Intro to Tax Exam One

estates and trusts are required to file a tax return if their gross income exceeds _____

$600

field examinations

-Least common audit -Held at the taxpayer's place of business and can last months to years.

capital assets include everything except

1. accounts receivable from the sale of goods 2. inventory and other assets held for sale in the ordinary course of business 3. assets used in trade or business including supplies

to qualify as a dependent an individual must

1. be a citizen of the U.S. or a resident of the U.S., Canada or Mexico 2. must not file a joint tax return with his or her spouse unless there is no tax liability on the couple's joint return and there would not have been if filed separately 3. must be considered a qualifying child or dependent

the research memo has five basic parts

1. facts 2. issues 3. authority list 4. conclusion 5. analysis

a qualifying child must satisfy four tests

1. relationship 2. age 3. residence 4. support

a qualifying relative must satisfy three tests

1. relationship 2. support 3. gross income

Taxpayers are eligible for qualifying widow or widower filing status if they

1. remain unmarried 2. pay for over half the costs of maintaining a household where a child who qualifies as the taxpayers dependent lived for the entire year

basic components of a client letter include

1. research questions and limitations 2. facts 3. analysis 4. closing

filing status determines

1. the applicable tax rate schedule for determining the taxpayer's liability 2. the taxpayer's standard deduction amount 3. the AGI threshold for reductions in tax benefits

the unified tax credit exempts from taxation _______ in bequests (transfers upon death) and lifetime gifts

11,700,000

the tax base for Social Security tax is capped at

142,800

the annual gift exclusion allows taxpayers to transfer ______ of gifts per donee each year without being subject to gift tax

15,000

a qualifying child must be younger than the taxpayer and 1. under the age of ___ or 2. under the age of ___ and a full time student

19 and 24

taxpayers who claim the standard deduction are allowed to deduct up to ____ of charitable contributions (_____ for married filing jointly) as a from AGI deduction

300, 600

Substantial authority suggests the probability that the taxpayers position will be sustained upon audit or litigation is _____ to ____ percent or above

35-40

the gross income test requires that a qualifying relative's gross income be less than ____

4300

employees and employers split Social Security and Medicare tax equally at

6.2% for Social Security and 1.45% for Medicare

writ of certiorari

A formal writ used to bring a case before the Supreme Court.

value added tax

A tax on increased value of the product at each stage of production and distribution rather than just at the point of sale.

Alternative Minimum Tax (AMT)

Created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.

the ____ system is the most important IRS initiative for choosing audits

DIF

For fraudulent tax returns, the statute of limitations for IRS assessment is ten years. T/F

False, the statue is indefinite

Revenue Rulings

Less authoritative weight, but they provide a much more detailed interpretation of the Code (e.g., application to a specific factual situation)

What is the due date for calendar-year partnership income tax returns, assuming the date does NOT fall on a Saturday, Sunday or holiday?

March 15

primary authorities

Official sources of tax law Statutory sources (e.g., Internal Revenue Code) Judicial sources (the courts) Administrative sources (IRS pronouncements)

Private Letter Rulings

Rulings issued by the IRS to specific taxpayers or organizations that request an interpretation of the law.

Revenue Procedures

Second in administrative authoritative weight after regulations. Revenue procedures are much more detailed than regulations and explain in greater detail IRS practice and procedures in administering the tax law. Revenue procedures have the same authoritative weight as revenue rulings.

office examinations

Second most common audit Conducted in the local IRS office and tends to be broader in scope

What is the gross income threshold for most taxpayers to determine whether a return is required to be filed?

Sum of standard deduction and additional deductions for taxpayers age 65 or older

T/F: Any individual, partnership, or S corporation unable to file a tax return by the original due date, can by the same deadline, request a six-month extension to file, which is granted automatically by the IRA

TRUE

T/F: The U.S. Court of Federal Claims hears a much narrower set of claims and therefore has more authoritative weight than the district courts

TRUE

T/F: final and temporary regulations have the same authoritative weight

TRUE

T/F: if a taxpayer sells a personal use automobile or personal residence at a loss, the loss is not deductible

TRUE

T/F: letter rulings may not be used as precedent by tax payers

TRUE

T/F: the IRS has the same authoritative weight as tax treaties and Supreme Court Rulings

TRUE

U.S. _____ court decisions typically are considered to have more authoritative weight than decisions rendered by a district court or U.S. Court of Federal Claims

Tax

Employment Taxes

Taxes consisting of the Old Age, Survivors, and Disability Insurance (OASDI) tax, commonly called the Social Security tax, and the Medical Health Insurance (MHI) tax known as the Medicare tax.

dynamic forecasting

The process of forecasting tax revenues that incorporates into the forecast how taxpayers may alter their activities in response to a tax law change.

Legislative Regulations

The rarest type of regulation, issued when Congress specifically directs the Treasury Department to create regulations to address an issue in an area of law. In these instances, the Treasury is actually writing the law instead of interpreting the Code. Because legislative regulations actually represent tax law instead of an interpretation of tax law, legislative regulations have more authoritative weight than interpretative and procedural regulations.

Regulations

Treasury Department's official interpretation of the Internal Revenue Code, have the highest authoritative weight.

the three legislative or statutory tax authorities are

U.S. constitution, the Internal Revenue Code, and tax treaties

stare decisis

a doctrine meaning that a court will rule consistently with its previous rulings and the rulings of higher courts with appellate jurisdiction

discriminate function system (DIF) score

a numeric score assigned to individual tax returns that measures the return's potential for generating additional tax on audit

tax

a payment required by a government that is unrelated to any specific benefit or service received from the government

information matching program

a program that compares the taxpayer's tax return to information submitted to the IRS from other taxpayers

document perfection program

a program under which all tax returns are checked for mathematical and tax calculation errors.

question of fact

a research question that hinges upon the facts and circumstances of the taxpayer's transaction.

question of law

a research question that hinges upon the interpretation of the law, such as interpreting a particular phrase in a code section.

sufficiency

a standard of evaluating a good tax system. assessing the aggregate size of the tax revenues that must be generated and ensuring that the tax system provides these revenues

use tax

a tax imposed on the retail price of goods owned, possessed, or consumed within a state that were not purchased within the state.

flat tax

a tax in which a single tax rate is applied throughout the tax base

ad valorem tax

a tax levied on the assessed value of real and personal property

personal property tax

a tax on the fair market value of all types of tangible and intangible property, except real property.

real property tax

a tax on the fair market value of land and structures permanently attached to land.

regressive tax structure

a tax rate structure that imposes a decreasing marginal tax rate as the tax base increases. as the tax base increases, the taxes paid increase, but the marginal tax rate decreases

progressive tax rate structure

a tax rate structure that imposes an increasing marginal tax rate as the tax base increases. As the tax base increases, both the marginal tax rate and the taxes paid increase.

earmarked tax

a tax that is assessed for a specific purpose (education)

Character of Income

a type of income that is treated differently for tax purposes from other types of income. Common income characters (or types of income) include ordinary, capital, and qualified dividend.

whenever the IRS loses a Supreme Court case it may issue an _____ or _______

acquiescence or non acquiescence

tax treaties

agreements negotiated between countries that describe the tax treatment of entities subject to tax in both countries

example of excise tax

alcohol, diesel fuel, gasoline, and tobacco

proportional tax rate structure

also known as a flat tax, this tax rate structure imposes a constant tax rate throughout the tax base. As the tax base increases, the taxes paid increase proportionally.

correspondence examination

an IRS audit conducted by mail and generally limited to one or two items on the taxpayer's return. Among the three types of audits, correspondence audits are generally the most common, the most narrow in scope, and least complex.

the average tax rate is useful for

budgeting tax expense

the effective tax rate is useful for

comparing the relative tax burdens of taxpayers

various tax systems meet ______ by tying the the collection of tax as closely as possible to the transaction it generates

convenience

all ____ must file a tax return regardless of their taxable income

corporations

a loss on a capital gain, no matter how long the asset is held generates a _____ in the year of sale

deduction

______ reduce a taxpayer's taxable income

deductions

statue of limitations

defines the period in which the taxpayer can file an amended tax return or the IRS can assess a tax deficiency for a specific tax year.

shareholders receiving _____ from corporations include the dividend in gross income

dividends

______ are required to pay state and federal tax, based on their employees wages/salary

employers

when a taxpayer has no taxable income, the effective and average tax rates will always be ______

equal

an _____ allows the taxpayer to delay filing but not extend the due dates of the payments

extension

example of progressive tax

federal and state income taxes

capital losses are _____ AGI deductions and offsets the taxpayers ordinary income, and is limited to $3000 for the year

for

AGI minus _____ AGI deductions determine taxable income

from

the general purpose of a tax is to

fund the operations of a government (raise revenue)

capital income

gains or losses on the disposition or sale of capital assets

______ taxes are based on their fair market values of wealth transfers made upon death or by gift

gift

____ ____ determines whether a tax return is required

gross income

the U.S. tax laws are based on the all inclusive income concept which is

gross income means all income from whatever source derived

a qualifying child must not have provided more than _____ her own support for the year

half

open facts

have not yet occurred, can be altered

the most significant tax imposed by the U.S. government is ______ taxes

income

realized income

income generated in a transaction with a second party in which there is a measurable change in property rights between parties.

ordinary income

income or loss that is taxed at the ordinary rates provided in the tax rate schedules, or offsets income taxed at these rates, and is not capital in character

common state and local taxes include

income taxes, sales and use taxes, excise taxes, and property taxes

implicit taxes

indirect taxes that result from a tax advantage the government grants to certain transactions to satisfy social, economic, or other objectives. They are defined as the reduced before-tax return that a tax-favored asset produces because of its tax-advantaged status.

major federal taxes include

individual and corporate income tax, employment taxes, estate and gift taxes, and excise taxes

For AGI deductions can be associated with business activities and certain _____ activities

investing

deductions are a matter of ______ ____

legislative grace

state income tax rates are significantly _____ than federal

less

head of household status is _____ favorable than MFJ and qualifying widow, but ____ favorable than single or MFS

less, more

______ _____ are less authoritative but more specific than revenue rulings and procedures

letter rulings

if the capital gain is ____ term, it is generally taxed at 15% (20% for higher income and 0% for lower)

long

the effective tax rate is always ______ than the average

lower

Civil Penalties

monetary penalties imposed when tax practitioners or taxpayers violate tax statutes without reasonable cause—for example, as the result of negligence, intentional disregard of pertinent rules, willful disobedience, or outright fraud.

a qualifying child must have the same principle residence as the taxpayer for _____ than half the year

more

interest income from ______ ____ is excluded from gross income

municipal bonds

U.S. Tax Court

national court tax experts do not pay tax first

the Code and the Supreme Court should ______ be in conflict

never

examples of capital assets

nonbusiness assets such as personal automobiles, residences, and assets held for investment such as stocks or bonds

Which of the following criteria determine whether an individual must file a tax return?

number of dependents, filing status, gross income, and age

Treasury Department

of which the IRS is a bureau, is charged with administering and interpreting tax laws of the United States, among other duties such as printing money and advising the president on economic issues

economy

one criteria used to evaluate a good tax system. means a tax system should minimize its compliance and administration costs

convience

one criteria used to evaluate a tax system. a tax system should be designed to facilitate the collection of tax revenues without undue hardship on the taxpayer or the government

equity

one criteria used to evaluate the tax system. a tax system is considered fair or equitable if the tax is based on the taxpayers ability to pay; taxpayers with a greater ability to pay pay more.

certainty

one of the criteria used to evaluate tax systems. Certainty means taxpayers should be able to determine when, where, and how much tax to pay.

U.S. Court of Federal Claims

one of the three trial-level courts. It is a national court that only hears monetary claims against the federal government. must pay tax deficiency first.

U.S. District Courts

one of three trial level courts. only court that allows a jury. there is at least one in each state. must pay tax deficiency first.

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 like leisure pursuits for taxable ones because the marginal value of taxable activities has decreased

qualified dividends and long term capital gains are said to be treated at _______ tax rate, a rate that is lower than the ordinary income tax rate

preferential

revenue rulings have the same authoritative weight as revenue ______

procedures

income tax is based on a ______ tax structure

progressive

_____ _____ are taxed at 0% for lower income, 15%, and 20% for higher income

qualified dividends

to provide tax relief for widowers with dependents, taxpayers who meet certain requirements are eligible for ______ ____ status for up to two years after the spouse has died

qualifying widower

Estimated Tax Payments

quarterly tax payments that a taxpayer makes to the government if the tax withholding is insufficient to meet the taxpayer's tax liability.

Deferrals

realized income items that taxpayers include in gross income in a subsequent year

exclusions

realized income items that taxpayers permanently exclude from taxation

when we look at effective tax rates, sales tax is a ______ tax

regressive

Proposed Regulations

regulations issued in proposed form; they do not carry the same authoritative weight as temporary or final regulations. All regulations are issued in proposed form first to allow public comment on them.

procedural regulations

regulations that explain Treasury Department procedures as they relate to administering the Code.

the key components of a tax are

required, imposed by a governmental agency, and not tied directly to the benefit received by the taxpayer

the most common end product of a research question is the internal _______ ____

research memo

Technical Advice Memorandum

ruling issued by the IRS national office, requested by an IRS agent, and generally for a completed transaction

determination letters

rulings requested by the taxpayer, issued by local IRS directors, and generally not controversial. An example of a determination letter is the request by an employer for the IRS to rule that the taxpayer's retirement plan is a "qualified plan."

example of flat tax

sales tax, 21% corporate tax

employment and unemployment taxes are the ______ largest taxes imposed by the U.S. Federal Government

second

Which type of taxpayer has lower gross income thresholds for filing than the general filing requirements?

self employed persons

if the capital gain is ____ term, it is taxed at ordinary rates however not included in ordinary income

short

the original three year statue is extended to ___ years if the taxpayers omits items of gross income that exceed 25% of the gross income reported on the tax return

six

Examples of regressive taxes include

social security tax and federal/state unemployment tax

Substantial Authority

standard used to determine whether a tax practitioner may recommend and a taxpayer may take a tax return position without being subject to IRS penalty.

from AGI deductions include which three deductions?

standard, itemized, and qualified business income deductions

higher disposable income is likely to correlate with ______ effect

substitution

examples of secondary authorities

tax articles, law reviews, newsletters, and textbooks

marginal tax rates are useful for

tax planning

marginal tax rate

tax rate that applies to the next dollar of taxable income

deductions directly reduce

taxable income

withholdings

taxes collected and remitted to the government by an employer from an employee's wages.

explicit taxes

taxes directly imposed by a government and are easily quantified

graduated tax

taxes in which the tax base is divided into a series of monetary amounts, or brackets, where each successive bracket is taxed at a different (gradually higher or gradually lower) percentage rate.

excise tax

taxes levied on a particular good or service, tax base depends on quantity purchased

tax credits directly reduce

taxes payable

the support test for qualifying relative generally requires

taxpayer pays more than half of their support

time that the child or taxpayer is away from the home ____ due to illness, pursuing an education, or has other circumstances is counted as a child

temporarily

acquiescence

the IRS has decided to follow the court's adverse ruling in the future. it does not mean that the IRS agrees

90 day letter

the IRS letter received after an audit and receipt of the 30-day letter that explains that the taxpayer has 90 days to either (1) pay the proposed deficiency or (2) file a petition in the U.S. Tax Court to hear the case. The 90-day letter is also known as the statutory notice of deficiency.

30 day letter

the IRS letter received after an audit that instructs the taxpayer that he or she has 30 days to either (1) request a conference with an appeals officer or (2) agree to the proposed adjustment.

U.S. Circuit Court of Appeals

the first level of appeals courts after the trial-level courts. There are 13 U.S. circuit courts of appeal: 1 for the Federal Circuit and 12 assigned to hear cases that originate from a specific circuit (e.g., the 11th Circuit Court of Appeals only hears cases originating within the 11th Circuit).

U.S. Supreme Court

the highest court of the United States; it sits at the top of the federal court system

vertical equity

the idea that taxpayers with a greater ability to pay taxes should pay larger amounts

an asset is tax favored when

the income the asset produces is either excluded from the tax base or subject to a lower (preferential) tax rate, or if the asset generates a tax benefit like a large deduction

interpretive regulations

the most common regulations; they represent the Treasury's interpretation of the Code and are issued under the Treasury's general authority to interpret the Code.

if the child is a dependent of more than one non parent who has priority to claim the child?

the non parent with the higher AGI

if a child of divorced parents resides with each parent an equal amount of time, who would have priority to claim the dependent?

the parent with the higher AGI

if an individual is a qualifying child for more than one parent, who would have priority for claiming the child as a dependent?

the parent with whom the child has resided for the longest period of time during the year

static forecasting

the process of forecasting tax revenues based on the existing state of transactions while ignoring how taxpayers may alter their activities in response to a tax law change.

Golsen Rule

the tax court will abide by rulings of the circuit court that has appellate jurisdiction for a case

average tax rate

the taxpayer's average level of taxation on each dollar of taxable income

effective tax rate

the taxpayers average rate of taxation on each dollar of total income

the statue of limitations generally ends ____ years from the later of 1. the date the tax return was actually filed 2. the tax returns original due date

three

T/F: a person is a full time student if she was in school during any part of each of the five calendar months during the year

true

T/F: a person meets the qualifying relative member of household test if that person has the same principle place abode as the taxpayer for the entire year

true

T/F: when one spouse dies during the year, the other is still considered to be married until the end of the year the spoused died unless remarried

true

horizontal equity

two taxpayers in similar situations pay the same tax

Secondary Authorities

unofficial tax authorities that interpret and explain the primary authorities

tax prepayments include

withholdings, estimated tax payments and tax that the taxpayer overpaid on the prior year tax return that the taxpayer elects to apply as an estimated payment for the current tax year instead of receiving a refund