- Which of the following is correct regarding the records a taxpayer who purchased a principal residence needs to substantiate the adjusted basis and the amount realized on its 2025 sale for purposes of the section 121 exclusion?
Answer: The taxpayer needs the closing statements from the purchase and sale, records of capital improvements, and proof of the purchase price; a Form 1099-S reports gross proceeds, not basis.
Choice B is correct. IRC § 121 permits a taxpayer to exclude gain from the sale of a principal residence, but the taxpayer must know both the amount realized and the adjusted basis. Closing statements show the purchase and sale prices and selling expenses; improvement records increase basis. Form 1099-S reports gross proceeds, not basis. Choice A misstates the rule: the amount excludable under § 121 is limited to the gain realized, so the taxpayer must know the gain; it cannot be determined solely from sales proceeds and filing status. Choice C misstates basis: capital improvements generally increase adjusted basis. Choice D misstates the records: property tax bills and mortgage interest statements do not establish the amount realized or the adjusted basis.
- Which of the following is correct for claiming the child and dependent care credit?
Answer: The client should request the center's EIN using Form W-10; if the center refuses, the credit may still be claimed if the client documents the refusal and the attempt to obtain the EIN.
IRC §21 and Form 2441 instructions: A taxpayer claiming the child and dependent care credit must identify the care provider by name, address, and TIN. If the provider will not give the TIN, the taxpayer may still claim the credit after making a reasonable, documented effort to obtain it, and Form W-10 is an appropriate request form. Choice A is wrong because Form 2441 does require provider identifying information. Choice B is wrong because refusal alone does not automatically bar the credit if due diligence is shown. Choice C is wrong because the taxpayer does not attach Form 1099-MISC to the return and the center's reporting obligation is separate.
- Assuming the client is otherwise eligible for the credit, which of the following is correct regarding the documentation for the credit?
Answer: The tuition billing statement, payment receipts, and textbook receipts are sufficient substantiation, so the return does not need to wait for Form 1098-T.
IRC § 25A(b) and (g)(8); Instructions for Form 8863. The American opportunity tax credit generally requires that the taxpayer or the student have received Form 1098-T. The Form 8863 instructions make an exception when the institution was required to furnish the form but did not: the credit may still be claimed if, after January 31 and before filing, the taxpayer or student requested the form, cooperated with the institution's efforts to issue it, and can substantiate enrollment and the qualified expenses paid. The daughter made that request, and the billing statement, payment receipts and textbook receipts substantiate the expenses, including the required course materials, so the return need not wait for Form 1098-T. Choice A is correct. Choice B is wrong because substantiating documents are not attached to the return; they are kept and provided if the IRS asks for them. Choice C is wrong because required books, supplies and equipment are qualified expenses for the American opportunity tax credit wherever they are bought; no rule requires buying them from the university. Choice D is wrong because the credit is based on qualified expenses paid during the year, and a billing statement alone does not show payment.
- Which of the following should the enrolled agent recommend?
Answer: Form 4506, requesting a copy of the tax return, because it will include the signed return, schedules, and attachments for a fee.
Form 4506 instructions: A copy of the actual return, including schedules and attachments, is obtained by filing Form 4506, not by requesting a transcript. Form 4506-T transcripts are free but do not include every attachment and are not exact copies. Choice A is wrong because a Tax Return Transcript is not a copy of the return and may omit schedules. Choice B is wrong because an Account Transcript shows assessments, payments, and transactions, not the return as filed. Choice D is wrong because a Wage and Income Transcript is a list of information-return data, not a reproduction of the return.
- Which of the following is correct regarding the documents needed to prepare the return?
Answer: The taxpayer should collect the sale closing statement and the original purchase records and reconstruct improvement costs, which increase basis and reduce gain.
IRC § 121; Pub. 523, Selling Your Home. Gain on a home sale is amount realized minus adjusted basis, and the § 121 exclusion applies only after the gain is computed. Adjusted basis includes capital improvements, so the correct practice is to collect the sale closing statement, the original purchase/settlement records, and to reconstruct improvement costs. Choice A is wrong because a property tax assessment is not the taxpayer's cost basis. Choice B is wrong because the exclusion does not remove the need to compute basis and gain. Choice D is wrong because improvements increase basis and therefore reduce the gain reportable on the return.
- Which of the following is correct regarding the documentation and reporting required when a taxpayer does not receive a Form W-2 in time to file a return for tax year 2025?
Answer: The taxpayer should ask the employer for the form and, if it is still not received, file Form 4852 as a substitute; an amended return may be needed if the actual Form W-2 later shows different amounts.
Under IRC § 6051 and the Instructions for Form 4852, an employer must furnish a Form W-2, but a taxpayer who has made a reasonable effort and still has not received it may file a substitute Form 4852 based on the best available information; if the actual Form W-2 later shows different amounts, an amended return may be necessary. Choice A is therefore correct. Choice B misstates the filing requirement: the IRS accepts a return filed with Form 4852 in place of the actual Form W-2, and filing an extension is not required. Choice C misstates the income tax rule: wages are taxable when received regardless of whether the employer issues a Form W-2. Choice D misstates the substitute method: the estimate must be based on current-year records, not the prior year's Form W-2.
- Which of the following is correct regarding the document needed to reconcile advance payments of the premium tax credit for a taxpayer who was enrolled in a Marketplace plan for 2025?
Answer: Form 1095-A, issued by the Marketplace, shows the monthly enrollment premiums and advance credit payments and is used to complete Form 8962.
IRC § 36B(f)(3) and the Instructions to Form 1095-A govern this point: the Marketplace furnishes Form 1095-A, which reports the monthly enrollment premiums and the monthly advance payment of the premium tax credit, and the taxpayer uses that information to complete Form 8962. Choice B misstates the form and its contents: Form 1095-B reports minimum essential coverage and does not report advance credit payments. Choice C misstates the source: Form 1095-C reports employer-sponsored coverage offers, not Marketplace advance payments, and it is not attached to Form 8962. Choice D misstates the records: monthly billing statements are not an acceptable substitute for Form 1095-A when reconciling the premium tax credit.
- Which of the following is correct for preparing Form 8962?
Answer: The agent may use the information from the Marketplace account and should make sure the client has a copy of Form 1095-A; an insurer statement is not a substitute.
IRC §36B and Form 8962 instructions: The premium tax credit reconciliation must be based on the monthly enrollment premiums and advance credit payments reported on Form 1095-A. If the paper form was lost, the taxpayer can obtain the form through the Marketplace account, and this information may be used. Choice A is wrong because an insurer's statement is not the Marketplace's official statement and may not show APTC. Choice B is wrong because bank records do not establish the APTC amounts that were paid on the client's behalf. Choice C is wrong because the client need not wait for an IRS-generated transcript before filing.
- Which of the following is correct for preparing Schedule C?
Answer: Obtain transaction reports from both platforms and reconcile them with bank deposits; report the $21,500 plus the $13,000 of business receipts, and deduct allowable expenses.
IRC §61 and Schedule C instructions: All business receipts are taxable, whether or not an information return is issued. The $13,000 from the second platform must be reported even though no Form 1099-K was issued for it. The agent should obtain transaction reports and reconcile them to bank deposits, and deduct expenses separately. Choice A is wrong because the absence of a form does not make income nontaxable. Choice B is wrong because platform fees are expenses, not a subtraction from gross receipts, and the 1099-K reporting threshold does not change the income rule. Choice D is wrong because a return may not be delayed merely because an information return has not been received.
- Which of the following is correct regarding the documentation required to determine the basis of stock that a taxpayer inherited and sold in 2025, when the Form 1099-B does not report basis?
Answer: The taxpayer needs evidence of the stock's fair market value on the decedent's date of death, because inherited property generally takes a stepped-up basis for Federal income tax purposes.
IRC § 1014(a). Property acquired from a decedent generally takes a basis equal to its fair market value on the date of death. Because the broker did not report basis, the taxpayer needs evidence of the stock's value on the date of death, such as a brokerage date-of-death valuation or the estate's valuation records. Choice C is correct. Choice A is wrong because the date-of-death value is the basis whether or not an estate tax return was filed; a Form 706 is not a condition of a stepped-up basis, and many estates are not required to file one. Choice B is wrong because inherited property generally takes a date-of-death basis, not a carryover of the decedent's adjusted basis, so the original purchase confirmation does not establish basis. Choice D is wrong because Form 1099-S reports proceeds from real estate transactions; it does not report the basis of inherited securities.
- Which of the following is correct for the return?
Answer: Report the $10,000 as other income and deduct $10,000 of losses as an itemized deduction; the diary and receipts substantiate losses up to, but not exceeding, winnings.
IRC §165(d): A taxpayer who gambles outside a trade or business may deduct wagering losses only to the extent of wagering gains, and only if the taxpayer itemizes. Gambling winnings are reported as other income, and a Form W-2G is not the only evidence of winnings. Here, total winnings are $10,000 and substantiated losses are $12,500, so the maximum itemized deduction is $10,000. Choice D is correct. Choice A is wrong because it would deduct $12,500, exceeding the $10,000 of winnings. Choice B is wrong because gambling winnings are taxable even if no Form W-2G is issued. Choice C is wrong because these facts describe recreational gambling, not a Schedule C trade or business; keeping records alone does not make gambling a business.
- Which of the following is the correct way for the enrolled agent to prepare the return?
Answer: Use the pay stubs and bank records to complete Form 4852, attach it to the return, and file an amended return if a later Form W-2 or W-2c shows different amounts.
Form 4852 instructions: A taxpayer who cannot obtain Form W-2 after a reasonable effort must complete and attach Form 4852, using the best available data from pay stubs and bank records. If the actual W-2 or W-2c later arrives and shows different amounts, the taxpayer should file Form 1040-X. Choice B is wrong because the IRS transcript is not the required substitute and may not exist yet. Choice C is wrong because bank deposits alone do not show withholding and no substitute form is attached. Choice D is wrong because Form 4506-T does not produce the employer's W-3, and the W-3 is an aggregate filing, not a per-employee substitute.
- Which of the following is correct regarding the documentation needed to determine whether a taxpayer's 22-year-old daughter, who is not a full-time student and is not permanently and totally disabled, can be claimed as a qualifying relative for 2025?
Answer: The taxpayer should keep the daughter's income records, such as Forms W-2, 1099-INT, and 1099-DIV, to confirm gross income less than $5,200, and support payment records to show that the taxpayer provided more than half of her support.
Choice B is correct. Under IRC § 152(d)(1)(B) and (C), a qualifying relative must have gross income less than the annual limit ($5,200 for 2025) and must receive more than half of her support from the taxpayer. Income records such as Forms W-2, 1099-INT, and 1099-DIV evidence gross income, and support payment records evidence the taxpayer's support contributions. Choice A misstates the measure: the gross income test uses all gross income, not only earned income. Choice C misstates the test: the $5,200 limit applies to gross income, not to the amount the individual spent on her own support. Choice D misstates the measure: the statutory test uses gross income, not adjusted gross income.
- Which of the following is correct regarding the information a taxpayer needs to report a distribution from a qualified tuition program on a 2025 return?
Answer: The taxpayer needs Form 1099-Q and records of qualified education expenses, such as Form 1098-T; the taxable earnings are the earnings allocated to the distribution not covered by those expenses.
Choice C is correct. Under IRC § 529 and Pub. 970, the taxable portion of a qualified tuition program distribution is the earnings allocated to the distribution that are not offset by qualified education expenses. The taxpayer substantiates those expenses with records such as Form 1098-T, along with Form 1099-Q showing the distribution. Choice B is incorrect because tax-free treatment is not automatic merely because the distribution was used for tuition; the distribution must be compared with qualified education expenses. Choice A is incorrect because a qualified tuition program distribution is not reported on Form 1098-T, and Form 1099-Q is furnished to the distributee, or to both the distributee and the designated beneficiary when they are different, not only to the designated beneficiary. Choice D is incorrect because Form 1098-E reports student loan interest, which does not reduce the taxable portion of a qualified tuition program distribution.
- What documentation should the enrolled agent use to determine basis?
Answer: Use the date-of-death brokerage statement, because inherited property generally takes a fair market value basis on the date of death.
IRC §1014(a): Property acquired from a decedent generally has a basis equal to its fair market value on the date of death, or on the alternate valuation date if elected. The date-of-death brokerage statement is therefore the correct document. Choice A is wrong because it applies carryover basis, which is generally the rule for gifts, not bequests. Choice C is wrong for the same reason. Choice D is wrong because the step-up applies whether or not an estate tax return was required.
