Sample practice questions

A few real questions from this free bank, with full explanations. Use the practice tool above for the whole set.

1. 1. Ethics, Professional Responsibilities and Federal Tax Procedures

   While preparing Ortega's current-year return, CPA Lin finds that Ortega's prior-year return, prepared by another firm, left out $12,000 of consulting income. Under Treasury Circular 230, what must Lin do?

   • a.File an amended prior-year return without waiting for Ortega
   • b.Report the omission to the IRS within 30 days of finding it
   • c.Withdraw from the engagement before filing this year's return
   • d.Promptly tell Ortega about the omission and its consequences

   Answer: d

   Explanation: Circular 230 section 10.21 requires a practitioner who learns of a client's error or omission on a filed return to advise the client promptly of it and of its consequences under the Code. The rule does not require reporting the client to the IRS, and it does not by itself force withdrawal. Whether to amend is the client's decision; the practitioner cannot file an amended return on the client's behalf without the client.

2. 2. Ethics, Professional Responsibilities and Federal Tax Procedures

   Dana's return was due April 15 with no extension. She filed it and paid the $10,000 balance due 1 month and 20 days late, without reasonable cause and without fraud. What are the combined failure-to-file and failure-to-pay additions under IRC section 6651?

   • a.$1,000
   • b.$900
   • c.$1,100
   • d.$1,500

   Answer: a

   Explanation: Both additions count each month or fraction, so the delay is 2 months. Failure to file is 5 percent per month (10 percent, $1,000) and failure to pay is 0.5 percent per month (1 percent, $100). Section 6651(c)(1) reduces the failure-to-file amount by the failure-to-pay amount for months both apply, so the total is $900 + $100 = $1,000. $1,100 ignores that reduction, $900 is the reduced failure-to-file amount alone, and $1,500 counts three months.

3. 3. Business Law

   A buyer's purchase order to a merchant seller states that acceptance is limited to the order's terms. The seller's signed acknowledgment accepts the order but adds a clause charging interest on late payments. Under UCC 2-207, what are the contract terms?

   • a.No contract exists, because the acknowledgment added a new term
   • b.A contract exists on the buyer's terms, without the interest clause
   • c.A contract exists on the buyer's terms, plus the interest clause
   • d.A contract forms when the buyer signs the interest clause

   Answer: b

   Explanation: Under UCC 2-207(1), a definite acceptance operates as an acceptance even though it states additional terms, unless it is expressly conditional on assent to them. Between merchants, the additional terms become part of the contract unless, among other things, the offer expressly limits acceptance to its terms (2-207(2)(a)). Here the offer did, so the contract is formed on the buyer's terms and the interest clause drops out.

4. 4. Business Law

   In an individual's Chapter 7 case, which of these debts is discharged?

   • a.A debt for willful and malicious injury to another
   • b.Income tax for a year for which no return was filed
   • c.Credit card debt from ordinary household purchases
   • d.Unpaid child support owed to a former spouse

   Answer: c

   Explanation: 11 U.S.C. 523(a) lists debts excepted from an individual's discharge, including domestic support obligations (523(a)(5)), debts for willful and malicious injury (523(a)(6)), and taxes for which a required return was not filed (523(a)(1)(B)). Ordinary unsecured consumer credit is not on the list, so it is discharged, absent fraud in incurring it.

5. 5. Federal Taxation of Property Transactions

   Theo inherited stock when his father died in March 2025. His father had bought it for $20,000; it was worth $90,000 at death, and no alternate valuation was elected. Theo sold it in July 2025 for $95,000. What does Theo report?

   • a.$5,000 short-term capital gain
   • b.$75,000 short-term capital gain
   • c.$5,000 long-term capital gain
   • d.$75,000 long-term capital gain

   Answer: c

   Explanation: Property acquired from a decedent takes a basis equal to its fair market value at the date of death (IRC 1014(a)), here $90,000, so the gain is $95,000 - $90,000 = $5,000. Under IRC 1223(9), a person whose basis is determined under section 1014 and who sells within one year after the death is treated as having held the property for more than one year, so the gain is long-term. The father's $20,000 cost does not carry over.

6. 6. Federal Taxation of Individuals

   A travel agency lets its employees buy the trip-planning services it sells to customers for $1,000 at a price of $700. How much must an employee who uses the discount include in gross income?

   • a.$0
   • b.$100
   • c.$200
   • d.$300

   Answer: b

   Explanation: IRC 132(c)(1)(B) excludes a qualified employee discount on services only up to 20 percent of the price at which the employer offers the services to customers. Twenty percent of $1,000 is $200, but the discount is $300, so the $100 excess is included in income.

7. 7. Federal Taxation of Individuals

   For tax year 2025, Hugo's AGI (his contribution base) is $100,000. He gives $70,000 in cash to his church, a public charity, and makes no other gifts. How much can he deduct in 2025, and what happens to the rest?

   • a.$30,000 now; $40,000 carried forward up to 5 years
   • b.$60,000 now; $10,000 carried forward up to 5 years
   • c.$50,000 now; $20,000 carried forward up to 5 years
   • d.$70,000 now; nothing is carried forward to later years

   Answer: b

   Explanation: IRC 170(b)(1)(G) allows cash contributions to public charities up to 60 percent of the contribution base for tax years beginning after 2017, which is $60,000 here, and the excess carries over to each of the 5 succeeding tax years. $50,000 applies the general 50 percent limit, and $30,000 applies the 30 percent limit for capital gain property, neither of which governs cash gifts to a public charity.

8. 8. Federal Taxation of Individuals

   The Parks' daughter, age 20, is a full-time college student who lives with them all year apart from time at school. She earned $9,000 from a part-time job but did not provide more than half of her own support, and she files no joint return. Can the Parks claim her?

   • a.Yes, as a qualifying child; her earnings don't matter
   • b.Yes, as a qualifying relative rather than a child
   • c.No; a child over age 18 cannot be a qualifying child
   • d.No; her income exceeds the qualifying relative limit

   Answer: a

   Explanation: Under IRC 152(c), a qualifying child must be the taxpayer's child (or other listed relative), live with the taxpayer more than half the year, be under 19 or a student under 24 at year-end, not provide over half her own support, and not file a joint return. There is no gross income test for a qualifying child; the gross income limit in IRC 152(d)(1)(B) applies only to qualifying relatives, and a qualifying child cannot also be a qualifying relative (152(d)(1)(D)).

9. 9. Federal Taxation of Entities (including tax preparation)

   Jade Co. sells tangible goods to customers in State X. Its only in-state activity has been solicitation of orders by traveling sales reps, with orders approved and shipped from outside State X. Which new activity would cost Jade the protection of Public Law 86-272 from State X's net income tax?

   • a.Its reps begin soliciting orders that are sent out for approval
   • b.Its employees begin repairing customers' machines in State X
   • c.Its reps begin soliciting orders from State X buyers by phone
   • d.It begins shipping approved orders from a warehouse in State Y

   Answer: b

   Explanation: 15 U.S.C. 381(a) bars a state from imposing a net income tax when the only in-state activities are solicitation of orders for sales of tangible personal property that are sent outside the state for approval and filled by shipment from outside the state. Performing repair services in the state goes beyond solicitation, so the protection is lost. Soliciting by phone, shipping from another state, and sending orders out for approval all stay within the statute.

10. 10. Federal Taxation of Entities (including tax preparation)

    Lena's stock basis in an S corporation is $20,000 at the start of the year, and she has no debt basis. Her shares of this year's items are: ordinary business income $15,000; tax-exempt interest $1,000; nondeductible expenses $2,000; long-term capital loss $5,000. She received a $30,000 cash distribution and made no special ordering election. How much of the capital loss may she deduct this year?

    • a.$5,000, with nothing carried forward
    • b.$2,000, with $3,000 carried forward
    • c.$4,000, with $1,000 carried forward
    • d.$0, since the distribution came first

    Answer: c

    Explanation: Under Treas. Reg. 1.1367-1(f), basis is first increased for income ($20,000 + $15,000 + $1,000 = $36,000), then reduced for distributions ($6,000 left, so the distribution is tax-free), then for nondeductible expenses ($4,000 left), and last for losses. Only $4,000 of the $5,000 loss is allowed (IRC 1366(d)(1)); $1,000 carries forward indefinitely (1366(d)(2)). $5,000 would require the elective ordering rule of 1.1367-1(g).