Regulation (REG) AICPA Released Questions 2021 Answer Explanations

Regulation (REG)

AICPA

Released Questions ¨C

2021

Answer Explanations

Multiple Choice Question #1:

The correct answer is (c)

A practitioner cannot unreasonably delay the prompt disposition of

any matter before the Internal Revenue Service. The representative/practitioner should not in any

manner delay or hinder the IRS examination, collection, or investigation by failing to produce the

necessary information, after repeated requests. This applies to the practitioner while responding to the

client as well as to IRS personnel. Practitioners also cannot advise a client to submit any document to

the IRS for the purpose of delaying or impeding the administration of the Federal tax laws.

Options (a), (b) & (d) are incorrect based on the above explanation.

Multiple Choice Question #2:

The correct answer is (a)

Tax preparers who prepare federal income tax returns are subject to federal statutory liability and a

penalty may be assessed by the IRS if a preparer fails to sign a tax return. The penalty for failure to sign a

tax return is $50 per return up to $27,000 per year.

Option (b) is incorrect because the preparer made the mistake unknowingly and without the intention

to deceive; the amount of misstatement is also clearly trivial

Option (c) is incorrect because, according to the Statement on Standards for Tax Services, members can

recommend a position which has a realistic possibility of it being sustained.

Option (d) is incorrect because preparers may rely on information provided by the client without

verification unless it is clearly incorrect or incomplete. However, reasonable enquiries must be made

about the existence. Hence no penalty might be assessed.

Multiple Choice Question #3:

The correct answer is (c)

A member in public practice shall not disclose any confidential client information outside of the CPA firm

without specific consent of the client including work papers or audit documentation created by the CPA

during the course of the audit. Information cannot be shared with other CPAs or be given to third

parties, no professional courtesy.

Option (a) and (b) is incorrect because disclosure of information in the tax returns is not a violation.

Option (d) is incorrect because work papers may be disclosed without client consent to subpoena or

summons from valid judicial authorities, quality review, inquiry by AICPA or investigation authorized by

AICPA or CPA society or State Board of Accountancy (Mnemonic: IRIS)

Multiple Choice Question #4:

The correct answer is (a)

An agent¡¯s apparent authority can be terminated due to a provision of law and without notice under the

following circumstances1) Death of principal or agent (does not affect contracts made before death)

2) Insanity of principal

3) Bankruptcy of the principal

4) Subject of the agreement becomes illegal or impossible

Note- termination of an agency relationship by operation of law, applies to both actual and apparent

authority.

Option (b), (c) and (d) are incorrect as those might not always lead to the termination of apparent

authority.

Multiple Choice Question #5:

The correct answer is (c)

The UCC Sales Article (Article 2) applies to all contracts involving sale of goods (tangible personal

property) derived from statutory law either by merchant or non- merchant.

However, the following are governed by common law

?

?

?

?

Real estate

Insurance

Service and

Employment (mnemonic RISE)

Therefore, only the sale of a used car by a non-merchant comes under the purview of UCC Article 2 (sale

of goods).

Option (a) is incorrect because sale of stock is governed by the Securities Act of 1934

Option (b) is incorrect because service is covered by common law

Option (d) is incorrect because sale of real estate is governed by common Law, specifically property law

Multiple Choice Question #6:

The correct answer is (a)

No government approval is needed in the creation of a general partnership and there are no specific

filings required. A general partner has:

?

?

Unlimited liability.

Fiduciary duties towards the partnership.

?

Responsibility for the day-to-day operations and decision making.

Option (b) is incorrect because the partners in a general partnership have unlimited liability

Option (c) is incorrect because under RUPA, withdrawal, death and bankruptcy of a partner doesn't

automatically dissolve the partnership. However, withdrawal, death and bankruptcy of all partners

leaving one leads to dissolution. Hence, partnership doesn't have perpetuity.

Option (d) is incorrect because a partnership cannot raise capital through issuance/sale of common

stock.

Multiple Choice Question #7:

The correct answer is (a)

The transaction represents a wash sale. A wash sale exists when a security is sold for a loss and is

repurchased within 30 days before or after the sale date. This loss cannot be deducted, but is added to

the basis of the repurchased asset.

Since the taxpayer sold Core Co. shares on June 10th, within 30 days of purchasing it on May 15, the

$8,000 loss (i.e., $10,000 Selling Price - $18,000 Purchase Price) cannot be deducted.

Options (b), (c) and (d) are incorrect based on above explanation

Multiple Choice Question #8:

The correct answer is (a)

In general, all gains from related party transactions are taxed but no loss is deductible. Related parties

include but not limited to spouses, siblings, children, grandchildren, majority partner in a partnership

and majority shareholder in a corporation. Since Hull is a 60% partner in a partnership, Hull and the

partnership are considered related parties. As such, the $12,000 loss realized on the sale of stock to the

partnership cannot be recognized as a capital loss.

Option (b) is incorrect because $3,000 is the maximum allowable net capital loss that individuals can

offset against other income. Since the transaction in question is considered a related party transaction,

no loss is recognized.

Option (c) is incorrect based on the above explanation.

Option (d) is incorrect because $12,000 is the loss realized and not the recognized loss.

Multiple Choice Question #9:

The correct answer is (b)

Taxes may be owed by those who transfer large amounts of their wealth to others during their lifetime

and upon their death, based on the unified transfer tax. Transfers made during their lifetime are

reported on gift tax returns (Form 709) and upon death on estate tax return (Form 706) ¨C This estate tax

return combines all reported gifts and value of the estate at death to determine if any additional taxes

are due.

The taxable gift amount each year is calculated as gross gifts (Cash / FMV) less non-discretionary and

discretionary expenses along with annual exclusions. The non-discretionary exclusion includes marital

and charitable deductions. The annual provisions have increased the annual exclusion amount to

$30,000 for married filing jointly ($28,000 as per prior law) and $15,000 for single taxpayers ($14,000 as

per prior law).

Therefore, from the list provided, only standard deduction is excluded while calculating the amount of

taxable gifts.

Option (a) is incorrect because of the above explanation.

Option (c) is incorrect because there is a gift tax annual exclusion up to $15,000 for single taxpayers and

$30,000 for married filing jointly.

Option (d) is incorrect because marital deduction of 100% is allowed in gift tax calculation.

Multiple Choice Question #10:

The correct answer is (d)

Business income and expenses for self-employed individuals are reported on Schedule C. In general, any

expenses that are illegal are non-deductible and any federal, state and local fines and penalties are also

non-deductible. However, for businesses that are illegal, only the cost of goods sold is allowed as a

deduction, but all income is reported.

Particular

Income-commission

Amount

$100,000

Less-Expenses:

Auto rentals

(2,000)

Referral fees to other

brokers

(20,000)

Total Income

$78,000

Options (a), (b) and (c) are incorrect because both parking fines and the illegal referral fees are nondeductible against income on Schedule C.

Multiple Choice Question #11:

The correct answer is (b)

Investment interest expense up to the extent of taxable investment interest income is deductible.

Jefferson has taxable interest income of $2,000 from a treasury bond and non-taxable/tax-exempt

interest income of $1,000 from a municipal bond. Hence, he can deduct up to $2,000 of investment

interest expense to the extent of taxable interest income from the treasury bond.

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