Practice questions · Finance & Accounting
Enrolled Agent (EA): Practice Questions
Original concept-check questions across the three SEE parts: Individuals, Businesses, and Representation, Practices and Procedures. Each answer is explained, including why the other options are wrong. Filter by domain or difficulty. These test understanding of public US tax concepts - not real exam questions. Tax law changes yearly, so always confirm current rules with the IRS.
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Which credential gives a tax practitioner unlimited rights to represent any taxpayer before the IRS?
Correct answer: C. An Enrolled Agent has unlimited representation rights before the IRS - any taxpayer, any matter, any office. A PTIN alone only lets someone prepare returns, the Annual Filing Season Program gives only limited representation rights, and a state business licence confers no federal representation rights at all. -
What must a candidate obtain before they can schedule the Special Enrollment Examination?
Correct answer: A. A valid PTIN is required before scheduling the SEE. The EA has no education requirement, so a degree and 150 credit hours are not needed, and a CPA licence is an entirely separate credential, not a prerequisite for the EA. -
A single taxpayer with no dependents who is not a surviving spouse or head of household will generally use which filing status?
Correct answer: D. An unmarried taxpayer with no qualifying dependents files as Single. Head of household requires a qualifying person and paying more than half the cost of a home, married filing jointly requires a spouse, and qualifying surviving spouse requires a recently deceased spouse and a dependent child. -
For an individual, the standard deduction is best described as:
Correct answer: B. The standard deduction is a fixed dollar amount that reduces taxable income, taken instead of itemizing. It reduces income rather than tax directly (that would be a credit), it is not a tax on investment income, and it lowers income rather than adding to it. -
The 'basis' of a purchased capital asset is generally used to:
Correct answer: C. Basis (generally cost, adjusted over time) is subtracted from the amount realized to figure gain or loss on a sale. It does not set the selling price, has nothing to do with filing status, and is unrelated to payroll tax. -
Which of the following is generally a refundable tax credit for eligible individuals?
Correct answer: D. The Earned Income Tax Credit is refundable, so it can produce a refund even if it exceeds the tax owed. The foreign tax credit, the lifetime learning credit and the general business credit are nonrefundable (the lifetime learning credit, unlike the partly refundable American Opportunity Credit, is fully nonrefundable). -
A taxpayer holds a stock for eight months and sells it at a profit. The gain is:
Correct answer: A. Held one year or less, the gain is short-term and taxed at ordinary income rates. Long-term (preferential) rates require holding more than one year, the gain is not tax-free, and a profit is a gain, not a deductible loss. -
Contributions to a traditional IRA may be deductible, whereas qualified distributions from a Roth IRA are:
Correct answer: B. A Roth IRA is funded with after-tax money, so qualified distributions come out generally tax-free. They are not fully taxable (that describes traditional IRA distributions), retirement distributions are not subject to payroll tax, and qualified Roth distributions are clearly permitted. -
A dependent child's unearned income above a threshold may be taxed at the parents' rate under which rule?
Correct answer: D. The kiddie tax can tax a child's unearned income above a threshold at the parents' (higher) rate. The marriage penalty concerns joint filers, the wash-sale rule disallows certain repurchase losses, and the alternative minimum tax is a separate parallel calculation, not the rule for a child's unearned income. -
An individual who is self-employed pays self-employment tax, which primarily funds:
Correct answer: A. Self-employment tax covers the Social Security and Medicare contributions that an employer and employee would otherwise split. It is separate from federal income tax, and it has nothing to do with state sales tax or property tax. -
On a joint return, a married couple report:
Correct answer: B. Married filing jointly combines both spouses' income, deductions and credits on a single return, and both are jointly responsible for the tax. It is not limited to the higher earner or to investment income, and filing wholly separate returns describes married filing separately, a different status. -
A single-member LLC that has not elected to be taxed as a corporation is, by default, treated for federal tax as:
Correct answer: B. By default a single-member LLC is a disregarded entity, so its activity is reported on the owner's return like a sole proprietorship. It is not a C or S corporation unless it elects that treatment, and it cannot be a partnership because a partnership needs at least two members. -
Income earned by a partnership is generally:
Correct answer: D. A partnership is a pass-through entity: it files an information return but the income flows through to partners, who pay the tax. It is not taxed at the entity level, it is not exempt, and the flat 21% rate is the C corporation rate, not the partnership treatment. -
A defining feature of an S corporation compared with a C corporation is that the S corporation:
Correct answer: A. An S corporation passes income through to shareholders, generally avoiding the double taxation a C corporation faces. Double taxation is the C corporation feature it avoids, an S corporation must have shareholders (within limits), and it is not tax-exempt. -
Section 179 of the tax code generally allows a business to:
Correct answer: C. Section 179 lets a business immediately expense the cost of qualifying property (up to annual limits) instead of depreciating it over years. It is not about deducting wages, it does not remove the filing requirement, and it does not let a business defer income indefinitely. -
An employer that pays wages is generally required to withhold and remit:
Correct answer: B. Employers must withhold federal income tax and the employee share of FICA, and remit these with the employer share. Withholding is not limited to state income tax, employers cannot simply leave it to employees, and sales tax is unrelated to payroll. -
The maximum federal corporate income tax rate applied to a C corporation's taxable income is currently:
Correct answer: D. Since the 2017 tax law, C corporations are taxed at a flat 21%. The old top rate was 35%, while 10% and 0% are too low for the corporate rate. Always confirm the current rate, as tax law can change. -
For an accrual-basis business, income is generally recognized when:
Correct answer: C. Under the accrual method, income is recognized when earned - when all events fixing the right to receive it have occurred and the amount can be determined. Recognizing on cash receipt is the cash method, and neither return filing nor the owner's discretion governs the timing. -
A business deduction is generally allowable if the expense is:
Correct answer: A. Ordinary and necessary business expenses are deductible. Personal living costs are not deductible, dividends are a distribution of profit rather than a deductible expense, and repaying loan principal is a return of borrowed money, not a deductible cost (only the interest may be). -
Income earned by a simple trust is generally:
Correct answer: D. A simple trust must distribute all its income currently, so that income is generally taxed to the beneficiaries who receive it. It is not taxed to the trustee personally, it is not exempt, and a simple trust does not defer income to termination. -
Which form does a partnership use to report each partner's share of income, deductions and credits?
Correct answer: B. A partnership issues each partner a Schedule K-1 showing their share of income, deductions and credits. A W-2 reports employee wages, a 1099-MISC reports certain non-employee payments, and Form 941 is the employer's quarterly payroll tax return. -
Circular 230 is best described as:
Correct answer: C. Circular 230 sets out the Treasury Department's rules of practice and ethics for those who represent taxpayers before the IRS. It is not a tax credit, not a return, and not an audit technique - it is the conduct rulebook for practitioners. -
An Enrolled Agent who seriously violates Circular 230 may face which of the following sanctions?
Correct answer: A. Breaches of Circular 230 can lead to censure, suspension or disbarment from practice before the IRS. The other options are nonsensical as penalties - a pay rise, becoming a CPA, or being excused from continuing education are not sanctions. -
Which form is generally used to authorise a representative to act for a taxpayer before the IRS?
Correct answer: D. Form 2848, Power of Attorney and Declaration of Representative, authorises a representative to act for a taxpayer before the IRS. Form W-4 sets employee withholding, Form 1040 is the individual return, and Form 1099 reports various income - none grants representation authority. -
If a taxpayer disagrees with the result of an IRS examination, the next step is usually to:
Correct answer: B. A taxpayer who disagrees with an examination can take the case to the IRS Independent Office of Appeals. Ignoring the notice forfeits rights and worsens the position, and the other options (prison, paying double automatically) are not how the dispute process works. -
An Enrolled Agent's continuing education requirement is:
Correct answer: C. EAs must complete 72 hours of continuing education per three-year enrollment cycle, including 6 hours of ethics, with a yearly minimum of 16 hours. Continuing education is ongoing rather than a one-time pre-enrollment task, it is genuinely required, and 1,000 hours a year is far beyond the rule. -
Under Circular 230, a practitioner who discovers a client made an error on a past return should:
Correct answer: A. Circular 230 requires the practitioner to promptly advise the client of a known error or omission and its possible consequences; the decision to correct it then rests with the client. The practitioner does not report the client to the police, cannot amend a return without authorisation, and must not simply ignore a known error. -
The IRS statute of limitations for assessing additional tax is generally:
Correct answer: D. The general assessment statute of limitations is three years from when the return was filed, though it extends (for example to six years for a substantial understatement, and is unlimited for fraud or a non-filed return). It is not six months, not indefinite in ordinary cases, and the ten-year period applies to collection after assessment, not assessment itself. -
How often must an Enrolled Agent renew their enrollment with the IRS?
Correct answer: A. EAs renew enrollment every three years (on Form 8554, on a schedule tied to the last digit of the SSN). It is not annual, not a one-time permanent status, and not a ten-year cycle. -
Which statement about the Enrolled Agent credential is correct?
Correct answer: C. The EA is a federal credential, so it is recognised in every state, unlike the state-by-state CPA licence. It is not issued state by state, it does not expire on passing (it begins at enrollment and is renewed every three years), and it grants full representation rights, not just preparation. -
To qualify for head of household filing status, a taxpayer generally must be unmarried and:
Correct answer: A. Head of household generally requires being unmarried (or considered unmarried) and paying more than half the cost of maintaining a home for a qualifying person. Having no dependents fails the qualifying-person test, earning only investment income is irrelevant, and being a student is not a requirement. -
Which of the following types of income is generally taxable to an individual?
Correct answer: C. Wages reported on a W-2 are taxable compensation. A qualified gift is generally excluded from the recipient's income, loan proceeds are not income because they must be repaid, and a return of one's own capital is not taxable income. -
Municipal bond interest from a state or local government is generally:
Correct answer: B. Interest on most state and local municipal bonds is generally exempt from federal income tax. It is not ordinary taxable income, not subject to self-employment tax, and is interest rather than a capital gain. -
An individual who receives unemployment compensation must generally treat it as:
Correct answer: D. Unemployment compensation is generally taxable for federal income tax purposes and reported on the return. It is not tax-free, not a gift, and not a capital contribution. -
The child tax credit is best described as:
Correct answer: A. The child tax credit reduces tax for taxpayers with qualifying children, subject to eligibility rules and income phaseouts. It is a credit, not a deduction from income, not a tax on children, and not an exemption that adds to income. -
A taxpayer's filing status of married filing separately generally:
Correct answer: C. Married filing separately can limit or disallow several credits and deductions, so it is not always advantageous. It does not always lower combined tax, is not identical to single status, and is not required, since couples may file jointly. -
Qualified dividends are generally taxed at:
Correct answer: B. Qualified dividends are taxed at the preferential long-term capital gains rates when the holding-period requirements are met. They are not taxed at ordinary rates (that applies to ordinary dividends), not subject to self-employment tax, and not taxed at a flat 50%. -
A capital loss on the sale of a personal-use asset, such as a family car used personally, is generally:
Correct answer: D. Losses on the sale of personal-use property are generally not deductible. They are not fully deductible, not a business expense (the asset is personal), and a loss is not ordinary income. -
When figuring gain or loss on selling stock, the amount realized is reduced by the asset's:
Correct answer: A. Gain or loss equals the amount realized minus the asset's adjusted basis. A selling commission adjusts the amount realized but is not the full subtraction, and dividend yield and market capitalization are not used to compute the gain. -
Alimony under a divorce agreement executed after 2018 is generally:
Correct answer: C. For divorce agreements executed after 2018, alimony is generally neither deductible by the payer nor taxable to the recipient under current law. The deductible-and-taxable treatment applied to older agreements, and alimony is not a business expense or subject to self-employment tax. -
An individual who itemizes deductions instead of taking the standard deduction would report items such as:
Correct answer: B. Itemized deductions include qualifying mortgage interest, certain state and local taxes (within limits) and charitable contributions. Gross wages are income, loan principal received is not deductible, and tax-free gifts are not itemized deductions. -
Distributions of earnings from a traditional IRA before the owner reaches the qualifying age are generally:
Correct answer: D. Early distributions from a traditional IRA are generally subject to income tax and often a 10% additional tax unless an exception applies. They are not tax-free, not a deductible expense, and not a gift. -
A taxpayer who pays qualified higher-education tuition may be eligible for the American Opportunity Credit, which is:
Correct answer: A. The American Opportunity Credit is partially refundable and applies to eligible students in their first four years of higher education. It is not entirely nonrefundable, not a deduction, and requires qualifying enrollment. -
A sole proprietor reports the income and expenses of the business on:
Correct answer: C. A sole proprietor reports business income and expenses on Schedule C with the individual Form 1040. Form 1120 is for C corporations, Form 1065 is for partnerships, and a sole proprietorship does not file a separate corporate return. -
A partnership files which return to report its income, even though it generally pays no entity-level income tax?
Correct answer: B. A partnership files Form 1065, an information return, and passes income through to partners via Schedule K-1. Form 1040 is the individual return, Form 1120 is the C corporation return, and Form W-2 reports wages. -
An S corporation files which federal income tax return?
Correct answer: D. An S corporation files Form 1120-S and passes items through to shareholders on Schedule K-1. Form 1120 is for C corporations, Form 1040 is the individual return, and Form 941 is the employer's quarterly payroll return, not the income tax return. -
Depreciation allows a business to recover the cost of:
Correct answer: A. Depreciation recovers the cost of tangible property used in a business over a set recovery period. Inventory is accounted for through cost of goods sold, and wages and interest are deducted as expenses, not depreciated. -
Bonus depreciation generally allows a business to:
Correct answer: C. Bonus depreciation lets a business deduct a large percentage of the cost of qualifying property in the year it is placed in service. It does not eliminate all taxes, does not apply to inventory, and dividends are not deductible. -
A business operating at a net loss for the year that exceeds certain limits may be able to:
Correct answer: B. A net operating loss may generally be carried forward to offset future taxable income, subject to applicable limitations. The loss is not ignored, cannot be converted to tax-free income, and cannot be deducted twice. -
An employer must generally file which form to report annual wages and withholding to each employee?
Correct answer: D. Employers report each employee's annual wages and withholding on Form W-2. Form 1099-NEC reports nonemployee compensation, Schedule K-1 reports a partner's or shareholder's share of pass-through items, and Form 1040 is the individual return. -
Payments of 600 dollars or more to an independent contractor for services are generally reported on:
Correct answer: A. Nonemployee compensation of 600 dollars or more for services is generally reported on Form 1099-NEC. Form W-2 is for employees, Form 1120 is a corporate return, and Schedule A is for individual itemized deductions. -
The cost of goods sold for a business that sells products is generally:
Correct answer: C. Cost of goods sold is subtracted from gross receipts to determine gross profit for a product business. It is not ignored, not a personal expense, and reduces rather than adds to income. -
A corporation that distributes a dividend to its shareholders:
Correct answer: B. A corporation cannot deduct dividends paid, and shareholders generally include dividends in income, producing double taxation for C corporations. Dividends are not a deductible expense, not tax-free, and not cost of goods sold. -
A like-kind exchange under current law generally allows deferral of gain for exchanges of:
Correct answer: D. Under current law, like-kind exchange deferral applies to real property held for productive use in a business or for investment. It no longer applies to personal property, and it does not cover inventory or stocks and bonds. -
An estate or trust reports its income on:
Correct answer: A. An estate or trust files Form 1041 to report its income, deductions and distributions. Form 1040 is for individuals, Form 1120 for C corporations, and Form 941 is the employer's quarterly payroll return. -
A complex trust differs from a simple trust in that a complex trust may:
Correct answer: C. A complex trust may accumulate income, distribute corpus (principal), or make charitable contributions, unlike a simple trust that must distribute all income currently. It can make distributions, is not limited to cash, and must still file when required. -
An employer's share of FICA taxes is:
Correct answer: B. FICA has both an employee share (withheld) and an employer share that the employer pays on top, funding Social Security and Medicare. It is not withheld solely from the employee, is required, and is not automatically refunded. -
The qualified business income (QBI) deduction generally allows eligible owners of pass-through businesses to:
Correct answer: D. The QBI deduction generally permits eligible pass-through owners to deduct up to a set percentage of qualified business income, subject to thresholds and limitations. It does not eliminate self-employment tax, allow deducting all gross receipts, or make wages tax-free. -
A partnership's separately stated items on Schedule K-1 are reported this way because they:
Correct answer: A. Separately stated items (such as capital gains or charitable contributions) are passed through individually because they may face different limitations or rates on each partner's return. They are not inherently nondeductible, flow through to partners rather than staying at the entity, and a partnership generally does not pay entity-level tax. -
Which professionals have unlimited representation rights before the IRS?
Correct answer: C. Enrolled agents, CPAs and attorneys have unlimited rights to represent taxpayers before the IRS. Attorneys alone is too narrow, unenrolled preparers have only limited rights, and a PTIN alone does not confer unlimited representation. -
Under Circular 230, a practitioner must exercise due diligence in:
Correct answer: B. Circular 230 requires due diligence in preparing and filing returns and in the correctness of representations made to the IRS and clients. It is not limited to billing or marketing, and office furnishings are irrelevant. -
Circular 230 generally prohibits a practitioner from charging:
Correct answer: D. Circular 230 prohibits charging an unconscionable fee for representing a taxpayer before the IRS. It does not bar all fees, and reasonable flat or hourly fees are permitted. -
A practitioner who is asked by a client to take a frivolous position on a return should:
Correct answer: A. A practitioner must decline to take a frivolous position, consistent with Circular 230 and preparer penalty standards. Taking it to please the client or for a higher fee violates those standards, and reporting the client to the police is not the prescribed response. -
The form used by a taxpayer to authorize a representative to receive and inspect confidential tax information, but not to represent, is:
Correct answer: C. Form 8821, Tax Information Authorization, lets a designee receive and inspect confidential tax information without granting representation rights. Form 2848 grants representation, Form 1040 is the individual return, and Form W-4 sets withholding. -
If a taxpayer cannot pay the full amount of tax owed, one option is to:
Correct answer: B. A taxpayer unable to pay in full may request an installment agreement to pay the balance over time. Ignoring the balance worsens the situation, the debt is not automatically cancelled, and tax cannot be converted to a gift. -
An offer in compromise allows a taxpayer to:
Correct answer: D. An offer in compromise lets a qualifying taxpayer settle a tax liability for less than the full amount owed, subject to IRS acceptance. It is not an automatic no-payment option, does not excuse future filing, and does not increase a refund. -
The IRS issues a statutory notice of deficiency (a '90-day letter') to give the taxpayer the right to:
Correct answer: A. A statutory notice of deficiency gives the taxpayer a set period (generally 90 days) to petition the Tax Court before assessment, without first paying the disputed tax. It is not to be ignored, does not guarantee a win, and is not converted to a credit. -
Under the rules of practice, a power of attorney on Form 2848 generally allows the representative to:
Correct answer: C. Form 2848 generally lets the representative receive notices and represent the taxpayer for the specific matters and tax periods listed. Signing the return is allowed only in narrow circumstances, and the authority does not extend to spending the client's funds or unilaterally changing filing status. -
The Office of Professional Responsibility (OPR) at the IRS is mainly responsible for:
Correct answer: B. OPR oversees practitioner conduct and enforces the standards in Circular 230. It does not process refunds, set interest rates, or audit every return. -
A practitioner who learns that a client failed to file a required return should:
Correct answer: D. Under Circular 230, the practitioner must advise the client of the noncompliance and its consequences; acting to correct it is then the client's decision. Filing secretly, going to the media, and ignoring the issue are not appropriate. -
The taxpayer bill of rights includes the right to:
Correct answer: A. The Taxpayer Bill of Rights includes the rights to be informed, to quality service, and to challenge the IRS's position and be heard, among others. It does not promise freedom from audit, zero tax, or a guaranteed refund. -
An enrolled agent who fails to complete the required continuing education for an enrollment cycle risks:
Correct answer: C. Failing to meet the continuing education requirement can prevent renewal and lead to inactive status. It does not bring a salary increase, does not convert the EA to a CPA, and is unrelated to a refund. -
A practitioner generally must return a client's records on request:
Correct answer: B. Circular 230 generally requires returning a client's records promptly on request, even amid a fee dispute, though state law may affect certain practitioner work product. It is not contingent on winning, never returning them, or doubling the fee. -
The IRS Independent Office of Appeals exists to:
Correct answer: D. The Independent Office of Appeals offers an impartial review of disputes, aiming to resolve cases without litigation when possible. It does not prepare returns, set tax rates, or function solely to issue refunds. -
Estimated tax payments are generally required when a taxpayer:
Correct answer: A. Estimated payments are generally required when a taxpayer expects to owe more than a threshold after withholding and credits, such as the self-employed. They are not needed when withholding fully covers the tax, when there is no income, or when income is only tax-free gifts. -
A taxpayer who contributes appreciated stock held long-term to a qualified charity may generally:
Correct answer: C. Donating long-term appreciated stock to a qualified charity generally allows a deduction of fair market value, within limits, and avoids tax on the appreciation. A zero deduction, a cost-only deduction, or recognizing the gain do not reflect this favorable treatment. -
A self-employed individual may generally deduct one-half of their:
Correct answer: B. A self-employed taxpayer may deduct one-half of self-employment tax as an adjustment to income, mirroring the employer share. They cannot deduct half their income tax, and charitable gifts and mortgage principal are treated under different rules. -
A business meal that is ordinary, necessary and not lavish is generally:
Correct answer: D. Qualifying business meals are generally partially deductible, subject to the percentage limitation in effect for the year. They are not always fully nondeductible, not cost of goods sold, and not a personal gift. -
An accountable plan for reimbursing employee business expenses requires that employees:
Correct answer: A. Under an accountable plan, employees must substantiate expenses and return any excess advances, so reimbursements are generally not taxable wages. Keeping unsubstantiated amounts, always treating them as wages, or not documenting fail the plan's requirements. -
The accuracy-related penalty may apply when a taxpayer's underpayment is due to:
Correct answer: C. The accuracy-related penalty can apply to underpayments from negligence or a substantial understatement of income tax. A position with substantial authority, timely payment, and clearly allowed deductions do not trigger it. -
A practitioner preparing a return must sign it and include their:
Correct answer: B. A paid preparer must sign the return and include their PTIN. A home address alone is not the requirement, putting an SSN on the return in place of the PTIN is not how it works, and a bank account number is irrelevant. -
When representing a client, an enrolled agent owes a duty of:
Correct answer: B. An enrolled agent must provide competent, diligent representation within the bounds of the law and applicable ethics. The duty is to the client within legal limits, not loyalty to the IRS over the client, not winning through misstatements, and confidentiality is a genuine obligation, not an optional convenience.
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