IRS Enrolled Agent Exam (SEE) — All Questions

A taxpayer's filing status for the year is generally determined as of:

• a.The first day of the tax year
• b.The date the return is filed
• c.The last day of the tax year✓
• d.The date of the taxpayer's most recent pay period

Filing status (single, married, head of household, etc.) is generally determined by the taxpayer's marital and household situation on the last day of the tax year, December 31 for calendar-year taxpayers. A special rule treats a taxpayer whose spouse died during the year as married for that year.

Which requirement must be met to file as head of household?

• a.The taxpayer must be married and filing separately
• b.The taxpayer must be unmarried (or considered unmarried) and pay more than half the cost of keeping up a home for a qualifying person✓
• c.The taxpayer must have no dependents
• d.The taxpayer must earn below the standard deduction amount

Head of household requires the taxpayer to be unmarried or considered unmarried at year-end and to have paid more than half the cost of maintaining a home that was the principal residence of a qualifying person for more than half the year. It provides a larger standard deduction than single status.

Which of the following is generally EXCLUDED from a taxpayer's gross income?

• a.A cash gift received from a relative✓
• b.Wages reported on a Form W-2
• c.Interest earned on a bank savings account
• d.Net profit from a sole proprietorship

Gifts received are excluded from the recipient's gross income (any tax consequence falls on the donor through gift tax rules). Wages, taxable interest, and business profit are all includible in gross income.

A credit differs from a deduction in that a credit:

• a.Reduces gross income before AGI is computed
• b.Is always refundable
• c.Can only be claimed by businesses
• d.Reduces the tax owed dollar for dollar✓

A tax credit reduces the tax liability directly, dollar for dollar, making it more valuable per dollar than a deduction, which only reduces taxable income. Some credits are refundable and some are nonrefundable, so not all credits are refundable.

Property sold for a gain after being held for more than one year generally receives:

• a.Ordinary income treatment at the taxpayer's marginal rate
• b.Long-term capital gain treatment at favorable rates✓
• c.No tax because it was held over a year
• d.Treatment as a nondeductible personal expense

A holding period of more than one year produces long-term capital gain, generally taxed at preferential rates lower than ordinary rates. A holding period of one year or less produces short-term gain taxed as ordinary income.

The gain or loss on the sale of a capital asset is computed as:

• a.Sales price minus original cost only, ignoring improvements
• b.Fair market value minus the standard deduction
• c.Amount realized minus adjusted basis✓
• d.Adjusted basis minus depreciation recapture

Gain or loss equals the amount realized (what the seller receives) minus the adjusted basis. Adjusted basis starts with cost and is increased by improvements and decreased by items such as depreciation, so it is not simply original cost.

When a taxpayer has a net capital loss for the year, the tax law generally allows:

• a.A limited amount of the net loss to offset ordinary income, with the excess carried forward✓
• b.The entire net loss to offset ordinary income with no limit
• c.No deduction for capital losses under any circumstances
• d.The loss to be carried back three years automatically

Capital losses first offset capital gains; a limited amount of any remaining net capital loss may offset ordinary income each year, and the unused excess carries forward to future years. The annual offset against ordinary income is capped.

Adjustments to income (above-the-line deductions) are important because they:

• a.Are only available to itemizers
• b.Reduce gross income to arrive at adjusted gross income (AGI)✓
• c.Directly reduce the tax owed dollar for dollar
• d.Apply only to corporations

Above-the-line adjustments, such as the deductible part of self-employment tax and certain retirement contributions, reduce gross income to compute AGI. Because AGI drives many limits and phaseouts, these adjustments can be valuable and are available whether or not the taxpayer itemizes.

A general partnership reports its income to the IRS by:

• a.Paying entity-level income tax on Form 1120
• b.Reporting all income on the managing partner's Schedule C
• c.Filing an information return (Form 1065) and issuing Schedule K-1s to partners✓
• d.Not filing any federal return

A partnership is a pass-through entity that files an information return, Form 1065, and issues each partner a Schedule K-1 reporting their share of income and deductions. The partners, not the partnership, pay the tax on that income.

Which entity's profits are subject to double taxation?

• a.A C corporation✓
• b.An S corporation
• c.A general partnership
• d.A sole proprietorship

A C corporation pays tax at the entity level, and when after-tax profits are distributed as dividends, shareholders are taxed again, producing double taxation. Pass-through entities (S corporations, partnerships, sole proprietorships) are generally taxed only once, at the owner level.

Under the accrual method of accounting, income is generally recognized when:

• a.Cash is actually received
• b.It is earned, under the all-events test✓
• c.The tax return is filed
• d.The customer's check clears the bank

Under the accrual method, income is reported when earned (when all events fixing the right to receive it have occurred and the amount can be determined) and expenses when incurred. The cash method, by contrast, recognizes income when actually or constructively received.

The standard system used to depreciate most tangible business property placed in service today is:

• a.Straight-line over the property's entire physical life
• b.The cash method
• c.Amortization over 15 years for all assets
• d.The Modified Accelerated Cost Recovery System (MACRS)✓

MACRS is the standard depreciation system for most tangible business property, assigning assets to recovery classes with prescribed methods and periods. Provisions such as Section 179 expensing and bonus depreciation can accelerate the write-off within limits.

A sole proprietor reports the net profit or loss from the business on:

• a.A separate corporate return, Form 1120
• b.Form 1065 with Schedule K-1
• c.Schedule C, filed with the owner's individual Form 1040✓
• d.Form 941

A sole proprietorship is not a separate taxpayer; the owner reports business net profit or loss on Schedule C, which is filed with the individual Form 1040. The profit is also generally subject to self-employment tax.

An employer's obligations for employee wages include:

• a.Withholding income and FICA taxes, paying the matching employer FICA share, and remitting FUTA✓
• b.Withholding only federal income tax and nothing else
• c.Paying the entire Social Security tax with no employee share
• d.Issuing a Schedule K-1 to each employee

Employers must withhold income tax and the employee share of Social Security and Medicare (FICA), pay the matching employer FICA share, and remit federal unemployment (FUTA) tax, reporting on returns such as Form 941 and Forms W-2. Employees receive a W-2, not a K-1.

To be deductible, a business expense generally must be:

• a.Capital in nature and depreciated over 39 years
• b.Ordinary and necessary for the business✓
• c.Personal to the owner
• d.Paid in cash only

A deductible business expense must be ordinary (common and accepted in the trade) and necessary (helpful and appropriate). Personal expenses are not deductible, and capital expenditures must be recovered through depreciation rather than deducted immediately.

Treasury Circular 230 governs:

• a.The calculation of the standard deduction
• b.The depreciation of business assets
• c.The rules of practice before the IRS by enrolled agents and other practitioners✓
• d.The interest rate on tax refunds

Circular 230 sets the ethical and professional standards for practitioners, including enrolled agents, attorneys, and CPAs, who practice before the IRS. It covers due diligence, fees, conflicts of interest, and grounds for sanctions.

Enrolled agents are distinguished by having:

• a.Unlimited rights to represent any taxpayer on any tax matter before any IRS office✓
• b.Authority to practice only before the Tax Court
• c.The ability to represent only individual, not business, taxpayers
• d.No authority to receive confidential taxpayer information

Enrolled agents, like attorneys and CPAs, hold unlimited representation rights before the IRS, meaning they may represent any taxpayer on any type of tax matter before any IRS office. This is broader than the limited rights of some other preparers.

Which form authorizes a practitioner to represent a taxpayer and act on the taxpayer's behalf before the IRS?

• a.Form 8821, Tax Information Authorization
• b.Form 2848, Power of Attorney and Declaration of Representative✓
• c.Form W-9, Request for Taxpayer Identification Number
• d.Form 941, Employer's Quarterly Federal Tax Return

Form 2848 grants a power of attorney, authorizing the practitioner to represent the taxpayer and act on their behalf. Form 8821 only allows a person to receive and inspect confidential tax information; it does not authorize representation.

A taxpayer who receives a statutory notice of deficiency and disagrees with it may generally challenge the tax without first paying it by petitioning:

• a.The U.S. District Court
• b.The U.S. Court of Federal Claims
• c.The Supreme Court directly
• d.The U.S. Tax Court✓

The U.S. Tax Court is the only forum where a taxpayer can litigate a deficiency without first paying the disputed tax, by filing a petition within the period stated in the statutory notice of deficiency. The District Court and Court of Federal Claims generally require paying the tax and suing for a refund.

Under Circular 230, when a practitioner discovers an error or omission on a client's return, the practitioner must:

• a.Promptly advise the client of the error and its consequences✓
• b.Immediately amend the return without telling the client
• c.Report the client to the IRS
• d.Ignore it unless the IRS asks

Circular 230 requires a practitioner who learns of an error or omission to promptly advise the client of it and of the consequences under the law. The practitioner cannot correct the return without the client's consent, but must inform the client.

A paid tax return preparer is required to:

• a.Guarantee the client a refund
• b.Sign the return and provide a valid Preparer Tax Identification Number (PTIN)✓
• c.Retain the taxpayer's original documents permanently
• d.Represent the client for free in any audit

Paid preparers must sign returns they prepare and include a valid PTIN, and they must meet due-diligence and recordkeeping duties. They may not guarantee refunds, and they return original documents to the client.

The IRS Independent Office of Appeals exists to:

• a.Prepare returns for taxpayers who cannot afford a preparer
• b.Collect unpaid taxes through liens and levies
• c.Provide an impartial review of disputes between taxpayers and the IRS✓
• d.Set the annual tax rates and brackets

The Independent Office of Appeals offers taxpayers an impartial, independent review of proposed adjustments, aiming to resolve disputes without litigation. Collection functions, not Appeals, handle liens and levies, and Congress sets tax rates.