Enrolled Agent Practice Exam

1. Business meals with clients, properly documented and not lavish, are deductible at what portion?

• A. 100%
• B. 50%
• C. 25%
• D. 0% — meals are never deductible

2. Which employment tax is paid by the EMPLOYER alone, with no employee withholding?

• A. Additional Medicare tax withheld from high earners
• B. Federal unemployment tax (FUTA)
• C. Federal income tax withholding from wages
• D. The employee half of Social Security tax

3. An investor wants to swap a rental building for another rental property tax-deferred under Section 1031. What limits apply today?

• A. Any property qualifies for like-kind treatment, including business equipment, vehicles, and virtual currency held for investment
• B. Like-kind exchange treatment is limited to REAL property held for investment or business use
• C. Only a taxpayer's primary residence qualifies for like-kind exchange treatment
• D. Section 1031 was repealed in full and no longer applies to any transaction

4. A business sells land for payments spread over five years. How is the gain reported by default?

• A. All of the gain is recognized in the year of sale, with no alternative method available
• B. Under the installment method — gain recognized proportionally as payments arrive
• C. All of the gain is deferred until the final payment is received in year five
• D. None of the gain is ever taxed once payments are spread across three years

5. Shares are sold at a loss to the seller's brother. What is the tax outcome for each of them, now and on his later resale?

• A. The loss doubles in value when claimed on the seller's return
• B. The loss is disallowed between related parties; his later gain is reduced by the disallowed loss
• C. The loss is fully deductible in the year of sale, since siblings are not treated as related parties under the tax code
• D. The brother inherits the disallowed loss and may deduct it on his own return

6. What does the qualified business income (QBI) deduction offer owners of pass-through businesses?

• A. Complete exemption from federal tax on all business income earned by the owner, regardless of the entity's total annual revenue
• B. A credit equal to the payroll taxes the business paid during the year
• C. Nothing for pass-through owners; the deduction is reserved for C corporations
• D. A deduction of up to 20% of qualified business income, subject to income-based limits and service-business restrictions

7. Equipment fully depreciated to a zero basis sells for $15,000. How is the gain characterized?

• A. Ordinary income up to the depreciation taken — Section 1245 recapture
• B. Entirely long-term capital gain, since the equipment was held more than a year
• C. A tax-free return of capital up to the equipment's original cost
• D. A deductible casualty loss reported on Form 4684

8. What must be true of a home office for a self-employed taxpayer to deduct it?

• A. Occasional use during evenings and weekends, so long as the space is used for business at some point
• B. The office space must occupy more than half of the home's total square footage
• C. Exclusive and regular use as the principal place of business (or a place to meet clients)
• D. The office must be a detached structure separate from the main dwelling

9. Who must file Schedule C rather than reporting wages: an office worker paid on a W-2, or a rideshare driver paid gross fares with no withholding?

• A. The office worker, since W-2 employees may also elect to file a Schedule C
• B. The rideshare driver — an independent contractor reporting business income and expenses on Schedule C
• C. Both workers, since Schedule C applies to anyone who receives any compensation for personal services rendered
• D. Neither one; Schedule C is reserved for corporations electing S status

10. A business buys equipment and wants the fastest possible deduction rather than multi-year depreciation. Which provision does that?

• A. Section 179 expensing — electing to deduct qualifying property in the year placed in service, within annual limits
• B. Straight-line depreciation spread evenly over a 39-year recovery period
• C. No provision in the current code permits acceleration faster than the regular MACRS depreciation schedule already allows for
• D. Deducting the full cost immediately by classifying it as a routine repair

11. A new restaurant spends $8,000 investigating and launching before opening day. How are these start-up costs treated?

• A. The full $8,000 is deductible in the year paid regardless of when the restaurant actually opens its doors
• B. Up to $5,000 deducted immediately (phased down for large totals), the rest amortized over 180 months
• C. None of it is deductible until the restaurant permanently closes its doors
• D. The costs are deducted only when the restaurant first turns a profit

12. Which taxpayer may generally use the CASH method of accounting?

• A. Any C corporation, no matter its size or annual gross receipts
• B. No business at all — accrual accounting is required across the board
• C. A small service business meeting the gross-receipts test
• D. Only a business that carries no inventory of any kind

13. A wholesaler's customer goes bankrupt owing $12,000 on account (previously included in accrual income). A friend also fails to repay a $3,000 personal loan. How do the two write-offs differ?

• A. Both debts are ordinary deductions in the year either one becomes even partially worthless, with no capital-loss limitation applying
• B. The business bad debt is an ordinary deduction; the nonbusiness bad debt is a short-term capital loss, only when wholly worthless
• C. Both debts are long-term capital losses subject to the same $3,000 annual limit
• D. Neither write-off is deductible, since informal loans lack a written agreement

14. A contractor deducts the daily drive from home to his first job site as a business expense. Is it allowed?

• A. Yes, since driving from home to any job site counts as deductible business mileage under current law
• B. Yes, but only at half of the standard mileage rate for that tax year
• C. No — commuting between home and a regular work location is personal and nondeductible
• D. Yes, once the one-way commute exceeds fifty miles in a single day

15. An employer reimburses employee travel under a plan requiring business substantiation and return of excess advances. How are the reimbursements treated?

• A. As an accountable plan — reimbursements are excluded from employees' wages
• B. As a nondeductible expense that the employer may not claim anywhere on its own tax return
• C. As dividends paid to the traveling employee's investment account
• D. As bonus wages, subject to income tax withholding and payroll tax

16. For a taxpayer whose prior-year AGI was over $150,000, which estimated-payment safe harbor avoids an underpayment penalty?

• A. Paying 100% of the prior year's tax, the threshold that applied before her income crossed $150,000
• B. Paying half of the current year's projected tax liability in four equal installments
• C. No safe harbor is available once prior-year AGI exceeds $150,000
• D. Paying 110% of the prior year's tax (or 90% of the current year's)

17. Which taxpayer owes self-employment tax?

• A. An employee whose employer withholds Social Security and Medicare tax from W-2 wages
• B. A retiree whose only income is a Social Security retirement benefit
• C. A freelance designer with $40,000 of Schedule C net profit
• D. An investor whose only income is qualified dividends from a brokerage account

18. A household employer pays a nanny $3,500 in cash wages during 2025 and withholds nothing. What tax obligation does this trigger for the employer?

• A. Household employment ("nanny") tax on Schedule H, since her cash wages crossed the annual threshold for Social Security and Medicare tax
• B. None, since household employers are exempt from all federal employment tax rules regardless of how much cash they pay a household worker
• C. A requirement to issue the nanny a Form 1099-NEC instead of ever tracking any household employment tax obligation
• D. Full corporate payroll tax registration, the same quarterly filing regime that applies to a business with dozens of W-2 employees

19. A taxpayer with 2025 modified AGI of $260,000 (single) has $40,000 of net investment income from dividends and capital gains. How much is subject to the net investment income tax?

• A. $60,000, the full amount by which her MAGI exceeds the $200,000 single-filer net investment income tax threshold for 2025
• B. $40,000 — her entire net investment income, since it is smaller than her $60,000 MAGI excess over the $200,000 threshold
• C. Nothing, since the net investment income tax applies only to married couples filing a joint return, never to single filers
• D. $20,000, using a flat 50% reduction applied to all net investment income once MAGI crosses the single-filer threshold

20. A taxpayer earning $215,000 in Medicare wages from a single employer for 2025 notices no additional Medicare tax was withheld. Is the employer required to withhold it?

• A. No, since additional Medicare tax withholding is voluntary and elected by the employee on Form W-4 each year
• B. No, because the additional Medicare tax only ever applies when a taxpayer files as married filing jointly with a spouse
• C. Yes — an employer must withhold an additional 0.9% Medicare tax once one employee's wages exceed $200,000, regardless of filing status
• D. Yes, but only once the employee's combined household wages from every job held during the year exceed $250,000 in total

21. A member of the clergy receives a $30,000 salary plus a $12,000 parsonage allowance that his church designated in advance, spent entirely on housing costs within the allowance limit. How does income tax treatment of the allowance differ from its treatment under SECA self-employment tax rules?

• A. Excluded from both income tax and self-employment tax, since a properly designated clergy housing allowance is entirely tax-free in every respect
• B. Included in income tax as ordinary salary, but excluded from self-employment tax entirely because it is treated as a housing benefit rather than wages
• C. Included in both income tax and self-employment tax in full, since the church's advance designation has no legal effect on taxability
• D. Excluded from income tax to the extent used for housing and not more than fair rental value, but still included in net earnings from self-employment for SE tax purposes

22. A taxpayer serving in a combat zone receives $9,000 of otherwise-taxable military pay during 2025 that qualifies for the combat pay exclusion. How does excluding this pay from gross income affect his earned income for purposes of claiming the Earned Income Tax Credit?

• A. He may elect to include the nontaxable combat pay in earned income for EITC purposes if doing so increases his credit
• B. Combat pay can never be counted toward earned income for any federal credit, since it is entirely outside the tax system once excluded
• C. Including combat pay in earned income for EITC purposes is mandatory whenever any amount of it is received during the tax year
• D. The exclusion of combat pay automatically disqualifies the service member from claiming the Earned Income Tax Credit altogether that year

23. A decedent had earned but uncollected wages and unpaid interest income at the time of death. How is this income in respect of a decedent (IRD) treated for federal tax purposes?

• A. It disappears from the federal tax system entirely and permanently once the taxpayer who originally earned it has died
• B. It is taxed to the recipient in the year received, retaining the decedent's character, with no basis step-up at death
• C. It is taxed only on the decedent's own final Form 1040, regardless of when or by whom the income is actually collected
• D. It automatically receives a fair-market-value basis step-up at death, exactly like the decedent's other capital assets

24. A first-time homebuyer who claimed the 2008 first-time homebuyer credit (the repayable version) sold the home in 2025, still owing $4,000 of the credit. What happens to the remaining repayment obligation?

• A. The remaining balance is forgiven the moment the home is sold, no matter whether the sale itself produced any gain
• B. The taxpayer continues repaying $500 per year exactly as originally scheduled, entirely unaffected by the sale of the home
• C. The remaining balance generally becomes due as additional tax on the return for the year of sale, since selling accelerates repayment
• D. The remaining balance converts into a nondeductible reduction added to the purchase price basis of the taxpayer's next home

25. A 45-year-old withdraws from his traditional IRA to buy a boat. Beyond income tax, what applies?

• A. The 10% additional tax on early distributions — no exception covers this
• B. Nothing beyond ordinary income tax, since only Roth IRA withdrawals carry the 10% early-distribution penalty
• C. A 50% excise tax, the penalty that applies to a missed required minimum distribution
• D. State income tax alone, since federal law does not penalize IRA withdrawals used to buy a boat

26. A December 30 paycheck sat unclaimed in the employer's office until January 3. When is it taxable to a cash-basis employee?

• A. In the later year, once the employee physically picks up the check from the employer's office
• B. In whichever year is more favorable to the employee, since constructive receipt permits an annual election
• C. Not taxable in either year, because a check left unclaimed by year-end is treated as forfeited income
• D. In the earlier year — constructive receipt occurred when the check was available without restriction

27. Which of the following must be INCLUDED in gross income?

• A. Unemployment compensation
• B. Municipal bond interest
• C. A gift of cash from a parent
• D. Life insurance proceeds paid by reason of death

28. Stock bought on March 10 of one year is sold on March 10 of the next. Is the gain long-term or short-term?

• A. Short-term or long-term at the taxpayer's election, since the code allows either treatment on anniversary-date sales
• B. Long-term, because holding through the one-year anniversary date satisfies the more-than-one-year requirement
• C. Short-term — the holding period must EXCEED one year, and it is exactly one year
• D. Long-term only if the sale occurs after the market opens on the anniversary date, per the trade-date convention

29. A father gifts his daughter stock with a $30,000 basis worth $50,000. She later sells it for $60,000. What is her gain?

• A. $20,000, measured as the increase in value between the gift date and the sale
• B. $60,000, because gifted property carries no basis from the donor at all
• C. Nothing taxable, since appreciated gifts pass to the recipient tax-free upon later sale
• D. $30,000 — she takes his carryover basis of $30,000

30. A taxpayer sells stock at a loss and buys the identical stock back 20 days later. What happens to the loss?

• A. Disallowed as a wash sale — the repurchase was within 30 days — and added to the new shares' basis
• B. Fully deductible this year, because the wash-sale rule applies only to repurchases within the same calendar month
• C. Deductible at half its value, with the remainder carried forward under the wash-sale rule
• D. Disallowed with no basis adjustment, since a repurchase inside the wash-sale window forfeits the loss for good

31. In a year with $9,000 of capital losses and no gains, how much can an individual deduct against ordinary income, and what happens to the rest?

• A. Nothing, because capital losses can offset capital gains but not ordinary income
• B. $3,000 deducted; $6,000 carries forward indefinitely
• C. $3,000 deducted, with the remaining $6,000 expiring unused after five years
• D. All $9,000 immediately, since capital losses face no annual limit against ordinary income

32. What does a Health Savings Account require of its owner, and what is its signature tax feature?

• A. Coverage under a high-deductible health plan; contributions, growth, and qualified medical withdrawals are all untaxed
• B. Coverage under an employer-sponsored PPO plan with a modest deductible, with withdrawals always taxed as ordinary income
• C. Enrollment in Medicare Part A, with contributions to the account funded solely by the employer each January
• D. No insurance requirement at all, functioning exactly like a conventional bank savings account paying taxable interest

33. A taxpayer received a $1,000 state income tax refund. When is any of it federally taxable?

• A. Always fully taxable in the year received, no matter which deduction method the taxpayer used the prior year
• B. Never taxable, since state refunds are a return of the taxpayer's own money
• C. Only if the refund exceeds $5,000, no matter which deduction method was used
• D. Only if the state tax was deducted as an itemized deduction in the prior year and produced a tax benefit

34. Social Security benefits are received by a high-income retiree. What is the MAXIMUM portion that can be federally taxable?

• A. 100% of the benefits
• B. 0% — Social Security benefits are excluded from federal tax outright
• C. 50%, a flat rate that applies no matter the retiree's other income
• D. 85% of the benefits

35. To claim a child as a qualifying child, which set of tests must be met?

• A. A biological relationship confirmed by a birth certificate or DNA test, with no other requirement
• B. Relationship, age, residency, support, and joint-return tests
• C. The child's gross income limit and the parent's citizenship status
• D. Satisfying two of five listed factors, the taxpayer's choice of which two

36. A taxpayer's spouse died in 2024. She has a dependent child at home and has not remarried. What filing status may she use for the two tax years after the year of death?

• A. Single filing status only, because qualifying surviving spouse treatment ended when the joint return for the year of death was filed
• B. Married filing jointly, on the theory that the household is treated as unchanged for two years after a spouse's death
• C. Qualifying surviving spouse, using married-filing-jointly rates
• D. Head of household status, which is the correct classification once a dependent child lives in the home

37. A dependent child has substantial unearned investment income. What does the 'kiddie tax' do to it?

• A. Exempts a dependent child's investment income from tax entirely up to the standard deduction amount
• B. Taxes all of a child's investment income at a flat 37% rate regardless of the parents' bracket
• C. Taxes unearned income above the threshold at the PARENTS' marginal rate
• D. Applies only to a child's wages from a part-time job, not to interest or dividends

38. A new client hands you last year's return showing a $4,000 capital loss carryover and last year's Form 8606 tracking $6,000 of nondeductible IRA basis. During preliminary intake, why do these prior-year figures matter for the current return?

• A. They carry forward into this year's return — the capital loss offsets future gains or ordinary income, and the IRA basis reduces the taxable portion of future distributions
• B. They matter only for audit defense and have no effect on any amount reported on the current-year return itself
• C. They expire automatically at the start of each new tax year, requiring the preparer to recompute both the carryover and the IRA basis figure entirely from zero each season each season
• D. They matter only if the client's income changed by more than 10% from the prior year to this one

39. A client moved from Texas to California mid-year and holds an H-1B visa. During preliminary work, which two determinations must the preparer make before selecting the correct return and reporting worldwide income?

• A. Only the client's employer's federal ID number and the mailing address on her most recent pay stub
• B. The client's residency status for tax purposes (resident or nonresident alien under the substantial presence test) and her state-by-state residency period for allocating income
• C. Only whether she prefers a paper filing or an electronic one for this year's return
• D. Only the number of dependents she plans to claim on this year's return, since visa and residency status have no bearing on federal filing requirements in this scenario

40. A taxpayer's return shows Schedule C business income, a rental property, and a K-1 from an S corporation. Under the ACA reporting rules relevant to preliminary intake, why does the preparer need the taxpayer's total household income and family size before finishing the return?

• A. To decide whether the taxpayer must attach a copy of her driver's license to the paper return
• B. To calculate the standard mileage rate she may claim for the rental property's upkeep visits
• C. To determine eligibility for and reconciliation of the premium tax credit on Form 8962, which is based on household income as a percentage of the federal poverty line
• D. To determine whether she owes the additional Medicare tax on her wages, a computation based on her wages and filing status rather than household size

41. A married client's spouse died in November of the prior tax year, and the client has not remarried. During preliminary intake, which piece of information is essential to determine the CURRENT year's correct filing status?

• A. The exact date in November on which the spouse died, since filing status changes at each specific day of the month
• B. Whether the client itemized deductions on last year's joint return with the deceased spouse
• C. The size of the estate the deceased spouse left behind, since a larger estate changes the surviving spouse's own personal filing status for the year
• D. Whether the client has a dependent child living with her, since that determines eligibility for qualifying surviving spouse status this year and next

42. A client tells the preparer she received a letter from the IRS two years ago proposing additional tax for an underreported 1099-DIV, which she never responded to. During preliminary work this year, what should the preparer do with that information?

• A. Review the prior IRS correspondence and any resulting account changes, since it can affect current-year balances or an open audit the new return should reflect
• B. Disregard it completely, since any IRS letter more than one year old has no bearing on the current return
• C. Advise the client that the notice automatically voids the two most recently filed returns and both must be redone
• D. File only an amended return for the year the letter addressed, treating this year's preliminary work as entirely unrelated to that old correspondence

43. How do the American Opportunity Credit and the Lifetime Learning Credit differ structurally?

• A. AOTC has no year limit and is fully refundable, while LLC is capped at four years of undergraduate study and requires full-time enrollment throughout
• B. AOTC is capped at four years, partly refundable, and requires at least half-time enrollment, while LLC has no year limit and is nonrefundable
• C. Both credits apply for any number of years at any level of education, differing in the percentage that is refundable
• D. AOTC applies only to graduate and professional degree programs, while LLC is reserved for the first four years of an undergraduate degree

44. A taxpayer donates $400 cash to a charity. What documentation does the deduction require?

• A. No documentation at all, since cash gifts under $1,000 are exempt from substantiation rules
• B. A contemporaneous written acknowledgment from the charity, since the gift is $250 or more
• C. Only a canceled check or bank record, regardless of the dollar amount given
• D. A qualified written appraisal, the standard required for any noncash donation

45. A W-2 employee works from a home office her employer requires. May she deduct home-office expenses on her federal return?

• A. Yes, on Schedule A, under the same exclusive-and-regular-use principal-place-of-business test a self-employed taxpayer applies
• B. Yes, but only for the portion of her internet, phone, and utility bills attributable to work use
• C. No — the employee home-office deduction is suspended; the deduction belongs to self-employed taxpayers
• D. Yes, once her weekly hours logged working from home under her employer's policy exceed fifty

46. A taxpayer paid $18,000 in qualified medical expenses during 2025 and has AGI of $100,000. How much of the medical expenses may she include as an itemized deduction?

• A. $18,000, since every dollar of substantiated medical spending is deductible once she itemizes
• B. $10,500 — the amount by which her expenses exceed 7.5% of her $100,000 AGI
• C. $9,000, using a flat 50% haircut applied to all unreimbursed medical costs
• D. Nothing, because medical expenses became entirely nondeductible for individuals after 2017

47. A married couple filing jointly has $31,500 of allowable itemized deductions for 2025. Should they itemize or take the standard deduction?

• A. They should always itemize, since itemizing carries additional tax benefits beyond the dollar amount deducted
• B. They must take the standard deduction, because itemized deductions below $40,000 are disregarded for joint filers
• C. It makes no difference to the deduction amount — $31,500 in itemized deductions equals the 2025 married-filing-jointly standard deduction of $31,500
• D. They should take the standard deduction only, since it rose to $45,000 for joint filers under the sweeping 2025 tax law changes that took effect this year

48. A taxpayer donates a used car with a $6,000 fair market value to a qualified charity, which sells the car at auction for $4,200 without using it or materially improving it. How much may the taxpayer deduct?

• A. $6,000, the full fair market value the taxpayer believed the car was worth at the time of the gift
• B. $3,000, a flat cap that applies to every noncash charitable contribution regardless of the asset
• C. Nothing, because vehicle donations to charity stopped qualifying for a federal income tax deduction after tax year 2005 under the old rules
• D. $4,200 — the deduction for a donated vehicle sold by the charity without significant use is limited to the gross proceeds from that sale

49. A taxpayer's home was damaged by a tornado that the President declared a federal disaster. Her homeowner's insurance reimbursed part of the loss. May she deduct the unreimbursed portion as a casualty loss?

• A. Yes — nonbusiness casualty losses remain deductible when they occur in a presidentially declared disaster area, subject to the per-event and AGI floors
• B. No, since the 2017 law changes eliminated the personal casualty loss deduction in every circumstance nationwide, with no disaster-area exception written into the statute
• C. Yes, but only if she declines every dollar of insurance reimbursement and pays for the repairs entirely herself
• D. Yes, and the full unreimbursed loss is deductible with no floor or reduction of any kind

50. A single taxpayer with 2025 modified AGI of $205,000 wants to deduct student loan interest she paid. What happens to her deduction?

• A. She may deduct the full amount paid, since the student loan interest deduction has no income limitation for a single filer at her income level
• B. It phases out entirely, since her MAGI exceeds the upper limit of the single-filer phase-out range for the student loan interest deduction
• C. She may deduct half of the interest paid, since MAGI above $200,000 triggers an automatic 50% reduction
• D. She may deduct it only if she also itemizes her deductions instead of taking the standard deduction

51. A taxpayer contributes $8,000 to her traditional IRA for 2025 despite the annual limit being lower than that. What is the tax consequence of the excess contribution if it is not corrected before the filing deadline?

• A. Nothing — the IRS automatically adjusts the account downward to the legal contribution limit each year with no penalty or notice sent to the taxpayer at all each time
• B. The entire $8,000 becomes immediately taxable as ordinary income in the year contributed
• C. A 6% excise tax applies each year to the excess amount that remains in the account, until it is withdrawn or absorbed by a later year's unused contribution room
• D. The excess is treated as an early distribution subject only to the 10% penalty, with no other consequence

52. A taxpayer's household includes a 20-year-old daughter who is a full-time college student, provides less than half of her own support, and does not qualify as a dependent for the Child Tax Credit because of her age. What credit may the taxpayer still claim for her?

• A. The full $2,200 Child Tax Credit, since full-time student status extends the CTC age limit through age 23
• B. No credit of any kind, since aging out of the Child Tax Credit removes the dependent from the return entirely
• C. The Earned Income Tax Credit computed as though the daughter were the taxpayer's own qualifying child solely for EITC eligibility purposes
• D. The $500 nonrefundable credit for other dependents, since the daughter still meets the qualifying-child tests apart from the under-17 age requirement

53. An S corporation's sole shareholder-employee takes no salary but large distributions, avoiding payroll tax. What is the IRS's position?

• A. S corporations may not pay cash distributions to shareholder-employees at any time during the tax year
• B. The structure is fully permissible under current law, since S corporation owners may set their own compensation freely
• C. Reasonable compensation must be paid as wages before distributions — the IRS can recharacterize distributions as salary
• D. Salary is optional for any owner who works fewer than 20 hours per week

54. Founders transfer appreciated property to a new corporation solely for its stock and end up controlling 85% of it. Is gain recognized?

• A. Yes, unless the newly formed corporation is organized outside the United States
• B. Yes, gain is recognized on every incorporation transaction regardless of the ownership percentage the founders retain afterward
• C. No — Section 351 defers gain when transferors of property receive stock and control 80% or more immediately after
• D. No, and their stock basis is stepped up to the property's fair market value

55. An activity has produced losses for six straight years, run casually with no records. The IRS reclassifies it. What is the consequence?

• A. As a hobby, its income is taxable but its expenses are not deductible against other income
• B. Only half of each year's losses are allowed, with the balance carried forward
• C. All six years of losses remain fully deductible against the taxpayer's other wage and investment income as filed
• D. The activity becomes exempt from tax entirely once the IRS reclassifies it

56. A new C corporation asks how its profits reach shareholders. What is the tax path?

• A. Profits pass through to shareholders untaxed, the same as an S corporation
• B. Only the shareholders are taxed, since the corporation itself pays no income tax
• C. The corporation pays tax on earnings, and shareholders pay again on dividends — two levels
• D. Only the corporation is taxed on its earnings; distributed dividends reach shareholders free of any further tax

57. Which requirement must a corporation meet to elect S status?

• A. Two or more classes of stock, deliberately structured to give founders disproportionate voting power over other investors
• B. At least 500 shareholders, each of whom must be a United States citizen personally holding voting common shares directly
• C. Incorporation in a foreign jurisdiction, with a domestic branch registered for federal tax reporting purposes
• D. No more than 100 eligible shareholders, one class of stock, and a domestic corporation

58. A partner receives a guaranteed payment for services to the partnership. How is it taxed to her?

• A. As ordinary income subject to self-employment tax, regardless of partnership profits
• B. As a tax-free return of the partner's own capital contribution
• C. As a long-term capital gain reported on Schedule D of the partner's individual return
• D. As W-2 wages, with the partnership withholding payroll taxes

59. A partner's basis in her partnership interest matters most for which reason?

• A. It sets her voting power within the partnership, proportional to her ownership share
• B. Losses pass through only up to her basis; distributions beyond basis trigger gain
• C. It fixes which management duties she performs under the partnership agreement
• D. It has no bearing on her tax reporting, only on her share of profits

60. Two people form an LLC and file no tax elections. How is it classified for federal tax by default?

• A. As a partnership — multi-member LLCs default to partnership; single-member LLCs are disregarded
• B. As a C corporation by default, unless the members affirmatively file a partnership election with the IRS
• C. As an S corporation automatically, since two owners meet the shareholder limit
• D. As a tax-exempt organization until the members apply for taxable status

61. Three individuals form a partnership. One contributes $50,000 cash, one contributes equipment worth $50,000 with a $20,000 adjusted basis, and one contributes only services in exchange for a 20% capital interest immediately transferable. How is the services partner treated for tax purposes?

• A. She recognizes no income at all, since contributing services to a partnership is treated as a tax-free exchange under the statute
• B. She generally recognizes ordinary income equal to the fair market value of the capital interest received for services
• C. She recognizes income only when the partnership eventually liquidates and distributes cash to her personally
• D. She recognizes a long-term capital gain equal to the value of the capital interest she received for her services

62. A two-member LLC taxed as a partnership dissolves when one member buys out the other's entire interest, leaving a single remaining owner. What happens to the entity's federal tax classification?

• A. Nothing changes; the LLC continues filing Form 1065 as a partnership indefinitely no matter how many members remain
• B. The LLC automatically becomes a C corporation the instant its membership count drops down to just one person
• C. The buyout is disregarded for federal tax purposes entirely, since only the LLC's state registration status matters
• D. The partnership terminates, and the now-single-member LLC becomes disregarded unless a corporate election is made

63. A controlled group of two corporations under common ownership wants to know why the IRS cares about their controlled-group status when computing certain tax benefits. What is the main consequence of controlled-group treatment?

• A. Certain benefits, like the Section 179 dollar limit, must generally be shared among all members rather than claimed in full by each corporation
• B. Controlled-group status has no federal tax effect and exists purely for securities-law disclosure purposes only
• C. Controlled-group treatment consolidates the corporations into filing one single combined income tax return each year automatically
• D. Controlled-group status matters solely for determining eligibility to elect S corporation status, never for C corporations

64. A C corporation with substantial accumulated earnings and no specific business need for the cash is accused by the IRS of avoiding shareholder-level tax by not paying dividends. What tax can the IRS assess against the corporation itself?

• A. The corporation faces no additional tax at all; shareholders alone can be penalized for a corporation's dividend policy
• B. The accumulated earnings tax, a penalty on earnings accumulated beyond the business's reasonable needs to avoid shareholder tax
• C. The alternative minimum tax, a separate provision that applies specifically to corporations that retain their earnings each year
• D. A retroactive revocation of the corporation's state-issued charter, the only remedy available for excess accumulations

65. An S corporation shareholder's stock basis is $8,000 at the start of the year. Her pro rata share of the S corporation's ordinary loss for the year is $15,000, and she made no additional loans or contributions. How much of the loss may she currently deduct?

• A. The full $15,000, since S corporation losses always pass through in full no matter the shareholder's stock or debt basis
• B. Nothing at all, because insufficient basis causes the suspended loss to be forfeited rather than carried forward to a later year
• C. Only $8,000, her basis; the remaining $7,000 is suspended and carries forward until she has enough basis to absorb it
• D. $7,500, exactly half the loss, applying the same 50% haircut that governs ordinary business meal deductions

66. An S corporation inadvertently terminates its election when a nonresident alien inherits shares from a deceased shareholder, making an ineligible shareholder the owner. What relief, if any, may the corporation seek?

• A. None; once an ineligible shareholder acquires stock the S election is irrevocably lost with no possibility of relief
• B. The corporation must wait a full five years before it may elect S status again, with no earlier option available
• C. The termination reverses automatically with no request, correction, or IRS action required from the corporation
• D. It may request inadvertent-termination relief, which if granted treats the election as continuing once the problem is fixed

67. A sole proprietor incorporates her business as a C corporation, transferring business assets with a $40,000 basis and a $15,000 attached loan in exchange for all the new corporation's stock. The corporation assumes the loan. Does the liability assumption trigger gain recognition under Section 351?

• A. Generally no, since an assumed liability is not treated as boot unless it exceeds the basis of the property transferred
• B. Yes, the full $15,000 of assumed liability is automatically taxable boot the instant the corporation takes over the debt
• C. Yes, but only because she is the corporation's sole shareholder rather than one among several co-founders
• D. Liability assumption in a Section 351 exchange has no bearing on the gain-recognition analysis under this scenario

68. A tax-exempt 501(c)(3) organization operates an unrelated gift shop that generates $60,000 of net income from selling items with no substantial relationship to its exempt educational purpose. How is this income treated?

• A. Entirely tax-free, since income earned by a 501(c)(3) organization is exempt no matter its source or underlying activity
• B. Unrelated business taxable income taxed at corporate rates and reported on Form 990-T, without affecting exempt status
• C. It automatically and immediately revokes the organization's exempt status the moment any unrelated income is earned
• D. Taxed as ordinary passive investment income and therefore excluded entirely from unrelated business taxable income

69. A newly formed corporation wants to adopt a fiscal year ending June 30 instead of the calendar year. What must it generally do to use that fiscal year?

• A. File Form 1128 and obtain advance IRS permission before it may use any accounting period besides the calendar year
• B. It may never use a fiscal year; only individuals and partnerships may choose a period other than the calendar year
• C. Adopt it simply by keeping books on that basis and filing its first return accordingly, generally without prior IRS approval
• D. Wait five full years after formation before it becomes eligible to change from an assumed calendar year to a fiscal one at all

70. A single taxpayer sells her main home, owned and occupied for 6 of the last 8 years, with a $200,000 gain. How much is taxable?

• A. All $200,000, because the Section 121 exclusion applies only to married couples filing jointly
• B. Nothing — the gain is within the $250,000 Section 121 exclusion
• C. Half of the gain, with the untaxed portion added back when she next sells a home
• D. It is deferred only if she buys a costlier home within two years of the sale

71. For divorces finalized after 2018, how is alimony treated for tax purposes?

• A. Deductible by both the payer and the recipient in equal shares each year
• B. Deductible by the payer and included in the recipient's gross income, the treatment used before 2019
• C. Included in income twice, once for the payer and again for the recipient
• D. Not deductible by the payer and not income to the recipient

72. An early-career taxpayer wants retirement contributions that are taxed now but withdrawn tax-free later. Which account matches?

• A. A traditional deductible IRA, which also taxes contributions going in
• B. A Roth IRA — after-tax contributions, qualified distributions tax-free
• C. A 401(k) with pre-tax deferrals, taxed again when the funds are withdrawn
• D. A taxable brokerage account, where gains are taxed annually as realized

73. A couple in a community property state is considering filing separately to isolate one spouse from the other's unreported cryptocurrency income. What should the preparer advise about filing status in a community property state?

• A. Filing separately in a community property state fully shields each spouse from the other spouse's unreported income
• B. Community property rules apply only to real estate that is titled jointly, never to wages, earnings, or investment gains realized during the marriage
• C. Filing separately is not permitted in a community property state; a joint return is the required filing status there
• D. Community property rules generally require each spouse to report half of most community income, so filing separately does not automatically isolate either spouse

74. A client is negotiating a divorce settlement and asks whether to take the family home or an equivalent amount of retirement account assets. What should the preparer point out about the after-tax value of each option?

• A. The home may carry a Section 121 exclusion on sale while a traditional retirement account is fully taxable on withdrawal, so nominal values are not equal after-tax
• B. Both options are exactly equal in after-tax value, since dollar-for-dollar property division in a divorce ignores the tax character of each asset
• C. Retirement account assets transferred incident to divorce are subject to the 10% early-withdrawal penalty even under a qualifying domestic relations order
• D. The home carries no potential future tax exposure of any kind, unlike a retirement account distribution taken later

75. A client nearing retirement asks whether to take Social Security at 62 or wait until 70, given that she also plans significant Roth IRA withdrawals. What tax-planning point should the preparer raise about the interaction?

• A. Roth IRA withdrawals increase the taxable portion of a taxpayer's Social Security benefits on a dollar-for-dollar basis each year without exception
• B. Because Social Security's taxable portion depends on provisional income, which account she draws from first can affect how much of her benefit becomes taxable
• C. The age at which she claims Social Security is, by itself, what fixes the taxable percentage of each future benefit payment
• D. Provisional income calculations apply only to taxpayers who made no Roth IRA contribution during their working years

76. A client's amended return claiming a large refund was filed just under three years after the original return's due date. The IRS is questioning whether the claim is timely. What should the preparer confirm to advise the client?

• A. Whether the client filed before April 15 of the current calendar year, since that single date is the only one relevant to any refund claim
• B. Whether the refund claimed exceeds $10,000, since claims above that dollar amount follow a separate and considerably longer statute of limitations
• C. Whether the claim was filed within the later of three years from filing the original return or two years from actually paying the tax
• D. Whether the client used a paid preparer for the original return, since self-prepared returns receive an extra year to claim any refund

77. Which practitioners hold UNLIMITED rights to practice before the IRS?

• A. Anyone who has registered for and holds a valid PTIN
• B. Enrolled agents, CPAs, and attorneys
• C. Attorneys admitted to practice in the taxpayer's home state
• D. Annual Filing Season Program participants, for any return they prepared

78. Under Circular 230, when may a practitioner charge a contingent fee?

• A. For any service the practitioner chooses to bill that way, including original return preparation
• B. Only in limited cases — such as IRS examination challenges, refund claims under review, and judicial proceedings — not for preparing original returns
• C. Not permitted for representation matters generally, since Circular 230 reserves contingent billing exclusively for narrow court-awarded fee arrangements
• D. Only for engagements that are expected to produce a refund for the client

79. A client fires her EA mid-dispute and requests her records back. The bill is unpaid. What does Circular 230 require?

• A. Holding all of the client's records and working papers as collateral until the outstanding invoice is fully paid
• B. Destroying the file once the engagement letter is formally terminated
• C. Sending the records only to the IRS, bypassing the former client entirely
• D. Prompt return of the client's records needed to comply with tax obligations — nonpayment does not excuse it

80. An EA is found to have willfully evaded her own taxes. Which office acts, and what sanctions are on the table?

• A. No office has jurisdiction, since an EA's personal tax matters stay private
• B. The IRS Office of Professional Responsibility — censure, suspension, disbarment from practice, and monetary penalties
• C. The state bar association where the enrolled agent resides
• D. The United States Tax Court, which holds independent authority to impose a jail sentence for willful tax evasion by a licensed practitioner

81. A preparer claims the earned income credit for a client with thin, contradictory information. What does due diligence require?

• A. Nothing beyond entering the figures the client provides on the intake sheet
• B. Denying each earned income credit claim that crosses her desk rather than risk a single due-diligence penalty on a valid one
• C. Conducting an in-home visit to verify the client's household composition
• D. Completing Form 8867, making reasonable inquiries when information seems incorrect, and keeping records — with a penalty per failure

82. How long must a paid preparer retain copies (or a list) of returns she prepared?

• A. Three years after the close of the return period
• B. One filing season, ending once the April due date passes
• C. Indefinitely, since no retention period is set by regulation
• D. Ten years, matching the IRS's collection statute of limitations

83. Under IRS rules, who is required to obtain a Preparer Tax Identification Number (PTIN)?

• A. Only enrolled agents, since other preparers work under an EA's PTIN
• B. Anyone who prepares, or substantially helps prepare, federal tax returns for compensation
• C. Every taxpayer who prepares and files his or her own return
• D. Only volunteers who staff a free, IRS-sponsored tax-preparation clinic during the filing season

84. Before submitting a return position with no substantial authority and no disclosure, what does the preparer risk under the code?

• A. Disbarment from practice imposed without any hearing or appeal
• B. Forfeiture of the client's refund back to the U.S. Treasury
• C. Nothing, since a return position is solely the client's legal responsibility
• D. The unreasonable-position preparer penalty — greater when the conduct is willful or reckless

85. What is the difference between Form 2848 and Form 8821?

• A. Form 8821 grants representation rights; Form 2848 is purely informational
• B. The two forms are interchangeable and may be used for either purpose
• C. Both forms apply exclusively to corporate taxpayers and may never be filed on behalf of an individual client
• D. Form 2848 grants power of attorney to represent; Form 8821 only authorizes receiving tax information

86. How long does the IRS generally have to assess additional tax, and what extends or removes that limit?

• A. No time limit applies to any return the IRS has already accepted and processed for a given tax year
• B. One year from filing, with no exceptions for fraud or large omissions
• C. Three years from filing; six years for omissions over 25% of gross income; no limit for fraud or unfiled returns
• D. Ten years from filing, the same period that applies to every return

87. During an IRS examination, the auditor asks the EA-represented taxpayer to attend an interview. Must the taxpayer appear personally?

• A. Yes, the taxpayer must appear immediately regardless of any representation on file
• B. The enrolled agent alone decides, without regard to IRS procedure, whether the client is required to appear in person
• C. Only if the refund claimed on the return exceeds $10,000
• D. Generally no — a taxpayer with a valid POA may be represented without appearing, unless the IRS issues an administrative summons

88. A preparer files 60 individual returns per year, all on paper at clients' insistence — without collecting any waivers. What rule is being ignored?

• A. No rule is violated, since a preparer may freely choose the filing method
• B. A cap limiting any one tax return preparer to no more than fifty individual returns filed on paper each season
• C. The e-file mandate — specified preparers filing more than 10 covered returns must file electronically, with documented client opt-outs
• D. A requirement that applies only to returns prepared for corporations

89. A taxpayer discovers an overpayment. Within what period must the refund claim be filed?

• A. One year from the date the taxpayer discovers the overpayment
• B. Any time at all, since refund claims carry no statute of limitations
• C. The later of three years from filing the return or two years from paying the tax
• D. Five years from the return's original due date, regardless of when it was filed

90. A taxpayer cannot pay a large assessed liability and asks about settling for less. Which IRS program addresses this, and on what grounds?

• A. No settlement mechanism exists once a liability has been assessed
• B. Forgiveness of the balance once five full years have passed since the liability was originally assessed
• C. Filing a refund claim for the amount she believes she overpaid
• D. An offer in compromise — doubt as to collectibility, doubt as to liability, or effective tax administration

91. The IRS issues a Final Notice of Intent to Levy. How long does the taxpayer have to request a Collection Due Process hearing?

• A. 10 days
• B. One year
• C. 30 days
• D. There is no hearing right once a final notice has been issued

92. What is the difference between a federal tax LIEN and a LEVY?

• A. The two terms are synonyms describing the same collection action
• B. A lien is the government's legal claim against property; a levy actually seizes property or rights to it
• C. A levy is the government's legal claim against property; a lien is the physical act of seizing that property
• D. Liens can be filed only against businesses, never against individuals

93. A newly formed nonprofit wants federal recognition of its 501(c)(3) tax-exempt status before soliciting large donations. What must it generally do, and by when, to have that recognition apply retroactively to its date of formation?

• A. Nothing; a newly formed nonprofit is tax-exempt from the date of formation with no application of any kind required
• B. File Form 1023 (or the streamlined 1023-EZ) within 27 months of the end of the month it was organized
• C. File Form 990 as its very first annual return, since that filing alone is what establishes exempt status retroactively
• D. Wait until it has operated for at least three full years before it becomes eligible to apply for exempt status at all

94. An unmarried decedent's estate in 2025 has a gross estate of $16,200,000 after allowable deductions bring the taxable estate to $15,800,000. Is a federal estate tax return required, and is tax owed?

• A. No return is required, since federal estate tax was permanently repealed for every decedent dying after 2010
• B. A return is required, but no tax is owed because the entire taxable estate is exempt no matter its size
• C. A return is required only for a married decedent's estate, since unmarried decedents are automatically exempt
• D. Form 706 is required, and tax is owed on the amount above the $13,990,000 basic exclusion amount for 2025

95. A widow's late husband died in 2024 with an unused portion of his $13,990,000 basic exclusion amount. What must the estate do to allow the widow to use that unused exclusion for her own future estate?

• A. Timely file Form 706 for the husband's estate and elect portability, even if filing is not otherwise required
• B. Nothing — unused exclusion amounts transfer automatically to a surviving spouse whether or not any return is filed
• C. The widow must file her own Form 706 while alive, since portability is elected on the survivor's return, not the decedent's
• D. Portability is unavailable to a widow under any circumstance; the unused exclusion amount always simply expires unused

96. A grandmother gives her grandson $25,000 in 2025 and elects gift-splitting with her spouse. How does gift-splitting change the gift tax result compared to the grandmother making the gift alone?

• A. Gift-splitting doubles the tax-free gift size in every case and eliminates any need to file a gift tax return
• B. Each spouse's $19,000 annual exclusion applies to half the gift, leaving only $6,000 of it in excess of exclusions on Form 709
• C. Gift-splitting has no effect on the annual exclusion and exists only to reassign legal liability for any gift tax owed
• D. Gift-splitting is available only for gifts of real property, never for cash gifts made between family members

97. A U.S. citizen held $12,000 in a foreign bank account at its highest point during 2025 and also has a separate foreign brokerage account. Which international reporting requirement is triggered, and by which form?

• A. No reporting is required at all, since each individual account stayed under the $50,000 foreign-asset threshold
• B. Only Form 8938 applies, since FBAR reaches only accounts held at banks physically located outside North America
• C. FinCEN Form 114, the FBAR, since aggregate foreign account value exceeded $10,000 at some point during the year
• D. Reporting is required only if the accounts together earned more than $600 of interest, matching the 1099-INT rule

98. A trust beneficiary receives a Schedule K-1 reporting both trust accounting income and a separate capital gain that state law and the trust document allocate to corpus rather than income. How should each item generally be reported to the beneficiary?

• A. Every item the trust realizes, including corpus gains, must be reported to the beneficiary no matter the document's allocation
• B. Nothing is reported to any beneficiary until the trust terminates and makes its final distribution of remaining assets
• C. Only capital gains are reported to a beneficiary; ordinary trust accounting income stays taxed at the trust level instead
• D. DNI, which generally follows accounting income, carries to the beneficiary; a corpus gain generally stays taxed to the trust

99. A farmer's crops were destroyed by a federally declared drought, and he received $40,000 in federal crop insurance proceeds. He wants to defer recognizing the income to the following year. Under what condition may he do so?

• A. He may elect deferral if his normal business practice shows he would have sold the crops in a later year anyway
• B. He may not defer crop insurance proceeds of any kind; they are taxable in the year of receipt with no exception available
• C. He may defer the proceeds only if he also sells all of his farm equipment during that same tax year
• D. Deferral applies to each crop insurance payment without an election or any supporting showing about normal practice

100. A real estate professional's rental activities show a $40,000 loss for 2025, and she materially participates in the rental business for more than 750 hours during the year while working no other job. How is the loss treated?

• A. As a passive loss capped at the $25,000 special allowance reserved for non-qualifying rental owners
• B. As a nonpassive loss fully deductible against other income, since real estate professional status removes rentals from the passive rules
• C. As a nondeductible personal expense, since rental real estate losses cannot offset nonpassive income under this scenario
• D. As a loss capped by her modified AGI, reduced dollar for dollar above $100,000, the ordinary passive rental phase-out limit