Cognitive Reflection And The Enrolled Agent Exam

Cognitive Reflection And The Enrolled Agent Exam

A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost? _____ cents. Shane Frederick, an associate professor at Yale University's School of Management, published this question as part of a three question Cognitive Reflection Test in the Journal of Economic Perspectives-Volume 19, Number 4-Fall 2005, pages 25-42. This test measures your ability to take a more reflective approach in your answers, and not simply trusting your instinctive response. If you are like most people, you intuitively guessed 10 cents as the cost of the ball. Of course, this cannot be correct, but if 10 cents is your answer it is very likely you were confident with your choice. This occurs because of the instant ability of your brain to draw a conclusion about the question, acting on impulse, and subtracting $1.00 as the cost of the bat from the total spent of $1.10. If you reflect further on the question, you will see that the ball cannot be 10 cents as the difference between $1.00 and 10 cents is 90 cents, and not the $1.00 indicated in the question. In reality, this is not that difficult of a question. The cost of the ball is 5 cents and the bat is $1.05. To figure the correct answer, you must fight the tendency we all have to accept our intuition and quickly move forward. In other words, take the time to reflect on the question and the appropriateness of your answer before moving on. The enrolled agent exam will provide your brain with several opportunities for cognitive missteps. Be careful, you just might see a tricky question like this on the ea exam: SEE Sample Question: Jason sold his Stone Cold Corporation stock to his sister Lila for $8,000. Jason's cost basis in the stock was $15,000. Lila later sold this stock to Millis, an unrelated party, for $15,500. What is Lila's realized gain? A. $500

B. $7,000

C. $7,500

D. $0 This question has many factors that you must understand to answer it correctly. While you read the question, your brain is forming opinions about the answer. The first thing you notice is that Jason has a loss on the sale of $7,000, but he sold it to his sister Lila. Reading on, you see that Lila later sold the stock to an unrelated party for a gain of $7,500. Immediately, you recall that Robert cannot recognize a loss because he is related to Lila; therefore, Lila can exclude the amount of the loss Robert was unable to claim from her gain. Your heart flutters with excitement as you mark choice A. $500 as your answer and move on with the comfort that you are one correct answer closer to becoming an enrolled agent. That enrolled agent course you took definitely paid off . . .or did it? Unfortunately, no amount of ea exam review will help if you rush through the answer. If you do not take the time to review your response and check what the question is asking, you are setting yourself up for this classic mistake. It is correct that Jason cannot report the loss (related party transaction) and Lila can exclude the amount of the loss previously disallowed to him, recognizing only $500 of the gain. Unfortunately, that is not what the question asks. In addition to the related party rules, this question also tests your understanding of the difference between realized and recognized gains. Lila's realized gain is $7,500. Amount realized - The amount realized from a sale or trade of property is everything received for the property. This includes the money, the fair market value of any property or services, and debt or other liabilities assumed by the buyer. Realized gains - The difference between the adjusted basis and the amount realized in a sale is the realized gain (or loss) on the transaction. Lila's basis is the amount she paid for the stock. Amount recognized - The amount of income or loss recognized is the amount a taxpayer includes in taxable income for the tax year. Sometimes we are just too darn smart for our own good. You will do better on this exam if you pace yourself and read the questions carefully before moving on. You have three and one-half hours to take the exam. This amounts to an average time for each question of over two minutes. The test is hard enough without missing questions you would otherwise answer correctly. Don't let your brain get in the way. IRS Circular 230 Disclosure - Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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