Individual Tax Exam 1 Helpful Hints

tax base for social security is capped at _____

$137,700

Proposed regulations

-- just a draft · All regulations are first issued in the form of proposed regulations to allow the public to comment on them. Proposed regulations do not carry the same authoritative weight as temporary of final regulations.

Temporary Regulations

--3 years · have a limited life (three years for regulations issued after November 20, 1988). Nonetheless, during their life, they carry the same authoritative weight as final regulations.

Equity -- tax structure

a tax system is considered fair or equitable if the tax is based on the taxpayer's ability to pay. · Horizontal equity means two taxpayers in similar situations pay the same tax. The failures of horizontal equity are due to tax preferences. Government provides tax preferences for a variety of reasons, such as to encourage investment or further social objectives. · Vertical equity is achieved when taxpayers with greater ability to pay tax, pay more tax than taxpayers with less ability to pay. Proponents of a flat income tax or a sales tax (both of which are proportional tax rate structures) are more likely to argue that vertical equity is achieved when taxpayers with a greater ability to pay tax simply pay more in tax dollars. Proponents of a progressive tax system are more likely to argue that taxpayers with a greater ability to pay should be subject to a higher tax rate. Regressive tax rate structures are generally considered not to satisfy vertical equity.

Normal -- Statute of limitations

three years from the later of: 1) the date the tax return was actually filed; or 2) the tax return's original due date

Average tax rate

total tax/ taxable income

Effective tax rate

total tax/ total Income This includes tax exempt income

Seven States that do NOT impose an individual income tax

· Alaska · Florida · Nevada · South Dakota · Texas · Washington · Wyoming · Note: New Hampshire and Tennessee only tax individual dividend and interest income

court type-- prepayment of tax

required for District Court and Court of Federal Claims Not for Tax Court (can go to tax court without having to pay the tax)

Court type -- jury trial

permitted only in District Court

Substantial authority

. Substantial authority suggests the probability that the taxpayer's position is sustained upon audit or litigation is in the 35% to 40% range or above

extended -- statute of limitations

6 years in the case of a 25% underreporting of gross income

Progressive tax structure

A progressive tax rate structure imposes an increasing (graduated) marginal tax rate as the tax base increases. As the tax base increases, both the marginal tax rate and the taxes paid increase. Common examples of progressive tax structures include federal and state income taxes. As illustrated in Exhibit 1-2, the average tax rate in a progressive tax rate structure will always be less than or equal to the marginal tax rate.

Proportional tax structure

A proportional tax rate structure (also known as a flat tax), imposes a constant tax rate throughout the tax base. As the tax base increases the taxes paid increase proportionally. Because this rate stays the same throughout all levels of the tax base, the marginal tax rate remains constant and equals the average tax rate (see Exhibit 1-1). The most common example of a proportional tax is a sales tax. The new corporate tax rate (which is a constant rate of 21 percent) is also an example of as flat tax.

Regressive tax structure

A regressive tax rate structure imposes a decreasing marginal tax rate as the tax base increase (see Exhibit 1-3). As the tax base increases, the taxes paid increases but the marginal tax rate decreases. Regressive tax rate structures are not common. In the United States, the Social Security tax employs a regressive tax rate structure. Wages subject to the Social Security tax (6.2 percent in 2020) are capped each year ($137,700 in 2020). Wages in excess of the cap are not subject to the tax.

Marginal tax rate

Change in Tax / Change in Taxable Income the rate you will be taxed at for the next income level The marginal tax rate is the tax rate that applies to the next additional increment of a taxpayer's taxable income (or deductions).

George H.W. Bush

Clarence Thomas

Economy -- tax system

Economy - requires that a good tax system should minimize the compliance and administration costs associated with the tax system. Economy can be viewed from the perspective of both the taxpayer and the government. The current IRS budget represents approximately ½ of one percent of every tax dollar collected. The income tax is often criticized for the compliance costs imposed on the taxpayer including record-keeping costs and accountant costs. Advocates of alternative tax systems often challenge the income tax on this criterion.

90 day letter

If the taxpayer and the IRS still do not agree on the proposed adjustment at the appeals conference, or the taxpayer chooses not to request an appeals conference, the IRS will send the taxpayer a 90 day letter. The 90 day letter (also known as the statutory notice of deficiency) explains that the taxpayer has 90 days to either: · pay the proposed deficiency; or · file a petition in the U.S Tax Court to hear the case.

30 day letter

If the taxpayer disputes the proposed changes, the taxpayer will receive a 30 day letter giving the taxpayer 30 days to either: · pay the proposed deficiency; or · request a conference with an appeals officer, who is independent and resides in a separate IRS division from the examining agent; or

Indefinite -- statute of limitations

In cases of fraud or returns that were never filed

George W. Bush

John Roberts (Chief Judge) Samuel Alito

Donald Trump

Neil Gorsuch Brett Kavanaugh

Bill Clinton

Ruth Bader Ginsburg Stephen Breyer

Form 1099

Self-employed taxpayers receive a Form 1099 indicating the compensation they received, which is reported on Schedule C of Form 1040.

Barack Obama

Sonia Sotomayor Elena Kagan

Two levels of authority that are required to avoid a penalty under SEC.6694

Substantial authority (position not disclosed to IRS) reasonable basis (position disclosed to IRS)

Section 83(b) election

The tax law allows employees who receive restricted stock to make a special tax election. If the employee makes the Section 83(b) election, the value of the restricted stock is taxed on the grant date rather than the date on which the stock vests. The effect of the election is to accelerate the tax on the market value of the restricted shares. If the employee expects the share price to increase after the grant date, making the election converts subsequent stock value appreciation from ordinary income into long-term capital gain. Without the Section 83(b) election, the employee reports no income when the shares are granted but is taxed on their fair market value at ordinary tax rates when the stock vests. With the Section 83(b) election, the employee pays tax at ordinary tax rates on the market value of the shares at the grant date. The Section 83(b) election is advisable when the potential for growth in the stock value is high and the amount of additional current tax is manageable. If an employee makes a Section 83(b) election and then forfeits the stock for any reason, the employee cannot deduct the loss on the forfeiture.

Reasonable Basis

The tax practitioner can also avoid penalty under IRC Section 6694 if the tax return position has at least a reasonable basis (i.e. supported by one or more tax authorities) and the position is disclosed on the taxpayer's return.

Form W-4

When employees begin employment with a firm, they complete a Form W-4. Employees use Form W-4 to indicate: 1) whether to withhold at the single tax rate or at the lower married tax rate; 2) the number of withholding allowances the employee chooses to claim (the more withholding allowances claimed, the less the tax withholding amount); 3) whether the employee wants an additional amount of tax withheld each period above the amount based on the number of allowances claimed.

Final Regulations

are regulations that have been issued in final form, and until revoked, they represent the Treasury Department's interpretation of the Code. Temporary regulations have a limited life (three years

Form W-2

from their employers summarizing their salary or wage compensation and the various withholding amounts made during the yea

Sufficiency -- tax rate

judging the sufficiency of a tax system means assessing the size of the tax revenues it must generate and ensuring that it provides them. · Static Forecasting - one option in forecasting revenue is to ignore how taxpayers may alter their activities in response to a tax law change and instead base projected tax revenues on the existing states of transactions. · Dynamic Forecasting - another option in forecasting is to account for possible taxpayer responses to a tax law change. · Income Effect - predicts that when taxpayers are taxed more, they will work harder to generate the same after-tax dollars. · Substitution Effect - predicts that when taxpayers are taxed more, rather than working more they will substitute nontaxable activities such and leisure pursuits because the marginal value of taxable activities has decreased.

Certainty -- tax structure

means that taxpayers should be able to determine when to pay the tax, where to pay the tax, and how to determine the tax. For example, sales taxes are based on the value of taxable purchases, property taxes are generally based on assessed property values, and excise taxes are based on the number of taxable units purchased.

Court Types -- Types of cases

only tax cases heard in Tax Court a mixture in district and federal

Convenience -- tax structure

suggests that a tax system should be designed to facilitate the collection of tax revenues without undue hardship on the taxpayer or the government. For example, retailers collect sales taxes when buyers purchase goods. Thus, it is difficult for the buyer to avoid paying sales tax. Likewise, employers withhold federal income tax and Social Security taxes directly from wage earners' paychecks, which speeds the government's collection of the taxes and makes it difficult for the taxpayer to evade the taxes. If tax withholdings are not sufficient relative to the taxpayer's anticipated income tax liability (or if the taxpayer is self-employed), the taxpayer is required to make quarterly estimated tax installments. Individual quarterly estimated tax payments are due of April 15, June 15, September 15, and January 15. Corporate estimated tax payments are due on the 15th day of the third, sixth, ninth, and twelfth months of the corporation's fiscal year.