure Program (VDP) allows taxpayers to come forward voluntarily to report previously undisclosed income in exchange for reduced penalties and protection from criminal prosecution.

Question 77: Accelerating deductions and deferring income is most beneficial when:

Income is already at the lowest marginal rate
Tax rates are expected to increase in future years (Correct answer)
Tax rates are expected to decrease in future years
The taxpayer has large capital loss carryforwards

Correct answer: Tax rates are expected to increase in future years

Accelerating deductions into the current year and deferring income to the future is most effective when future tax rates are anticipated to rise.

Question 78: Under the IRS installment agreement provisions, what type of agreement allows taxpayers who owe $50,000 or less to establish a payment plan without providing detailed financial information?

Partial Pay Installment Agreement (PPIA)
Guaranteed Installment Agreement
In-Business Trust Fund Express Agreement
Streamlined Installment Agreement (Correct answer)

Correct answer: Streamlined Installment Agreement

The Streamlined Installment Agreement allows taxpayers owing $50,000 or less in combined tax, penalties, and interest to enter a payment plan without providing detailed Collection Information Statements (Forms 433-A or 433-B).

Question 79: What is the maximum Child Tax Credit per qualifying child for tax year 2024?

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

Correct answer: $2,000

The Child Tax Credit is $2,000 per qualifying child under age 17 for tax year 2024.

Question 80: What is the net operating loss (NOL) carryforward rule under the Tax Cuts and Jobs Act?

No carryforward allowed
5-year carryback, 25-year carryforward
No carryback, indefinite carryforward limited to 80% of taxable income (Correct answer)
2-year carryback, 20-year carryforward

Correct answer: No carryback, indefinite carryforward limited to 80% of taxable income

Post-2017 NOLs generally cannot be carried back but may be carried forward indefinitely, limited to 80% of taxable income.

Question 81: What is the holding period required for a capital gain to be classified as long-term?

More than 1 year (Correct answer)
More than 6 months
More than 9 months
More than 2 years

Correct answer: More than 1 year

An asset must be held for more than one year to qualify for long-term capital gains treatment.

Question 82: Which IRS program allows currently uncollectible taxpayers to delay collection activity while their financial situation is monitored?

Currently Not Collectible (CNC) Status (Correct answer)
Installment Agreement
Penalty Abatement Program
Offer in Compromise (OIC)

Correct answer: Currently Not Collectible (CNC) Status

Currently Not Collectible (CNC) status suspends IRS collection action when a taxpayer demonstrates that paying the tax would prevent them from meeting basic living expenses, though the debt remains and interest continues to accrue.

Question 83: Which type of depreciation recapture applies to gains from selling depreciable real property attributable to prior Section 1250 depreciation?

Section 1231 gain taxed at long-term capital gain rates
AMT depreciation adjustment
Section 1245 recapture taxed as ordinary income
Unrecaptured Section 1250 gain taxed at a maximum 25% rate (Correct answer)

Correct answer: Unrecaptured Section 1250 gain taxed at a maximum 25% rate

Unrecaptured Section 1250 gain from selling depreciable real property is taxed at a maximum rate of 25%, not the standard 15%/20% long-term capital gains rates.

Question 84: Which IRS notice is typically the first formal notice that a taxpayer's return has been selected for examination?

Letter 566 (Initial Contact Letter) (Correct answer)
Notice of Deficiency (90-day letter)
Letter 525 (Revenue Agent's Report)
CP2000 Notice

Correct answer: Letter 566 (Initial Contact Letter)

Letter 566 is the IRS's initial contact letter informing a taxpayer that their return has been selected for examination and identifying the items under review.

Question 85: The 'bunching' strategy for charitable contributions involves:

Donating to multiple charities simultaneously
Making charitable contributions through a business entity
Concentrating multiple years' donations into one year to exceed the standard deduction (Correct answer)
Donating appreciated property instead of cash

Correct answer: Concentrating multiple years' donations into one year to exceed the standard deduction

Bunching accelerates charitable contributions into a single year so total itemized deductions exceed the standard deduction, then taking the standard deduction in other years.

Question 86: Which of the following is NOT included in gross income under IRC Section 61?

Child support received (Correct answer)
Royalties
Rental income
Gambling winnings

Correct answer: Child support received

Child support payments are not included in the recipient's gross income under federal tax law.

Question 87: A special use valuation election under IRC Section 2032A allows an estate to value farm or business real property at:

Fair market value for highest and best use
Its actual use value rather than its highest and best use value (Correct answer)
Zero if the heirs continue farming
A flat discount of 40% from fair market value

Correct answer: Its actual use value rather than its highest and best use value

Section 2032A allows qualifying farm and business real property to be valued based on its actual use rather than its fair market value, potentially reducing estate taxes significantly.

Question 88: A donor-advised fund (DAF) provides which tax planning benefit?

Provides a tax deduction only when grants are distributed to charities
Avoids all capital gains on contributed assets
Enables an immediate charitable deduction while granting investment control with grants made over time (Correct answer)
Allows the donor to receive income from donated assets

Correct answer: Enables an immediate charitable deduction while granting investment control with grants made over time

A DAF allows donors to take an immediate charitable deduction in the year of contribution while recommending grants to charities over future years.

Question 89: Which federal form is used to file the estate tax return?

Form 990
Form 1041
Form 709
Form 706 (Correct answer)

Correct answer: Form 706

Form 706 (United States Estate Tax Return) is filed by the executor of a decedent's estate when the gross estate exceeds the filing threshold.

Question 90: The alternative minimum tax (AMT) was designed primarily to ensure that:

All taxpayers pay at least a minimum amount of tax
Self-employed taxpayers pay Social Security taxes
High-income taxpayers cannot use too many deductions to eliminate their tax liability (Correct answer)
Corporations pay the same rate as individuals

Correct answer: High-income taxpayers cannot use too many deductions to eliminate their tax liability

The AMT was enacted to prevent high-income taxpayers from using deductions and credits to avoid paying federal income tax.

Question 91: The state and local tax (SALT) deduction is currently capped at what amount for most taxpayers?

$15,000
Unlimited
$5,000
$10,000 (Correct answer)

Correct answer: $10,000

The TCJA limited the SALT deduction to $10,000 ($5,000 for married filing separately) through at least 2025.

Question 92: A taxpayer who has an unpaid tax liability and the IRS has filed a Notice of Federal Tax Lien (NFTL) wants to sell their home. What IRS document would allow the property to be sold free and clear of the lien?

Withdrawal of Notice of Federal Tax Lien
Certificate of Release of Federal Tax Lien
Subordination Agreement
Certificate of Discharge of Federal Tax Lien (Correct answer)

Correct answer: Certificate of Discharge of Federal Tax Lien

A Certificate of Discharge removes the federal tax lien from a specific property, allowing it to be sold free and clear, even while the underlying tax liability remains and the lien attaches to other property.

Question 93: Under the MACRS system, what is the recovery period for 5-year property (e.g., automobiles, computers)?

10 years
3 years
7 years
5 years (Correct answer)

Correct answer: 5 years

Under MACRS, 5-year property has a 5-year recovery period using the 200% declining balance method.

Question 94: A shareholder-employee of an S corporation must receive a:

Reasonable salary subject to payroll taxes (Correct answer)
No compensation, only distributions
Guaranteed payment similar to a partnership
Distribution equal to all S corp earnings

Correct answer: Reasonable salary subject to payroll taxes

IRS rules require S corporation shareholder-employees who perform services to receive a reasonable salary subject to employment taxes.

Question 95: Which strategy is used to convert a traditional IRA to a Roth IRA, paying taxes now to receive tax-free distributions later?

Direct transfer
Stretch IRA
Rollover
Roth conversion (Correct answer)

Correct answer: Roth conversion

A Roth conversion involves transferring funds from a traditional IRA to a Roth IRA and including the converted amount in current taxable income.

Question 96: The self-employment tax rate for net self-employment earnings is:

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

Correct answer: 15.3%

The self-employment tax rate is 15.3%, covering 12.4% for Social Security and 2.9% for Medicare.

Question 97: Which Treasury Department circular governs the conduct of practitioners before the IRS?

Circular 170
Publication 946
Revenue Procedure 2014-5
Circular 230 (Correct answer)

Correct answer: Circular 230

Treasury Circular 230 sets forth the rules and ethical standards governing attorneys, CPAs, enrolled agents, and other practitioners before the IRS.

Question 98: Unreimbursed partnership expenses paid by a partner are reported on:

Form 2106
Schedule E, with a notation (Correct answer)
They are not deductible
Schedule C

Correct answer: Schedule E, with a notation

Partners may deduct unreimbursed partnership expenses on Schedule E as a reduction to their distributive share of partnership income.

Question 99: Which action by a tax practitioner constitutes a conflict of interest under Circular 230?

Representing two clients whose tax interests are directly adverse without proper consent (Correct answer)
Representing two clients in the same industry
Declining to represent a client in an audit
Charging different fee rates to different clients

Correct answer: Representing two clients whose tax interests are directly adverse without proper consent

Representing clients with directly adverse interests simultaneously is a conflict of interest that requires informed written consent from all affected clients under Circular 230.

Question 100: What is the annual gift tax exclusion per recipient for 2024?

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

Correct answer: $18,000

The annual gift tax exclusion is $18,000 per recipient in 2024, allowing tax-free gifts without reducing the lifetime exemption.

Question 101: A tax preparer who recklessly or intentionally disregards IRS rules and regulations on a return may face a preparer penalty of:

$250 per return
Equal to the tax understatement
$1,000 per return or 75% of income from the return, whichever is greater (Correct answer)
$5,000 per return

Correct answer: $1,000 per return or 75% of income from the return, whichever is greater

Under IRC Section 6694(b), willful or reckless disregard of tax rules carries a penalty of $5,000 or 75% of preparer income from the return, whichever is greater.

Certified Tax Advisor (CTA)

The Certified Tax Advisor (CTA) designation, issued by the Financial Education Partnership, validates advanced competency in federal taxation across individual, business, and estate/trust areas. Candidates must have 5+ years of tax industry experience and complete 18 hours of CTA course instruction before sitting the written exam.

100

Questions

180 min

Time Limit

75%

To Pass

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