Question

If a cash basis taxpayer chooses to have his dividends automatically reinvested in the corporation’s stock, they are not reported on the tax return nor taxed because he did not receive the money.

Select one:
a. True
b. False

Answer 1

The statement is false; cash-based taxpayers must report and pay taxes on reinvested dividends, as they are considered income regardless of their reinvestment.

Step-by-step explanation:

If a cash-based taxpayer chooses to have their dividends automatically reinvested in the corporation's stock, this question asks whether they need to report these dividends on their tax return or pay taxes on them. The answer is b. False. Regardless of whether the dividends are taken as cash or reinvested, they are considered received and are therefore taxable income. This is because reinvested dividends buy additional shares of stock, which means the taxpayer effectively receives them even though the dividends are immediately used to purchase more stock.

Answer 2

A cash basis taxpayer must report and pay taxes on dividends that are reinvested in additional stock, as they are considered income by the IRS.

Step-by-step explanation:

The statement that a cash basis taxpayer does not have to report or pay taxes on dividends that are automatically reinvested in the corporation's stock is false. Even if a taxpayer has chosen to reinvest dividends into purchasing additional stock, the Internal Revenue Service (IRS) requires that these dividends be reported as income on the taxpayer's return. This is because the dividends are considered to have been received by the taxpayer, despite being immediately used to purchase more shares.